-----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, JcluVQuEaOtATV5xj/qKdvyX92dOiPU9B1p+QTLVjxOS2YkQhDa3SGJ+kYSCQLI9 xzMwdeQR4Lq+BdBqXvBDqA== 0001130319-02-000189.txt : 20020415 0001130319-02-000189.hdr.sgml : 20020415 ACCESSION NUMBER: 0001130319-02-000189 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 20020322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUB INTERNATIONAL LTD CENTRAL INDEX KEY: 0001133016 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-84734 FILM NUMBER: 02581884 BUSINESS ADDRESS: STREET 1: 214 KING STREET WEST STREET 2: SUITE 314 CITY: ONTARIO STATE: A6 ZIP: 00000 BUSINESS PHONE: 4169795866 MAIL ADDRESS: STREET 1: 214 KING STREET WEST STREET 2: SUITE 314 CITY: ONTARIO STATE: A6 ZIP: 00000 S-1 1 t06723s-1.txt FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2002 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ HUB INTERNATIONAL LIMITED (Exact name of Registrant as specified in its Charter) ONTARIO, CANADA 6411 NOT APPLICABLE (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employee Identification incorporation or organization) Classification Code Number) Number)
------------------------------------ HUB INTERNATIONAL LIMITED 55 EAST JACKSON BOULEVARD CHICAGO, ILLINOIS 60604 (877) 402-6601 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------------ W. KIRK JAMES VICE PRESIDENT AND GENERAL COUNSEL HUB INTERNATIONAL LIMITED 55 EAST JACKSON BOULEVARD CHICAGO, ILLINOIS 60604 (312) 279-4881 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------------ COPIES TO: BRICE T. VORAN, ESQ. LUCIANA FATO, ESQ. SHEARMAN & STERLING DAVIS POLK & WARDWELL 199 BAY STREET 450 LEXINGTON AVENUE COMMERCE COURT WEST, SUITE 4405 NEW YORK, NY 10017 TORONTO, ONTARIO CANADA M5L 1E8 (212) 450-4000 (416) 360-8484
------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] 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, 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(d) 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 delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM TITLE OF EACH CLASS AGGREGATE AMOUNT OF OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------ Common Shares............................................... $75,000,000 $6,900 - ------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) 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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 22, 2002 PROSPECTUS SHARES (HUB INTERNATIONAL LOGO) COMMON SHARES Hub International Limited is selling common shares. Our common shares are listed on The Toronto Stock Exchange under the symbol HBG. On March 21, 2002, the closing sale price of our common shares as reported on the TSE was C$19.00 per share. This is our initial public offering in the United States. We anticipate that the initial public offering price will be between $ and $ per share. We intend to apply to list our common shares on the New York Stock Exchange under the symbol HBG.
- ------------------------------------------------------------------------------------------------------- PER SHARE TOTAL - ------------------------------------------------------------------------------------------------------- Initial public offering price $ $ Underwriting commissions $ $ Proceeds to Hub, before expenses $ $ - -------------------------------------------------------------------------------------------------------
We have granted the underwriters an option for a period of 30 days to purchase up to additional common shares. INVESTING IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. JPMORGAN COCHRAN, CARONIA & CO. STEPHENS INC. BMO NESBITT BURNS FERRIS, BAKER WATTS Incorporated , 2002 TABLE OF CONTENTS
PAGE Exchange rate information................................... ii Prospectus summary.......................................... 1 Risk factors................................................ 8 Forward-looking statements.................................. 18 Use of proceeds............................................. 19 Capitalization.............................................. 20 Dilution.................................................... 21 Market price of our common shares........................... 22 Dividend policy............................................. 22 Unaudited pro forma consolidated statement of earnings...... 23 Selected historical consolidated financial data............. 25 Management's discussion and analysis of financial condition and results of operations................................. 28 Industry.................................................... 44 Business.................................................... 47 Management.................................................. 56 Certain relationships and related party transactions........ 64 Principal shareholders...................................... 67 Description of share capital................................ 69 Shares eligible for future sale............................. 70 Certain United States and Canadian federal income tax considerations............................................ 72 Underwriting................................................ 78 Legal matters............................................... 81 Experts..................................................... 81 Where you can find more information......................... 81 Index to consolidated financial statements.................. F-1
------------------------------------ NO SECURITIES COMMISSION OR SIMILAR AUTHORITY IN CANADA HAS IN ANY WAY PASSED UPON THE MERITS OF THE COMMON SHARES OFFERED BY THIS PROSPECTUS AND ANY REPRESENTATION TO THE CONTRARY IS AN OFFENCE. THE COMMON SHARES OFFERED BY THIS PROSPECTUS HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR SALE UNDER THE SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA AND ARE NOT BEING OFFERED FOR SALE IN CANADA OR TO ANY RESIDENT OF CANADA AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN CANADA, OR TO OR FOR THE ACCOUNT OF ANY RESIDENT OF CANADA. i EXCHANGE RATE INFORMATION We publish our consolidated financial statements in U.S. dollars. All references in this prospectus to "dollars" or "$" are to U.S. dollars and all references to "C$" are to Canadian dollars, unless otherwise noted. The following table presents, in U.S. dollars, the exchange rates for the Canadian dollar, determined based on the inverse of the noon buying rate in New York City for cable transfers in U.S. dollars as certified for customs purposes by the Federal Reserve Bank of New York (the "noon buying rate") for the periods indicated.
- ----------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------- High........................ $0.6697 $0.6969 $0.6925 $0.7105 $0.7487 Low......................... 0.6241 0.6410 0.6535 0.6341 0.6945 End of period............... 0.6279 0.6669 0.6925 0.6504 0.6999 Average..................... 0.6444 0.6724 0.6744 0.6714 0.7197 - -----------------------------------------------------------------------------------
The average exchange rate is calculated on the last business day of each month for the applicable period. On March 21, 2002, the noon buying rate was C$1.00 = $0.6326. ------------------------------------ Unless the context requires otherwise, "Hub," "we," "our" and "us" refer to Hub International Limited and our consolidated subsidiaries. Except as otherwise indicated, all financial statements and financial data contained in this prospectus and in the documents incorporated by reference in this prospectus have been prepared in accordance with generally accepted accounting principles in Canada, or Canadian GAAP, which differs in certain significant respects from generally accepted accounting principles in the United States of America, or U.S. GAAP. Please see note 17 to our consolidated financial statements for a description of the material differences between Canadian GAAP and U.S. GAAP. ii PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common shares. You should read the entire prospectus carefully, including "Risk factors" beginning on page 8, our consolidated financial statements and the accompanying notes, as well as our unaudited pro forma consolidated statement of earnings and the accompanying notes, included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, all dollar amounts are expressed in, and the term "dollars" and the symbol "$" refer to, U.S. dollars. The term "Canadian dollars" and the symbol "C$" refer to Canadian dollars. HUB INTERNATIONAL LIMITED We are a leading North American insurance brokerage providing a broad array of property and casualty, life and health, employee benefits, investment and risk management products and services. We focus primarily on middle-market commercial accounts in the United States and Canada, which we serve through our approximately 1,900 employees in 130 locations, using a variety of retail and wholesale distribution channels. We define the middle-market as those clients that generate annual commissions and fees ranging from $2,500 to $250,000. We generate commissions and other revenue from placing insurance. Since our company was formed in 1998 through the merger of 11 Canadian insurance brokerages, we have acquired an additional 78 brokerages and have established a strong presence in the northeastern and midwestern United States and in the Canadian provinces of Ontario, Quebec and British Columbia. Through a combination of organic growth and acquiring quality brokerages with proven track records, we have grown our revenue from $38.7 million in 1998 to $154.0 million in 2001, representing a compound annual growth rate of 58%. In addition, our EBITDA has increased from $6.2 million in 1998 to $30.7 million in 2001, representing a compound annual growth rate of 70%. We operate through an organizational structure comprised of our head office, larger regional brokerages that we call "hub" brokerages and smaller brokerages that we call "fold-ins." We have nine hub brokerages, four operating in the United States and five in Canada. Each hub brokerage has a significant market presence in a geographic region in the United States or Canada. A hub brokerage is responsible not only for the development of its own business, but also the identification of fold-ins that can be acquired by and integrated into the operations of the hub brokerage. This process allows each hub brokerage an opportunity to strengthen its regional market presence by acquiring new or complementary products and services and management talent, while improving profit margins through the reduction or elimination of redundant administrative functions, premises and systems. Our structure enables our hub brokerages to more effectively and quickly meet the changing needs of our clients in various markets, while benefiting from the operating efficiencies and leverage of a large brokerage. We offer commercial and specialized insurance products and services to businesses, personal insurance products and services to individuals and program products to affinity groups and associations. We offer three categories of commercial products and services: 1 property and casualty products, employee benefits and risk management services. We offer two categories of personal products and services: property and casualty products and life, health and financial products and services. Our program products involve the development, in collaboration with insurance companies, of baskets of insurance products for members of affinity groups or associations, such as bar associations, medical associations and other professional groups. Our specialized risk products cover diverse exposures such as environmental, professional liability and directors' and officers' liability. We utilize retail, wholesale and call-center distribution channels, and have the ability to employ these distribution channels for specific market segments. Our primary goals are to further develop our position as a leading North American middle-market insurance broker and to generate significant sustained shareholder value. We plan to achieve these objectives by executing the following strategies: FOCUS ON MIDDLE-MARKET COMMERCIAL ACCOUNTS. We focus our sales efforts on middle-market companies because we believe the insurance needs of these companies are underserved and that middle-market commercial accounts generally generate higher profit margins than personal accounts and provide us with greater cross-selling opportunities. GROW ORGANICALLY. We intend to increase profitability per customer and attract new customers by leveraging our existing infrastructure to sell a broad range of products and services through multiple distribution channels, target profitable client segments and maximize cross-selling opportunities. GROW THROUGH SELECTED ACQUISITIONS. We acquire brokerages to grow our revenue, complement and supplement our existing products and services and add experienced management. STANDARDIZE PROCEDURES TO INCREASE OPERATING EFFICIENCY AND REDUCE COSTS. We strive to implement the best operating and sales practices of our brokerages across our company to increase operating efficiencies and reduce costs by eliminating administrative redundancies. RECRUIT, TRAIN AND RETAIN QUALIFIED PERSONNEL. We are formalizing our recruiting and training program to continue to build and sustain a sales and service team with a wide variety of experience and capabilities. We believe the following competitive advantages will enable us to achieve our objectives: DECENTRALIZED HUB APPROACH. Our decentralized hub approach allows us to react to regional market conditions while still centrally managing the growth and profitability of our business with consistent standards. BROAD ARRAY OF PRODUCTS AND SERVICES OFFERED THROUGH MULTIPLE DISTRIBUTION CHANNELS. We offer a broad array of products and services through a variety of distribution channels, which allows us to maintain and maximize existing client relationships and attract new clients. BENEFITS OF SCALE. Our scale, relative to smaller brokerages, provides insurers with greater incentives to work with us, which enables us to generate increased volume overrides and contingent commissions, based on the volume and profitability of the business we place, favorable commission rates, exclusive distribution rights for certain 2 territories and products, and, in some cases, have expanded authority to price and approve insurance policies on behalf of insurance companies. We believe our scale also makes us attractive to smaller brokerages as a potential acquiror. COMMITTED AND EXPERIENCED MANAGEMENT. Most of the senior managers of our brokerages have over 20 years of experience in the industry and also have significant shareholdings in our company, typically with transfer restrictions for up to ten years. Our executive office is located at 55 East Jackson Boulevard, Chicago, Illinois 60604, and our telephone number is (877) 402-6601. Our web site is located at www.hubinternational.com. Information contained on our website is not part of this prospectus. 3 THE OFFERING Common shares offered by us: shares Common shares to be outstanding after this offering: shares USE OF PROCEEDS We estimate that the net proceeds from this offering will be approximately $ million. We intend to use approximately $47 million of the net proceeds from this offering to repay existing indebtedness and the balance for working capital and other general corporate purposes, which may include acquisitions. See "Use of proceeds" on page 19 for more information regarding our use of the proceeds from this offering. DIVIDEND POLICY We have paid a dividend of C$0.07 per common share for each quarter commencing June 30, 2000. We have no formal dividend policy other than the board of directors considers the payment of dividends as quarterly financial information becomes available. In the future, dividends will be paid at the discretion of our board of directors depending on our financial position and capital requirements, general business conditions, contractual restrictions and other factors. Proposed New York Stock Exchange symbol: HBG Toronto Stock Exchange symbol: HBG ------------------------ The share information above is based on shares outstanding as of , 2002. ------------------------ Unless otherwise noted, the information in this prospectus assumes that the underwriters' over-allotment option will not be exercised. 4 SUMMARY CONSOLIDATED FINANCIAL DATA Our summary consolidated financial data has been derived from our historical consolidated financial statements as of and for the three years ended December 31, 2001 which are included elsewhere in this prospectus. Our historical consolidated financial statements are prepared in accordance with Canadian GAAP, which differs in certain significant respects from U.S. GAAP. For a discussion of the principal differences between Canadian GAAP and U.S. GAAP see note 17 to our historical consolidated financial statements beginning on page F-1. Historical results of operations are not necessarily indicative of future results. It is important that you read this information together with "Management's discussion and analysis of financial condition and results of operations" beginning on page 28 and our consolidated financial statements and the accompanying notes, included elsewhere in this prospectus. You should also read our "Unaudited pro forma consolidated statement of earnings" for the year ended December 31, 2001 and the accompanying notes, beginning on page 23 of this prospectus. Our unaudited pro forma consolidated statement of earnings gives effect to our June 28, 2001 acquisition of Kaye Group Inc. as if it had occurred on January 1, 2001. 5
- ----------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(1) 2001 2000 1999 - ----------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF EARNINGS DATA: Revenue: Commission income............................ $142,851 $ 86,410 $ 47,964 Contingent commissions and volume overrides.......................... 5,946 4,909 2,824 Other........................................ 5,196 3,921 3,309 -------------------------------- 153,993 95,240 54,097 -------------------------------- Expenses: Remuneration................................. 88,015 54,701 29,519 Selling...................................... 8,359 4,840 3,036 Occupancy.................................... 9,061 5,756 3,393 Depreciation................................. 3,940 1,885 1,275 Administration............................... 17,856 11,182 6,806 -------------------------------- 127,231 78,364 44,029 -------------------------------- Net earnings before the following.............. 26,762 16,876 10,068 Interest expense............................. 7,447 1,981 632 Goodwill and other intangible asset amortization............. 4,940 3,260 1,626 (Gain) loss on disposal of capital assets and investments............................... (173) 127 14 Other income -- put option liability......... (719) -- -- -------------------------------- Net earnings before income taxes............... 15,267 11,508 7,796 Provision for income tax expense...................................... 5,262 5,370 4,052 -------------------------------- Net earnings................................... $ 10,005 $ 6,138 $ 3,744 -------------------------------- Net earnings per share: Basic........................................ $ 0.53 $ 0.34 $ 0.22 Diluted...................................... $ 0.50 $ 0.34 $ 0.22 Weighted average shares: Basic........................................ 19,012 18,327 16,941 Diluted...................................... 20,105 18,327 16,941 Dividends per share(2)......................... $ 0.18 $ 0.13 -- Reconciliation to U.S. GAAP: Net earnings................................. $ 10,005 $ 6,138 $ 3,744 Adjustment to investment held for sale(3)........................ 520 -- -- Change in reporting currency(4)........... 158 366 233 -------------------------------- Net earnings (U.S. GAAP)..................... $ 10,683 $ 6,504 $ 3,977 - -----------------------------------------------------------------------------------
(1) Effective September 30, 2001, we adopted the U.S. dollar as our reporting currency. Our financial results for all periods prior to October 1, 2001 have been restated from Canadian dollars to U.S. dollars using the exchange rate in effect at September 30, 2001 of C$1.00 = $0.6338. (2) We commenced payment of dividends in the second quarter of 2000. (3) As part of our acquisition of Kaye, we acquired Old Lyme Insurance Company of Rhode Island, Inc. and Old Lyme Insurance Company, Ltd., which we refer to collectively as Old Lyme, and which we have agreed to sell to a subsidiary of Fairfax Financial Holdings Limited. See "Certain relationships and related party transactions." Under U.S. GAAP, interest expense on debt we incurred to finance the purchase of Old Lyme is not charged to earnings. See note 17 to our consolidated financial statements for more information. (4) Under U.S. GAAP, financial statements are translated using the average exchange rate for the period. See note 17 to our consolidated financial statements for more information. 6
- ------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PERCENTAGES)(1) 2001 2000 1999 - ------------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents(2)................. $ 26,979 $ 19,919 $ 21,368 Total assets................................. $ 502,296 $ 206,157 $ 171,202 Total debt(3)................................ $ 196,952 $ 34,665 $ 20,562 Total shareholders' equity................... $ 135,271 $ 112,212 $ 105,562 OTHER FINANCIAL DATA: EBITDA(4).................................... $ 30,702 $ 18,761 $ 11,343 EBITDA margin(5)............................. 19.9% 19.6% 20.9% Net cash flow provided by operating activities................................. $ 46,912 $ 12,807 $ 5,103 Net cash flow provided by financing activities................................. $ 132,431 $ 5,613 $ 58,494 Net cash flow (used in) investing activities................................. $(134,213) $ (17,983) $ (34,655) - ------------------------------------------------------------------------------------
(1) Effective September 30, 2001, we adopted the U.S. dollar as our reporting currency. Our financial results for all periods prior to October 1, 2001 have been restated from Canadian dollars to U.S. dollars at the exchange rate in effect at September 30, 2001 of C$1.00 = $0.6338. (2) Excludes trust cash, which includes premiums collected (less commissions and other deductions) not yet remitted to insurance companies. (3) Long-term debt and capital leases (including current portion), bank debt and subordinated convertible notes. (4) EBITDA is defined as earnings before interest, income taxes, depreciation and goodwill and other intangible asset amortization, but excluding gains or losses from the sale of capital assets and investments and other income -- put option liability. EBITDA is not a measure of financial performance under either U.S. or Canadian GAAP, and should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles as a measure of profitability or liquidity. We believe the presentation of EBITDA is relevant because EBITDA is a measurement that industry analysts use when evaluating our operating performance. Investors should be aware that our presentation of EBITDA may not be comparable with similarly titled measures presented by other companies. (5) EBITDA margin represents EBITDA as a percentage of total revenue. EBITDA margin is presented because we believe that it is a useful indicator to investors of our profitability. EBITDA margin should not be considered by investors as an alternative to operating margin as an indicator of our profitability. Investors should be aware that our presentation of EBITDA margin may not be comparable with similarly titled measures presented by other companies. 7 RISK FACTORS You should carefully consider the risks described below and all other information contained in this prospectus before making an investment decision. If any of the following risks, as well as additional risks and uncertainties that are not yet known to us or that we currently think are immaterial, actually occur, our business, financial condition and results of operations could be materially adversely affected. In that event, the trading price of our shares could decline, and you may lose part or all of your investment. RISKS RELATED TO OUR BUSINESS WE MAY BE UNSUCCESSFUL IN IDENTIFYING AND ACQUIRING SUITABLE ACQUISITION CANDIDATES, WHICH COULD IMPEDE OUR GROWTH AND ABILITY TO REMAIN COMPETITIVE IN OUR INDUSTRY. Our strategic plan includes the regular and systematic evaluation and acquisition of insurance brokerages in new and existing markets. There can be no assurance, however, that we will successfully identify suitable acquisition candidates. We are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed once negotiations have commenced. We compete for acquisition and expansion opportunities with entities that have substantially greater resources than we do and these entities may be able to outbid us for these acquisition targets. If we fail to execute our acquisition strategy, our revenue growth is likely to suffer and we may be unable to remain competitive. OUR CONTINUED GROWTH IS PARTLY BASED ON OUR ABILITY TO ACQUIRE ADDITIONAL BROKERAGES AND OUR FAILURE TO INTEGRATE THESE BROKERAGES SUCCESSFULLY MAY HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS. A significant element of our strategy is to acquire additional insurance brokerages. We cannot assure you that we will successfully integrate brokerages we may acquire in the future. The integration of an acquisition involves a number of factors that may affect our operations. These factors include: - - diversion of management's attention; - - difficulties in the integration of acquired operations and retention of personnel; - - entry into unfamiliar markets; - - unanticipated problems or legal liabilities; and - - tax and accounting issues. A failure to integrate acquired brokerages may be disruptive to our operations and negatively impact our revenue or increase our expenses. INSURANCE BROKERAGES THAT WE HAVE ACQUIRED MAY HAVE LIABILITIES THAT WE ARE NOT AWARE OF AND MAY NOT BE AS PROFITABLE AS WE EXPECT THEM TO BE. Since our formation in November 1998 through the merger of 11 insurance brokerages, we have acquired an additional 78 brokerages. Although we conduct due diligence in respect of the business and operations of each of the brokerages we acquire, we cannot assure you that we have identified all material facts concerning these 8 brokerages. Unanticipated events or liabilities relating to these companies could have a material adverse effect on our results of operations and financial condition. Furthermore, once we have integrated an acquired brokerage, it may not achieve levels of revenue, profitability, or productivity comparable to our existing locations, or otherwise perform as expected. Our failure to integrate one or more acquired brokerages so that they achieve our performance goals may have a material adverse effect on our results of operations and financial condition. IF WE FAIL TO OBTAIN ADDITIONAL FINANCING FOR ACQUISITIONS, WE MAY BE UNABLE TO EXPAND OUR BUSINESS. Our acquisition strategy may require us to seek additional financing. If we are unable to obtain sufficient financing on satisfactory terms and conditions, we may not be able to maintain or increase our market share or expand our business through acquisitions. Our ability to obtain additional financing will depend upon a number of factors, many of which are beyond our control. For example, we may not be able to obtain additional satisfactory financing because we already have debt outstanding and because we may not have sufficient cash flow to service or repay our existing or additional debt. WE CANNOT ACCURATELY FORECAST OUR COMMISSION REVENUE BECAUSE OUR COMMISSIONS DEPEND ON PREMIUM RATES CHARGED BY INSURANCE COMPANIES, WHICH HISTORICALLY HAVE VARIED AND ARE DIFFICULT TO PREDICT. ANY DECLINES IN PREMIUMS MAY ADVERSELY IMPACT OUR PROFITABILITY. In 2001, we derived approximately 93% of our revenue from commissions paid by insurance companies on the sale of their insurance products to our clients. Our revenue from commissions fluctuates with premiums charged by insurers, as commissions typically are determined as a percentage of premiums. When premiums decline, we experience downward pressure on our revenue and earnings. Historically, property and casualty premiums have been cyclical in nature and have varied widely based on market conditions. Significant reductions in premium rates occurred during the years 1988 through 2000 as a result of expanded underwriting capacity of property and casualty insurance companies and increased competition. In some cases, property and casualty insurance companies lowered commission rates. Because we cannot determine the timing and extent of premium pricing changes, we cannot accurately forecast our commission revenue, including whether it will significantly decline. If premiums decline or commission rates are reduced, our revenue, earnings and cash flow could decline. In addition, our budgets for future acquisitions, capital expenditures, dividend payments, loan repayments and other expenditures may have to be adjusted to account for unexpected changes in revenue. INSURANCE COMPANY CONTINGENT COMMISSIONS AND VOLUME OVERRIDES ARE LESS PREDICTABLE THAN NORMAL COMMISSIONS, WHICH IMPAIRS OUR ABILITY TO FORECAST THE AMOUNT OF SUCH REVENUE THAT WE WILL RECEIVE AND MAY NEGATIVELY IMPACT OUR OPERATING RESULTS. We derive a portion of our revenue from contingent commissions and volume overrides. The aggregate of these sources of revenue generally has accounted for 4% to 5% of our total revenue. Contingent commissions may be paid by an insurance company based on the profit it makes on the overall volume of business that we place with it. We generally receive these commissions in the first and second quarters of each year. Volume overrides are paid by an insurance company based on the volume of 9 business that we place with it and are generally paid over the course of the year. As a result of recent developments in the property and casualty insurance industry, including changes in underwriting criteria due in part to the higher numbers and dollar value of claims as compared to the premiums collected by insurance companies, we cannot predict the payment of these performance-based revenues as accurately as we have been able to in the past. Further, we have no control over the process by which insurance companies estimate their own loss reserves, which affects our ability to forecast contingent commissions. Because these contingent commissions affect our revenue, any decrease in their payment to us could adversely affect our results of operations. PROPOSED TORT REFORM LEGISLATION IN THE UNITED STATES, IF ENACTED, COULD DECREASE DEMAND FOR LIABILITY INSURANCE, THEREBY REDUCING OUR COMMISSION REVENUE. Legislation concerning tort reform is currently being considered in the United States Congress and in several states. Among the provisions being considered for inclusion in such legislation are limitations on damage awards, including punitive damages, and various restrictions applicable to class action lawsuits, including lawsuits asserting professional liability of the kind for which insurance is offered under certain policies we sell. Enactment of these or similar provisions by Congress, or by states or countries in which we sell insurance, could result in a reduction in the demand for liability insurance policies or a decrease in policy limits of such policies sold, thereby reducing our commission revenue. WE HAVE ENTERED INTO PUT OPTION ARRANGEMENTS WITH FORMER SHAREHOLDERS OF OUR ACQUIRED BROKERAGES, J.P. FLANAGAN CORPORATION AND BURNHAM INSURANCE GROUP, INC., WHICH MAY REQUIRE US TO PAY SUBSTANTIAL AMOUNTS TO REPURCHASE OUR COMMON SHARES FROM THESE SHAREHOLDERS. THOSE PAYMENTS WOULD REDUCE OUR CASH FLOW AND THE FUNDS AVAILABLE TO GROW OUR BUSINESS. In connection with our acquisitions of Flanagan and Burnham, we entered into put option arrangements with the former shareholders of those companies whereby we gave them the right to require us to repurchase their shares of Hub that were issued in consideration of the acquisitions. The rights under the put arrangements may be exercised between 2006 and 2011, and if exercised, we could be required to buy back our common shares at C$17.00 per share at specific exercise dates set out under the heading "Certain relationships and related party transactions -- Put options." We may not have sufficient cash on hand on the exercise dates to satisfy our obligations under these put arrangements and as a consequence we may have to obtain additional financing. However, we may not be able to incur additional debt at such time. Our inability to satisfy our obligations under the put options may adversely affect our relationship with the management team at Flanagan and Burnham and may result in the loss of key management personnel from these subsidiaries and, in turn, the loss of customers, which would adversely affect our business and financial condition. In addition, our failure to satisfy our obligations under the put options may cause us to breach our agreements with those shareholders. 10 A SUBSTANTIAL PORTION OF OUR TOTAL ASSETS ARE REPRESENTED BY GOODWILL AS A RESULT OF OUR ACQUISITIONS AND UNDER NEW ACCOUNTING STANDARDS, WE MAY BE REQUIRED TO WRITE DOWN THE VALUE OF OUR GOODWILL. When we acquire a brokerage, virtually the entire purchase price for the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of purchase price allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets paid by us to acquire the brokerage. On July 1, 2001, we adopted the Canadian Institute of Chartered Accountants (CICA) Accounting Standards Board Handbook Section 1581, "Business Combinations". These new rules require that all business combinations after June 30, 2001 be accounted for in accordance with the purchase method of accounting and expand the definition of other identifiable intangible assets acquired in a business combination using the purchase method. On January 1, 2002, we adopted CICA's Section 3062, "Goodwill and Other Intangible Assets". For all business combinations accounted for using the purchase method prior to June 30, 2001, Section 3062 eliminates the amortization of goodwill, requires annual impairment testing of goodwill and introduces the concept of definite life and indefinite life intangible assets. Indefinite life intangible assets, similar to goodwill, will no longer be amortized and will be tested at least annually for impairment. We can give no assurance that the carrying value of our goodwill and other indefinite life intangible assets will not be affected by this new accounting standard. THE LOSS OF MEMBERS OF OUR SENIOR MANAGEMENT OR A SIGNIFICANT NUMBER OF OUR BROKERS COULD NEGATIVELY AFFECT OUR FINANCIAL PLANS, MARKETING AND OTHER OBJECTIVES. The loss of or failure to attract key personnel could significantly impede our financial plans, growth, marketing and other objectives. Our success depends to a substantial extent not only on the ability and experience of our senior management but also on the individual brokers and teams that service our clients and maintain client relationships. Our operations are not generally dependent on any one individual; however, the loss of Martin Hughes, our Chairman and Chief Executive Officer, or Bruce Guthart, our President, U.S. Operations, could negatively impact our acquisition strategy in the United States due to their significant relationships and expertise in the insurance industry. The insurance brokerage industry has in the past experienced intense competition for the services of leading individual brokers and brokerage teams. We believe that our future success will depend in large part on our ability to attract and retain additional highly skilled and qualified personnel and to expand, train and manage our employee base. We may not be successful in doing so because the competition for qualified personnel in our industry is intense. If we fail to recruit and retain top producers, our organic growth may be adversely affected. COMPETITION IN OUR INDUSTRY IS INTENSE, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, WE MAY LOSE MARKET SHARE AND OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED. The insurance brokerage business is highly competitive and we actively compete with other insurance brokerages for customers and insurance company markets, many of which have existing relationships with insurance companies or have a significant 11 presence in niche insurance markets that may give them an advantage over us. Because relationships between insurance brokers and insurance companies or clients are often local or regional in nature, this potential competitive disadvantage is particularly pronounced. See "Business--Competition" for a further discussion of the level of competition in our industry. We face competition in all markets in which we operate, based on product breadth, innovation, quality of service and price. We compete with a number of brokerages, such as Arthur J. Gallagher & Co., Hilb, Rogal and Hamilton Company and Brown & Brown, Inc. in the United States, who may have greater resources than we do, as well as with numerous Internet-based, specialist and regional firms in the United States and Canada. If we are unable to compete effectively against our competitors, we will suffer a loss of market share, decreased revenue and reduced operating margins. In addition, regulatory changes in the financial services industry in the United States and Canada have permitted banks, securities firms and insurance companies to affiliate, causing rapid consolidation in the insurance industry. Some insurance companies are engaged in the direct sale of insurance, primarily to individuals, and do not pay commissions to agents and brokers on policies they sell directly. Increasing competition from insurance companies and from within the financial services industry, generally, could have a negative effect on our operations. WE DO BUSINESS WITH CERTAIN SUBSIDIARIES OF OUR LARGEST SHAREHOLDER AND IF A CONFLICT OF INTEREST WERE TO ARISE IT MAY NOT BE RESOLVED IN OUR FAVOR AND COULD ADVERSELY AFFECT OUR REVENUE. Fairfax Financial Holdings Limited owns 37% of our common shares. We do business with certain subsidiaries of Fairfax which represented approximately 4.9% of our revenue in 2001. We expect that this percentage will increase as a result of our sale of Old Lyme to Fairfax, as we will continue to do a significant amount of business with Old Lyme as described under "Certain relationships and related party transactions." If a conflict of interest were to arise between us and Fairfax or one of its subsidiaries, we cannot assure you that this conflict would be resolved in a manner that would favor us. In addition, if Fairfax were to sell our common shares that it owns, it may no longer be as interested in providing us with financial assistance or continuing to do business with us which could have a material adverse effect on our financial condition. WE DEPEND ON OUR INFORMATION PROCESSING SYSTEMS. INTERRUPTION OR LOSS OF OUR INFORMATION PROCESSING SYSTEMS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. Our ability to provide administrative services depends on our capacity to store, retrieve, process and manage significant databases and expand and upgrade periodically our information processing capabilities. Interruption or loss of our information processing capabilities through loss of stored data, breakdown or malfunctioning of computer equipment and software systems, telecommunications failure, or damage caused by fire, tornadoes, lightning, electrical power outage or other disruption could have a material adverse effect on our business, financial condition and results of operations. Although we have disaster recovery procedures in place for all our hub brokerages and insurance to protect against such contingencies, we cannot assure you that such procedures will be effective or that such insurance or recovery procedures will continue to be available 12 at reasonable prices, address all such losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide services. PRIVACY LEGISLATION MAY IMPEDE OUR ABILITY TO UTILIZE OUR CUSTOMER DATABASE AS A MEANS TO GENERATE NEW SALES. We intend to utilize our extensive customer databases for marketing and sales purposes, which we believe will enhance our ability to meet our organic growth targets. However, new privacy legislation, such as the Gramm-Leach-Bliley Act and the Health Insurance Portability and Accountability Act of 1996 in the United States and the Personal Information Protection and Electronic Documents Act in Canada, as well as other regulatory changes, may restrict our ability to utilize personal information that we have collected in our normal course of operations to generate new sales. If we become subject to new restrictions, or other regulatory restrictions which we are not aware of, our ability to grow our business may be adversely affected. THE SECURITY OF THE DATABASES THAT CONTAIN OUR CUSTOMERS' PERSONAL INFORMATION MAY BE BREACHED WHICH COULD SUBJECT US TO LITIGATION OR ADVERSE PUBLICITY. Our technology may fail to adequately secure personal information we maintain in our databases and protect it from inadvertent leakage or theft. In such circumstances, we may be held liable to our customers, which could result in litigation or adverse publicity that could have a material adverse effect on our business. OUR CORPORATE STRUCTURE AND STRATEGY OF OPERATING THROUGH DECENTRALIZED BROKERAGES MAY MAKE IT MORE DIFFICULT FOR US TO BECOME AWARE OF AND RESPOND TO ADVERSE OPERATING OR FINANCIAL DEVELOPMENTS AT OUR BROKERAGES. We depend on timely and accurate reporting of business conditions and financial results from our brokerages to affect our business plan and determine and report our operating results. We receive end of month reports from each of our brokerages regarding their financial condition and operating results. If an adverse business or financial development occurs at one or more of our brokerages near the beginning of a month, we may not become aware of the occurrence for several weeks which could make it more difficult for us to effectively respond to that development. In addition, if one of our brokerages were to report inaccurate financial information, we might not learn of these inaccuracies for several weeks, if at all, which could adversely affect our ability to determine and report our financial results. We are investigating the purchase of enterprise reporting software that would enable us to extract financial and operating data from our brokerages electronically and on a real time basis. We anticipate that such a system will be implemented in 2003. However, we cannot assure you that it can be implemented within this time frame or whether it will be effective. OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY MAY BE MATERIALLY ADVERSELY AFFECTED BY ERRORS AND OMISSIONS. We have extensive operations and are subject to claims and litigation in the ordinary course of business resulting from alleged errors and omissions. Errors and omissions claims can involve significant defense costs and may result in large damage awards against us. Errors and omissions could include, for example, our employees or sub-agents failing, whether negligently or intentionally, to place coverage or to notify 13 insurance companies of claims on behalf of clients, to provide insurance companies with complete and accurate information relating to the risks being insured or to appropriately apply funds that we hold for our clients on a fiduciary basis. It is not always possible to prevent and detect errors and omissions and the precautions we take may not be effective in all cases. Our results of operations, financial condition or liquidity may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liabilities for which we self-insure. In addition, errors and omissions claims may harm our reputation or divert management resources away from operating our business. IF WE FAIL TO COMPLY WITH REGULATORY REQUIREMENTS FOR INSURANCE BROKERAGES, WE MAY NOT BE ABLE TO CONDUCT OUR BUSINESS. Our business is subject to legal requirements and governmental regulatory supervision in the jurisdictions in which we operate. These requirements are designed to protect our clients by establishing minimum standards of conduct and practice, particularly regarding the provision of advice and product information as well as financial criteria. Our activities in the United States and Canada are subject to regulation and supervision by state and provincial authorities. Although the scope of regulation and form of supervision by state and provincial authorities may vary from jurisdiction to jurisdiction, insurance laws in the United States and Canada are often complex and generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. This supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling and investment of client funds held in a fiduciary capacity. Our ability to conduct our business in the jurisdictions in which we currently operate depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions. Our clients have the right to file complaints with the regulators about our services, and the regulators may investigate or require us to address these complaints. Our failure to satisfy the regulators that we are in compliance with their requirements or the legal requirements governing our activities can result in disciplinary action, fines, reputational damage and financial harm. In addition, changes in legislation or regulations and actions by regulators, including changes in administration and enforcement policies, could from time to time require operational improvements or modifications at various locations which could result in higher costs or hinder our ability to operate our business. See "Business--Government regulation." OUR SIGNIFICANT CANADIAN OPERATIONS EXPOSE US TO EXCHANGE RATE FLUCTUATIONS, AND OUR NET INCOME MAY SUFFER IF THE CANADIAN DOLLAR DECLINES IN VALUE. We report our results in U.S. dollars. However, our Canadian Operations, which accounted for 51% of our revenue in 2001, earn revenue and incur expenses in Canadian dollars. The Canadian dollar has suffered a decline in value compared to the U.S. dollar in recent years. For example, at December 31, 1999, C$1.00 was equivalent to $0.6925, at December 31, 2001, C$1.00 was equivalent to only $0.6279, a decline of 14 more than 9%. A decline in the value of the Canadian dollar compared to the U.S. dollar would reduce our reported revenue, which could have a material adverse effect on our business, financial condition, cash flow and results of operations. RISKS RELATED TO OUR COMMON SHARES OUR COMMON SHARES HAVE NO PRIOR TRADING HISTORY IN THE UNITED STATES AND AN ACTIVE TRADING MARKET MAY NOT DEVELOP. We are a reporting issuer in Ontario, Canada under the Securities Act (Ontario) and in the other provinces and territories of Canada under similar legislation. Our common shares are currently listed on the TSE but are not listed on any U.S. stock exchange or quoted on any U.S. quotation system. Accordingly, prior to this offering, there has been no public market for our common shares in the United States and we cannot assure you that an active trading market will develop or be sustained in the United States after this offering. Furthermore, there can be no assurance that an active trading market will be sustained in Canada. The public offering price negotiated among us and the underwriters may not be indicative of prices that will prevail in any trading market. THE PRICE OF OUR COMMON SHARES MAY FLUCTUATE SUBSTANTIALLY, WHICH COULD NEGATIVELY AFFECT THE HOLDERS OF OUR COMMON SHARES. The price of our common shares may fluctuate substantially due to the following factors: (1) fluctuations in the price of the shares of the small number of public companies in the insurance brokerage business, (2) announcements of acquisitions as part of our growth strategy, (3) additions or departures of key personnel, (4) announcements of legal proceedings or regulatory matters and (5) the general volatility in the stock market. The market price of our common shares could also fluctuate substantially if we fail to meet or exceed securities analysts' expectations of our financial results or if there is a change in financial estimates or securities analysts' recommendations. In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many companies, and that has often been unrelated to the operating performance of these companies. A number of other factors, many of which are beyond our control, could also cause the market price of our common shares to fluctuate substantially. As a result, you may not be able to resell your shares at or above the offering price, or at all. SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON SHARES COULD RESULT IN SECURITIES CLASS ACTION CLAIMS AGAINST US. Significant price and value fluctuations have occurred with respect to the securities of insurance and insurance-related companies. Our common share price is likely to be volatile in the future. In the past, following periods of downward volatility in the market price of a company's securities, class action litigation has often been pursued against the respective company. If similar litigation was pursued against us, it could result in substantial costs and a diversion of our management's attention and resources. 15 OUR CONTROLLING SHAREHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS MAY SUBSTANTIALLY INFLUENCE CERTAIN ACTIONS REQUIRING SHAREHOLDERS APPROVAL. As of December 31, 2001, Fairfax and our executive officers and directors owned 37% and 10%, respectively, of our common shares. After giving effect to the sales of our common shares contemplated in this offering, Fairfax will own % of our common shares and our executive officers and directors will own approximately % of our common shares. Fairfax also holds $35 million of subordinated convertible notes which it can convert at any time into our common shares at C$17.00 per share. If Fairfax converts the notes, after giving effect to this offering, it would hold % of our common shares. Under our by-laws and articles of incorporation, Fairfax and our executive officers and directors have the ability to substantially influence certain actions requiring shareholder approval, including: - - electing members of our board of directors; - - adopting amendments to our articles and by-laws; and - - approving a merger or consolidation, liquidation or sale of all or substantially all of our assets. FUTURE SALES OR THE POSSIBILITY OF FUTURE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON SHARES MAY DEPRESS THE PRICE OF YOUR COMMON SHARES. Future sales of a substantial number of our common shares by us from treasury or by one of our shareholders in the public market could adversely affect prevailing market prices and the price of your common shares. It may also impair our ability to raise capital through future sales of, or pay for acquisitions using, our equity securities. Upon completion of this offering, we will have common shares issued and outstanding of which common shares will be freely tradeable without restrictions under the Securities Act. All of the shares offered pursuant to this offering, plus any shares sold pursuant to the exercise of the underwriters' option to purchase additional common shares, will be freely tradeable without restriction under the Securities Act, unless purchased by our affiliates. Upon completion of this offering, shares will be restricted securities within the meaning of Rule 144. The rules affecting the sale of these securities are summarized under "Shares eligible for future sale." We expect we will continue to acquire brokerages to grow our business. We intend to pay for acquisitions using, at least in part, our common shares. In the event any such acquisition is significant, the number of shares that we may issue may in turn be significant. In addition, we may also grant registration rights covering shares issued in connection with any acquisition. Any significant share issuance by us will dilute your equity interest in our company. INVESTORS WILL INCUR IMMEDIATE DILUTION AND MAY EXPERIENCE FURTHER DILUTION. The initial public offering price of our common shares will be substantially higher than the net tangible book value per share of the outstanding common shares immediately after this offering. If you purchase common shares in this offering, based upon the issuance and sale of common shares at the initial public offering price of 16 $ per share, you will incur immediate dilution of approximately $ in the net tangible book value per common share. WE ARE INCORPORATED IN ONTARIO, CANADA, AND, AS A RESULT, IT MAY NOT BE POSSIBLE FOR SHAREHOLDERS TO ENFORCE CIVIL LIABILITY PROVISIONS OF THE SECURITIES LAWS OF THE UNITED STATES. We are organized under the laws of Ontario, Canada and some of our assets are located outside the United States. As a result, it may not be possible for the holders of our common shares to enforce against us in United States courts judgments based on the civil liability provisions of the securities laws of the United States. In addition, there is doubt as to whether the courts of Canada would recognize or enforce judgments of United States courts obtained against us or our directors or officers based on the civil liability provisions of the securities laws of the United States or any state or hear actions brought in Canada against us or those persons based on those laws. 17 FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements relate, among other things, to our plans and objectives for future operations. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which we describe in more detail elsewhere in this prospectus) include, but are not limited to: - - risks associated with implementing our business strategies; - - failure to identify or consummate acquisitions; - - failure to successfully integrate acquired businesses; - - decrease in the level of demand for insurance products; - - decrease in the premiums charged by insurance companies (which may result in a corresponding decrease in our revenue); - - loss of services of key executive officers; - - failure to successfully recruit and retain qualified employees; - - actions of our competitors, including industry consolidation and increased competition in the industry; - - inability to develop and implement effective information technology systems; and - - the passage of legislation subjecting our business to supervision or regulation in the jurisdictions in which we operate. ------------------------ The words "believe," "anticipate," "project," "expect," "intend," "will likely result" or "will continue" and similar expressions identify forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We have described some important factors that could cause our actual results to differ materially from our expectations in this prospectus, including in the section titled "Risk factors." We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 18 USE OF PROCEEDS We estimate that we will receive net proceeds from this offering of approximately $ million, or $ million if the underwriters' over-allotment option is exercised in full, assuming an initial public offering price of $ per share and after deducting the estimated underwriting commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering to repay (1) the C$42.5 million, or approximately $26.6 million, of 8.5% convertible subordinated notes due June 28, 2006, issued to Zurich Insurance Company in connection with our acquisition of Kaye, and (2) $20 million outstanding under one of our credit facilities incurred on July 19, 2001 in connection with our acquisition of Kaye, which expires on July 17, 2002 and bears interest at LIBOR plus 150 basis points. See "Management's discussion and analysis of financial condition and operating results--Liquidity and capital resources" for a more detailed description of our outstanding debt. The remaining proceeds will be used for working capital and general corporate purposes, which may include acquisitions. We have no commitments or agreements concerning any acquisitions as of the date of this prospectus. Pending the use of the net proceeds, we intend to invest these funds in short-term, interest-bearing, investment grade securities. 19 CAPITALIZATION The following table sets forth our capitalization as of December 31, 2001: - - on an actual basis; and - - on an as adjusted basis to give effect to (1) the sale by us of common shares at an assumed initial public offering price of $ per share, after deducting underwriting commissions and estimated offering expenses, and (2) the application of the proceeds therefrom. See "Use of proceeds" on page 19 for more information regarding our use of the net proceeds from this offering. This table should be read in conjunction with "Management's discussion and analysis of financial condition and results of operations," our consolidated financial statements and our unaudited pro forma consolidated statement of earnings and the accompanying notes, appearing elsewhere in this prospectus.
- ------------------------------------------------------------------------------------- AT DECEMBER 31, 2001 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ACTUAL AS ADJUSTED - ------------------------------------------------------------------------------------- Cash and cash equivalents(1)......................... $ 26,979 $ ---------------------------- Short-term debt(2)................................... 59,169 ---------------------------- Long-term debt and capital leases.................... 137,783 ---------------------------- Shareholders' equity: Preferred shares, unlimited authorized, none issued and outstanding at December 31, 2001 (actual and as adjusted).................................... -- Common shares, unlimited authorized, 21,655,748 issued and outstanding at December 31, 2001, (actual) and shares issued and outstanding (as adjusted)....................... 125,506 Cumulative translation account..................... 2,770 Retained earnings.................................. 6,995 ---------------------------- Total shareholders' equity...................... 135,271 ---------------------------- Total capitalization....................... $332,223 $ - -------------------------------------------------------------------------------------
(1) Excludes trust cash, which includes premiums collected (less commissions and other deductions) not yet remitted to insurance companies. (2) Includes bank debt and current portion of long-term debt and capital leases. 20 DILUTION At December 31, 2001, our net tangible book value was $(110.9) million, or $(5.12) per common share. Net tangible book value represents the amount of our total tangible assets less our total liabilities. After giving effect to the sale of shares at an assumed initial public offering price of $ per share, our net tangible book value after this offering as of December 31, 2001 would have been $ million, or $ per share. The net tangible book value after this offering assumes that the proceeds to us, net of underwriting commissions and offering expenses, will be approximately $ million. Based on the foregoing, there would be as at December 31, 2001 an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: - ------------------------------------------------------------------------------------ Assumed initial public offering price per share........... $ Net tangible book value per share at December 31, 2001.. $(5.12) Increase per share attributable to new investors........ --------- Net tangible book value per share after this offering..... --------- Dilution per share to new investors....................... $ ---------
The following table summarizes, as of December 31, 2001, the differences between our officers, directors and affiliates and new investors with respect to: - - the number of common shares purchased from us; - - the total consideration paid to us; and - - the average price paid per share. The table below is based on an assumed initial public offering price of $ per share and is calculated before deducting estimated underwriting commissions and estimated offering expenses payable by us.
- --------------------------------------------------------------------------------------- SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE - --------------------------------------------------------------------------------------- Affiliated shareholders... 21,655,748 % $125,505,172 % $5.80 New investors............. ----------------------------------------------------------- Total................ 100.0% $ 100.0% $ - ---------------------------------------------------------------------------------------
21 MARKET PRICE OF OUR COMMON SHARES Our common shares are listed and posted for trading on the TSE under the symbol HBG. The following table sets forth the high and low closing prices for our common shares on the TSE and the quarterly dividends paid for the periods indicated:
- ------------------------------------------------------------------------------------ HIGH LOW DIVIDENDS - ------------------------------------------------------------------------------------ 2000 First Quarter.................................. C$18.00 C$13.50 C$ -- Second Quarter................................. 16.00 13.00 0.07 Third Quarter.................................. 14.75 10.00 0.07 Fourth Quarter................................. 13.00 9.50 0.07 2001 First Quarter.................................. C$20.00 C$12.00 C$0.07 Second Quarter................................. 18.00 15.75 0.07 Third Quarter.................................. 17.25 13.75 0.07 Fourth Quarter................................. 15.75 13.00 0.07 2002 First Quarter (through March 20)............... C$19.25 C$15.50 C$0.07 - ------------------------------------------------------------------------------------
Source: Dow Jones & Company, Inc. and the TSE. On March 21, 2002 the closing price of our common shares on the TSE was C$19.00 and the inverse of the noon buying rate quoted by the Federal Reserve Bank of New York was C$1.00 per $0.6326. As of March 12, 2002, there were 21,655,748 of our common shares issued and outstanding. As of the close of business March 12, 2002, we had approximately 1,040 holders of record of our common shares. DIVIDEND POLICY We have paid a dividend of C$0.07 per common share for each quarter commencing June 30, 2000. We have no formal dividend policy other than the board of directors considers the payment of dividends as quarterly financial information becomes available. In the future, dividends will be paid at the discretion of our board of directors depending on our financial position and capital requirements, general business conditions, contractual restrictions and other factors. 22 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS We have set forth below our unaudited pro forma consolidated statement of earnings for the year ended December 31, 2001, which is prepared in accordance with U.S. GAAP. Our unaudited pro forma consolidated statement of earnings gives effect to the acquisition of Kaye as if it had occurred on January 1, 2001. We acquired Kaye on June 28, 2001, for cash consideration of $125.1 million. We accounted for the acquisition under the purchase method. Accordingly, $59.8 million of the purchase price was allocated to goodwill. For information as to the basis on which the unaudited pro forma consolidated statement of earnings are presented, see the accompanying notes to the unaudited pro forma consolidated statement of earnings. The unaudited pro forma consolidated statement of earnings is presented for illustrative purposes only and does not purport to represent what our actual performance or financial position would have been if the acquisition of Kaye had occurred at an earlier date. The pro forma adjustments are based upon currently available information and our estimates and assumptions. Actual adjustments may differ from the pro forma adjustments. Our future operating results may differ materially from the unaudited pro forma consolidated statement of earnings presented below due to various factors, including those described under "Risk factors" included elsewhere in this prospectus. You should read the unaudited pro forma consolidated statement of earnings including the accompanying notes, in conjunction with our historical consolidated financial statements and the accompanying notes, the audited financial statements of Kaye and "Management's discussion and analysis of financial condition and results of operations" included elsewhere in this prospectus. 23
- --------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2001 HUB (IN THOUSANDS, EXCEPT INTERNATIONAL KAYE PRO FORMA PER SHARE AMOUNTS) LIMITED GROUP INC.(1) ADJUSTMENTS PRO FORMA - --------------------------------------------------------------------------------------------- UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS(2): Revenue: Commission income................ $145,413 $20,174 -- $165,587 Contingent commissions and volume overrides...................... 6,073 448 -- 6,521 Other............................ 5,295 6,599 -- 11,894 -------------------------------------------------------- 156,781 27,221 -- 184,002 -------------------------------------------------------- Expenses: Remuneration..................... 89,627 13,290 -- 102,917 Other operating expenses......... 39,925 8,639 -- 48,564 -------------------------------------------------------- 129,552 21,929 -- 151,481 -------------------------------------------------------- Net earnings before the following........................ 27,229 5,292 -- 32,521 Interest expense................. 7,060 452 4,200(3) 11,712 Goodwill and intangible asset amortization................... 5,026 676 505(4) 6,207 (Gain) loss on disposal of capital assets and investments.................... (180) -- -- (180) Other income -- put option liability...................... (719) -- -- (719) Non-recurring expenses........... -- 13,263(5) (13,263)(6) -- -------------------------------------------------------- Net earnings (loss) before income taxes............................ 16,042 (9,099) 8,558 15,501 Provision for income tax expense (benefit)........................ 5,359 (4,326) 3,423(7) 4,456 -------------------------------------------------------- Net earnings from operations....... $ 10,683 $ 4,773 $ 5,135 $ 11,045 -------------------------------------------------------- Net earnings from operations per share: Basic............................ $ 0.56 $ 0.57 Diluted.......................... $ 0.53 $ 0.54 Average shares outstanding: Basic............................ 19,012 19,232 Diluted.......................... 20,105 20,325 - ---------------------------------------------------------------------------------------------
(1) Results for the period January 1, 2001 to June 28, 2001, excluding the results of Old Lyme. (2) Amounts presented in our unaudited pro forma consolidated statement of earnings are in accordance with U.S. GAAP. (3) Represents interest on convertible subordinated notes and short-term bank debt issued in connection with the acquisition of Kaye. The convertible subordinated notes issued in aggregate principal amounts of $35 million and $26.6 million bear interest at 8.5%. In addition, bank debt of $67 million accrues interest at an average rate of 6.7% for the six month period ended June 30, 2001. (4) Represents amortization of goodwill and other identifiable intangible assets resulting from the acquisition of Kaye. Goodwill in the amount of $59.8 million is amortized over 40 years. Definite-lived intangible assets in the amount of $13.0 million are amortized over 15 years. (5) Includes non-recurring costs incurred by Kaye in connection with our acquisition of Kaye in the amount of $13.2 million, including payments of approximately $10.6 million to retire Kaye's obligation under stock-based compensation plans. (6) Represents a reversal of non-recurring costs incurred by Kaye, as a result of our acquisition of Kaye. (7) Current tax benefit of 40.0% of the above adjustments excluding amortization of goodwill. 24 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following selected historical consolidated financial data should be read with "Management's discussion and analysis of financial condition and results of operations" and our historical consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The consolidated statement of earnings data relating to the three years ended December 31, 2001 and the balance sheet data as of December 31, 2001 and 2000 are derived from our historical consolidated financial statements for the three year period ended December 31, 2001 and as of December 31, 2001 and 2000 audited by PricewaterhouseCoopers LLP, our independent auditors, beginning on page F-1. The financial data relating to the year ended December 31, 1999 is derived from our historical audited consolidated financial statements for that year. The financial data for the years ended December 31, 1998 and 1997 is derived from our audited combined financial statements for those years. Historical results of operations are not necessarily indicative of future results. We were formed in November 1998 through the merger of 11 independent insurance brokerages into a new company. The merger was accounted for using the pooling-of-interests method. Accordingly, our results for the years ended December 31, 1998 and 1999 include the assets, liabilities, shareholders equity, revenue and expenses of the combined companies, without adjustments. Our results for the year ended December 31, 1999 reflect the results of TOS Insurance Services Ltd. and Mack and Parker, Inc. from September 1, 1999 and October 28, 1999, respectively, the dates on which we acquired each brokerage. Our results for the year ended December 31, 2000 reflect the results of C.J. McCarthy Insurance Agency, Inc. from July 1, 2000, the dates on which we acquired it. Our results for the year ended December 31, 2001 reflect the results of Flanagan, Kaye and Burnham from June 1, 2001, June 29, 2001 and July 2, 2001, respectively, the dates on which we acquired each brokerage. In addition to the acquisition of these larger brokerages, our results also reflect the acquisition of smaller brokerages that occurred in each respective period. As a result of our acquisitions, the results in each period are not directly comparable. Our historical consolidated financial statements are prepared in accordance with Canadian GAAP, which differs in certain significant respects from U.S. GAAP. For a discussion of the principal differences between Canadian GAAP and U.S. GAAP see note 17 to our historical consolidated financial statements included elsewhere in this prospectus. 25
- ---------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(1) 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF EARNINGS DATA: Revenue: Commission income................... $142,851 $86,410 $47,964 $35,177 $27,390 Contingent commissions and volume overrides........................ 5,946 4,909 2,824 2,604 1,528 Other............................... 5,196 3,921 3,309 942 882 ------------------------------------------------ 153,993 95,240 54,097 38,723 29,800 ------------------------------------------------ Expenses: Remuneration........................ 88,015 54,701 29,519 21,847 16,099 Selling............................. 8,359 4,840 3,036 2,810 2,622 Occupancy........................... 9,061 5,756 3,393 2,364 1,596 Depreciation........................ 3,940 1,885 1,275 897 658 Administration...................... 17,856 11,182 6,806 5,461 4,151 ------------------------------------------------ 127,231 78,364 44,029 33,379 25,126 ------------------------------------------------ Net earnings before the following..... 26,762 16,876 10,068 5,344 4,674 Interest expense.................... 7,447 1,981 632 805 567 Goodwill and other intangible asset amortization..................... 4,940 3,260 1,626 1,087 807 (Gain) loss on disposal of capital assets and investments........... (173) 127 14 (84) -- Other income -- put option liability........................ (719) -- -- -- -- ------------------------------------------------ Net earnings before income taxes...... 15,267 11,508 7,796 3,536 3,300 Provision for income tax expense...... 5,262 5,370 4,052 1,848 1,319 ------------------------------------------------ Net earnings.......................... $ 10,005 $ 6,138 $ 3,744 $ 1,688 $ 1,981 ------------------------------------------------ Net earnings per share: Basic............................... $ 0.53 $ 0.34 $ 0.22 $ 0.26 Diluted............................. $ 0.50 $ 0.34 $ 0.22 $ 0.26 Weighted average shares: Basic............................... 19,012 18,327 16,941 6,448 Diluted............................. 20,105 18,327 16,941 6,448 Dividends per share(2)................ $ 0.18 $ 0.13 -- -- Reconciliation to U.S. GAAP: Net earnings........................ $ 10,005 $ 6,138 $ 3,744 $ 1,688 $ 1,981 Adjustment to investment held for sale(3)................. 520 -- -- -- -- Change in reporting currency(4)................. 158 366 233 -- -- ------------------------------------------------ Net earnings (U.S. GAAP)............ $ 10,683 $ 6,504 $ 3,977 $ 1,688 $ 1,981 - ----------------------------------------------------------------------------------------
(1) Effective September 30, 2001, we adopted the U.S. dollar as our reporting currency. Our financial results for all periods prior to October 1, 2001 have been restated from Canadian dollars to U.S. dollars at the exchange rate in effect at September 30, 2001 of C$1.00 = $0.6338. (2) We commenced payment of dividends in the second quarter of 2000. (3) As part of our acquisition of Kaye, we acquired Old Lyme, which we have agreed to sell to a subsidiary of Fairfax as described under "Certain relationships and related party transactions." Under U.S. GAAP, interest expense on debt we incurred to finance the purchase of Old Lyme is not charged to earnings. See note 17 to our consolidated financial statements for more information. (4) Under U.S. GAAP, financial statements are translated using the average exchange rate for the period. See note 17 to our consolidated financial statements for more information. 26
- ------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PERCENTAGES)(1) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents(2)........ $ 26,979 $ 19,919 $ 21,368 $ 308 $ 563 Total assets........................ $ 502,296 $206,157 $171,202 $49,128 $39,741 Total debt(3)....................... $ 196,952 $ 34,665 $ 20,562 $14,388 $15,724 Total shareholders' equity.......... $ 135,271 $112,212 $105,562 $13,463 $ 6,297 OTHER FINANCIAL DATA: EBITDA(4)........................... $ 30,702 $ 18,761 $ 11,343 $ 6,241 $ 5,332 EBITDA margin(5).................... 19.9% 19.6% 20.9% 16.1% 17.8% Net cash flow provided by operating activities.............. $ 46,912 $ 12,807 $ 5,103 $ 3,545 $ 1,214 Net cash flow provided by financing activities.............. $ 132,431 $ 5,613 $ 58,494 $ 4,075 $ 3,250 Net cash flow (used in) investing activities........................ $(134,213) $(17,983) $(34,655) $(8,931) $(4,100) - ------------------------------------------------------------------------------------------
(1) Effective September 30, 2001, we adopted the U.S. dollar as our reporting currency. Our financial results for all periods prior to October 1, 2001 have been restated from Canadian dollars to U.S. dollars using the exchange rate in effect at September 30, 2001 of C$1.00 = $0.6338. (2) Excludes trust cash, which includes premiums collected (less commissions and other deductions) not yet remitted to insurance companies. (3) Includes long-term debt and capital leases (including current portion), bank debt and subordinated convertible notes. (4) EBITDA is defined as earnings before interest, income taxes, depreciation and goodwill and other intangible asset amortization, but excluding gains or losses from the sale of capital assets and investments and other income -- put option liability. EBITDA is not a measure of financial performance under either U.S. or Canadian GAAP, and should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles as a measure of profitability or liquidity. We believe the presentation of EBITDA is relevant because EBITDA is a measurement that industry analysts use when evaluating our operating performance. Investors should be aware that our presentation of EBITDA may not be comparable with similarly titled measures presented by other companies. (5) EBITDA margin represents EBITDA as a percentage of total revenue. EBITDA margin is presented because we believe that it is a useful indicator to investors of our profitability. EBITDA margin should not be considered by investors as an alternative to operating margin as an indicator of our profitability. Investors should be aware that our presentation of EBITDA margin may not be comparable with similarly titled measures presented by other companies. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes. Certain information contained in "Management's discussion and analysis of financial condition and results of operations" are forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements because of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading "Risk factors." Unless otherwise indicated, all dollar amounts are expressed in, and the term "dollars" and the symbol "$" refer to, U.S. dollars. The term "Canadian dollars" and the symbol "C$" refer to Canadian dollars. OVERVIEW We are a leading North American insurance brokerage providing a wide variety of property and casualty, life and health, employee benefits, investment and risk management products and services from 130 locations across North America. We were formed in November 1998 through the merger of 11 Canadian independent, privately-held insurance brokers. In 1999, we acquired 44 brokerages, including Mack and Parker, Inc., our first acquisition in the United States. In 2000, we acquired 18 brokerages in the United States and Canada, including C.J. McCarthy Insurance Agency, Inc. In 2001, we acquired 16 brokerages, including Kaye Group Inc. on June 28, Burnham Stewart Group Inc. on July 1 and Flanagan Corporation on May 31. We apply the purchase method of accounting to our acquisitions and, as a result, the acquired brokerages' financial results are included only from the date of purchase. Revenue generated by Kaye, which was previously listed on NASDAQ, represented 17% of our revenue for the year ended December 31, 2001 on an actual basis, and 30% on a pro forma basis. As part of our acquisition of Kaye, we acquired Old Lyme Insurance Company of Rhode Island, Inc. and Old Lyme Insurance Company Ltd., primary insurance companies, which together we call Old Lyme. We acquired Kaye with the intent to sell Old Lyme and have since entered into an agreement to sell Old Lyme to a subsidiary of Fairfax Financial Holdings Limited at a purchase price equivalent to its U.S. GAAP book value as of December 31, 2001 of approximately $42.8 million. As of December 31, 2001, Fairfax owned 37% of our common shares. As of June 28, 2001, we recorded Old Lyme as an investment available for sale. Accordingly, Old Lyme is shown separately on our balance sheet at cost, which is at or below market value, and its results of operations are not included in our consolidated earnings. We generate our revenue in the United States and Canada. As the table below shows, historically we derived a large percentage of our revenue from our Canadian Operations. However, after our acquisitions of Kaye, Burnham and Flanagan, and our other acquisitions in 2001, revenue from our U.S. Operations increased to almost half of our total revenue for 2001. We expect that in the future, a greater percentage of our revenue will be derived from our U.S. Operations and generated in U.S. dollars. 28
- -------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT % OF % OF % OF PERCENTAGES) 2001 TOTAL 2000 TOTAL 1999 TOTAL - -------------------------------------------------------------------------------------- Revenue U.S. Operations............ $ 75,429 49.0% $20,004 21.0% $ 1,535 2.8% Canadian Operations........ 78,564 51.0% 75,236 79.0% 52,562 97.2% ------------------------------------------------------- Total...................... $153,993 100.0% $95,240 100.0% $54,097 100.0% - --------------------------------------------------------------------------------------
We have demonstrated growth in revenue and EBITDA (which we define as earnings before interest, income taxes, depreciation and goodwill and other intangible asset amortization, but excluding gains or losses from the sale of capital assets and investments and other income -- put option liability) over the past three years. From December 31, 1998 to December 31, 2001, our revenue increased from $38.7 million to $154.0 million representing a compounded annual growth rate of 58%. This growth in revenue is primarily attributable to the additional 78 brokerages we have acquired since our formation in 1998 and has been supplemented by our consistent organic growth, which has ranged from 5% to 6% per year. We define organic growth as an increase in revenue for one period as compared to a prior period, including net new business and net increases in commissions from existing business. Revenue from a brokerage we acquire is excluded from the calculation of organic growth for the first 12 months subsequent to the acquisition of the brokerage. From December 31, 1998 to December 31, 2001, EBITDA improved from $6.2 million to $30.7 million, representing a compounded annual growth rate of 70%. EBITDA is not a measure of financial performance under either U.S. or Canadian GAAP, and should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles as a measure of profitability or liquidity. We believe the presentation of EBITDA is relevant because EBITDA is a measurement that industry analysts use when evaluating our operating performance. Investors should be aware that our presentation of EBITDA may not be comparable with similarly titled measures presented by other companies. Though the insurance brokerage industry is highly sensitive to changes in the property and casualty insurance industry, it is relatively less sensitive to economic cycles than other industries. Insurance coverage, products and services are essential to businesses, governmental agencies and consumers, and are typically a fixed cost that is difficult to eliminate even in periods of economic weakness. The commissions that we receive from primary insurers, however, fluctuate with premium levels within the insurance market. During the 1990's and into 2000, the property and casualty insurance industry experienced excess capacity which resulted in highly competitive market conditions, declining premium levels and a corresponding reduction in commissions paid to brokers. However, market participants, particularly in the United States, have recently reported significant increases in property and casualty premium levels. This change is the result of several years of reduced profitability for property and casualty insurance companies and a subsequent contraction of capacity. In the United States, premium levels for property and casualty insurance policy renewals generally increased throughout 2001, while in Canada prices did not begin to increase until the fourth quarter of 2001. We 29 believe that the events of September 11, 2001 have caused property and casualty insurance companies to increase premium levels even further. We also believe that the publicity surrounding these events has led to widespread acceptance of rate increases by middle-market companies. While we cannot predict the timing or extent of premium pricing changes or their effect on our operations in the future, we believe that premium rates will continue to increase at least through 2003. REVENUE We derive our revenue primarily from commissions on the sale of insurance products and services to our clients. Commissions, which represented approximately 93% of our revenue for 2001, are calculated as a percentage of and paid from premiums. The insurance companies determine insurance premium rates based upon their underwriting analyses, while the percentage of commission is negotiated between us and the insurers. Typically commission rates fall within a range of industry norms based on lines of business. For example, basic commissions for property and casualty insurance typically average approximately 15% of premiums. For the year ended December 31, 2001, approximately 65% of our revenue was derived from commercial accounts and approximately 28% from personal accounts, in both cases, excluding related contingent commissions and volume overrides. In addition to revenue from commissions on premiums, we derive a portion of our revenue from volume overrides, contingent commissions and fees. Volume overrides are additional compensation paid by insurance companies based upon the overall volume of business that an insurance broker places with an insurance company. Contingent commissions are based on the profit an insurance company makes on the overall volume of business we place with it. Contingent commissions are typically received in the first or second quarter. In 2001, 3.8% of our total revenue was derived from contingent commissions and volume overrides. We are not dependent on any single client or on a few clients for our revenue, nor are we dependent on a single industry or client type for a substantial amount of our business. We place insurance policies with more than 150 different insurance companies in the United States and Canada and do not depend on any single insurance company or group of related insurance companies for the products we market to our clients or for any substantial amount of our revenue. As of December 31, 2001, we placed insurance policies with six insurance companies owned by Fairfax, each of which offers competitively-priced products. All of our transactions with the Fairfax companies are in the normal course of business, at fair market value and, in the aggregate, generated approximately 4.9% of our total revenue in 2001. This percentage will increase in 2002 as a result of the sale of Old Lyme. See "Certain relationships and related party transactions" for a more detailed description of these transactions. EXPENSES The majority of expenses we incur are remuneration expenses related to compensation and employee benefits, which typically account for approximately 70% of our total operating expenses. In addition to salaries, we also pay bonuses pursuant to our performance bonus program whereby each brokerage has an opportunity to achieve an annual bonus ranging from 50% to 65% of its brokerage pre-bonus operating profit in 30 excess of 20% of the brokerage's prior year revenue. The bonus percentage earned is based upon the respective brokerage's operating profit margin. In 2001, salary, bonuses and benefits equaled approximately 57% of our total revenue. Other expenses include selling (which includes marketing and advertising, but not commissions paid to our sales producers), occupancy (which includes rent and related operating costs), administration (which includes office supplies, postage, telephone, training, technology and bad debts) and depreciation. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Revenue. Total revenue for the year ended December 31, 2001 increased by $58.8 million or 62% to $154.0 million from $95.2 million for the year ended December 31, 2000. Of this increase, $55.6 million or 95% was attributable to acquisitions and reflects the inclusion of the results of each brokerage we acquired during the year from the respective date of each acquisition. For the year ended December 31, 2001, commission income increased by $56.5 million or 65% to $142.9 million from $86.4 million for the year ended December 31, 2000. Excluding the effects of acquisitions, commission income increased $4.3 million or 5%. This increase was mainly due to organic growth including premium rate increases. For the year ended December 31, 2001, revenue from contingent commissions and volume overrides increased by $1.0 million or 20% to $5.9 million from $4.9 million for the year ended December 31, 2000. This increase was primarily attributable to acquisitions. For the year ended December 31, 2001 other income, which includes fees and interest income, increased by $1.3 million or 33% to $5.2 million from $3.9 million for the year ended December 31, 2000. This increase was primarily attributable to acquisitions. For the year ended December 31, 2001, total revenue from U.S. Operations increased by $55.4 million or 277% to $75.4 million from $20.0 million for the year ended December 31, 2000. This increase was primarily due to acquisitions. Excluding the effect of acquisitions, total revenue increased $2.1 million or 11% primarily due to organic growth. For the year ended December 31, 2001, total revenue from Canadian Operations increased by $3.4 million or 5% to $78.6 million from $75.2 million for the year ended December 31, 2000. Excluding the effect of acquisitions, total revenue increased $1.1 million or 1.0%. Remuneration. Remuneration costs for the year ended December 31, 2001 increased by $33.3 million or 61% to $88.0 million from $54.7 million for the year ended December 31, 2000. Remuneration costs as a percentage of total revenue remained unchanged at 57% for 2001 as compared to 2000. Selling. Selling expenses for the year ended December 31, 2001 increased by $3.6 million or 75% to $8.4 million from $4.8 million for the year ended December 31, 2000. Selling expenses as a percentage of total revenue of 5% remained unchanged for 2001 as compared to 2000. Occupancy. Occupancy expenses for the year ended December 31, 2001 increased by $3.3 million or 57% to $9.1 million from $5.8 million for the year ended December 31, 2000. Occupancy expenses as a percentage of total revenue of 6% remained unchanged for 2001 as compared to 2000. 31 Depreciation. Depreciation expenses for the year ended December 31, 2001 increased by $2.0 million or 105% to $3.9 million from $1.9 million for the year ended December 31, 2000. Depreciation expenses as a percentage of total revenue increased to 3% in 2001 from 2% in 2000. This increase was primarily due to capital assets that we acquired with our brokerage acquisitions. Administration. Administration expenses for the year ended December 31, 2001 increased by $6.7 million or 60% to $17.9 million from $11.2 million for the year ended December 31, 2000. Administration expenses as a percentage of total revenue of 12%, remained unchanged for 2001 as compared to 2000. This decrease was primarily due to increased cost efficiencies and the slower rate of increase of certain administrative costs versus the rate of growth of commission income. Interest expense. Interest expense for the year ended December 31, 2001 increased by $5.4 million or 270% to $7.4 million from $2.0 million for the year ended December 31, 2000. This increase was largely attributable to our issuance of 8.5% convertible subordinated notes to Fairfax and Zurich Insurance Company and new short-term bank loans incurred to fund the acquisitions of Kaye and other brokerages we acquired in 2001. Goodwill and other intangible asset amortization. Goodwill and other intangible asset amortization for the year ended December 31, 2001 increased by $1.6 million or 48% to $4.9 million from $3.3 million for the year ended December 31, 2000. This increase is attributable to acquisitions in 2001 and 2000. For more information, see "--Goodwill and other intangible assets" below. Provision for income tax expense. Income taxes for the year ended December 31, 2001 and 2000 amounted to $5.3 million and $5.4 million, respectively, resulting in an effective tax rate of 34% and 47% for 2001 and 2000, respectively. The decrease in our effective income tax rate was the result of more efficient tax planning, including the manner in which we have structured certain of our acquisitions in the United States. Net earnings. Net earnings for the year ended December 31, 2001 increased by $3.9 million or 63% to $10.0 million compared to $6.1 million in 2000. Basic earnings per share increased to $0.53 per share for 2001 from $0.34 per share for 2000. Diluted earnings per share increased to $0.50 per share for 2001 from $0.34 per share for 2000. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Revenue. Total revenue for the year ended December 31, 2000 increased by $41.1 million or 76% to $95.2 million from $54.1 million for the year ended December 31, 1999. Of this increase, $39.5 million or 96% was attributable to acquisitions. For the year ended December 31, 2000, commission income increased by $38.4 million or 80% to $86.4 million from $48.0 million for the year ended December 31, 1999. Excluding the effects of acquisitions, commission income increased $2.8 million or 6%. This increase was mainly due to organic growth. For the year ended December 31, 2000, revenue from contingent commissions and volume overrides increased by $2.1 million or 75% to $4.9 million from $2.8 million for the year ended December 31, 1999. This increase was primarily attributable to acquisitions. For the year ended December 31, 2000, other income, which includes fees and interest income, increased by $0.6 million or 18% to $3.9 million from $3.3 million for the year ended December 31, 1999. This increase was primarily attributable to acquisitions. 32 For the year ended December 31, 2000, total revenue from U.S. Operations increased by $18.5 million or 1,233% to $20.0 million from $1.5 million for the year ended December 31, 1999. This increase was primarily due to acquisitions. Total revenue from our U.S. Operations increased to 21% of our consolidated total revenue in 2000 from 3% in 1999. For the year ended December 31, 2000, total revenue from Canadian Operations increased $22.6 million or 43% to $75.2 million from $52.6 million for the year ended December 31, 1999 primarily due to acquisitions. Total revenue from our Canadian Operations decreased to 79% of consolidated total revenue in 2000 from 97% in 1999. Remuneration. Remuneration costs for the year ended December 31, 2000 increased by $25.2 million or 85% to $54.7 million from $29.5 million for the year ended December 31, 1999. Remuneration costs as a percentage of total revenue increased to 57% in 2000 from 55% in 1999. This increase was primarily a result of increases in brokerage performance bonuses. Brokerage performance bonuses were 4% of total revenue in 2000 compared to 1% in 1999. Due to the timing of our acquisitions, many of the brokerages did not qualify for an operating bonus in 1999. In 2000 however, all but three brokerages achieved a pre-bonus operating profit in excess of 20%. Selling. Selling expenses for the year ended December 31, 2000 increased by $1.8 million or 60% to $4.8 million from $3.0 million for the year ended December 31, 1999. Selling expenses as a percentage of total revenue decreased to 5% in 2000 from 6% in 1999. This decrease was mainly due to increased cost reductions. Occupancy. Occupancy expenses for the year ended December 31, 2000 increased by $2.4 million or 71% to $5.8 million from $3.4 million for the year ended December 31, 1999. Occupancy expenses as a percentage of total revenue of 6% remained unchanged for 2000 as compared with 1999. Depreciation. Depreciation expenses for the year ended December 31, 2000 increased by $0.6 million or 46% to $1.9 million from $1.3 million for the year ended December 31, 1999. Depreciation expenses as a percentage of total revenue of 2% remained unchanged for 2000 as compared to 1999. Administration. Administration expenses for the year ended December 31, 2000 increased by $4.4 million or 65% to $11.2 million from $6.8 million for the year ended December 31, 1999. Administration expenses as a percentage of total revenue decreased to 12% in 2000 from 13% in 1999. This decrease was primarily due to our continuous effort to reduce overhead costs. Interest expense. Interest expense for the year ended December 31, 2000 increased by $1.4 million or 233% to $2.0 million from $0.6 million for the year ended December 31, 1999. This increase is attributable to the increase in long-term debt incurred to fund our acquisitions. Goodwill and other intangible asset amortization. Goodwill and other intangible asset amortization for the year ended December 31, 2000 increased by $1.7 million or 106% to $3.3 million from $1.6 million for the year ended December 31, 1999. This increase is attributable to the 62 acquisitions we completed during 2000 and 1999. Provision for income tax expense. Income taxes for the year ended December 31, 2000 and 1999 amounted to $5.4 million and $4.1 million, respectively, resulting in an effective tax rate of 47% and 52% for 2000 and 1999, respectively. The decrease in our 33 effective income tax rate is the result of more efficient tax planning, including the manner in which we have structured certain of our acquisitions in the United States. Net earnings. Net earnings for the year ended December 31, 2000 increased by $2.4 million or 65% to $6.1 million compared to $3.7 million for 1999. Basic and diluted earnings per share increased to $0.34 per share for 2000 from $0.22 per share for 1999. CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES We act as an intermediary between insurance companies and their insured customers. As such, we collect and hold premiums paid by customers on behalf of the insurers. We deduct commissions and other expenses from these payments and hold the remainder in trust for the insurers. We earn interest on those funds during the time between receipt of the cash and the time the cash is paid out to the insurers. However, we may not use the funds for any purpose and we must remit the funds within a specified period after the effective date of the respective policy. The cash we hold in trust is shown separately on our balance sheet. As of December 31, 2001, we had cash and cash equivalents of $77.4 million, of which $50.4 million was trust cash, an increase of $45.1 million from $32.3 million as of December 31, 2000. During 2001, $46.9 million of cash was provided by operating activities, primarily as a result of timing differences between the payment of accounts payable and the collection of accounts receivable. The remainder was the result of increased net earnings adjusted for items affecting working capital. Long-term debt financing and bank debt financing generated $137.8 million of cash. Share capital issued generated cash of $3.3 million, net of repurchases. From these amounts and existing cash balances, $148.8 million (including gross of $25.4 million cash received) was used to acquire businesses and $5.2 million was used to repay long-term debt and capital leases, $3.6 million was used to pay dividends, and $10.9 million was used for additions to capital assets and other assets. As of December 31, 2000, we had cash and cash equivalents of $32.3 million, of which $12.4 million was trust cash, an increase of $0.5 million from $31.8 million as of December 31, 1999. During 2000, $12.8 million of cash was provided from operating activities primarily as a result of timing differences between the payment of accounts payable and the collection of accounts receivable. The remainder was the result of increased net earnings adjusted for items affecting working capital. Long-term debt financing generated $29.8 million of cash. In addition, the executive share purchase plan and the sale of other assets generated $2.8 million of cash. From these amounts and existing cash balances, $18.9 million was used to acquire brokerages, $2.8 million was used to repurchase our common shares, $18.9 million was used to repay long-term debt, capital leases, and bank debt, $2.5 million was used to pay dividends, and $2.1 million was used for additions to capital assets. As of December 31, 2001, we had client premiums receivable outstanding of $80.5 million, of which 1.7% were over 90 days old. We monitor these receivables on a regular and timely basis and have controls in place to manage aging accounts. In addition, we can mitigate the risk of loss related to client premiums receivable by requesting that the insurance company cancel the contract for insurance where payment is overdue, thereby reducing the related premiums payable to insurance companies and the related amounts to be collected from the client. Therefore, we do 34 not believe that the aging of our accounts receivable presents a material liquidity risk. As of December 31, 2001, we had related premiums payable to insurance companies of $122.7 million. We require that our brokerages submit to head office on a monthly basis all excess cash on hand in excess of a working capital ratio of 1:1. All brokerages with trust reporting requirements are required to submit to head office on a quarterly basis trust reconciliation calculations stating whether or not they are in compliance with applicable insurance broker regulations. We maintain four separate credit facilities: - - $50 million facility. Borrowings under this facility are accessed at a floating rate of 112.5 basis points above LIBOR, which was 2.09% as of December 31, 2001. This facility expires on June 20, 2002 and requires us to maintain certain financial ratios. We intend to extend this facility for a further period of one year, but if the revolving period is not extended, any amounts outstanding will automatically convert into a three-year term loan at a fixed interest rate equal to the Canadian dollar interest swap rate quoted by the lender plus 1.375%. As of December 31, 2001, $49.5 million had been drawn on this facility. We intend to pay down approximately $5 million of this facility with the proceeds from the sale of Old Lyme. - - $25 million facility. Borrowings under this facility are accessed at a floating rate of 135 basis points above LIBOR. This facility is guaranteed by certain of our subsidiaries and by Fairfax. It expires on July 18, 2002 and contains covenants that, among other things, require us to maintain certain financial ratios, restrict our ability to incur additional debt and limit our quarterly dividend payments to C$0.07 per share. As of December 31, 2001, $25 million was drawn on this facility. We intend to fully repay and terminate this facility with proceeds from the sale of Old Lyme. - - $25 million facility. Borrowings under this facility are accessed either at a floating rate of 150 basis points above LIBOR or at a fixed interest rate of 9%. This facility is guaranteed by certain of our subsidiaries. The floating rate portion of this facility expires on July 17, 2002 and contains covenants that, among other things, require us to maintain certain financial ratios, restrict our ability to incur additional debt and limit our quarterly dividend payments to C$0.07 per share. As of December 31, 2001, $24.5 million was drawn on this facility, of which $23 million was drawn at a floating interest rate, and $1.5 million was drawn at a fixed interest rate, which is included in long-term debt and is due October 31, 2005. We intend to repay $4.5 million of this facility with proceeds from the sale of Old Lyme and to repay $20 million and terminate both the fixed and floating portions of this facility with proceeds from this offering. - - $7.5 million facility. Borrowings under this facility are at an interest rate of prime, which was 4.75% as of December 31, 2001, plus 1%. Payment is due on demand. As of December 31, 2001, $7.0 million had been drawn on this facility. We intend to fully repay and terminate this facility with the proceeds from the sale of Old Lyme. As of September 30, 2001, we were not in compliance with certain financial covenants relating to the maintenance of our financial ratios under both of our $25 million credit facilities. Our non-compliance was the direct result of a delay in reaching a final agreement for the sale of Old Lyme, the proceeds of which would have been used to repay debt. Our lenders have granted us waivers with respect to our non-compliance with these covenants. In addition, we have negotiated amended agreements with these 35 lenders as of December 31, 2001. Under the amended agreements, we are in compliance with all of the financial covenants governing the respective credit facilities as of December 31, 2001. As of December 31, 2001, we had $13.6 million of subsidiary debt comprised of various notes payable, term loans and capital leases. We intend to repay these liabilities from internally generated cash flow, existing cash balances and/or borrowings under our credit facilities as the subsidiary debt becomes due during 2002 through 2010. Of the outstanding subsidiary debt, $8.6 million is secured by liens on certain assets of our subsidiaries. In connection with our acquisition of Kaye on June 28, 2001, we issued: (1) $26.6 million aggregate principal amount of 8.5% convertible subordinated notes due June 28, 2006 to Zurich Insurance Company, the Zurich notes; and (2) $35 million aggregate principal amount of 8.5% convertible subordinated notes due June 28, 2007 to certain subsidiaries of Fairfax, the Fairfax notes. These convertible notes were anti-dilutive to earnings per share as of December 31, 2001. The Zurich notes are convertible by Zurich at any time into our common shares at C$17.00 per share, subject to mandatory conversion on June 30, 2006. Zurich has agreed not to convert the Zurich notes into common shares before June 30, 2002 and also has agreed to allow us to repay the Zurich notes, in whole or in part, on or before June 30, 2002, without penalty. We intend to repay the Zurich notes using proceeds from this offering. The Fairfax notes are convertible by the holders at any time into our common shares at C$17.00 per share. Beginning June 28, 2006, we may require Fairfax to convert the Fairfax notes into our common shares at C$17.00 per share if, at any time, the weighted average closing price of our common shares for 20 consecutive trading days equals or exceeds C$19.00 per share. If Fairfax converted all of the Fairfax notes, Fairfax would own approximately 45.1% of our total outstanding common shares as of December 31, 2001 or % after giving effect to this offering. Net debt, defined as, long-term debt, including the current portion, bank debt and subordinated convertible notes, less non-trust cash and the investment held for sale, as of December 31, 2001, was $129.2 million, compared to $14.7 million as of December 31, 2000. The increase in debt is largely associated with debt incurred to finance acquisitions we made in 2001. In connection with our acquisition of Kaye for $130.4 million, we issued $61.6 million in convertible subordinated notes to Fairfax and Zurich, as described above, as well, $54.0 million was financed with bank debt and $14.8 million was paid with cash. Similarly, the cash portion of our purchase of Burnham was financed with a short-term bank loan of $11.9 million. As a result of financing of these acquisitions with debt, our net debt-to-equity ratio has increased. As of December 31, 2001, our net debt-to-equity ratio was 0.96:1, up from 0.13:1 as of December 31, 2000. We may incur additional debt to pay for future acquisitions. However, we intend to continue our practice of using our common shares to pay for acquisitions. To the extent we issue additional common shares to pay for future acquisitions, your equity interest in us will be diluted. 36 The table below summarizes our contractual obligations and commercial commitments as of December 31, 2001:
- ----------------------------------------------------------------------------------------- PAYMENTS DUE BY PERIOD ON LESS THAN 1 - 3 4 - 5 AFTER (IN THOUSANDS) TOTAL DEMAND 1 YEAR YEARS YEARS 5 YEARS - ----------------------------------------------------------------------------------------- Bank borrowings............. $ 55,000 $7,000 $48,000 -- -- -- Long-term debt and capital lease obligations......... 80,328 -- 4,169 $ 5,272 $62,381 $ 8,506 Operating lease obligations............... 53,766 -- 9,061 14,877 11,991 17,837 ----------------------------------------------------------- Total..................... $189,094 $7,000 $61,230 $20,149 $74,372 $26,343 - -----------------------------------------------------------------------------------------
We intend to repay approximately $41.5 million of bank borrowings with the proceeds from the sale of Old Lyme. We intend to repay $20 million of our remaining bank borrowings and the Zurich notes with the net proceeds from this offering. It is our intention to pay for operating lease obligations with cash flows generated from our operating activities. We believe that our existing cash, funds generated from operations and borrowings available under our credit facilities, together with the proceeds from the sale of Old Lyme and the net proceeds from this offering, will be sufficient to satisfy our financial requirements, including strategic acquisitions, during the next twelve months. We may also raise debt or equity capital in the public or private markets in the future. If we issue additional common shares, your equity interest in us will be diluted. CONTINGENT OBLIGATIONS As part of our executive share purchase plan, we guaranteed loans made by a Canadian chartered bank to executives and employees to acquire our common shares. We may be required under certain circumstances to repay up to $5.5 million in loans incurred under the plan. The loans are secured by 669,000 of our common shares, which had a market value of $6.4 million as of December 31, 2001. See "Management--Indebtedness of directors, executive officers and senior officers" for a more detailed discussion of the loans outstanding. Additionally, in conjunction with our acquisitions of Flanagan and Burnham in 2001, we issued our common shares to the former owners of each brokerage in consideration of the purchase price paid and granted to them the option to require us to repurchase our shares, approximately 2.1 million common shares in total, upon certain triggering events. The estimated financial liability associated with these put options totaled $17.3 million as of December 31, 2001 and is included in long-term debt. See note 8 to our consolidated financial statements and the section entitled "Certain relationships and related party transactions--Put options" for more detail regarding the put options. We paid for the acquisition of Burnham and Flanagan with a combination of cash and our common shares. The former shareholders of Burnham and Flanagan are also entitled to receive contingent consideration if their respective brokerages meet specified performance targets, based on revenue and operating profit. 37 FLANAGAN The following table summarizes the contingent consideration that will be issued to the former shareholders of Flanagan if Flanagan meets certain performance criteria:
- --------------------------------------------------------------------------------------- CONTINGENT CONTINGENT CONSIDERATION YEAR CONSIDERATION TARGET CRITERIA - --------------------------------------------------------------------------------------- 2002.................................. 38,000 shares Revenue 2002.................................. 38,000 shares Profitability 2003.................................. 88,000 shares Revenue 2003.................................. 37,000 shares Profitability - ---------------------------------------------------------------------------------------
Flanagan met its contingent consideration criteria for 2001. Accordingly, as of December 31, 2001, we have an obligation to issue 50,000 shares in the amount of $478,000. The additional purchase consideration has been recorded in goodwill and share capital as of December 31, 2001. BURNHAM The former shareholders of Burnham are entitled to contingent consideration in the event that the acquired Burnham operations meet certain profitability targets for the twelve-month period ended June 30, 2002. The contingent consideration to be issued, if the profitability criteria are met, will be a portion of actual profitability in excess of the target. Any contingent consideration issued by us will be paid 38% in cash, 51% in our restricted shares, and 11% in our unrestricted shares. OTHERS An additional $400,000 of contingent consideration, based primarily on revenue targets, may also be issued in connection with acquisitions we made in 2001. SHAREHOLDERS' EQUITY Share repurchases. In 2001, no common shares were purchased and cancelled. As of December 31, 2001, 8,000 common shares were reserved in respect of our executive stock purchase plan. In 2000, we purchased and cancelled 226,000 of our common shares for an aggregate cost of $2.0 million of which $0.6 million was charged to retained earnings. In addition, we reserved 62,000 common shares in respect of our executive stock purchase plan. Of the aggregate cost of $0.8 million, retained earnings was charged with $0.4 million. Shareholders' equity increased by $23.1 million or 21% to $135.3 million as of December 31, 2001 from $112.2 million as of December 31, 2000. This increase resulted from net earnings of $10.1 million, an increase in the cumulative translation account of $2.6 million and an increase in share capital of $14.1 million primarily related to issuance of our common shares in connection with acquisitions. The increase in shareholders' equity was offset by the payment of dividends of $3.6 million. Shareholders' equity increased by $6.7 million or 6% to $112.2 million as of December 31, 2000 from $105.5 million as of December 31, 1999. This increase resulted from net earnings of $6.1 million, an increase in the currency translation account of $1.0 million and an increase in share capital of $3.1 million, which was offset by the payment of dividends of $2.5 million and excess over stated value of shares purchased of $1.0 million. 38 MARKET RISK INTEREST RATE RISK We are exposed to interest rate risk in connection with our credit facilities. We have approximately $104.5 million of floating rate bank debt. However, we intend to pay down approximately $41.5 million of such debt with proceeds from the sale of Old Lyme and $20 million of such debt with proceeds from this offering. Accordingly, upon completion of this offering and the application of the proceeds, we will be subject to interest rate risk on $43 million. Each 100 basis point increase in the interest rates charged on the balance of our outstanding floating rate debt after the offering will result in a $0.3 million decrease in our net earnings. We currently do not engage in any derivatives or hedging transactions. However, we are investigating and may enter into an interest rate swap for our outstanding foreign currency debentures. EXCHANGE RATE SENSITIVITY We report our revenue in U.S. dollars. Our Canadian Operations earn revenue and incur expenses in Canadian dollars. Given our significant Canadian dollar revenue, we are sensitive to the fluctuations in the value of the Canadian dollar and are therefore exposed to foreign currency exchange risk. Foreign currency exchange risk is the potential for loss in revenue and net income as a result of a decline in the U.S. dollar value of our Canadian dollar revenue due to a decline in the value of the Canadian dollar compared to the U.S. dollar. The Canadian dollar is subject to volatility and has experienced significant decline in its value compared to the U.S. dollar in recent years. As shown in the table under "Exchange rate information," the value of the Canadian dollar as of December 31, 1999 was $0.6925 compared to $0.6279 as of December 31, 2001, a decline of more than 9%. The table below summarizes the effect that a $0.01 decline or increase in the value of the Canadian dollar would have had on our revenue and net earnings in prior years.
- ------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PERCENTAGES) 2001 2000 1999 - ------------------------------------------------------------------------------------ Canadian Operations revenue........................ $78,564 $75,236 $52,562 Percentage of total.............................. 51.0% 79.0% 97.2% Canadian Operations net earnings................... $ 9,163 $ 6,446 $ 3,969 Percentage of total.............................. 91.6% 100.0% 100.0% $0.01 change in value of C$ results in change in: Revenue.......................................... +/-$785 +/-$752 +/-$ 525 Net earnings..................................... +/- 92 +/- 64 +/- 40 - ------------------------------------------------------------------------------------
The increasing proportion of our revenue derived from our U.S. Operations and earned in U.S. dollars has, in part, offset the potential risk of a decline in the Canadian dollar. We expect that the proportion of revenue earned in U.S. dollars will continue to increase, further mitigating our foreign currency exchange sensitivity. We have not entered into, and do not intend to enter into, foreign currency forward exchange agreements. 39 GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets arising from acquisitions consist of the following:
- ------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, (IN THOUSANDS) 2001 2000 - ------------------------------------------------------------------------------------ Customer relationships...................................... $ 21,720 $ -- Non-competition covenants................................... 2,587 -- Trademarks.................................................. 1,839 -- Goodwill.................................................... 235,670 128,226 Accumulated amortization.................................... (15,637) (10,482) -------------------- Total..................................................... $246,179 $117,744 - ------------------------------------------------------------------------------------
The amounts allocated to customer relationships, non-competition covenants and trademarks are determined by discounting the net cash flow of future commissions adjusted for expected persistency, mortality and associated costs. The balance of the excess purchase price is allocated to goodwill. Customer relationships are amortized on a straight-line basis over their periods of duration, normally fifteen years. Many factors outside our control determine the persistency of our customer relationships and we cannot be sure that the value we have allocated will ultimately be realized. Non-competition covenants and trademarks are intangible assets that have an indefinite life and accordingly, are not amortized but are evaluated for impairment under the new accounting standards as discussed under "--Effects of new accounting pronouncements." We have historically amortized goodwill primarily over a period of forty years. Under the new accounting standards, goodwill is not amortized and is evaluated annually for impairment. For the past three years ended December 31, 2001, our amortization has been comprised of the following:
- ------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, (IN THOUSANDS) 2001 2000 1999 - ------------------------------------------------------------------------------------ Customer relationships................................ $ 759 $ -- $ -- Non-competition covenants............................. 56 -- -- Goodwill.............................................. 4,125 3,260 1,626 -------------------------- Total............................................... $4,940 $3,260 $1,626 - ------------------------------------------------------------------------------------
We estimate that our amortization charges for 2002 through 2006 for all acquisitions consummated to date will be:
- ------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, (IN THOUSANDS) 2002 2003 2004 2005 2006 - ------------------------------------------------------------------------------------ Customer relationships................. $1,487 $1,487 $1,487 $1,487 $1,487 Non-competition covenants.............. 80 24 -- -- -- ------------------------------------------ Total................................ $1,567 $1,511 $1,487 $1,487 $1,487 - ------------------------------------------------------------------------------------
40 EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS In July 2001, we adopted the Canadian Institute of Chartered Accountants (CICA) Accounting Standards Board Handbook Sections 1581, "Business Combinations" and Section 3062, "Goodwill and Other Intangible Assets" (Section 1581 and Section 3062, respectively) for all business combinations accounted for using the purchase method consummated after that date. These sections harmonize Canadian standards with Financial Accounting Standards Boards Statement of Financial Accounting Standards No. 141 and No. 142 (SFAS No. 141 and SFAS No. 142, respectively). Section 1581 and SFAS No. 141 require that all business combinations be accounted for in accordance with the purchase method of accounting. We have historically used the purchase method to record acquisitions, with the exception of the initial 11 acquisitions in 1998, which was accounted for as a pooling-of-interests. Section 1581 and SFAS No. 141 also expand the definition of intangible assets acquired in a business combination accounted for using the purchase method. As a result, the purchase price allocation of future business combinations may be different than the allocation that would have resulted under the old rules. Business combinations must be accounted for using Section 1581 and SFAS No. 141 beginning on July 1, 2001. Our acquisition of the Burnham, effective July 1, 2001, was accounted for under the provisions of Section 1581 and SFAS No. 141. In accordance with the above, we completed valuations of our 2001 acquisitions and separately identified definite and indefinite life intangible assets apart from goodwill acquired as a result of our business combinations accounted for using the purchase method. Prior to 2001, we allocated the entire excess of the purchase price over net assets acquired to goodwill and primarily amortized that amount over a period of 40 years. Accordingly, there were no attempts to value and separately identify other intangible assets apart from goodwill associated with business combinations accounted for using the purchase method prior to 2001. For business combinations with a date of acquisition before July 1, 2001, accounted for by the purchase method, the transitional guidance of CICA Section 1581 and SFAS No. 141 require that the carrying amount of any recognized intangible assets, that meet the recognition criteria in paragraph 1581.48 (SFAS No. 141 paragraph 61), and has been included in an amount reported as goodwill (or as goodwill and intangible assets) should be reclassified and accounted for as an asset, apart from goodwill, upon initial application of CICA Section 3062 and SFAS No. 142 to the entire financial statements. For acquisitions prior to 2001, we did not separately identify and recognize intangible assets apart from goodwill in our accounting records. Therefore, we intend to continue to report the carrying value of the excess of purchase price over net assets acquired as goodwill for purchase business combinations prior to 2001. We believe that this treatment is in accordance with the transitional provisions of CICA Section 1581 and SFAS No. 141. In January 2002, we adopted CICA Section 3062 and SFAS No. 142 "Goodwill and Other Intangible Assets" for all business combinations accounted for using the purchase method prior to June 30, 2001. CICA Section 3062 and SFAS No. 142 eliminate the amortization of goodwill, require annual impairment testing of goodwill, and introduces the concept of definite and indefinite life intangible assets. Indefinite life 41 intangible assets, similar to goodwill, will no longer be amortized and will be tested at least annually for impairment. Definite life intangible assets will be amortized over the estimated useful life of the asset. CICA Section 3062 and SFAS No. 142 must be adopted on January 1, 2002. These new requirements will increase our future net earnings by an amount equal to the amount of goodwill amortization that has been discontinued, offset by any goodwill impairment charges and additional amortization as a result of reclassification of other intangible assets as goodwill. An initial impairment test must be performed as of January 1, 2002. Any resulting impairment charge from this initial test will be reported as a change in accounting principle, and charged to opening retained earnings, net of tax. Although we have not completed our assessment of the impact of the new impairment testing rules or the reclassification rules, based on current conditions, we do not expect to incur a material transition goodwill impairment charge as of January 1, 2002. We do, however, expect that because goodwill will no longer be amortized and charged to earnings that there will be a significant impact on our consolidated earnings in 2002 when compared to consolidated earnings for prior years. Amortization expense related to goodwill and other intangible assets for the years ended December 31, 2001 was $4.9 million compared to $3.3 million and $1.6 million in 2000 and 1999, respectively. ACCOUNTING FOR THE DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principal Board Opinion No. 30 "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB No. 30). SFAS No. 144 generally retains the basic accounting model for the identification and measurement of impairments to long-lived assets to be held, and long-lived assets to be disposed. SFAS No. 144 broadens the definition of "discontinued operations," as previously defined by APB No. 30, but does not allow for the accrual of future operating losses, as was previously permitted under that standard. SFAS No. 144 also addresses several implementation and financial statement presentation issues not previously addressed under U.S. GAAP. SFAS No. 144 excludes from its scope financial accounting and reporting for the impairment of goodwill and other intangible assets. The transitional guidance of SFAS No. 144 generally permits long-lived assets classified as held for disposal as a result of disposal activities that were initiated prior to SFAS No. 144's initial application to continue to be accounted for in accordance with the prior pronouncement applicable for that disposal. As such, our investment in Old Lyme, which is classified as held for disposal at December 31, 2001, will continue to be accounted for in accordance with generally accepted accounting principles applicable at the date that the disposal activities were initiated. 42 As of the time of this filing, the CICA has not harmonized Canadian GAAP with the provisions of SFAS No. 144. Accordingly, any impact related to the adoption of the provisions of SFAS No. 144 will be treated as a reconciling item between U.S. and Canadian GAAP. However, we do not anticipate that the provisions of SFAS No. 144 will have a material impact on our financial position or results of operations as reported under U.S. GAAP. 43 INDUSTRY OVERVIEW An insurance broker is an intermediary that places and negotiates insurance contracts for an insured. The broker works with the insured to assess its risk, determine the amount and type of coverage it needs, and select insurance providers. An insurance broker does not typically assume underwriting risk. There are three main sub-sectors of the insurance brokerage industry: (a) retail brokering, (b) wholesale brokering and (c) reinsurance brokering. Retail brokering involves placing insurance on behalf of the insured. The retail broker handles the majority of traditional risk placement services. Wholesale brokering involves placing insurance on behalf of another insurance broker. Reinsurance brokering involves placing reinsurance on behalf of an insurance company or reinsurance company. Typically, a broker is compensated for its services through commissions, which are calculated and paid as a percentage of the total insurance premium, and through fees for management and consulting services. The insured submits the premium to the broker who then deducts its commission and remits the remaining premium to the insurance company. The broker has the opportunity to earn investment income on premiums held in trust, pending remittance to the insurance company. Premiums are typically held in trust for less than 60 days and are invested in short-term securities. Insurance brokers may also earn fees for other risk management and consulting services that they perform for clients. Volume overrides and contingent commissions can also be negotiated with an insurance company based on the volume, type and profitability of the coverage placed with that insurance company. Payments for volume overrides are received from insurance companies throughout the year while payments for contingent commissions are typically received in the first or second quarter of the subsequent year. TRENDS AFFECTING THE INSURANCE BROKERAGE INDUSTRY Correlation with the property and casualty insurance underwriting industry. The insurance brokerage industry is highly sensitive to changes in the property and casualty insurance industry. The property and casualty insurance industry has undergone a substantial restructuring in recent years, including significant consolidation of insurers and until recently significant downward pressure on premiums. In an effort to improve profitability, insurance companies began to take steps to reduce their costs, including their distribution costs. As a result, insurance companies have demanded increased service and efficiency from insurance brokers. For example, brokers are expected to be fully automated in order to provide additional administrative services and to gain efficiencies in processing insurance applications. In addition, many insurers have redesigned the insurer/broker relationship by replacing loyalty with demands for minimum volume levels and requiring that the ratio between the claims paid and the premiums collected be reduced on policies being sold by brokerages. Beginning in 2001, and accelerated by the events of September 11, 2001, insurance premiums have risen. Increased premiums are now pervasive in the marketplace. Insurers have also become more selective in underwriting risks, causing brokers to expend greater resources to place coverages. In some cases, higher premium levels and more selective underwriting have caused brokers to lose clients due to unavailable or non-competitively priced products. 44 Consolidation. The soft pricing conditions that, until recently, characterized the insurance market for more than a decade resulted in downward pressure on margins in the insurance brokerage industry. Moreover, insurance brokers were only able to achieve a relatively low level of organic growth, typically tracking overall economic growth, because of the maturity of this industry. These two factors resulted in increasing consolidation within the insurance brokerage industry during the 1990s as insurance brokers sought to supplement their organic growth with growth from acquisitions. Some of the larger acquisitions in the 1990s included Marsh & McLennan Companies, Inc.'s purchases of Johnson & Higgins and Sedgwick and Aon Corporation's purchases of Alexander & Alexander and Frank B. Hall. In addition, a number of smaller insurance brokers have employed acquisition strategies, such as Arthur J. Gallagher, Hilb, Rogal and Hamilton, Brown & Brown, Acordia and USI, to develop a regional or national presence. This period of rapid consolidation has led to the emergence of two dominant participants in the North American insurance brokerage market: Marsh & McLennan and Aon Corporation, each of which primarily serve Fortune 1000 companies and other large companies. In the middle-market, the insurance brokerage industry tends to be fragmented and continues to be dominated by regional insurance brokerages. Despite consolidation, the insurance brokerage industry still features a large number of small, independent brokers, that often lack sophisticated succession plans. As the principals of small brokerages approach retirement, there is often an opportunity for larger, better capitalized brokers to acquire the smaller brokerages, providing the principals with liquidity for their ownership stake and providing the consolidators with attractive acquisition targets. Consolidators attempt to improve the efficiency of acquired brokerages by providing new technology, centralizing certain key management and administrative functions and providing a greater depth of products and services. Non-traditional sources of competition. Additional competitive pressures have arisen in the insurance brokerage industry from the entry of new market participants, such as banks, mid-sized accounting firms and insurance companies. In the United States certain banks have implemented aggressive insurance brokerage acquisition strategies in an attempt to augment their non-interest income and to capitalize on existing lending relationships with middle-market customers. Some mid-sized accounting firms have also sought to expand their existing relationships with middle-market customers by acquiring insurance brokerages, although the success of this strategy has generally been limited. Insurance companies also compete with brokers by directly soliciting insureds without the assistance of an independent broker or agent. In addition, both insurers and brokers have turned to the Internet as a direct marketing strategy. Despite these trends we believe that traditional insurance brokers will continue to have a significant role in the placement of larger, more complicated policies and to function as risk managers on behalf of many small to medium-sized clients. Diversification. Another trend in the insurance brokerage industry is the increasing diversification of products and services offered by larger regional and national brokers. Brokers specializing in commercial lines traditionally have focused on offering one or two niche products targeted to a particular industry. In recent years, larger brokers have added a variety of new products and services in order to meet the increasingly 45 complex risk management needs of their clients and to address the decision by clients to retain more of the risk themselves to better manage premium levels. Client demands. Clients generally have an increasing level of awareness of their risk management options and are demanding improved coverage and services without commensurate increases in price. Brokers no longer can adopt a uniform strategy to attract and satisfy clients. Clients are more segmented, with certain groups emphasizing price and others emphasizing personal service and efficiencies in the insurance purchasing process. In this new environment, brokers must employ different strategies and offer a broader range of products, services and distribution channels to attract and satisfy different client segments. RESULTING EFFECTS ON INSURANCE BROKERS Property and casualty insurers are becoming more selective about the brokers that distribute their products. Brokers must demonstrate to insurers productivity (by meeting minimum volume levels and not exceeding specified loss ratios), efficiency (by having the capability to process insurance applications on behalf of the insurer) and sophistication (by having information technology, aggressive marketing strategies and client retention systems). To meet these high standards, brokers are changing the way they traditionally have operated their businesses by making greater investments in technology, preparing comprehensive business, marketing and succession plans and generally transforming themselves into more sophisticated operations. Many large brokers have established multiple distribution channels to attract different market segments and to compete on a cost-effective basis with new entrants into the market. In addition, many brokers now offer multiple types of insurance products and services in an effort to provide one-stop shopping. We believe that smaller brokers may be unable to invest in improving technology or to further broaden their products and services. We also believe that consolidation of the brokerage industry will continue as smaller brokers seek access to the resources of larger partners and their economies of scale. DIFFERENCES BETWEEN THE U.S. AND CANADIAN MARKETS The trends in the insurance brokerage industry tend to be similar in the United States and Canada. However, there are a few distinctions. For example: - - premiums generally began to increase in the United States in the early part of 2001, but did not generally begin to increase in Canada until the latter part of 2001; - - provincial governments in Canada provide publicly funded, government-managed health insurance to all residents and some provincial governments have assumed the role of the exclusive provider of primary liability automobile insurance, which they sell through designated independent brokers; and - - the Canadian market for insurance brokerage products and services is much smaller than the U.S. market. 46 BUSINESS OVERVIEW We are a leading North American insurance brokerage providing a broad array of property and casualty, life and health, employee benefits, investment and risk management products and services. We focus primarily on middle-market commercial accounts in the United States and Canada, which we serve through our approximately 1,900 employees in 130 locations, using a variety of retail and wholesale distribution channels. We define the middle-market as those clients that generate annual commissions and fees ranging from $2,500 to $250,000. Since our company was formed in 1998 through the merger of 11 Canadian insurance brokerages, we have acquired an additional 78 brokerages and have established a strong presence in the northeastern and midwestern United States and in the Canadian provinces of Ontario, Quebec and British Columbia. Through a combination of acquiring quality brokerages with proven track records and organic growth, we have grown our revenue from $38.7 million in 1998 to $154.0 million in 2001, representing a compound annual growth rate of 58%. In addition, our EBITDA has increased from $6.2 million in 1998 to $30.7 million in 2001, representing a compound annual growth rate of 70%. We operate through an organizational structure comprised of our head office, larger regional brokerages that we call "hub" brokerages and smaller brokerages that we call "fold-ins." Our head office coordinates selling and marketing efforts, identifies cross-selling opportunities among our brokerages, negotiates significant contracts with insurers and handles general administrative functions. We have nine hub brokerages, four operating in the United States and five in Canada. Each hub brokerage has a significant market presence in a geographic region of the United States or Canada. We operate our hub brokerages in a decentralized manner so they may more effectively address their local market conditions. A hub brokerage is responsible not only for the development of its own business, but also the identification of fold-ins that can be acquired by and integrated into the operations of the hub brokerage. This process allows each hub brokerage an opportunity to strengthen its regional market presence by acquiring new or complementary products and services and management talent and improve profit margins through the reduction or elimination of redundant administrative functions, premises and systems. Our structure enables our hub brokerages to more effectively and quickly meet the changing needs of our clients in various markets, while benefiting from the operating efficiencies and leverage of a large brokerage. OUR PRODUCTS AND SERVICES We offer commercial and specialized insurance products and services to businesses, personal insurance products and services to individuals and program products to affinity groups and associations. We offer three categories of commercial products and services: property and casualty products, employee benefits and risk management services. We offer two categories of personal products and services: property and casualty products and life, health and financial products and services. Our program products involve the development, in collaboration with insurance companies, of baskets of insurance products for members of affinity groups or associations, such as bar associations, medical associations and other professional groups. Our specialized risk products cover 47 diverse exposures such as environmental, professional liability and directors' and officers' liability. The chart below lists a selection of our commercial and personal insurance products and services. COMMERCIAL INSURANCE
- ----------------------------------------------------------------------------------- PROPERTY AND CASUALTY EMPLOYEE BENEFITS RISK MANAGEMENT SERVICES - ----------------------------------------------------------------------------------- - - Business property - Group life and health - Claims management - - Auto and trucking fleets - Employment issues - Risk finance structuring - - Technology - Human resources - Exposure evaluation - - Intellectual property - Retirement plans - Coverage analysis - - Natural disaster - Contract review - Contract review - - Workers' compensation - - Liability - - Surety bonds - - Business income - - Accounts receivable - - Environmental risks - -----------------------------------------------------------------------------------
PERSONAL INSURANCE
- -------------------------------------------------------------------------------------------- PROPERTY AND CASUALTY LIFE, HEALTH AND FINANCIAL - -------------------------------------------------------------------------------------------- - - Home - Disability - - Personal property - Life - - Auto and recreational vehicles - Investments - - Travel accident and trip cancellation - Financial planning - --------------------------------------------------------------------------------------------
The mix of products and services we offer in the United States differs from those we offer in Canada. Our product mix in the United States is comprised of more commercial products and services as compared to more personal products and services in Canada. In the United States in 2001, 83.6% of our commission income was generated from the sale of commercial lines and 10.0% from personal lines. In Canada in 2001, 47.1% of our commission income was generated from the sale of commercial lines and 44.5% from personal lines. STRATEGY Our primary goals are to further develop our position as a leading North American middle-market insurance brokerage and to generate significant sustained shareholder value. We plan to achieve these objectives by executing the following strategies: Focus on middle-market commercial accounts. We focus our sales efforts on middle-market companies. We estimate that there are more than 1.2 million middle-market companies in the United States and more than 50,000 middle-market companies in Canada. We believe that the insurance and risk management needs of these companies are underserved because many of the brokers that target them have limited capital 48 resources and lack the breadth of products and services that we are able to offer due to our scale and strong insurer relationships. We primarily target commercial accounts because they generally generate higher profit margins than personal accounts. Commercial accounts also provide us with the opportunity to sell personal insurance products and employee benefits to the employees of those businesses. Grow organically. We intend to increase profitability per customer and attract new customers by leveraging our existing infrastructure to: - - sell a broad range of products and services through the efficient use of a variety of distribution channels; - - effectively and efficiently identify and target profitable client segments by employing technology to capitalize on our extensive customer databases; and - - maximize cross-selling opportunities among our brokerages. Grow through selected acquisitions. The introduction of new brokerages through acquisitions is a fundamental component of our strategy. We have acquired an additional 78 brokerages since our formation in 1998. We acquire brokerages to grow our revenue, complement and supplement our existing products and services and add experienced management. In addition, acquisitions of larger brokerages allow us to further expand our hub platform and geographic reach. We believe that we are well positioned to compete for quality brokerages and that our proven success in consolidating brokerages in the past will make us attractive to regional brokerages seeking to join with and share in the resources of a larger North American brokerage. Standardize procedures to increase operating efficiency and reduce costs. We strive to implement the best operating and sales practices of our brokerages across our company. We provide centralized marketing support to our brokers for many specialized risk programs and group home and auto plans and we are integrating promotional programs across our brokerage offices. Our brokerages share certain systems, such as accounting and payroll, which reduce redundancies and increase operating efficiencies. In addition, we are developing a comprehensive quality control program and a standardized approach to our sales and marketing efforts across our brokerages. Recruit, train and retain qualified personnel. We are formalizing our recruiting and training program to continue to build and sustain a sales and service team with a wide variety of experience and capabilities. We intend to recruit directly from college campuses and provide graduates with effective training and attractive compensation packages. In addition, we are making a concerted effort to develop a company-wide sales culture by promoting the techniques and results of our most successful producers through regular newsletters, sales meetings, sales tracking, awards, recognition programs and training. We are implementing a formal internship program designed to groom selected candidates to be successful producers within our company. We anticipate commencing the program in the second half of 2002. Candidates will be selected by our hub brokerages and typically will have a university education or relevant work experience. Participants will spend several weeks learning about the insurance industry, our company, quality standards, products and services and leading sales techniques from our leading producers, members of management, representatives of insurance compa- 49 nies and other members of the industry. Upon completion of the curriculum, successful trainees will be designated for an area of specialization. COMPETITIVE ADVANTAGES We believe the following competitive advantages will enable us to achieve our objectives: Decentralized hub approach. Our decentralized hub approach allows us to react to regional market conditions while still centrally managing the growth and profitability of our business with consistent standards. Our geographic diversity allows us to balance our revenue stream across markets and better insulate us from regional adverse developments. Our hub structure provides us with strong local name recognition and a ready platform, capable of reacting quickly to smaller brokerage acquisition opportunities, and to assimilate fold-ins once acquired. Broad array of products and services offered through multiple distribution channels. We offer a broad array of products and services, which allows us to maintain and maximize existing client relationships and attract new clients. We offer these insurance products and services through four distribution channels: retail, wholesale property and casualty, wholesale life and financial and call-centers. Our diversity provides us with the flexibility to determine the most appropriate product and service and which distribution channel to employ for particular market segments. We are exploring the implementation of Internet strategies to reach a growing on-line market segment and to reduce costs in processing insurance quotes and applications. See "--Distribution channels" for a more detailed discussion about distribution. Benefits of scale. Our scale, relative to smaller brokerages, provides insurers with greater incentives to work with us. Enhanced insurer relationships often result in mutual cost savings, increased volume overrides and contingent commissions, favorable commission rates, collaborative marketing arrangements and product design, exclusive distribution rights for certain territories and products, and, in some cases, expanded authority to price and approve insurance policies on behalf of insurance companies, thus eliminating the time and expense required for the broker to solicit numerous price quotes. Our scale also makes us attractive to smaller brokerages as a potential acquiror. Committed and experienced management. Most of the senior managers of our brokerages have over 20 years of experience in the industry and also have significant shareholdings in our company, typically with transfer restrictions for up to ten years. In addition, designated key employees in each brokerage are rewarded for their contribution to their brokerage's success through a bonus program that recognizes brokerage performance in excess of specified targets. We believe that these strategies encourage loyalty and align the interests of management of our brokerages with our corporate goals and the interests of our shareholders, combining to create a powerful incentive to maximize financial results. Most of our senior managers have extensive contacts in the insurance brokerage industry, including participation in prominent industry associations, brokerage networks and insurance company broker councils. 50 OUR OPERATIONS We were created in November 1998 when 11 Canadian brokerages merged to form Hub. Significant events that have occurred since our formation in the last four years include: - - January 1999--Fairfax purchased 5.4 million common shares of Hub for $35 million cash. - - January 1999--We completed a financing whereby we issued a total of 2,838,080 common shares, on a private placement basis at a price of $8.60 per common share or approximately $24.4 million in the aggregate. Fairfax purchased, through certain of its wholly-owned subsidiaries, 1,185,184 of the common shares. - - February 1999--We completed a public offering in Canada of 865,624 common shares at a price of $8.60 per share for total proceeds of approximately $7.4 million and listed our common shares on the TSE. - - During 1999--We acquired 44 brokerages in Canada and completed our first acquisition in the United States (Mack and Parker, Chicago, Illinois). - - During 2000--We acquired 18 brokerages in Canada and the United States (including McCarthy). - - During 2001--We acquired 16 brokerages in Canada and the United States (including Flanagan, Kaye and Burnham). Our activities are currently conducted from principal offices located in Chicago, New York, Boston, Toronto, Vancouver and Montreal. The following table lists our nine hub brokerages.
- ------------------------------------------------------------------------------------------ NAME LOCATIONS DATE ACQUIRED - ------------------------------------------------------------------------------------------ Burnham Battle Creek, Michigan, and other July 2001 locations in Michigan, Chicago, Cleveland, Dallas Kaye New York, Rhode Island, Connecticut, June 2001 California C.J. McCarthy Boston June 2000 Mack and Parker Chicago, New York, Baltimore, October 1999 (includes Flanagan Cleveland, Denver acquired in June 2001) TOS Insurance Services Vancouver, British Columbia August 1999 Barton Insurance British Columbia November 1998 The Hub Group (Ontario) Southern and central Ontario November 1998 Martin Assurance & Gestion de Montreal, Quebec November 1998 Risques Hub Financial Toronto, Calgary, Vancouver, Edmonton November 1998 - ------------------------------------------------------------------------------------------
51 ACQUISITION PROCESS Our senior management is responsible for identifying and negotiating the acquisition of hub brokerages that are strategically suited to our growth strategy. Typically we are familiar with the owners and management of the acquisition target well before we initiate discussions. Most of the hub brokerages we acquire are owner operated. We perform extensive diligence on potential targets and we determine what the budget of the acquired brokerage will be, including payroll and other adjustments, prior to completing the acquisition. We anticipate that we will selectively acquire more hub brokerages in geographic regions where we currently have a limited presence, most notably the southeastern, southwestern and western United States. There are many more brokerages in the United States that we would consider suitable hub brokerage acquisition candidates than in Canada due to the market size of the United States. Each new hub will be characterized by the following attributes: - - an experienced and talented management team prepared to make a long-term commitment to executing our strategic business plan; - - the ability to identify, acquire and seamlessly integrate smaller brokerages (fold-ins) in its region; - - specialization in certain products or services that may be beneficial to or complement our other brokerages; and - - a demonstrated record of organic growth and profitability, operating at, or capable of achieving in the near term, minimum financial performance targets. The retention of existing management at the hub brokerages we acquire is important to the successful integration and subsequent operation of acquired brokerages. We encourage existing management to stay with the acquired hub brokerage by using our common shares to pay a large majority of the acquisition price. The shares the owner/management receive are subject to transfer restrictions for up to ten years, with 10% being released from these restrictions on the third, fourth and fifth anniversaries of the acquisition. DISTRIBUTION CHANNELS We utilize retail, wholesale and call-center distribution channels, and have the ability to employ these distribution channels for specific market segments. Each brokerage uses a combination of different distribution channels: - - Retail sales and service centers that target middle-market companies provide a broad range of property and casualty insurance, life and health insurance, risk management and financial services from traditional office locations leased by our brokerages in local communities. All of our brokerages utilize this distribution channel; - - Retail call-centers provide sales and services by telephone to individuals or members of employee groups, associations, affinity groups and specific communities. We operate call-centers in Chicago, Toronto, Saint John, New Brunswick and Chilliwack, British Columbia; 52 - - Wholesale life and financial services centers, known as managing general agents, provide life and financial products and expertise to independent agents on a wholesale basis from our locations in Vancouver, Calgary and Toronto; and - - Wholesale property and casualty insurance centers provide products, international risk solutions, captive management programs and specialty lines to independent brokers and corporations in North America and internationally from our locations in New York, Toronto and Vancouver. In addition, we are a member of the Worldwide Broker Network, a consortium of international brokerages which we can access to service clients resident in the United States and Canada who require insurance internationally. DECISION-MAKING PROCESS We have established an executive committee that consists of our senior executive officers and the heads of each of our hub brokerages. The executive committee is comprised of two subcommittees that meet independently of each other, one comprised of U.S. representatives (chaired by Bruce Guthart, our President, U.S. Operations), and the other comprised of Canadian representatives (chaired by Craig Barton, our President, Canadian Operations). The mandate of the sub-committees is to discuss topics of common concern and opportunity for the brokerages of each respective country and to make recommendations to the executive committee and to implement and report to the executive committee regarding initiatives that are undertaken. The executive committee convenes monthly to discuss company-wide strategies and developments. COMPETITION The insurance brokerage industry is highly competitive. We face several sources of competition including other brokerages, insurance companies, banks and other financial services companies. Brokerage consolidators have been active in the market over several years. Consolidators, often publicly traded corporations, consolidate small to medium size independent brokerages with a view to strengthening their competitive position and increasing their market share. In addition to direct competition from the insurance companies, new sources of competition are emerging as banks in the United States accelerate their efforts to diversify their financial services to include insurance brokerage services (often through the acquisition of established insurance brokerages) and as the Canadian chartered banks lobby for greater flexibility to create and market insurance products. We compete for clients in both the United States and in Canada on the basis of reputation, client service, program and product offerings and the ability to tailor our products and risk management services to the specific needs of a client. We believe that we are in a favorable competitive position in most of the meaningful aspects of our business, because of our broad array of products and services, diversity of distribution channels, industry focus and expertise, and management experience. We believe that our most serious competitive threat in the United States will likely come from brokerages such as Arthur J. Gallagher, Brown & Brown and Hilb, Rogal and Hamilton, who pursue an acquisition or consolidation strategy similar to ours. We believe that our primary competitors in Canada are local retail brokers. 53 GOVERNMENT REGULATION LICENSES In every state, province and territory in which we do business, the relevant brokerage is required to be licensed or to have received regulatory approval to conduct business. In addition to licensing requirements, most jurisdictions require individuals who engage in brokerage and certain insurance service activities to be licensed personally. Our operations depend on the validity of and continued good standing under the licenses and approvals pursuant to which we operate. Licensing laws and regulations vary from jurisdiction to jurisdiction and are always subject to amendment or interpretation by regulatory authorities. Such authorities are generally vested with general discretion as to the grant, renewal and revocation of licenses and approvals. PRIVACY The management and dissemination of information is critical to our business. We gather information from our customers to assess and address their insurance needs. We share information both internally, among our employees, and, where appropriate and permitted, between our brokerages, as well as externally, with insurers. We believe we have taken appropriate steps to safeguard our customers' information. A recent trend in both the United States and Canada has been the introduction of more comprehensive privacy laws designed to protect the privacy of individuals from the undisclosed or non-consensual sharing of sensitive information for commercial purposes. As the gathering and use of information is such an integral component of our business, we must always be alert for changes in the information regulatory environment. For example, in response to the recent effectiveness of the privacy provisions of the Gramm-Leach-Bliley Act, our U.S.-based brokerages have developed or refined written privacy policies that, together with appropriate opt-out elections, have been sent to all of our customers who are resident in the United States. In Canada, the federal Personal Information Protection and Electronic Documents Act and similar proposed provincial legislation will affect our operations as of January 1, 2004, and possibly sooner. This new legislation will require us to obtain the consent of our customers before their personal information can be collected, used or disclosed. Furthermore, to the extent we share information with federally regulated Canadian organizations or disclose personal information between provinces or internationally for consideration, we are already subject to the federal legislation. We do not believe that these regulatory changes will have any significant effect on our operations. EMPLOYEES As of December 31, 2001, we employed 1,932 persons on a full-time basis, 1,544 of whom were employed in sales and customer service and 388 of whom were employed in corporate finance and administration. None of our employees are represented by a labor union and we have never experienced a work stoppage. We believe our relationship with our employees is good. 54 FACILITIES We maintain our corporate headquarters at premises that we sublet from Mack and Parker in Chicago, Illinois. This facility, totaling approximately 3,500 square feet, contains corporate, finance, administration, sales and customer support functions. The lease on the premises expires on October 1, 2011. We also lease the following premises:
- ------------------------------------------------------------------------------------- SPACE NUMBER OF LEASE EXPIRATION OF FACILITY (SQUARE FEET) LOCATIONS REGIONAL HEAD OFFICE - ------------------------------------------------------------------------------------- California....................... 7,200 1 September 30, 2007 Connecticut...................... 10,400 1 November 30, 2002 Illinois......................... 50,200 4 October 1, 2011 Massachusetts.................... 32,800 6 July 1, 2002 Michigan......................... 25,000 8 June 30, 2011 New York......................... 82,600 3 August 31, 2010 Rhode Island..................... 7,500 1 April 30, 2007 Texas............................ 15,000 2 September 30, 2006 Alberta.......................... 21,800 5 December 31, 2006 British Columbia................. 175,300 68 December 31, 2010 New Brunswick.................... 2,200 1 May 31, 2004 Ontario.......................... 106,400 24 August 31, 2010 Quebec........................... 62,300 4 August 31, 2010 - -------------------------------------------------------------------------------------
Total annual base rent for all of these locations is approximately $7.9 million. We believe that our facilities are well maintained and in good condition and are adequate for our current needs. We expect that suitable additional space will be available as required. LEGAL PROCEEDINGS In the normal course of business, we are involved in various claims and legal proceedings relating to insurance placed by us and other contractual matters. Our management does not believe that any such pending or threatened proceedings will have a material adverse effect on our consolidated financial position or future results of operations. 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following persons are our executive officers and directors as of December 31, 2001:
- -------------------------------------------------------------------------------------------- NAME AGE POSITION - -------------------------------------------------------------------------------------------- Martin P. Hughes 53 Chairman, Chief Executive Officer and Director Richard A. Gulliver 46 President, Chief Operating Officer and Director John Varnell(1) 45 Vice-Chairman and Director Bruce D. Guthart 46 President, U.S. Operations and Director R. Craig Barton 48 President, Canadian Operations and Director W. Kirk James 46 Vice President, Secretary and General Counsel Dennis J. Pauls 41 Vice President and Chief Financial Officer Peter L. Scavetta 41 Vice President, Finance Jean Martin 55 Vice President and Director Anthony F. Griffiths(1)(2) 71 Director Paul Murray(1)(2) 70 Director Bradley P. Martin(3) 42 Director - --------------------------------------------------------------------------------------------
(1) Member of audit committee. (2) Member of compensation committee. (3) Will stand for election to our board of directors at our annual general meeting in May 2002 and will be appointed to our audit committee and compensation committee. Martin P. Hughes has served as our Chairman, Chief Executive Officer and a director since December 1999. Mr. Hughes has 28 years of experience in the insurance brokerage industry. In 1973, Mr. Hughes joined Mack and Parker for which he served as Chairman from 1999 to 2001 and as President from 1990 to 1999. Mr. Hughes previously served as Chairman of Assurex International, a worldwide insurance service organization, as director of the Assurex Marketing Group and as a director of the Council of Insurance Agents and Brokers. Richard A. Gulliver has served as our President and a director since November 1998, and as our Chief Operating Officer from December 1999 to the present and as our Chief Executive Officer from January 1999 to December 1999. Mr. Gulliver has 25 years of marketing, sales and management experience in the insurance brokerage industry. Prior to joining us, Mr. Gulliver served as President of The Hub Group (Ontario) from 1997 to 1998 and of its subsidiary, Gulliver Insurance Brokers Ltd., from 1986 to 1998. In 1995, Mr. Gulliver and others collaborated to form Insurance Network Solutions Inc., a company for which Mr. Gulliver served as President from 1995 to 1997. Mr. Gulliver holds his designation from the Insurance Institute of Canada and is a Canadian Certified Insurance Broker. 56 John Varnell has served as a director since November 1998 and as our Vice Chairman since December 1999. Prior to December 1999, Mr. Varnell served as our Chairman and until February 1999 as our Chief Financial Officer. Mr. Varnell has been a senior officer of Fairfax since 1986 and was involved in most of Fairfax's acquisitions and investments from then until 2001. Mr. Varnell is a chartered accountant. Bruce D. Guthart has served as our President, U.S. Operations and a director since August 2001. Prior to joining us, Mr. Guthart held the position of President of Kaye since its formation in 1993. He was appointed Chief Executive Officer of Kaye in 1996 and its Chairman in 1997. Mr. Guthart is a Director of the Council of Insurance Agents and Brokers. R. Craig Barton has served as our President, Canadian Operations since November 2001, and as a director since November 1998. Mr. Barton has been involved in the insurance brokerage industry for approximately 29 years. He has been the President and Chief Executive Officer of Barton Insurance since 1988. W. Kirk James has served as our Vice President, Secretary and General Counsel since December 1999. Mr. James has practiced law for 20 years and is a member of the Law Society of Upper Canada (Ontario). Prior to joining us, Mr. James was a corporate lawyer and partner with the law firm McKenzie, Lake, in London, Ontario from 1991 to 1999. Dennis J. Pauls has served as our Chief Financial Officer and as Vice President since February 1999 and December 1999, respectively. Mr. Pauls served as Chief Financial Officer of The Hub Group (Ontario) and its subsidiary, Gulliver Insurance, from 1991 to 1999, where he participated in planning the initial organization and structure of our company. Mr. Pauls is a chartered accountant. Peter L. Scavetta, has served as our Vice President, Finance, since December 1, 2001. Prior to that, since September 1992, Mr. Scavetta was Vice President, Finance of Kaye. Mr. Scavetta has been a certified public accountant since 1985 and is a member of the American Institute of Certified Public Accountants. Prior to joining Kaye, Mr. Scavetta held positions in both the audit and tax departments at Coopers & Lybrand, Certified Public Accountants. Jean Martin has been our Vice President and a director since November 1998. Mr. Martin has been involved in the insurance brokerage industry for approximately 30 years. He has served as President of Martin Assurance (and its predecessor companies) for the past 20 years. Anthony F. Griffiths has served as a director since December 1998. He is currently an independent business consultant and corporate director. Mr. Griffiths became the Chairman of Mitel Corporation, a telecommunications company, in 1987 and also assumed the positions of President and Chief Executive Officer in addition to that of Chairman from 1991 to 1993. He is currently a director of various operating subsidiaries of Fairfax and of Alliance Atlantis Communications Inc., Leitch Technology Corporation, QLT Inc. and Russel Metals Inc. Paul Murray has served as a director since January 1999. He has been President of Pinesmoke Investments Ltd. of Toronto, Ontario, since 1985. From 1990 to 1998 Mr. Murray served as President, Secretary and Treasurer of Lockwood Manufacturing Inc. of Brantford, Ontario. Mr. Murray is a chartered accountant. 57 Bradley P. Martin will stand for election to our board of directors at our annual general meeting in May 2002. He has served as a Vice President of Fairfax since June 1998. Prior to that, Mr. Martin had been a partner at the law firm of Torys LLP in Toronto, Ontario since 1995. BOARD COMMITTEES Our board of directors has an audit committee, a compensation committee and an executive committee. AUDIT COMMITTEE Our board of directors has established an audit committee to be comprised of three independent directors. The audit committee's primary responsibilities include: - - engaging independent accountants; - - approving independent audit fees; - - reviewing quarterly and annual financial statements, audit results and reports, including management comments and recommendations thereto; - - reviewing our system of controls and policies, including those covering conflicts of interest and business ethics; - - evaluating reports of actual or threatened litigation; - - considering significant changes in accounting practices; and - - examining improprieties or suspected improprieties, with the authority to retain outside counsel or experts. Our audit committee is currently comprised of Anthony F. Griffiths, Paul Murray and John Varnell. We intend to appoint Bradley P. Martin to our audit committee after he is elected to our board of directors at our next annual general meeting. COMPENSATION COMMITTEE Our board of directors has established a compensation committee to be comprised of three independent directors. The compensation committee's primary responsibilities include reviewing and making recommendations to our board of directors regarding our restricted share plan, share purchase plans and compensation to our officers. The compensation committee also establishes and reviews general policies relating to compensation and benefits of our employees. Our compensation committee is currently comprised of Anthony F. Griffiths and Paul Murray. We intend to appoint Bradley P. Martin to our compensation committee after he is elected to our board of directors at our next annual general meeting. EXECUTIVE COMMITTEE We also have an executive committee, appointed by our board of directors, comprised of certain of our senior executive officers identified in the table under the heading "--Executive officers and directors" as well as the following, each of whom are the heads of hub brokerages: Charles C. Burnham (Burnham), Nelson Tilander (Hub Ontario), Edward Mack (Mack and Parker), Joseph P. Flanagan (Mack and Parker), 58 Cornelius J. McCarthy (McCarthy) and Larry Lineker (TOS). The executive committee meets on a monthly basis and assists management in assessing, developing and exploiting company-wide brokerage opportunities and initiatives. See "Business--Our operations--Decision making process" for a more detailed description of the executive committee. DIRECTOR COMPENSATION Directors other than directors who are officers of Hub or of any of Hub's subsidiaries ("outside directors") are paid an annual retainer of approximately $3,100 for their services. Additional amounts may be paid to outside directors for special assignments. In 2001 three outside directors were entitled to receive an aggregate of $9,300 pursuant to these arrangements. Directors other than outside directors are not compensated for their services. Directors are reimbursed for travel and other out-of-pocket expenses incurred in attending board or committee meetings or in otherwise being engaged on Hub's business. EXECUTIVE COMPENSATION The following table sets forth compensation information for our Chief Executive Officer and our five other most highly compensated executive officers, referred to as our named executive officers, during the year ended December 31, 2001.
- --------------------------------------------------------------------------------------------------------- ANNUAL COMPENSATION ------------------------------------- LONG-TERM NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER COMPENSATION POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2) AWARDS - --------------------------------------------------------------------------------------------------------- Martin P. Hughes........... 2001 $350,000 $350,000 $45,989 $ -- -- Chairman and Chief Executive Officer Richard A. Gulliver........ 2001 250,000 250,000 42,635 -- -- President and Chief Operating Officer Bruce D. Guthart(3)........ 2001 250,000 296,000 13,700 2,550 -- President, U.S. Operations R. Craig Barton(4)......... 2001 258,715 538,452 39,097 4,366 -- President, Canadian Operations Dennis J. Pauls............ 2001 200,000 100,000 14,272 -- -- Vice President and Chief Financial Officer W. Kirk James.............. 2001 200,000 100,000 17,764 -- -- Vice President, Secretary and General Counsel - ---------------------------------------------------------------------------------------------------------
(1) The amounts quoted in this column includes the taxable benefits represented by automobile allowances, memberships, participation in group medical and life insurance plans, relocation expenses, an interest free loan to R.C. Barton Ltd. (now repaid in full) and interest or deemed interest with respect to 10 year interest free loans granted in connection with our executive share purchase plan described under "Executive share purchase plan" and "Indebtedness of directors, executive officers and senior officers." The shares issued under the plan vest at 10% per year while the participant remains employed by us. Until the principal of the loan has been repaid, these shares continue to be held as collateral for the outstanding loan. We have agreed to forgive the $0.5 million and $0.4 million loans made by us to each of Mr. Hughes and Mr. Gulliver, respectively, after each has been continuously employed by us for ten years from the original date of the respective loan. When we implement our restricted share plan, Mr. Hughes and Mr. James will no longer participate in our executive share purchase plan. (2) The amounts quoted in this column include our contribution to Mr. Guthart's 401(k) plan and a contribution to the Barton Insurance retirement plans on behalf of Mr. Barton. 59 (3) Employed and paid by Hub's subsidiary, Kaye (which was acquired by us effective June 2001) for six months in 2001. (4) Salary and Bonus until December 31, 2001 were paid in the form of fees to Librico Properties Ltd., a corporation controlled by R. Craig Barton, by Hub's subsidiary, Barton Insurance. Pursuant to the employment agreement we entered into with Mr. Barton on January 1, 2002, salary and bonus will now be paid by Barton Insurance directly to Mr. Barton. MANAGEMENT AND EMPLOYMENT CONTRACTS We have entered into employment agreements with Martin Hughes, our Chairman and Chief Executive Officer, Richard Gulliver, our President and Chief Operating Officer, Dennis J. Pauls, our Vice President and Chief Financial Officer, and W. Kirk James, our Vice President, Secretary and General Counsel. The agreements provide Mr. Hughes, Mr. Gulliver, Mr. Pauls and Mr. James with an annual salary of $350,000, $300,000, $200,000 and $200,000, respectively, participation in our 401(k) plan, in which we provide a matching contribution of 60% of the participant's contribution, up to a maximum of three percent of the participant's salary, and an annual bonus of up to $350,000, $200,000, $100,000 and $100,000, respectively, to be declared at the discretion of our compensation committee. Our compensation committee determines the amount of the annual bonuses of Mr. Hughes, Mr. Gulliver, Mr. Pauls and Mr. James taking into consideration not only individual performance, but also our performance as a company relative to our growth and profitability targets for the applicable year. Under our agreement with Mr. Hughes, he is provided with use of a company car. Under our respective agreements with Mr. Gulliver, Mr. Pauls and Mr. James, each is provided with a car allowance. In the event of termination of Mr. Hughes, Mr. Gulliver, Mr. Pauls or Mr. James by us without cause, or by Mr. Hughes, Mr. Gulliver, Mr. Pauls or Mr. James for good reason (including any significant alteration in the nature of his duties), each is entitled to payment of an amount equal to one year's salary plus a ratable portion of an amount equal to his bonus for the prior year. Each of Mr. Hughes, Mr. Gulliver, Mr. Pauls and Mr. James is obligated not to compete with us through employment or other arrangements with any insurance brokerage in the United States or Canada (except in the case of termination by us without cause or by him for good reason) or to solicit any of our clients or employees for a period of two years following the cessation of his employment. Our agreements with Mr. Hughes, Mr. Gulliver, Mr. Pauls and Mr. James provide that once we implement our restricted share plan each will be awarded 44,130 shares, 35,817 shares, 25,000 shares and 30,000 shares, respectively, under the plan. The shares will be awarded without payment of any cash consideration and to be free from transfer restrictions, other than securities laws restrictions, as to 50% after five years and the balance after 10 years of employment. Our hub brokerage, Kaye, has entered into an employment agreement with Bruce Guthart, our President, U.S. Operations, as President and Chief Executive Officer of Kaye. Under the agreement, Mr. Guthart is entitled to an annual salary of $500,000, a car allowance, participation in our 401(k) plan and an annual bonus representing 50% of the aggregate of any bonuses earned by senior management under Kaye's management bonus agreement. In the event of termination by us without cause, or by Mr. Guthart for good reason (including significant alteration in the nature of his duties), Mr. Guthart is entitled to payment of an amount equal to one year's salary plus a ratable portion of his share of Kaye's management bonus for the year. Mr. Guthart is 60 obligated not to compete with us through employment or other arrangements with any insurance brokerage in the United States (except in the case of termination by us without cause or by him for good reason) or to solicit any of our clients or employees for a period of two years following the cessation of his employment. In connection with the acquisition of Kaye, we agreed to award Mr. Guthart 88,261 restricted shares when we implement our restricted share plan, to be issued without payment of any cash consideration and to be free from transfer restrictions, other than securities laws restrictions, as to 50% after five years and the balance after 10 years of employment. Our hub brokerage, Barton Insurance, has entered into an employment contract with Craig Barton, our President, Canadian Operations, as President and Chief Executive Officer of Barton. Under the agreement, Mr. Barton is entitled to an annual salary of C$400,000, and an annual bonus representing his share, as determined by him, of the aggregate of any bonuses earned by senior management under Barton's management bonus agreement. In the event of termination by us without cause, Mr. Barton is entitled to payment of an amount equal to one year's salary plus a ratable portion of his share of Barton's management bonus for the year. Mr. Barton is obligated not to compete in any insurance brokerage in the Province of British Columbia (except in the case of termination by us without cause) or to solicit any of our clients or employees for a period of two years following the cessation of his employment. Each member of senior management of our brokerages is subject to an employment agreement that sets out the terms of his or her employment. These agreements typically include non-competition covenants, which continue for two years following the cessation of employment, except in the case of termination by us without cause, and generally provide for a payment equal to one year's salary in the event they are terminated without cause. Members of senior management of our brokerages also may be entitled to bonuses pursuant to the management bonus agreement for the respective brokerage if operating targets are achieved. We believe that the compensation we provide to our senior management is commensurate with that provided to senior management of similar sized insurance brokerages. EXECUTIVE SHARE PURCHASE PLAN We have an executive share purchase plan under which we may from time to time grant or guarantee loans to our designated employees, officers and service providers to purchase common shares. Our board of directors determines who may participate in the plan. Participation in the plan is entirely voluntary. A loan advanced or arranged under the plan is repayable by the participant ten years from the date of the loan. We pay interest on behalf of the employee. A participant's entitlement to shares allocated under the plan vests at the rate of 10% per year while employed. All shares purchased pursuant to the plan are held as security for the outstanding loans of the participant. Common shares purchased under the plan may be purchased from treasury at market values or in the open market without any discount from fair market value. The maximum number of shares authorized for issuance from treasury under such plan is 1,000,000. There is no limit on the number of shares, which may be purchased in the open market under the plan. The plan is administered by Computershare Trust Company of Canada. We have arranged and made loans under the plan. See "--Indebtedness of directors, executive officers and senior officers." 61 EMPLOYEE SHARE PURCHASE PLAN We have an employee share purchase plan under which our employees and service providers who have completed three months of continuous service may purchase our common shares by contributing to the plan up to a maximum of 10% of his or her annual compensation. We do not make any loan or other contribution in respect of such purchase. Participation in the plan is entirely voluntary and transfers of shares acquired under this plan are not restricted by the terms of the plan. Common shares purchased under the plan are to be made by the trustee of the plan either from treasury at market values or in the open market without any discount from fair market value. The maximum number of shares authorized for issuance from treasury under such plan is 1,000,000. There is no limit on the number of shares which may be purchased in the open market under the plan. The plan is administered by Computershare Trust Company of Canada. 401(K) PLAN We have established a 401(k) retirement savings plan that is intended to qualify as a profit-sharing plan under Internal Revenue Code Section 401(a), and includes a cash or deferred arrangement that is intended to qualify under Code Section 401(k). The plan was established and is maintained for the exclusive benefit of our eligible employees and their beneficiaries. The plan was effective as of January 1, 2002 and merged the 401(k) plan and related assets previously administered by each of Mack and Parker, McCarthy, Kaye and Flanagan. We make matching contributions for active participants equal to 60% of their permitted contributions, up to a maximum of three percent of the participant's salary. One-third of our contribution will be used by the trustee that administers the plan to fund the purchase of our common shares on the open market. EQUITY-BASED AND OTHER COMPENSATION PLANS We intend to adopt plans that provide for awards of restricted shares and options to purchase our common shares, and a long-term incentive compensation plan prior to the completion of this offering. The terms of these proposed plans have not been finalized. INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS The aggregate outstanding indebtedness represented by loans made under our executive share purchase plan to our current and former officers, directors and employees as at December 31, 2001 was $5,542,341 and $2,141,823 to a Canadian chartered bank and our company, respectively. We pay the interest on the loans provided by the bank, calculated at rates ranging from prime plus one-half percent to prime plus one-and-a-half percent per annum. We have guaranteed the loans provided by the bank and may, under certain circumstances, be obligated to purchase the loans from the bank. 62 The following table summarizes indebtedness of certain officers and directors represented by loans made under our executive share purchase plan:
- ------------------------------------------------------------------------------------------ LARGEST AMOUNT FINANCIALLY OUTSTANDING AMOUNT ASSISTED SECURITIES DURING FISCAL OUTSTANDING PURCHASED DURING SHARES YEAR ENDED AS OF FISCAL YEAR ENDED HELD AS NAME AND PRINCIPAL DECEMBER 31, DECEMBER 31, DECEMBER 31, SECURITY FOR POSITION 2001 2001 2001 INDEBTEDNESS - ------------------------------------------------------------------------------------------ Martin P. Hughes(1)... $463,177 $463,177 -- 36,883 Chairman and Chief Executive Officer Richard A. Gulliver... 397,147 397,147 -- 52,444 President and Chief Operating Officer R. Craig Barton....... 545,877 545,877 -- 86,937 President, Canadian Operations W. Kirk James(1)...... 125,580 125,580 -- 11,765 Vice President, Secretary and General Counsel Jean Martin........... 52,445 52,445 -- 6,187 Vice President - ------------------------------------------------------------------------------------------
(1) When we implement our restricted share plan, Mr. Hughes and Mr. James will no longer participate in our executive share purchase plan. The aggregate indebtedness of our directors, executive officers and senior officers, other than under our executive share purchase plan is $50,801 as at December 31, 2001, and is summarized in the following table:
- ----------------------------------------------------------------------------------------- LARGEST AMOUNT AMOUNT OUTSTANDING DURING AMOUNT OUTSTANDING AS FISCAL YEAR ENDED OUTSTANDING AS OF OF NAME AND PRINCIPAL POSITION DECEMBER 31, 2001 DECEMBER 31, 2001 MARCH 15, 2002 - ----------------------------------------------------------------------------------------- R. Craig Barton(1)........... $22,187 $18,684 -- President, Canadian Operations W. Kirk James(2)............. 37,674 32,117 -- Vice President, Secretary and General Counsel - -----------------------------------------------------------------------------------------
(1) A non-interest bearing loan made by our subsidiary Barton Insurance to R.C. Barton Ltd., a corporation controlled by Mr. Barton, to facilitate the acquisition of shares in the capital of Barton Insurance. (2) A non-interest bearing loan made by us to Mr. James to facilitate the relocation of his principal residence from Toronto, Ontario to Chicago, Illinois. 63 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS BUSINESS RELATIONSHIPS RELATIONSHIPS WITH INSURANCE COMPANIES OWNED BY FAIRFAX Most of the founding 11 brokerages have generated a significant portion of their revenue from the sale of insurance policies issued by Lombard Canada Ltd., a property and casualty insurer which is a wholly-owned subsidiary of Fairfax. Certain of the founding 11 brokerages and their principals have in the past received financial support from Lombard in accordance with standard practice between insurance companies and their significant brokers. Such financial support was primarily in the form of loans and equity investments negotiated at arms length between the parties. Certain of the former shareholders of the founding 11 brokerages who are officers or employees of the founding 11 brokerages or Hub or associates of such individuals remain indebted to Lombard in an aggregate amount of approximately C$5.2 million. We also had transactions with and recorded commission income from the following Fairfax insurance companies which represented approximately 4.9%, 8.6% and 12.1% of our total revenue in 2001, 2000 and 1999, respectively.
- ---------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (IN THOUSANDS) 2001 2000 1999 - ---------------------------------------------------------------------------------------- Lombard General Insurance Company of Canada................. $6,123 $7,527 $6,077 Commonwealth Insurance Company.............................. 374 351 353 Federated Insurance Company of Canada....................... 28 10 1 Markel Insurance Company of Canada.......................... 88 72 61 Crum & Forster Insurance.................................... 745 291 67 TIG Specialty Insurance..................................... 150 -- -- -------------------------- $7,508 $8,251 $6,559 - ----------------------------------------------------------------------------------------
As of December 31, 2001, we had accounts receivable and accounts payable balances with the Fairfax insurance companies in the amounts of $0.3 million and $6.8 million, respectively. All revenue and related accounts receivable and accounts payable are the result of transactions in the normal course of business and were transacted at fair market value. As part of our acquisition of Kaye, we acquired Old Lyme but have since entered into an agreement to sell Old Lyme to a subsidiary of Fairfax, at a purchase price equivalent to its U.S. GAAP book value as of December 31, 2001 of approximately $42.8 million. In connection with the sale of Old Lyme, we entered into three agreements with Old Lyme under which some of our subsidiaries will continue to provide services that they had previously provided to Old Lyme. As a result of our sale of Old Lyme the amount of our revenue generated from transactions with insurance companies owned by Fairfax will increase in 2002. Claims settlement agreement. We will provide claims settlement and administration services to Old Lyme. Such services will include analysis, investigation, adjustment, settlement and denial of claims. Compensation will be based on a schedule. 64 Underwriting agreement. Two of our subsidiaries will provide underwriting-related services to Old Lyme, including, but not limited to, receiving and reviewing applications submitted by producing brokers and determining the premium to be charged. We will be compensated on a commission basis and will also be eligible to receive a contingent commission equal to a percentage of Old Lyme's underwriting profit generated from new business we place. Although, we will not incur underwriting risk, under the agreement Old Lyme will be entitled to offset a percentage of underwriting losses resulting from new business we place against our future contingent commissions. Administration agreement. We will provide certain administrative services to Old Lyme, including actuarial, audit, executive, legal, personnel, accounting and other financial services. In addition, we will also provide office space and office equipment. Compensation will be based on the actual cost we incur to provide the services. FAIRFAX INSURANCE COVERAGE Fairfax has purchased an insurance policy from Lloyd's of London and various other insurance companies covering comprehensive crime insurance, insurance companies professional liability insurance, directors' and officers' liability and company reimbursement insurance, employment practices liability insurance and fiduciary liability insurance. Fairfax's coverage under the policy is subject to an overall aggregate limit of $250 million combined during the policy period which runs from May 31, 2000 to May 31, 2003, subject to various single loss limits, deductibles, retentions, and other exclusions, adjustments and limitations. The comprehensive crime insurance portion of the policy covers specified losses sustained by Fairfax and certain entities in which more than 50% of the outstanding voting shares are owned directly or indirectly by Fairfax, and other entities in which Fairfax maintains an ownership interest, including us. The professional liability insurance, directors' and officers' liability and company reimbursement insurance, employment practices liability insurance and fiduciary liability insurance portion of the policy cover specified losses sustained by the companies and their officers and directors in respect of claims made during the policy period. Coverage includes directors and officers and company liability coverage, employment practices coverage, fiduciary liability coverage, and errors and omissions coverage. Our share of the premiums for this policy for the year ended December 31, 2001 was $350,000. RELATIONSHIPS WITH SENIOR OFFICERS AND DIRECTORS When we acquire a brokerage we only purchase the brokerage operations and not other assets such as a building from which a brokerage operates. In circumstances where the former principal of an acquired brokerage owns the office space, we frequently enter into an agreement to lease the premises from the former principal at fair market value. R. Craig Barton, President of our Canadian Operations and President of Barton Insurance, leases four premises to us through a company he controls. The following table lists the annual base rent and expiry date of each lease.
- --------------------------------------------------------------------------------- ANNUAL BASE RENT EXPIRY DATE - --------------------------------------------------------------------------------- C$138,000................................................... December 31, 2010 C$59,400.................................................... November 30, 2008 C$21,450.................................................... November 30, 2008 C$285,524................................................... December 31, 2007 - ---------------------------------------------------------------------------------
65 In addition, we lease one of our locations from Mr. Barton's brother, at an annual rent of C$45,320. This lease expires on November 30, 2008. Under the terms of the leases, after five years the annual base rent will increase by 20%. We believe that each of these leases represents the fair market value of the associated premises. PUT OPTIONS In conjunction with our acquisition of Flanagan and Burnham in 2001, we granted to the former owners of the brokerages the right to require us to repurchase our shares issued in consideration of the purchase price of the respective brokerage, in accordance with the schedule set out below, if the trading price of our shares is below C$17.00 per share at these specified exercise dates. FLANAGAN
- -------------------------------------------------------------------------------- EXERCISE DATE NUMBER OF SHARES - -------------------------------------------------------------------------------- June 18, 2006............................................... 340,000 (50.0%) June 18, 2007............................................... 68,000 (10.0%) June 18, 2011............................................... 272,000 (40.0%) ------------------ Total..................................................... 680,000 (100.0%) - --------------------------------------------------------------------------------
BURNHAM
- ---------------------------------------------------------------------------------- EXERCISE DATE NUMBER OF SHARES - ---------------------------------------------------------------------------------- July 1, 2006................................................ 873,062 (61.4%) July 1, 2011................................................ 549,772 (38.6%) -------------------- Total..................................................... 1,422,834 (100.0%) - ----------------------------------------------------------------------------------
In the event of special circumstances, such as attaining age 60, death, disability or dismissal without cause, the put options are exercisable relative to all of the shares held by the respective individuals. In addition, the put options are effective with respect to any shares that such individuals may receive as contingent consideration in connection with the Flanagan acquisition and the Burnham acquisition (estimated at about an aggregate maximum of 420,000 shares). See "Management's discussion and analysis of financial conditions and results of operations--Contingent obligations." In the event that any put options are exercised, we have the option to require the Flanagan and Burnham shareholders to sell their shares on the open market. We would then be required to make a payment to the selling shareholders equal to the difference between the sale price of the shares being sold and C$17.00 per share. 66 PRINCIPAL SHAREHOLDERS The following tables sets forth information with respect to the beneficial ownership of our issued share capital, comprised solely of common shares, as of December 31, 2001 and as adjusted to reflect our sale of common shares in this offering by: - - all those known by us to be beneficial owners of more than five percent of the outstanding common shares; - - our top five most highly compensated named executive officers; - - each of our directors; and - - all executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person or group who has or shares voting or investment power with respect to such shares. Unless otherwise indicated, the persons names on this table have sole voting and investment control with respect to all shares beneficially owned.
- -------------------------------------------------------------------------------------- COMMON SHARES COMMON SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING --------------------- --------------------- NAME OF BENEFICIAL OWNER AMOUNT PERCENT AMOUNT PERCENT - -------------------------------------------------------------------------------------- Fairfax Financial Holdings Limited(1).......................... 11,232,870 45.1% 11,232,870 Zurich Insurance Company(2)........... 2,500,000 10.4% 2,500,000 R. Craig Barton(3).................... 598,666 2.8% 598,666 Martin P. Hughes(4)................... 489,048 2.3% 489,048 Bruce D. Guthart(5)................... 439,526 2.0% 439,526 Richard A. Gulliver(6)................ 321,844 1.5% 321,844 Jean Martin(7)........................ 226,345 1.0% 226,345 Dennis J. Pauls(8).................... 29,323 * 29,323 W. Kirk James(9)...................... 12,015 * 12,015 Paul Murray........................... 2,000 * 2,000 Anthony F. Griffiths.................. -- -- -- John Varnell.......................... -- -- -- Bradley P. Martin(10)................. -- -- -- ---------------------------------------------- Executive officers and directors as a group............................... 2,118,767 9.8% 2,118,767 Total............................... 15,851,637 57.9% 15,851,637 - --------------------------------------------------------------------------------------
* Indicates less than 1%. (1) Includes 3,278,904 shares issuable upon the conversion of the Fairfax notes and 638,273 shares subject to escrow releasable as to 70,920 shares on each of November 30, 2002 and 2003 and 496,433 shares on November 30, 2008. The Sixty Two Investment Company Limited, a company controlled by V. Prem Watsa, owns subordinate and multiple voting shares representing 55.8% of the total votes attached to all classes of shares of Fairfax. Mr. Watsa himself beneficially owns and controls additional subordinate voting shares which, together with the shares owned by Sixty Two, represent 56.3% of the total votes attached to all classes of Fairfax's shares. (2) Represents the shares that are issuable upon the conversion of the Zurich notes. Zurich has agreed to allow us to redeem the Zurich notes at our option and without penalty until June 30, 2002. Zurich has also agreed not to convert the Zurich notes until after June 30, 2002. 67 (3) Includes 86,937 shares allocated under our executive share purchase plan of which 69,550 are not vested and which vest as to 10% of the allocated amount per year while employed and includes 356,183 shares subject to escrow restrictions, which release 62,854 shares on each of November 30, 2002 and 2004, 46,096 shares on each of November 30, 2003, 2005, 2006 and 2007 and 46,091 shares on November 30, 2008. (4) Includes 36,883 shares allocated under our executive share purchase plan of which 33,195 are not vested and which vest as to 10% of the allocated amount per year while employed and includes 452,165 shares subject to escrow restrictions, which release 45,217 shares on each of October 27, 2002, 2003 and 2004 and 316,514 shares on September 8, 2008. (5) Represents 439,526 shares subject to escrow restrictions, which release 43,953 shares on each of June 30, 2004, 2005 and 2006 and 307,667 shares on June 30, 2011. (6) Includes 52,444 shares allocated under our executive share purchase plan of which 41,955 are not vested and which vest as to 10% of the allocated amount per year while employed and includes 242,460 shares subject to escrow restrictions, which release 26,940 shares on each of November 30, 2002 and 2003 and 188,580 shares on November 30, 2008. (7) Includes 6,187 shares allocated under our executive share purchase plan of which 4,950 are not vested and which vest as to 10% of the allocated amount per year while employed and includes 198,142 shares subject to escrow restrictions, which release 22,016 shares on each of November 30, 2002 and 2003 and 154,110 shares on December 6, 2006. (8) Includes 26,091 shares subject to escrow restrictions, which release 3,232 shares on November 30, 2002, 2,804 shares on November 30, 2003, 428 shares on November 30, 2004 and 19,627 shares on November 30, 2008. (9) Represents shares allocated under our executive share purchase plan of which 10,588 are not vested and which vest as to 10% of the allocated amount per year while employed. (10) Will stand for election to our board of directors at our annual general meeting in May 2002. 68 DESCRIPTION OF SHARE CAPITAL Our authorized capital consists of an unlimited number of preference shares, issuable in series, and an unlimited number of common shares. After giving effect to the offering, no preference shares and common shares will be issued and outstanding. The following is a summary of the material provisions of the share capital of Hub. COMMON SHARES The holders of our common shares are entitled to one vote per share at meetings of our shareholders other than those meetings where only the holders of the preference shares as a class or the holders of one or more series of the preference shares are entitled to vote. The holders of common shares will be entitled to such dividends as may be declared by the directors out of funds legally available therefore, subject to the preferential rights of the preference shares. In the event of our liquidation, dissolution or winding-up, the holders of our common shares will be entitled to receive all of the our assets remaining after the payment of all of our liabilities, subject to the preferential right of the preference shares or any other shares which may rank prior to the common shares. PREFERENCE SHARES Preference shares may be issued at any time and from time to time in one or more series, each series comprising the number of shares, and having the designation, rights, privileges, restrictions and conditions, which our board of directors determines by resolution. Our preference shares rank prior to our common shares with respect to the payment of dividends and distribution of assets in the event of our liquidation, dissolution or winding-up. Except as required by law or where the rights privileges, restrictions and conditions attaching to a series of preference shares provide for voting rights for the holders of that series of preference shares, the holders of the preference shares as a class are not entitled as such to receive notice of, to attend or to vote at any meeting of our shareholders. INDEMNIFICATION OF OFFICERS AND DIRECTORS Our by-laws provide that we will indemnify our current and former directors and officers to the fullest extent permitted by Ontario law. The by-laws also provide that we will purchase and maintain insurance for the benefit of our directors and officers to the extent permitted by Ontario law. We believe that the provisions in our by-laws are necessary to attract and retain qualified persons as directors and officers. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common shares is CIBC Mellon Trust Company. 69 SHARES ELIGIBLE FOR FUTURE SALE If our shareholders sell substantial amounts of common shares in the public market following this offering, the market price of our common shares could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future and at a time and price that we consider appropriate. Upon completion of this offering, we will have outstanding an aggregate of common shares. All of the common shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless these common shares are purchased by our affiliates, or persons who directly or indirectly control, are controlled by or are under common control with us. Common shares held by affiliates generally may be sold only in compliance with the limitations of Rule 144 of the Securities Act described below. Upon completion of this offering, of our outstanding shares will be restricted securities and shares will be eligible for sale in the public market at various times after days from the date of this prospectus. LOCK-UP AGREEMENTS All of our officers, directors and certain of our shareholders have signed lock-up agreements with the underwriters under which they agreed, subject to certain limitations, not to offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, (or enter into any swap or other agreement that transfers, in whole or part, any of the economic consequences of ownership of), any shares of our common shares, or any securities convertible into or exercisable or exchangeable for our common shares (including, common shares which may be deemed to beneficially owned by them in accordance with the rules, of the SEC) for a period of 180 days after the date of this prospectus, without the prior written consent of J.P. Morgan Securities Inc. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - - 1% of the number of our common shares then outstanding, which will equal approximately shares immediately after this offering; or - - the average weekly trading volume of our common shares on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 concerning that sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. RULE 144(K) Under Rule 144(k) as currently in effect, a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned restricted securities proposed to be sold for at least two years, including the 70 holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases our common shares from us in connection with a compensatory stock plan or other written agreement is eligible to resell those shares 90 days after the effective date of this prospectus in reliance on Rule 144. RESTRICTED SHARE PURCHASE PLAN Shortly after this offering, we intend to file a registration statement on Form S-8 covering the common shares reserved for issuance under our plans that will provide for awards of units representing our restricted shares and options to purchase or common shares. The shares covered by the Form S-8 registration statement will be freely tradeable, subject to volume restrictions applicable to affiliates. 71 CERTAIN UNITED STATES AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS This section describes the material United States federal income tax consequences of the purchase, ownership and disposition of the common shares, subject to the limitations provided herein. This section assumes that you will hold your common shares as capital assets for United States federal income tax purposes. This section does not discuss special rules that may apply to you if you are a member of a class of holders subject to special rules, including if you are: - - a bank; - - a dealer in securities or currencies; - - a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings; - - a tax-exempt organization; - - a life insurance company; - - a person liable for alternative minimum tax; - - a person that actually or constructively owns 10% or more of our voting shares; - - a person that holds common shares as part of a straddle, hedging or conversion transaction; or - - a person whose functional currency is not the U.S. dollar. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. For purposes of this discussion, you are a U.S. holder if you are a beneficial owner of common shares and you are: - - a citizen or resident of the United States; - - a corporation, partnership or other entity organized under the laws of the United States or any state thereof; - - an estate whose income is subject to United States federal income tax regardless of its source; or - - a trust (a) if a United States court can exercise primary supervision over the trust's administration and one or more United States persons are authorized to control all substantial decisions of the trust or (b) that has elected to be treated as a United States person under applicable Treasury regulations. You should consult your own tax advisor regarding the United States federal, state and local and other tax consequences of owning and disposing of common shares in your particular circumstances. 72 TAXATION OF DIVIDENDS U.S. holders. Subject to the passive foreign investment company rules discussed below, if you are a U.S. holder, you must include in your gross income as ordinary income the gross amount of any dividend paid by us out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). You must include the dividend in income when you receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income will be the U.S. dollar value of the Canadian dollar payments made, determined at the Canadian dollar to U.S. dollar "spot rate" on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss. This income or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of our current and accumulated earnings and profits (as determined for United States federal income tax purposes) will be treated as a non-taxable return of capital to the extent of your basis in the common shares and thereafter as capital gain. We do not maintain calculations of earnings and profits (as determined for United States federal income tax purposes). For purposes of this discussion, the "spot rate" generally means a rate that reflects a fair market rate of exchange available to the public for currency under a "spot contract" in a free market and involving representative amounts. A "spot contract" is a contract to buy or sell a currency on or before two business days following the date of the execution of the contract. If such a spot rate cannot be demonstrated, the Internal Revenue Service has the authority to determine the "spot rate." A portion of dividends paid by us, as a foreign corporation which is engaged in a U.S. trade or business, will be treated as domestic source income because 25% or more of our worldwide gross income over a three-year testing period (ending with the close of the our taxable year immediately preceding the declaration of a dividend) is effectively connected with our U.S. business or is treated as effectively connected. The dividends will be U.S. source income to the extent our gross income for the testing period is effectively connected income, or treated as such, in relation to our gross income from all sources for such period. The remainder of the dividends from the common shares will be classified as foreign source income. The foreign source income generally will be "passive income" or "financial services income" which will be treated separately from other types of income for purposes of computing the foreign tax credit allowable to you. The rules relating to foreign tax credits are extremely complex and the availability of a foreign tax credit depends on numerous factors. You should consult your own tax advisors concerning the application of the U.S. foreign tax credit rules to your particular situation. TAXATION OF CAPITAL GAINS U.S. holders. Subject to the passive foreign investment company rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your common shares, you 73 will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your common shares. Capital gain of a non-corporate U.S. holder is generally taxed at a maximum rate of 20% if the property has been held more than one year and 18% if the property has been held for more than five years. The deductibility of capital losses is subject to limitations. The gain or loss will generally be gain or loss from sources within the United States for foreign tax credit limitation purposes. PASSIVE FOREIGN INVESTMENT COMPANY RULES We do not expect to be considered a passive foreign investment company, but this conclusion is a factual determination that is made annually and this may be subject to change. In general, if you are a United States holder, we will be a passive foreign investment company with respect to you if, for any taxable year in which you held our common shares: - - 75% or more of our gross income for the taxable year is "passive income"; or - - 50% or more of the average quarterly value of our assets consists of assets that produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business) and net gains from the disposition of assets that produce passive income. For purposes of determining whether we will be treated as a passive foreign investment company, we will be treated as holding our proportionate share of the assets of any corporation in which we owned, directly or indirectly, 25%, by value, of the corporation's stock and we will be treated as receiving directly our proportionate share of the corporation's income. If we are treated as a passive foreign investment company, and you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to: - - any gain you realize on the sale or other disposition of your common shares; and - - any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the ordinary shares during the three preceding taxable years or, if shorter, your holding period for the common shares). Under these rules: - - the gain or excess distribution will be allocated ratably over your holding period for the common shares; - - the amount allocated to the taxable year in which you realized the gain or excess distribution or to any years prior to our being treated as a passive foreign investment company will be taxed as ordinary income; - - the amount allocated to each prior year other than a year prior to the first year in which we were a passive foreign investment company, with certain exceptions, will be taxed at the highest federal income tax rate in effect for that year with respect to ordinary income; and 74 - - the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year. These rules apply even if we would not be considered a passive foreign investment company in a subsequent year, unless you make an election to be taxed under these rules on any gain that would be recognized if you sold your common shares on the last day of the last taxable year in which we were a passive foreign investment company. Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a passive foreign investment company. The foregoing rules with respect to distribution and dispositions may be avoided if you are eligible for and timely make either a valid "qualifying electing fund" election, in which case you would be required to include in income on a current basis your pro rata share of our ordinary income and net capital gains. We do not currently intend to complete the actions necessary for U.S. holders to make a qualifying electing fund election in the event that we are considered a passive foreign investment company for any taxable year. If we are a passive foreign investment company and the common shares are treated as "marketable stock" under applicable Treasury regulations, you may make a mark-to-market election. With respect to your common shares, if you make this election, you will not be subject to the passive foreign investment company rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your common shares at the end of the taxable year over your adjusted basis in your common shares. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your common shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the common shares will be adjusted to reflect any such income or loss amounts. The mark-to-market election is made on a shareholder-by-shareholder basis and, once made, can only be revoked with the consent of the Internal Revenue Service. Under applicable Treasury regulations, the term "marketable stock" includes stock of a passive foreign investment company that is "regularly traded" on a qualified exchange or other market. For these purposes, a class of stock is regularly traded on a qualified exchange or other market for any calendar year during which such class of stock is traded (other than in de minimis quantities) on at least 15 days during each calendar quarter. The New York Stock Exchange is a qualified exchange and it is expected that there will be sufficient trading in the shares so that any will be treated as "regularly traded", but no assurances can be given. If you own common shares during any year that we are a passive foreign investment company, you must file Internal Revenue Service Form 8621 with your annual United States federal income tax return for each year in which you own common shares even if we subsequently would not be considered a passive foreign investment company. If we are a passive foreign investment company, U.S. holders who acquire common shares from decedents could be denied the step-up of the income tax basis for such common shares, which would otherwise have been available. 75 INFORMATION REPORTING AND BACK-UP WITHHOLDING You may be subject to information reporting on dividends or sales proceeds on the common shares unless you establish that you are an "exempt recipient" for purposes of the information reporting rules. If you do not establish that you are an exempt recipient, you may be subject to backup withholding on these amounts if you do not provide a correct taxpayer identification number. You generally may obtain a credit against your United States federal income tax liability for any amounts withheld under the backup withholding rules and a refund for amounts that exceed your income tax liability by filing the required information with the United States Internal Revenue Service. CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS In the opinion of Torys LLP, our Canadian counsel, the following is a summary of the principal Canadian federal income tax considerations generally applicable to the holders described below. This summary is based on the current provisions of the Income Tax Act, the regulations thereunder, all specific proposals to amend the Income Tax Act or the regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof, and counsel's understanding of the current administrative practices of the Canada Customs and Revenue Agency. This summary is not exhaustive of all possible Canadian federal income tax considerations and, except as mentioned above, does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign tax legislation or considerations, which may differ from the federal income tax considerations described herein. THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER, AND NO REPRESENTATION WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO ANY PARTICULAR HOLDER IS MADE. CONSEQUENTLY, PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES. The following summary is generally applicable to a person (a "Non-Resident Holder"): (1) who acquires common shares under this offering, (2) who holds such common shares as capital property, (3) who, at all relevant times, for purposes of the Income Tax Act and any applicable tax treaty or convention, is not a resident of Canada, (4) who does not use or hold (and will not use or hold) and is not deemed to use or hold the common shares in, or in the course of, carrying on a business in Canada and does not carry on an insurance business in Canada and elsewhere, and (5) whose shares do not constitute "taxable Canadian property" for purposes of the Income Tax Act. Provided that the common shares are listed on a prescribed stock exchange (which includes the TSE and the NYSE) at a particular time, the common shares will generally not constitute taxable Canadian property to a Non-Resident Holder at that time. This rule applies unless, at any time during the five-year period immediately preceding that time, 25% or more of the issued shares of any class or series of a class of Hub capital stock was owned by the Non-Resident Holder, persons with whom the Non-Resident Holder did not deal at arm's length or any combination thereof. For this purpose, the Non-Resident Holder and persons with whom the Non-Resident Holder did not deal at arm's length are considered to own any shares which such Non-Resident Holder or such 76 persons have an interest in or an option in respect of. A Non-Resident Holder's common shares can be deemed to be taxable Canadian property in certain circumstances set out in the Income Tax Act. Dividends on common shares paid or credited or deemed under the Income Tax Act to be paid or credited to a Non-Resident Holder generally will be subject to Canadian withholding tax at the rate of 25%, subject to any applicable reduction in the rate of withholding in an applicable tax treaty where the Non-Resident Holder is a resident of a country with which Canada has an income tax treaty. Where the Non-Resident Holder is a U.S. resident entitled to benefits under the Canada--U.S. Income Tax Convention, dividends on common shares generally will be subject to Canadian withholding tax at the rate of 15%. A Non-Resident Holder will not be subject to tax under the Income Tax Act in respect of any capital gain realized on the disposition of common shares. THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON SHARES. PROSPECTIVE PURCHASERS OF COMMON SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR PARTICULAR SITUATIONS. 77 UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated the date of this prospectus, the underwriters named below, who are represented by J.P. Morgan Securities Inc., have severally agreed to purchase from us the respective number of common shares shown opposite their names below.
- ------------------------------------------------------------------------------ NAME NUMBER OF SHARES - ------------------------------------------------------------------------------ J.P. Morgan Securities Inc. ................................ Cochran, Caronia Securities LLC ............................ Stephens Inc. .............................................. BMO Nesbitt Burns Corp. .................................... Ferris, Baker Watts, Incorporated........................... ----------- Total....................................................... - ------------------------------------------------------------------------------
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and our independent auditors. The underwriters are committed to purchase all of our common shares if they purchase any shares. The following table shows the underwriting fees to be paid to the underwriters by us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional common shares. UNDERWRITING COMMISSIONS
- ----------------------------------------------------------------------------------------- WITHOUT OVER- WITH OVER- ALLOTMENT EXERCISE ALLOTMENT EXERCISE - ----------------------------------------------------------------------------------------- Per share...................................... $ $ Total.......................................... $ $ - -----------------------------------------------------------------------------------------
We will pay the offering expenses, estimated to be $ , excluding underwriting commissions. The underwriters propose to initially offer some of the common shares directly to the public at the public offering price on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and these dealers may re-allow, a concession not in excess of $ per share on sales to other dealers. After the initial offering of the shares to the public, the representative of the underwriters may change the public offering price and such concessions. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. We have granted to the underwriters an option, exercisable for 30 days after the date of the underwriting agreement, to purchase up to additional common shares at the initial public offering price less the underwriting fees. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this 78 offering. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of common shares to be purchased by it shown in the above table bears to the total number of common shares offered hereby. We will be obligated, pursuant to the option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of common shares offered hereby. The offering of our common shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation, or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of common shares in whole or in part. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute the payments that the underwriters may be required to make in respect of these liabilities. We, our executive officers and directors and certain of our shareholders have agreed, subject to limited exceptions, for a period of 180 days after the date of this prospectus, not to, without the prior written consent of J.P. Morgan Securities Inc.: - - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any common shares or any securities convertible into or exercisable or exchangeable for common shares; or - - enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common shares. Either of the foregoing transfer restrictions will apply regardless of whether a covered transaction is to be settled by the delivery of common shares or such other securities, in cash or otherwise. In addition, during this 180-day period, we have also agreed not to file any registration statement for, and each of our executive officers, directors and several shareholders have agreed not to make any demand for, or exercise any right of, the registration of any shares of common shares or any securities convertible into or exercisable or exchangeable for common shares without the prior written consent of J.P. Morgan Securities Inc. We intend to apply to list our common shares on the NYSE under the symbol HBG. The common shares to be sold in the offering have not been and will not be qualified for sale under the securities laws of Canada or any province or territory of Canada. The common shares to be sold in the offering may not be offered or sold, directly or indirectly, in Canada, or to or for the benefit of any resident thereof, in violation of the securities laws of Canada or any province or territory of Canada. Each underwriter has agreed that it will: a) not, directly or indirectly, offer, sell or deliver common shares in Canada or to persons who are residents of Canada or acting on the behalf of residents of Canada or to any person whom it believes intends to reoffer, resell or deliver the shares in Canada or to any persons who are residents of Canada or acting on the behalf of residents of Canada; and b) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. 79 We have been advised by the representative that, pursuant to Regulation M under the Securities Act, some persons participating in the offering may engage in transactions, including syndicate covering transactions, stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of our common shares at a level above that which might otherwise prevail in the open market. A "syndicate covering transaction" is a bid for or the purchase of common shares on behalf of the underwriters to reduce a syndicate short position incurred by the underwriters in connection with the offering. The underwriters may create a syndicate short position by making short sales of our common shares and may purchase our common shares in the open market to cover syndicate short positions created by short sales. Short sales involve the sale by the underwriters of a greater number of common shares than they are required to purchase in the offering. Short sales can be either "covered" or "naked." "Covered" short sales are sales made in an amount not greater than the underwriters' over-allotment option to purchase additional shares from us in the offering. "Naked" short sales are sales in excess of the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common shares in the open market after pricing that could adversely affect investors who purchase in the offering. If the underwriters create a syndicate short portion, they may choose to reduce or "cover" this position by either exercising all or part of the over-allotment option to purchase additional shares from us or by engaging in "syndicate covering transactions." The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. The underwriters must close out any naked short position by purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. A "stabilizing bid" is a bid for, or the purchase of, common shares on behalf of the underwriters for the purpose of fixing or maintaining the price of our common shares. A "penalty bid" is an arrangement that permits the representative to reclaim the selling concession from an underwriter or a syndicate member when our common shares sold by such underwriter or syndicate member are purchased by the representative in the syndicate covering transaction and therefore have not been effectively placed by the underwriter or syndicate member. We have been advised by the representative that these transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time. Similar to other purchase activities, these activities may have the effect of raising or maintaining the market price of our common shares or preventing or retarding the decline in the market price of our common shares. As a result, the price of our common shares may be higher than the price that might otherwise exist in the open market. One or more members of the underwriting selling group may make copies of the preliminary prospectus available over the Internet to customers or through its or their websites. 80 LEGAL MATTERS Legal matters relating United States law will be passed upon for us by Shearman & Sterling, Toronto, Canada. The validity of the issuance of the common shares to be sold in the offering and other legal matters relating to Canadian law will be passed upon for us by Torys LLP, Toronto, Canada. Legal matters relating to United States law will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York. EXPERTS The consolidated financial statements of Hub International Limited as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Kaye Group Inc. as of June 28, 2001, and December 31, 2000 and 1999, and for the period January 1, 2001 through June 28, 2001, and for each of the three years in the period ended December 31, 2000 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act, and the rules and regulations promulgated thereunder, with respect to our common shares offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits thereto. Statements contained in this prospectus as to the contents of any contract or other document that is filed as an exhibit to the registration statement are not necessarily complete and each such statement is qualified in all respects by reference to the full text of such contract or document. You may read and copy all or any portion of the registration statement and the exhibits at the SEC's public reference room at 450 Fifth Street N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 233 Broadway Avenue, New York, New York 10279 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents, upon payment of a duplication fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the SEC's public reference rooms. Also, the SEC maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. As a result of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy and information statements and other information with the SEC. These periodic reports, proxy, and information statements and other information will be available for inspection and copying at the public reference facilities, regional offices and SEC's Web site referred to above. 81 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HUB INTERNATIONAL LIMITED PAGE Auditors' Report to the Board of Directors and Shareholders of Hub International Limited.............................. F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000...................................................... F-3 Consolidated Statements of Earnings for the Years Ended December 31, 2001, 2000 and 1999.......................... F-4 Consolidated Statements of Retained Earnings (Deficit) for the Years Ended December 31, 2001, 2000 and 1999.......................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999.......................... F-6 Notes to Consolidated Financial Statements.................. F-7 KAYE GROUP INC. Report of Independent Accountants to the Board of Directors of Kaye Group Inc......................................... F-31 Consolidated Balance Sheet as of June 28, 2001.............. F-32 Consolidated Statement of Operations for the period January 1, 2001 through June 28, 2001............................. F-34 Consolidated Statement of Stockholders' Equity for the period January 1, 2001 through June 28, 2001.............. F-35 Consolidated Statements of Comprehensive Loss for the period January 1, 2001 through June 28, 2001..................... F-36 Consolidated Statements of Cash Flows for the period January 1, 2001 through June 28, 2001............................. F-37 Notes to Consolidated Financial Statements.................. F-38 KAYE GROUP INC. Report of Independent Accountants to the Board of Directors and Stockholders of Kaye Group Inc........................ F-54 Consolidated Balance Sheets as of December 31, 2000 and 1999...................................................... F-55 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998.......................... F-57 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.......................... F-58 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.............. F-59 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999 and 1998.............. F-60 Notes to Consolidated Financial Statements.................. F-61 Financial Statement Schedules: Schedule II -- Condensed Financial Information of Registrant: Balance Sheets as of December 31, 2000 and 1999........... F-82 Statements of Income for the years ended December 31, 2000, 1999 and 1998.................................... F-83 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................................... F-84 Notes to Condensed Financial Statements................... F-85 Schedule IV -- Reinsurance for the years ended December 31, 2000, 1999 and 1998....................................... F-86 Schedule VI -- Supplemental Information Concerning Property-Casualty Insurance Operations for the years ended December 31, 2000, 1999 and 1998.......................... F-87
The information for Schedule I is contained in the Notes to the Consolidated Financial Statements. The information for Schedule III is included in Schedule VI. The information required for Schedule V is not applicable. F-1 AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF HUB INTERNATIONAL LIMITED: We have audited the accompanying consolidated balance sheets of Hub International Limited and its subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of earnings, retained earnings (deficit) and cash flows for each of the years in the three year period ended December 31, 2001, all expressed in United States of America dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Canada and in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hub International Limited and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2001, in accordance with accounting principles generally accepted in Canada. LOGO Chartered Accountants Toronto, Ontario, Canada March 18, 2002 F-2 HUB INTERNATIONAL LIMITED CONSOLIDATED BALANCE SHEETS As of December 31, 2001 and 2000 (in thousands of U.S. dollars)
2001 2000 -------- ------------ (AS RESTATED SEE NOTE 2) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 26,979 $ 19,919 Trust cash 50,426 12,356 Accounts and other receivables 101,313 41,975 Investment held for sale 40,772 -- Income taxes receivable 1,460 2,382 Future income taxes 1,999 -- Prepaid expenses 2,471 872 -------- -------- TOTAL CURRENT ASSETS 225,420 77,504 Capital assets 20,935 7,208 Other intangible assets 25,331 -- Goodwill 220,848 117,744 Future income taxes 2,671 368 Other assets 7,091 3,333 -------- -------- TOTAL ASSETS $502,296 $206,157 -------- ------------ LIABILITIES CURRENT LIABILITIES: Bank debt $ 55,000 $ -- Accounts payable and accrued liabilities 164,094 57,601 Income taxes payable -- 927 Future income taxes 1,387 -- Current portion long-term debt and capital leases 4,169 2,167 -------- -------- TOTAL CURRENT LIABILITIES 224,650 60,695 Long-term debt and capital leases 76,159 32,498 Subordinated convertible debentures 61,624 -- Future income taxes 4,592 752 -------- -------- TOTAL LIABILITIES 367,025 93,945 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Share capital 125,506 111,430 Cumulative translation account 2,770 195 Retained earnings 6,995 587 -------- -------- TOTAL SHAREHOLDERS' EQUITY 135,271 112,212 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $502,296 $206,157 -------- ------------
(the accompanying notes form an integral part of the financial statements) F-3 HUB INTERNATIONAL LIMITED CONSOLIDATED STATEMENTS OF EARNINGS For the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars, except per share amounts)
2001 2000 1999 -------- ------------ ------------ (AS RESTATED (AS RESTATED SEE NOTE 2) SEE NOTE 2) REVENUE Commission income $142,851 $86,410 $47,964 Contingent commissions and volume overrides 5,946 4,909 2,824 Other 5,196 3,921 3,309 -------- ------- ------- 153,993 95,240 54,097 -------- ------- ------- EXPENSES Remuneration 88,015 54,701 29,519 Selling 8,359 4,840 3,036 Occupancy 9,061 5,756 3,393 Depreciation 3,940 1,885 1,275 Administration 17,856 11,182 6,806 -------- ------- ------- 127,231 78,364 44,029 -------- ------- ------- NET EARNINGS BEFORE THE FOLLOWING 26,762 16,876 10,068 Interest expense 7,447 1,981 632 Goodwill and other intangible asset amortization 4,940 3,260 1,626 (Gain) loss on disposal of capital assets and investments (173) 127 14 Other income -- put option liability (719) -- -- -------- ------- ------- NET EARNINGS BEFORE INCOME TAXES 15,267 11,508 7,796 -------- ------- ------- PROVISION FOR INCOME TAX EXPENSE (BENEFIT) Current 4,967 4,907 4,260 Future 295 463 (208) -------- ------- ------- 5,262 5,370 4,052 -------- ------- ------- NET EARNINGS $ 10,005 $ 6,138 $ 3,744 -------- ------------ ------------ EARNINGS PER SHARE BASIC $ 0.53 $ 0.34 $ 0.22 DILUTED $ 0.50 $ 0.34 $ 0.22 WEIGHTED AVERAGE SHARES OUTSTANDING -- BASIC (000'S) 19,012 18,327 16,941 WEIGHTED AVERAGE SHARES OUTSTANDING -- DILUTED (000'S) 20,105 18,327 16,941
(the accompanying notes form an integral part of the financial statements) F-4 HUB INTERNATIONAL LIMITED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT) For the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
2001 2000 1999 ------- ------------ ------------ (AS RESTATED (AS RESTATED SEE NOTE 2) SEE NOTE 2) RETAINED EARNINGS (DEFICIT) -- BEGINNING OF YEAR $ 587 $(2,049) $(3,159) Net earnings 10,005 6,138 3,744 Excess over stated value of shares purchased -- (1,046) (2,634) Dividends (3,597) (2,456) -- ------- ------- ------- RETAINED EARNINGS (DEFICIT) -- END OF YEAR $ 6,995 $ 587 $(2,049) ------- ------------ ------------
(the accompanying notes form an integral part of the financial statements) F-5 HUB INTERNATIONAL LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
2001 2000 1999 --------- ------------ ------------ (AS RESTATED (AS RESTATED SEE NOTE 2) SEE NOTE 2) OPERATING ACTIVITIES Net earnings $ 10,005 $ 6,138 $ 3,744 Items not affecting working capital Amortization and depreciation 8,880 5,145 2,901 (Gain) loss on disposal of capital assets and investments (173) 127 14 Other income -- put option liability (719) -- -- Future income taxes 295 463 (208) --------- -------- -------- 18,288 11,873 6,451 Non-cash working capital items Accounts and other receivables (5,511) (2,330) (3,331) Prepaid expenses (299) (283) 128 Accounts payable and accrued liabilities 32,571 6,122 1,953 Income taxes 1,863 (2,575) (98) --------- -------- -------- 46,912 12,807 5,103 --------- -------- -------- FINANCING ACTIVITIES Bank debt 55,122 (16,425) 14,178 Long-term debt -- advances 21,096 29,835 92 Subordinated convertible debentures 61,624 -- -- Long-term debt and capital leases -- repayments (5,154) (2,501) (14,529) Share capital -- issued for cash, net of issue costs 3,621 -- 65,534 Share capital -- repurchases (281) (2,840) (6,781) Dividends (3,597) (2,456) -- --------- -------- -------- 132,431 5,613 58,494 --------- -------- -------- INVESTING ACTIVITIES Capital assets -- purchases (10,298) (2,050) (1,243) Capital assets -- proceeds on sale 96 222 76 Purchase of subsidiaries, net of cash received (123,365) (18,932) (29,203) Other assets (646) 2,777 (4,285) --------- -------- -------- (134,213) (17,983) (34,655) --------- -------- -------- CHANGE IN CASH AND CASH EQUIVALENTS AND TRUST CASH 45,130 437 28,942 CASH AND CASH EQUIVALENTS AND TRUST CASH -- BEGINNING OF YEAR 32,275 31,838 2,896 --------- -------- -------- CASH AND CASH EQUIVALENTS AND TRUST CASH -- END OF YEAR $ 77,405 $ 32,275 $ 31,838 --------- ----------- -----------
(the accompanying notes form an integral part of the financial statements) F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2001, 2000 and 1999 (in thousands, except per share amounts or as otherwise indicated) 1. NATURE OF OPERATIONS Business operations Hub International Limited (the "Company") is an international insurance brokerage which provides a variety of property, casualty, life and health, employee benefits, investment and risk management products and services. Business combinations Acquisitions of subsidiaries have been accounted for using the purchase method, whereby the results of acquired companies are included only from the date of acquisition. Effective June 28, 2001, the Company acquired Kaye Group Inc. (Kaye). Kaye, primarily an insurance broker, also underwrote insurance risks through its subsidiaries, Old Lyme Insurance Company of Rhode Island Inc. and Old Lyme Insurance Company, Ltd. (collectively Old Lyme). The Company did not want to retain the underwriting risk associated with Old Lyme, and indicated prior to the effective date of the acquisition that it intended to find a purchaser for the Old Lyme operations as soon as possible after closing. At December 31, 2001, the net assets and liabilities of Old Lyme are recorded at their original cost as an investment held for sale in the Company's consolidated balance sheet. The net earnings of the Old Lyme operations from the date of acquisition to December 31, 2001 have been excluded from the Company's 2001 consolidated statement of earnings and, accordingly, transactions with Old Lyme have not been eliminated on consolidation. The amount of Old Lyme net earnings excluded from consolidated net earnings for the period ended December 31, 2001 was approximately $1,833. On December 31, 2001, Kaye entered into a stock purchase agreement with Fairfax Inc. to sell all of the issued and outstanding shares of Old Lyme, pending regulatory approval. Fairfax Inc. is a subsidiary of Fairfax Financial Holdings Limited (Fairfax), which currently owns approximately 37% of the Company's outstanding shares. The agreed-upon purchase price (which is considered to be fair market value) is Old Lyme's December 31, 2001 stockholder's equity of approximately $42,800 determined in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The purchase price will be increased by four percent, compounded annually, from January 1, 2002, until the closing date. Any difference between the actual purchase price at the closing date and the carrying amount of the investment held for sale in the Company's consolidated balance sheet will be recorded as a gain or loss on the sale of investment at the closing date. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements of the Company are expressed in United States (U.S.) dollars and have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP). These principles differ in certain respects from U.S. GAAP and to the extent that they affect the Company, the differences are F-7 described in note 17 "Reconciliation to U.S. GAAP." The more significant of the accounting policies are as follows: Basis of presentation The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material inter-company accounts and transactions have been eliminated. Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. Change in reporting currency The Company's consolidated financial statements have historically been expressed in Canadian dollars. Effective September 30, 2001, the Company adopted the U.S. dollar as its reporting currency. Comparative financial information has been restated in U.S. dollars using the translation of convenience method. At September 30, 2001, all historical financial statements were converted from Canadian to U.S. dollars at the exchange rate in effect at September 30, 2001 of one Canadian dollar to 0.6338 U.S. dollar. Foreign currency translation The assets and liabilities of these subsidiaries as at December 31, 2001 were translated to U.S. dollars at the year end exchange rate. Revenue and expenses subsequent to September 30, 2001 were translated to U.S. dollars at the average exchange rate for the period. The operations of the Company's subsidiaries outside of the U.S. are self-sustaining. Accordingly, the unrealized gains and losses which result from this translation are deferred and included in shareholders' equity under the caption "Cumulative translation account." Revenue Recognition Commission income and fees, (including commission income related to installment billing arrangements) are generally recognized as of the latter of the effective date of the policy or the date at which the amount can be reasonably estimated. Commission income is reported net of sub-broker commission expense. Commission and other adjustments are recorded when they occur and the Company maintains an allowance for estimated policy cancellations and commission returns. The Company is entitled to contingent commissions and volume overrides from insurance companies and are recorded in the earlier of the period in which amounts can be reasonably estimated or the period in which amounts are received. Cash and cash equivalents and trust cash Cash and cash equivalents consist of cash, highly-liquid investments having maturities of three months or less and trust cash. The carrying amounts on the balance sheet approximate fair value. Premiums collected (less commissions and other deductions) but not yet remitted to insurance carriers are included in trust cash. Trust cash is restricted as to use by contractual obligations and by laws in certain states and provinces in which the Company operates. F-8 Capital assets Capital assets are stated at cost less accumulated depreciation and amortization. Depreciation is recorded based on useful economic lives, using principally the declining balance method at a rate which ranges between 20% and 30%. Leasehold improvements are amortized on the straight-line method over the term of the related lease. Upon sale or retirement, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is reflected in earnings. Goodwill Goodwill, equal to the excess of the purchase price over the fair value of net identifiable assets acquired, relating to acquisitions which took place before July 1, 2001, is amortized to earnings on a straight-line basis over 40 years. Goodwill relating to acquisitions which took place on or after July 1, 2001 is carried at cost and reviewed annually for impairment. In June 2001, the Canadian Institute of Chartered Accountants approved a new Handbook Section 3062, Goodwill and Other Intangible Assets. From January 1, 2002, goodwill will no longer be amortized but will be subject to regular review for impairment. The impact of ceasing the amortization of goodwill on the year ended December 31, 2002 will likely be to increase net earnings before income taxes by approximately $3,400. The Company does not anticipate any other material impact on the financial statements as a result of implementation of this new accounting standard. The new rule harmonizes Canadian GAAP with U.S. GAAP. Other intangible assets Intangible assets arising from purchase acquisitions principally represent the fair value of customer relationships, company trademarks and non-competition covenants. Definite life intangible assets are amortized to earnings on a straight-line basis over the estimated useful life of the asset, averaging 15 years. Indefinite life intangible assets are carried at cost and reviewed annually for impairment. Investment held for sale The investment held for sale (Old Lyme) is recorded at cost, which is at or below market value. Future income taxes Income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities and their tax bases. Future income tax assets and liabilities are determined for each temporary difference based on the tax rates which are expected to be in effect when the asset or liability is settled. The benefit of loss carryforwards is recognized as an asset to the extent that it is more likely than not to be recoverable from future profitable operations. The principal temporary differences are related to loss carryforwards, goodwill and other intangible asset amortization and reserves. Estimates and assumptions Preparation of the financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amount of F-9 assets and liabilities and the reported amount of revenue and expense during the reporting period. Actual results could differ from those estimated. Earnings per share Basic earnings per share, excluding the dilutive effect of common share equivalents, is calculated by dividing net earnings by the weighted average number of common shares outstanding for the year. Diluted earnings per share are calculated using the treasury stock method and include the effects of all potentially dilutive securities. Earnings per common share has been compiled below:
2001 2000 1999 ------- ------ ------ Net income (numerator) $10,005 $6,138 $3,744 ------- ------ ------ Weighted average common shares and effect of dilutive shares used in the computation of earnings per share: Average shares outstanding -- basic (denominator) 19,012 18,327 16,941 Effect of dilutive shares* 1,093 -- -- ------- ------ ------ Average shares outstanding -- diluted (denominator) 20,105 18,327 16,941 ------- ------ ------ Earnings per common share: Basic $ 0.53 $ 0.34 $ 0.22 Diluted $ 0.50 $ 0.34 $ 0.22
* Reflects dilutive effect of all put options issued in connection with certain 2001 acquisitions. The subordinated convertible debentures are anti-dilutive. Written put options The fair value of put options issued by the Company as consideration for businesses acquired is classified as long-term debt until such time as the option is exercised or expires. Changes in the fair value of these options are recorded in earnings. 3. ACQUISITIONS The Company's strategic business plan includes the regular and systematic evaluation and acquisition of insurance brokerages in new and existing markets. Insurance brokerages, due to their nature, typically maintain a very low capital to earnings ratio. As a result, the Company recorded a substantial amount of goodwill and other intangible assets in connection with these acquisitions. The Company typically pays a portion of the consideration for an acquired brokerage in cash. Consideration for the remainder of the purchase price is normally in the form of the Company's common shares. The Company's common shares issued in consideration for acquired brokerages are valued based on the quoted market price, on the Toronto Stock Exchange, for a short period before and after the closing date of the business combination. a) During 2001, the Company purchased all of the issued and outstanding shares of Kaye, Burnham Stewart Group, Inc. (Burnham) and J.P. Flanagan Corporation (Flanagan), as well as the outstanding shares or net assets of 13 other brokerages, all of which were acquired using the purchase method of accounting. Accordingly, the results of operations and cash flows of the acquired companies have been included in the Company's consolidated results from their respective acquisition dates. F-10 The allocation of the purchase price, including goodwill and other identifiable intangible assets, and the cost of the acquired brokerages are summarized as follows:
KAYE BURNHAM FLANAGAN OTHERS TOTAL ------------- ------------ ------------ ------- -------- Acquisition Date June 28, 2001 July 1, 2001 May 31, 2001 Various Working capital $ 43,141 $ 3,002 $ (703) $ (216) $ 45,224 Capital and other assets 7,413 1,580 79 (244) 8,828 Long-term debt and capital leases assumed (1,449) (8,200) (1,339) (70) (11,058) -------- ------- ------- ------- -------- Net assets (liabilities), at fair value $ 49,105 $(3,618) $(1,963) $ (530) $ 42,994 ------------- ------------ ------------ ------- -------- Consideration Cash $125,131 $11,533 $ 776 $ 3,950 $141,390 Debt -- 12,435 7,210 1,760 21,405 Shares -- 6,191 1,821 557 8,569 -------- ------- ------- ------- -------- $125,131 $30,159 $ 9,807 $ 6,267 $171,364 ------------- ------------ ------------ ------- -------- Goodwill $ 59,816 $27,269 $ 8,838 $ 6,001 $101,924 Customer relationships 12,992 5,690 2,242 796 21,720 Trademarks 1,714 623 250 -- 2,587 Non-competition covenants 1,204 195 440 -- 1,839 -------- ------- ------- ------- -------- $ 75,726 $33,777 $11,770 $ 6,797 $128,070 ------------- ------------ ------------ ------- -------- Number of shares issued as consideration (000's) -- 1,743 730 51 2,524 ------------- ------------ ------------ ------- --------
Contingent Consideration In addition to the consideration shown above, the previous owners of Burnham, Flanagan and other subsidiaries are entitled to contingent consideration if certain revenue and profitability targets are met. Purchase price allocations for Flanagan and Burnham are subject to adjustment for future consideration issued. F-11 Flanagan The following table summarizes the contingent consideration that may be issued in connection with the acquisition of Flanagan:
CONTINGENT CONSIDERATION CONTINGENT CONSIDERATION YEAR (000'S) TARGET CRITERIA - ---- ------------- ------------------------- 2001 50 shares Revenue and Profitability 2002 38 shares Revenue 2002 38 shares Profitability 2003 88 shares Revenue 2003 37 shares Profitability
As of December 31, 2001, the contingent consideration criteria for 2001 were met. Accordingly, the Company has an obligation to issue 50 shares in the amount of $478. The additional purchase consideration has been recorded in goodwill and share capital as of December 31, 2001. Burnham The owners of Burnham shall be entitled to contingent consideration in the event that the acquired Burnham operations meet certain profitability targets for the twelve-month period ended June 30, 2002. The contingent consideration to be issued, if the profitability criteria are met, shall be a portion of actual profitability in excess of the target. Any contingent consideration issued by the Company shall be paid 38% in cash, 51% in restricted shares of the Company's common stock, and 11% in unrestricted shares of the Company's common shares. Others An additional $400 of contingent consideration, based primarily on revenue targets, may also be issued in connection with other acquisitions made by the Company in 2001. F-12 b) During 2000, the Company purchased all of the issued and outstanding shares of C.J. McCarthy Insurance Agency Inc. (McCarthy), as well as the outstanding shares or net assets of 17 other brokerages, all of which were acquired using the purchase method of accounting. Accordingly, the results of operations and cash flows of the acquired companies have been included in the Company's consolidated results from their respective acquisition dates. The allocation of the purchase price, including goodwill, and the cost of the acquired brokerages are summarized as follows:
MCCARTHY OTHERS TOTAL ------------- ------- ------- Acquisition date June 30, 2000 Various Working capital $ 3,033 $(1,600) $ 1,433 Capital and other assets 487 363 850 Long-term debt and capital leases assumed (899) (24) (923) ------- ------- ------- Net assets (liabilities), at fair value $ 2,621 $(1,261) $ 1,360 ------------ ------- ------- Consideration Cash $18,236 $ 6,710 $24,946 Debt -- 1,951 1,951 Shares 4,415 466 4,881 ------- ------- ------- $22,651 $ 9,127 $31,778 ------------ ------- ------- Goodwill $20,030 $10,388 $30,418 ------------ ------- ------- Number of shares issued as consideration (000's) 465 43 508 ------------ ------- -------
F-13 c) During 1999, the Company purchased all of the issued and outstanding shares of 44 brokerages, all of which were acquired using the purchase method of accounting. Accordingly, the results of operations and cash flows of the acquired companies have been included in the Company's consolidated results from their respective acquisition dates. The allocation of the purchase price, including goodwill, and the cost of the acquired brokerages are summarized as follows:
TOS MACK AND INSURANCE PARKER, INC. SERVICES LTD. OTHERS TOTAL ---------------- --------------- ------- ------- Acquisition date October 27, 1999 August 31, 1999 Various Working capital $ 3,283 $ 441 $ (632) $ 3,092 Capital and other assets 793 1,296 1,246 3,335 Long-term debt and capital leases assumed (251) (2,219) (3,825) (6,295) ------- ------- ------- ------- Net assets (liabilities), at fair value $ 3,825 $ (482) $(3,211) $ 132 -------------- ------------- ------- ------- Consideration Cash $10,082 $ 4,376 $22,097 $36,555 Shares 13,249 4,496 12,586 30,331 ------- ------- ------- ------- $23,331 $ 8,872 $34,683 $66,886 -------------- ------------- ------- ------- Goodwill $19,506 $ 9,354 $37,894 $66,754 -------------- ------------- ------- ------- Number of shares issued as consideration (000's) 1,103 417 1,185 2,705 -------------- ------------- ------- -------
F-14 4. ACCOUNTS AND OTHER RECEIVABLES Accounts and other receivables consist of the following:
DECEMBER 31, ------------------ 2001 2000 -------- ------- Client premiums receivable $ 80,488 $33,430 Commissions receivable 18,214 5,870 Less: Allowance for doubtful accounts and policy cancellations (1,427) (502) -------- ------- 97,275 38,798 Other receivables 4,038 3,177 -------- ------- $101,313 $41,975 -------- -------
Allowance for doubtful accounts and policy cancellations:
DECEMBER 31, -------------------- 2001 2000 1999 ------ ---- ---- Balance, January 1 $ 502 $309 $110 Charged to net earnings before income taxes 340 26 188 Acquired through acquisitions 585 167 11 ------ ---- ---- Balance, December 31 $1,427 $502 $309 ====== ==== ====
5. CAPITAL ASSETS
DECEMBER 31, ------------------- 2001 2000 -------- -------- Leasehold improvements $ 10,043 $ 1,929 Office equipment 11,140 6,570 Computer equipment 13,620 8,900 -------- -------- 34,803 17,399 Accumulated depreciation and amortization (13,868) (10,191) -------- -------- Net book value $ 20,935 $ 7,208 -------- --------
During 2001 and 2000, capital assets were acquired at an aggregate cost of $11,534 and $2,395, respectively, of which $1,236 and $345, respectively, were acquired by means of capital leases. The cost above reflects certain capital assets held under capital leases of which the remaining liability at December 31, 2001 and 2000 was $1,470 and $667, respectively. F-15 6. OTHER INTANGIBLE ASSETS AND GOODWILL As of December 31, 2001, the gross carrying amount and accumulated amortization of intangible assets were as follows:
GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION TOTAL -------- ------------ ------- Definite life intangible assets: Customer relationships $21,720 $759 $20,961 Indefinite life intangible assets: Non-competition covenants 2,587 56 2,531 Trademarks 1,839 -- 1,839 ------- ---- ------- Total $26,146 $815 $25,331 ------- --------- -------
The Company is unable to estimate the useful life of non-competition covenants and trademarks. These indefinite life intangible assets will be reviewed annually for impairment. Once a non-competition covenant is triggered, the Company's policy is to amortize the related intangible asset over the period of the remaining contractual obligation. The changes in the carrying amount of goodwill for the years ended December 31, 2001 and 2000, are as follows:
OPERATIONS OPERATIONS IN CANADA IN U.S. TOTAL ---------- ---------- -------- Balance as of January 1, 2000 $67,760 $ 22,051 $ 89,811 Goodwill acquired during 2000 10,388 20,030 30,418 Amortization of goodwill during 2000 (2,501) (759) (3,260) Cumulative translation adjustment -- 775 775 ------- -------- -------- Balance as of December 31, 2000 $75,647 $ 42,097 $117,744 Goodwill acquired during the period January 1, 2001 to June 30, 2001 1,255 67,848 69,103 Goodwill acquired during the period July 1, 2001 to December 31, 2001 556 32,265 32,821 Amortization of goodwill during 2001 (2,292) (1,833) (4,125) Cumulative translation adjustment (884) 6,189 5,305 ------- -------- -------- Balance as of December 31, 2001 $74,282 $146,566 $220,848 -------- --------- --------
Goodwill acquired prior to July 1, 2001 is amortized on a straight-line basis over a period of 40 years. Accumulated amortization was $14,822 and $10,482 at December 31, 2001 and 2000, respectively. F-16 For the years ended December 31, 2001, 2000 and 1999, amortization has been comprised of the following:
2001 2000 1999 ------ ------ ------ Customer relationships $ 759 $ -- $ -- Non-competition covenants 56 -- -- Goodwill 4,125 3,260 1,626 ------ ------ ------ Total $4,940 $3,260 $1,626 ------ ------ ------
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31, 2001 2000 ------------- ------------- Insurance premiums payable $122,668 $42,472 Accrued liabilities 41,426 15,129 -------- ------- $164,094 $57,601 ------------- ------------
8. DEBT Bank debt At December 31, 2001, the Company had bank debt consisting of three separate credit facilities: - $25 million facility. Borrowings under this facility are accessed at a floating rate of 135 basis points above LIBOR, which was 2.09% as of December 31, 2001. This facility is guaranteed by certain of the Company's subsidiaries and by Fairfax. It expires on July 18, 2002 and contains covenants that, among other things, require the Company to maintain certain financial ratios, restrict its ability to incur additional debt, and limit quarterly dividends to C$.07 per share. As of December 31, 2001, $25 million was drawn on this facility. The Company intends to fully repay and terminate this facility with proceeds from the sale of Old Lyme. - $25 million facility. Borrowings under this facility are accessed either at a floating rate of 150 basis points above LIBOR, which was 2.09% as of December 31, 2001, or at a fixed interest rate of 9%. This facility is guaranteed by certain of the Company's subsidiaries. It expires on July 17, 2002 and contains covenants that, among other things, require the Company to maintain certain financial ratios, restrict its ability to incur additional debt and limit quarterly dividend payments to C$0.07 per share. As of December 31, 2001, $24.5 million was drawn on this facility, $23 million at a floating interest rate and $1.5 million at a fixed interest rate, which is included in long-term debt and is due October 31, 2005. We intend to repay approximately $4.5 million of this facility with the proceeds from the sale of Old Lyme. - $7.5 million facility. Borrowings under this facility are at an interest rate of prime, which was 4.75% as of December 31, 2001, plus 1%. Payment is due on demand. As of December 31, 2001, $7.0 million had been drawn on this facility. The Company intends to fully repay and terminate this facility with the proceeds from the sale of Old Lyme. F-17 The Company has agreed to sell Old Lyme to a subsidiary of Fairfax for approximately $42.8 million, subject to obtaining regulatory approval. The Company intends to use the proceeds from the sale of Old Lyme to repay debt. As of September 30, 2001, the Company was not in compliance with certain financial covenants relating to the maintenance of certain ratios under both of the $25 million credit facilities. The non-compliance was the direct result of a delay in reaching a final agreement for the sale of Old Lyme, the proceeds of which would have been used to repay debt. The Company's lenders have granted waivers with respect to the non-compliance with these covenants. In addition, the Company has negotiated amended agreements, with respect to these covenants, with these lenders as of December 31, 2001. The amendments are for the remaining life of the loans. Under the amended agreements, the Company is in compliance with all the financial covenants governing the respective credit facilities as of December 31, 2001. Long-term debt and capital leases
2001 2000 ------- ------- Revolving U.S. Dollar LIBOR loans at 3.2% $49,454 $29,835 Put options (see below) 17,274 -- Term loan with interest at prime plus 3/4%, repayable at $22 monthly, due August, 2005* 849 1,130 Term loan with interest at 9%, repayable at $46 monthly, due October, 2005* 1,533 -- Term loan with interest at 7.8%, repayable at $367 quarterly, due June 2002* 728 -- Term loan with interest at 7.75% repayable at $13 monthly, due March 2002* 38 -- Note payable with interest at 5.92%, repayable at $272 annually, due November 2005 953 1,103 Term loan with interest at 8.25%, repayable at $364 semi-annually, due June 2007* 4,007 -- Term loan with interest at 8%, repayable at $18 monthly, due July 2010 1,353 -- Various other unsecured notes payable and debt 2,669 1,702 Capital leases* 1,470 667 Term loans repaid during the year -- 228 ------- ------- Long-term debt and capital leases 80,328 34,665 Less current portion (4,169) (2,167) ------- ------- $76,159 $32,498 ------- -------
- --------------- * Certain capital assets have been pledged as collateral in amounts not less than the outstanding balance at December 31, 2001. Revolving U.S. dollar LIBOR loans Borrowings under this facility total $50 million and are accessed at a floating rate of 112.5 basis points above LIBOR, which was 2.09% as of December 31, 2001. This facility expires on June 20, 2002 and requires the Company to maintain certain financial ratios. The Company intends to extend the facility for a further period of one year; however, F-18 if the revolving period is not extended, any amounts outstanding will automatically convert into a three-year term loan at a fixed interest rate equal to the Canadian dollar interest swap rate quoted by the lender plus 1.375%. As of December 31, 2001 $49.5 million had been drawn on this facility. The Company intends to pay down approximately $5 million of this facility with the proceeds from the sale of Old Lyme. Put options Long-term debt includes the estimated value of the financial liability of $17,274 relating to written put option agreements on 2,103 common shares, exercisable at a price of C$17.00 per share, issued to former owners of brokerages acquired who are officers and employees of the Company. The put options are exercisable as follows:
NUMBER OF SHARES DATE (000'S) - ---- --------- June 18, 2006 340 July 1, 2006 873 June 18, 2007 68 June 18, 2011 272 July 1, 2011 550
The Company will not be required to settle the liabilities in cash if the common share price exceeds C$17.00 on each of the above mentioned exercise dates. Any options not exercised on the exercise date immediately expire. Subordinated convertible debentures In connection with the acquisition of Kaye on June 28, 2001, we issued: (1) $26.6 million aggregate principal amount of 8.5% convertible subordinated notes due June 28, 2006 to a third-party, the third-party notes; and (2) $35 million aggregate principal amount of 8.5% convertible subordinated notes due June 28, 2007 to certain subsidiaries of Fairfax, the Fairfax notes. These convertible notes were anti-dilutive to earnings per share as of December 31, 2001. The third-party notes are convertible at any time into the Company's common shares at C$17.00 per share, subject to mandatory conversion at June 28, 2006. The Company subsequently entered into an agreement whereby the third-party agreed not to convert the notes into common shares before June 30, 2002 and also agreed to allow the Company to repay the notes, in whole or in part, on or before June 30, 2002 without penalty. The Fairfax notes are convertible by the holders at any time into the Company's common shares at C$17.00 per share. Beginning June 28, 2006, the Company may require conversion of the Fairfax notes into common shares at C$17.00 per share if, at any time, the weighted average closing price of the Company's common shares for twenty consecutive trading days equals or exceeds C$19.00 per share. If converted, Fairfax would own approximately 45% of the total outstanding common shares as of December 31, 2001. F-19 Future repayment of long-term debt and capital leases is as follows: Year ending December 31, 2002 $ 4,169 2003 2,794 2004 2,478 2005 51,365 2006 11,016 2007 and thereafter 8,506 ------- $80,328 -------
9. COMMITMENTS AND CONTINGENCIES a) The Company is committed under lease agreements for office premises and computer equipment. At December 31, 2001, aggregate minimum rental commitments (net of expected sub-lease receipts) under operating leases of $53,766 are summarized as follows: 2002 $ 9,061 2003 $ 7,909 2004 $ 6,968 2005 $ 6,311 2006 $ 5,680 2007 and thereafter $17,837
b) The Company may, under certain circumstances be obligated to purchase loans for officers, directors and employees from a Canadian chartered bank totaling $5,542 (2000 -- $5,896) to assist in purchasing common shares of the Company. As collateral, the employees have pledged 669 (2000 -- 690) common shares which have a year-end market value of $6,389 (2000 -- $5,683). Interest in the amount of $377 (2000 -- $397) on the loans was paid by the Company. c) In the ordinary course of business, the Company and its subsidiaries are subject to various claims and lawsuits consisting primarily of alleged errors and omissions in connection with the placement of insurance. In the opinion of management, the ultimate resolution of all asserted and potential claims and lawsuits will not have a material effect on the consolidated financial position or results of operations of the Company. 10. SHAREHOLDERS' EQUITY At December 31, 2001 and 2000, there were an unlimited number of non-voting, preferred shares authorized, issuable in series on such terms and conditions as set by the Board of Directors, of which no shares were issued. At December 31, 2001 and 2000, there were an unlimited number of common shares authorized, of which 21,656 in 2001 and 18,528 in 2000 were issued and outstanding. F-20
COMMON SHARES ---------------------- OUTSTANDING (000'S) AMOUNT ----------- -------- Balance, January 1, 1999 7,077 $ 16,624 Repurchase (577) (4,147) Issued for cash 9,104 65,534 Purchase of subsidiaries 2,704 30,331 ------ -------- Balance, December 31, 1999 18,308 108,342 Repurchase (288) (1,794) Purchase of subsidiaries 508 4,882 ------ -------- Balance, December 31, 2000 18,528 111,430 Issued for cash 440 3,621 Issued for executive stock purchase plan (net of repurchases) 164 1,886 Purchase of subsidiaries 2,474 8,091 Issuable for contingent consideration 50 478 ------ -------- Balance, December 31, 2001 21,656 $125,506 ----------- --------
During 2000, under terms of normal course issuer bids approved by The Toronto Stock Exchange, the Company purchased and cancelled 226 common shares for an aggregate cost of $1,996, of which $649 was charged to retained earnings. On January 22, 1999, the Company issued 2,838 Special Warrants for cash of $24,282. Holders of Special Warrants were entitled to receive, upon exercise and without payment of any further consideration, one common share of the Company for each Special Warrant held. These warrants were exercised on February 10, 1999. On January 29, 1999, the Company filed a prospectus with applicable regulatory authorities in each of the provinces of Canada for the offering and issuance of 866 common shares of the Company for cash of $7,406. The offering closed on February 10, 1999. Shares issued for cash of $65,534 is net of issue costs of $376. Cumulative translation account
2001 2000 ------- ------ Balance at January 1 $ 195 $ (831) Translation of self-sustaining foreign operations 9,479 1,335 Translation of debt financing self-sustaining foreign operations (6,904) (309) ------- ------ Balance at December 31 $ 2,770 $ 195 ------- ------
11. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial assets and liabilities, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities at December 31, 2001 and 2000, approximate fair value because of the short maturity of these instruments. The carrying value of the Company's variable rate debt of $105,300 approximates fair market value. F-21 The fair value of the Company's subordinated convertible debentures is not determinable. The carrying values of put options and other long-term debt approximate fair values. 12. INCOME TAXES The provision for income tax expense differs from the result that would have been obtained by applying the combined Canadian statutory federal and provincial income tax rate of 41.7% for 2001, 44.0% for 2000 and 44.5% for 1999, as follows:
2001 2000 1999 ------- ------- ------ Provision for tax at statutory rates $ 6,366 $ 5,058 $3,467 Non-deductible amortization of goodwill 1,579 994 588 Income earned outside Canada (3,170) (1,148) (44) Other 487 466 41 ------- ------- ------ Provision for tax $ 5,262 $ 5,370 $4,052 ------- ------- ------
The components of the future tax assets and liabilities at December 31, 2001 and 2000, were as follows:
2001 2000 ------- ----- Future income tax assets Loss carryforwards $ 1,886 $ 166 Non-deductible book reserves 1,602 -- Deferred compensation 879 -- Other 303 202 ------- ----- Total future income tax assets 4,670 368 Less: current portion future income tax assets (1,999) -- ------- ----- Future income tax assets $ 2,671 $ 368 ------- ----- Future income tax liabilities Goodwill and other intangible asset amortization $ 3,663 $ 712 Other accrual adjustments 1,309 -- Capital asset depreciation 169 181 Other 838 (141) ------- ----- Total future income tax liabilities 5,979 752 Less: current portion future income tax liabilities (1,387) -- ------- ----- Future income tax liabilities $(4,592) $ 752 ------- -----
The Company has Canadian net operating loss carryforwards of $2,425 at December 31, 2001 that expire 2007 through 2008. In addition, the Company has various state and local net operating loss carryforwards in the U.S. of approximately $9,100, which expire 2016 through 2021. Such net operating losses are currently available to offset certain future state and local taxable income. As a result of an ownership change, there are annual limitations imposed upon the utilization of these losses and, accordingly, a valuation allowance in the amount of approximately $1,400 has been established where we do not believe the net operating losses will be realized. F-22 Valuation allowance January 1, 2001 $ -- Acquired through acquisitions 1,461 Valuation allowance December 31, 2001 1,400 ------ Change in the period $ 61 Average state and local tax rate 10% ------ Charged to provision for income tax expense for the year ended December 31, 2001 $ 6 ------
13. INTEREST AND INCOME TAXES PAID Interest and income taxes paid were for the years ending December 31 were:
2001 2000 1999 ------ ------ ------ Interest paid $6,818 $2,606 $ 632 Income taxes paid $3,444 $7,528 $4,264
14. PRO FORMA RESULTS OF ACQUISITIONS (UNAUDITED) The following table reflects the results of our operations, on a pro forma basis, as if the 2001 acquisitions of Burnham, Flanagan and Kaye had been completed on January 1, 2000, and the 2000 acquisition of McCarthy had been completed on January 1, 2000. The 1999 acquisitions have not been presented due to the significant number of individually immaterial acquisitions.
2001 2000 -------- -------- Total revenue $197,786 $172,541 Net earnings (loss) before income taxes $ 16,321 $ (2,287) Net earnings (loss) from operations $ 11,440 $ (3,388) Net earnings (loss) from operations per share Basic $ 0.56 $ (0.18) Diluted $ 0.53 $ (0.16) Weighted average shares outstanding Basic (000's) 20,387 19,231 Diluted (000's) 21,480 21,654
The pro forma adjustments for 2001 and 2000 include adjustments to remove non- recurring expenses incurred by the brokerages acquired in connection with the purchase transactions by the Company, adjustments to amortization of goodwill and other identifiable intangible assets, as well as adjustments to reflect the Company's cost of borrowings as if the 2001 acquisitions of Burnham, Flanagan and Kaye had been completed on January 1, 2000, and the 2000 acquisition of McCarthy had been completed on January 1, 2000. 15. SEGMENTED INFORMATION The Company is an international insurance brokerage which provides a variety of property, casualty, life and health, employee benefits, investment and risk management products and services. In addition to its Corporate Operations, the Company has identified two operating segments within its insurance brokerage business; Canadian Operations and U.S. Operations. Corporate Operations consist primarily of investment F-23 income, unallocated administrative costs, interest expense and the income tax expense or benefit which is not allocated to the Company's operating segments. The elimination of intra-segment revenue relates to intra-company interest charges and management fees. Geographic revenue is determined based upon the functional currency of the various subsidiaries. Financial information by operating and geographic segment for 2001, 2000 and 1999 is as follows:
2001 2000 ---------------------------------- --------------------------------- CANADA U.S. CONSOLIDATED CANADA U.S. CONSOLIDATED -------- -------- ------------ -------- ------- ------------ REVENUE Brokerage $ 78,488 $ 75,458 $153,946 $ 74,710 $19,864 $ 94,574 Corporate and other 16,960 237 17,197 7,953 5,142 13,095 Elimination of intra-segment revenue (16,884) (266) (17,150) (7,427) (5,002) (12,429) -------- -------- -------- -------- ------- -------- $ 78,564 $ 75,429 $153,993 $ 75,236 $20,004 $ 95,240 -------- -------- ---------- -------- ------- ---------- NET EARNINGS BEFORE INCOME TAXES Brokerage $ 6,625 $ 13,200 $ 19,825 $ 8,017 $ 3,242 $ 11,259 Corporate and other 6,126 (10,684) (4,558) 3,771 (3,522) 249 -------- -------- -------- -------- ------- -------- $ 12,751 $ 2,516 $ 15,267 $ 11,788 ($280) $ 11,508 -------- -------- ---------- -------- ------- ---------- INCOME TAXES Brokerage $ 3,910 $ 5,793 $ 9,703 $ 4,930 $ 1,339 $ 6,269 Corporate and other (322) (4,119) (4,441) 412 (1,311) (899) -------- -------- -------- -------- ------- -------- $ 3,588 $ 1,674 $ 5,262 $ 5,342 $ 28 $ 5,370 -------- -------- ---------- -------- ------- ---------- NET EARNINGS Brokerage $ 2,715 $ 7,505 $ 10,122 $ 3,087 $ 1,903 $ 4,990 Corporate and other 6,448 (6,565) (117) 3,359 (2,211) 1,148 -------- -------- -------- -------- ------- -------- $ 9,163 $ 842 $ 10,005 $ 6,446 ($308) $ 6,138 -------- -------- ---------- -------- ------- ---------- IDENTIFIABLE ASSETS Brokerage $109,896 $319,989 $429,885 $129,899 $63,116 $193,015 Investment held for sale -- 40,772 40,772 -- -- -- Corporate and other 28,212 3,427 31,639 8,309 4,833 13,142 -------- -------- -------- -------- ------- -------- $138,108 $364,188 $502,296 $138,208 $67,949 $206,157 -------- -------- ---------- -------- ------- ---------- AMORTIZATION $ 2,316 $ 2,624 $ 4,940 $ 2,482 $ 778 $ 3,260 ADDITIONS TO CAPITAL ASSETS $ 1,624 $ 9,910 $ 11,534 $ 2,190 $ 205 $ 2,395 DEPRECIATION $ 1,755 $ 2,185 $ 3,940 $ 1,619 $ 266 $ 1,885 INTEREST REVENUE $ 805 $ 1,188 $ 1,993 $ 977 $ 704 $ 1,681 INTEREST EXPENSE $ 6,337 $ 1,110 $ 7,447 $ 1,920 $ 61 $ 1,981
F-24
1999 --------------------------------- CANADA U.S. CONSOLIDATED -------- ------- ------------ REVENUE Brokerage $ 50,944 $ 1,535 $ 52,479 Corporate and other 4,029 -- 4,029 Elimination of intra-segment revenue (2,411) -- (2,411) -------- ------- -------- $ 52,562 $ 1,535 $ 54,097 -------- ------- ----------- NET EARNINGS BEFORE INCOME TAXES Brokerage $ 5,727 $ (236) $ 5,491 Corporate and other 2,510 (205) 2,305 -------- ------- -------- $ 8,237 $ (441) $ 7,796 -------- ------- ----------- INCOME TAXES Brokerage $ 3,274 $ (65) $ 3,209 Corporate and other 994 (151) 843 -------- ------- -------- $ 4,268 $ (216) $ 4,052 -------- ------- ----------- NET EARNINGS Brokerage $ 2,453 $ (171) $ 2,282 Corporate and other 1,516 (54) 1,462 -------- ------- -------- $ 3,969 $ (255) $ 3,744 -------- ------- ----------- IDENTIFIABLE ASSETS Brokerage $117,038 $32,070 $149,108 Corporate and other 20,247 1,847 22,094 -------- ------- -------- $137,285 $33,917 $171,202 -------- ------- ----------- AMORTIZATION $ 1,547 $ 79 $ 1,626 ADDITIONS TO CAPITAL ASSETS $ 1,225 $ 83 $ 1,308 DEPRECIATION $ 1,211 $ 64 $ 1,275 INTEREST REVENUE $ 724 $ 83 $ 807 INTEREST EXPENSE $ 425 $ 207 $ 632
16. RELATED PARTY TRANSACTIONS The Company had transactions with and recorded commission income from the following related parties:
2001 2000 1999 ------ ------ ------ Lombard General Insurance Company of Canada $6,123 $7,527 $6,077 Commonwealth Insurance Company 374 351 353 Federated Insurance Company of Canada 28 10 1 Markel Insurance Company of Canada 88 72 61 Crum & Forster Insurance 745 291 67 TIG Specialty Insurance 150 -- -- ------ ------ ------ $7,508 $8,251 $6,559 ------ ------ ------
As of December 31, 2001, the Company had accounts receivable and accounts payable balances with the above related parties in the amounts of $271 and $6,839 (2000 -- F-25 $269 and $3,605), respectively. All revenue and related accounts receivable and accounts payable are the result of transactions in the normal course of business. The companies above are related through common ownership by Fairfax, which owns approximately 37% of the Company's common shares. As of December 31, 2001, long-term debt related to put options and certain subordinated convertible debentures are due to related parties. During 2001 and 2000, the Company incurred expenses related to rental of premises from related parties in the amount of $1,373 and $993, respectively. At December 31, 2001 and 2000, the Company also had accounts receivable due from related parties in the amount of $4,586 (2000 -- $2,320), of which the majority were loans to employees to enable them to purchase shares of the Company. 17. RECONCILIATION TO U.S. GAAP The consolidated financial statements have been prepared in accordance with Canadian GAAP which differs in certain respects from United States GAAP. The following represents the differences affecting net earnings:
2001 2000 1999 ------- ------- ------ Net earnings for the year based on Canadian GAAP $10,005 $ 6,138 $3,744 Adjustment to investment held for sale(1) 520 -- -- Change in reporting currency(2) 158 366 233 ------- ------- ------ NET EARNINGS FOR THE YEAR BASED ON U.S. GAAP(3) 10,683 6,504 3,977 Other comprehensive income Unrealized gains (losses), net of tax of $226 -- 2001, ($112) -- 2000, ($25) -- 1999 (370) 183 41 Less: reclassification adjustment, net of tax of ($112) -- 2001, $0 -- 2000 (182) (1) -- Foreign currency translation adjustment, net of tax of ($2,478) -- 2001, $1,294 -- 2000, ($1,514) -- 1999(2) 3,718 (1,940) 2,272 ------- ------- ------ Comprehensive income based on U.S. GAAP(4) $13,849 $ 4,746 $6,290 ------- ------- ------ Basic earnings per share based on U.S. GAAP $ 0.56 $ 0.35 $ 0.23 Diluted earnings per share based on U.S. GAAP $ 0.53 $ 0.35 $ 0.23
F-26 The effect of these adjustments on shareholders' equity is as follows:
2001 2000 -------- -------- Shareholders' equity based on Canadian GAAP $135,271 $112,212 Adjustment to investment held for sale(1) 520 -- Accumulated other comprehensive income: Unrealized gains (losses), net of tax of ($89) -- 2001, $136 -- 2000 (146) 224 Cumulative translation account(2) (1,864) 5,582 Executive share purchase plan loan(5) (2,142) -- -------- -------- Shareholders' equity based on U.S. GAAP(3) $131,639 $118,023 -------- --------
- --------------- (1) Under Canadian GAAP, Old Lyme is treated as an investment held for sale at its June 28, 2001 cost of $40,772. Under U.S. GAAP, Old Lyme is reflected at its fair market value, which is equal to its U.S. GAAP shareholder's equity at December 31, 2001 pursuant to the pending sale of Old Lyme. Accordingly, under U.S. GAAP, the investment in Old Lyme has been increased to reflect the net increase in its shareholder's equity from the date of acquisition. This adjustment is treated as a purchase price adjustment to the Kaye acquisition and results in an increase of $2,075 in the investment in Old Lyme and a corresponding decrease in goodwill, with no effect on net earnings or shareholders' equity. Under Canadian GAAP, interest on debt used to finance the Old Lyme acquisition in the amount of $520 (net of tax) is charged to earnings. Under U.S. GAAP, the interest expense on the debt incurred to finance the purchase of Old Lyme is applied to the carrying value of the investment and does not affect the net earnings of the Company. (2) Under Canadian GAAP, the Company's consolidated financial statements have historically been expressed in Canadian dollars. Effective September 30, 2001, the Company adopted the U.S. dollar as its reporting currency. Comparative financial information has been restated in U.S. dollars using the translation of convenience method. At September 30, 2001, all historical financial statements were converted from Canadian to U.S. dollars at the exchange rate in effect at September 30, 2001 of one Canadian dollar to 0.6338 U.S. dollar. Revenue and expenses subsequent to September 30, 2001 were translated to U.S. dollars at the average exchange rate for the period. Under U.S. GAAP, historical financial statements are translated using a current exchange rate; which for assets and liabilities is the exchange rate at the balance sheet date; for the income statement is the average exchange rate for the period; and for share capital accounts is the historical exchange rate. In addition, foreign exchange differences under U.S. GAAP are included in the cumulative translation account net of tax. The aggregate impact of these differences has been presented in the reconciliation of shareholders' equity for Canadian to U.S. GAAP under the caption "cumulative translation account." F-27 (3) The consolidated statements of earnings and cash flows for the years ended December 31, 2001, 2000 and 1999 and the condensed balance sheets as at December 31, 2001 and 2000 under U.S. GAAP are as follows:
2001 2000 1999 --------- -------- -------- Revenue $ 156,781 $100,919 $ 57,458 Net earnings before income taxes $ 16,042 $ 12,195 $ 8,281 Net earnings $ 10,683 $ 6,504 $ 3,977 Cash provided by operating activities $ 44,980 $ 13,563 $ 5,377 Cash used in investing activities $(130,687) $(18,914) $(37,886) Cash provided by financing activities $ 130,881 $ 5,904 $ 63,949 Total current assets $ 225,485 $ 81,518 Total assets $ 499,381 $216,834 Total current liabilities $ 224,968 $ 63,839 Total liabilities $ 367,742 $ 98,811 Total shareholders' equity $ 131,639 $118,023
(4) Comprehensive income is measured in accordance with Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" (SFAS 130). This standard defines comprehensive income as all changes in equity other than those resulting from investments by owners and distributions to owners and includes the change in unrealized gains (losses) and foreign currency translation adjustments, which under Canadian GAAP are not recognized and recorded as a separate component of shareholders' equity, respectively. Certain disclosures required by SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, have not been included as such disclosures related to the Company's investments in debt and equity securities are immaterial to the overall financial statement presentation. (5) Under Canadian GAAP, loans granted by the Company to employees under the executive share purchase plan are treated as a receivable and included in the balance sheet caption "Accounts and other receivables." Under U.S. GAAP, those loans receivables must be included as a reduction to shareholders' equity. 18. EFFECTS OF NEW U.S. GAAP ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations subsequent to June 30, 2001 be accounted for in accordance with the purchase method of accounting, as well as specifies criteria for recognizing intangible assets acquired in a purchase business combination. SFAS No. 142 eliminates the amortization of goodwill, requires annual impairment testing of goodwill, and introduces the concept of definite and indefinite life intangible assets. Indefinite life intangible assets, similar to goodwill, will no longer be amortized and will be tested at least annually for impairment. Definite life intangible assets will be amortized over the estimated useful life of the asset. SFAS No. 142 must be adopted on January 1, 2002. Although the Company has not completed its assessment of these new accounting standards, it expects that the provisions of SFAS No. 142 related to accounting for F-28 goodwill and other intangible assets will have a significant impact on its consolidated earnings in 2002, as goodwill will no longer be amortized and charged to income, when compared to consolidated earnings for years prior to 2002. The Company is reviewing the impairment testing provisions of these standards, and based on current conditions, does not expect to incur a material transition goodwill impairment charge as of January 1, 2002. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective for fiscal years beginning after December 15, 2001. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB No. 30). SFAS No. 144 generally retains the basic accounting model for the identification and measurement of impairments to long-lived assets to be held, and long-lived assets to be disposed. SFAS No. 144 broadens the definition of "discontinued operations," as previously defined by APB No. 30, but does not allow for the accrual of future operating losses, as was previously permitted under that standard. SFAS No. 144 also addresses several implementation and financial statement presentation issues not previously addressed under U.S. GAAP. SFAS No. 144 excludes from its scope financial accounting and reporting for the impairment of goodwill and other intangible assets. The transitional guidance of SFAS No. 144 generally permits long-lived assets classified as held for disposal as a result of disposal activities that were initiated prior to SFAS No. 144's initial application to continue to be accounted for in accordance with the prior pronouncement applicable for that disposal. As such, our investment in Old Lyme, which is classified as held for disposal at December 31, 2001, will continue to be accounted for in accordance with Canadian and U.S. generally accepted accounting principles applicable at the date that the disposal activities were initiated. In the event that the sale of Old Lyme is not completed by December 31, 2002, the investment will be reclassified as held for use in operations, in accordance with the provisions of SFAS No. 144. Canadian GAAP has not been harmonized with U.S. GAAP related to the provisions of SFAS No. 144. Accordingly, any impact related to the adoption of the provisions of SFAS No. 144 will be treated as a reconciling item between U.S. and Canadian GAAP. However, we do not anticipate that the provisions of SFAS No. 144 will have a material impact on our financial position or results of operations as reported under U.S. GAAP. F-29 19. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- -------- YEAR ENDED DECEMBER 31, 2001 Revenue $28,096 $29,342 $43,601 $52,954 $153,993 Net earnings $2,467 $2,558 $2,029 $2,951 $10,005 Net earnings per share -- Basic $0.13 $0.14 $0.11 $0.15 $0.53 Net earnings per share -- Diluted $0.13 $0.14 $0.09 $0.14 $0.50 YEAR ENDED DECEMBER 31, 2000 Revenue $23,205 $23,080 $24,504 $24,451 $95,240 Net earnings $2,302 $2,093 $1,184 $559 $6,138 Net earnings per share -- Basic $0.13 $0.12 $0.06 $0.03 $0.34 Net earnings per share -- Diluted $0.13 $0.12 $0.06 $0.03 $0.34
F-30 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS OF KAYE GROUP INC.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows, of stockholders' equity and comprehensive loss present fairly, in all material respects, the financial position of Kaye Group Inc. and its subsidiaries at June 28, 2001, and the results of their operations and their cash flows for the period from January 1, 2001 through June 28, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. LOGO PricewaterhouseCoopers LLP New York, New York March 12, 2002 F-31 KAYE GROUP INC. CONSOLIDATED BALANCE SHEET As of June 28, 2001 (in thousands, except par value per share) ASSETS INSURANCE BROKERAGE COMPANIES: CURRENT ASSETS Cash and cash equivalents (including short term investments, and funds held in a fiduciary capacity of $16,618) $ 18,053 Premiums and other receivables 36,857 Prepaid expenses and other assets 1,251 Deferred income taxes 1,363 -------- TOTAL CURRENT ASSETS 57,524 -------- Fixed assets (net of accumulated depreciation of $7,950) 5,256 Intangible assets (net of accumulated amortization of $5,485) 12,128 Deferred income taxes 1,287 Other assets 518 -------- TOTAL ASSETS -- INSURANCE BROKERAGE COMPANIES 76,713 -------- PROPERTY AND CASUALTY COMPANIES: Investments available-for-sale Fixed maturities, at market value (amortized cost $50,038) 50,261 Equity securities, at market value (cost $350) 350 -------- TOTAL INVESTMENTS 50,611 -------- Cash and cash equivalents 8,998 Accrued interest and dividends 1,107 Premiums receivable 3,429 Reinsurance recoverable on paid and unpaid losses 7,430 Prepaid reinsurance premiums 1,248 Deferred acquisition costs 3,376 Deferred income taxes 3,120 Other assets 5,092 -------- TOTAL ASSETS -- PROPERTY AND CASUALTY COMPANIES 84,411 -------- CORPORATE: Cash and cash equivalents 107 Cash, restricted 2,445 Prepaid income taxes 1,176 Prepaid expenses and other assets 10 Investment -- Equity securities, at market value (cost $308) 359 Deferred income taxes 71 -------- TOTAL ASSETS -- CORPORATE 4,168 -------- TOTAL ASSETS $165,292 --------
See notes to consolidated financial statements. F-32 KAYE GROUP INC. CONSOLIDATED BALANCE SHEET As of June 28, 2001 (in thousands, except par value per share) LIABILITIES INSURANCE BROKERAGE COMPANIES: Current liabilities Premiums payable and unearned commissions $ 42,657 Accounts payable and accrued liabilities 6,625 Notes payable 488 Advance from Hub International Limited 10,585 Deferred income taxes 1,069 -------- TOTAL CURRENT LIABILITIES 61,424 Notes payable 94 Deferred income taxes 288 -------- TOTAL LIABILITIES -- INSURANCE BROKERAGE COMPANIES 61,806 -------- PROPERTY AND CASUALTY COMPANIES: Liabilities Unpaid losses and loss expenses 30,366 Unearned premium reserves 11,875 Accounts payable and accrued liabilities 375 Deferred income taxes 1,442 Other liabilities 954 -------- TOTAL LIABILITIES -- PROPERTY AND CASUALTY COMPANIES 45,012 -------- CORPORATE: Current liabilities Accounts payable and accrued liabilities 2,482 Loan payable 1,412 Deferred income taxes 17 -------- TOTAL CURRENT LIABILITIES -- CORPORATE 3,911 -------- TOTAL LIABILITIES 110,729 -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value; 1,000 shares authorized; none issued or outstanding Common stock, $.01 par value; 20,000 shares authorized; 8,507 shares issued and outstanding 85 Paid-in capital 17,995 Accumulated other comprehensive income, net of deferred income tax liability of $93 181 Retained earnings 36,302 -------- TOTAL STOCKHOLDERS' EQUITY 54,563 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $165,292 --------
See notes to consolidated financial statements. F-33 KAYE GROUP INC. CONSOLIDATED STATEMENT OF OPERATIONS For the period January 1, 2001 through June 28, 2001 (in thousands) INSURANCE BROKERAGE COMPANIES: Revenues Commissions and fees -- net $20,174 Net investment income 448 Net realized loss on investments (364) ------- TOTAL REVENUES 20,258 ------- Expenses Compensation and benefits 12,089 Amortization of intangibles 676 Other operating expenses 7,795 ------- TOTAL OPERATING EXPENSES 20,560 ------- Interest expense 377 ------- LOSS BEFORE MERGER EXPENSES -- INSURANCE BROKERAGE COMPANIES (679) ------- PROPERTY AND CASUALTY COMPANIES Revenues Net premiums written 14,671 Change in unearned premiums 2,121 ------- Net premiums earned 16,792 Net investment income 1,768 Net realized loss on investments (713) Other income 6,480 ------- TOTAL REVENUES 24,327 ------- Expenses Losses and loss expenses 7,258 Acquisition costs and general and administrative expenses 6,701 ------- TOTAL EXPENSES 13,959 ------- INCOME BEFORE MERGER EXPENSES -- PROPERTY AND CASUALTY COMPANIES 10,368 ------- CORPORATE: Revenues -- Net investment income 16 Expenses Other operating expenses 247 Interest expense 75 ------- LOSS BEFORE MERGER EXPENSES -- CORPORATE (306) ------- Income before merger expenses 9,383 Merger expenses 13,263 ------- LOSS BEFORE INCOME TAXES (3,880) ------- (Benefit) provision for income taxes Current 703 Deferred (2,735) ------- TOTAL BENEFIT FOR INCOME TAXES (2,032) ------- Loss before cumulative effect of change in accounting principle (1,848) Cumulative effect of change in accounting principle (net of tax effect) 158 ------- NET LOSS $(1,690) -------
See notes to consolidated financial statements. F-34 KAYE GROUP INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the period January 1, 2001 through June 28, 2001 (in thousands)
COMMON STOCK ACCUMULATED ------------------- COMMON UNEARNED OTHER TOTAL OUTSTANDING PAR STOCK STOCK GRANT PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' SHARES VALUE IN TREASURY COMPENSATION CAPITAL INCOME EARNINGS EQUITY ----------- ----- ----------- ------------ ------- ------------- -------- ------------- Balance, January 1, 2001 8,481 $85 $(37) $(235) $18,019 $(207) $38,417 $56,042 Change in unrealized appreciation, net of deferred income tax of $200 388 388 Amortization of unearned restricted stock 9 9 Net loss (1,690) (1,690) Shares issued -- SRW acquisition 21 171 171 Shares issued -- employee stock option plan 4 31 31 Dividends declared (per share -- $0.05) (425) (425) Write off balance of unearned restricted stock 226 (226) -- Shares forfeited -- stock performance plan (3) -- Reissuance of treasury stock 4 37 37 ----- --- ---- ----- ------- ----- ------- ------- Balance, June 28, 2001 8,507 $85 $ -- $ -- $17,995 $ 181 $36,302 $54,563 ------- --- ------- -------- ------ -------- ------- ---------
See notes to consolidated financial statements. F-35 KAYE GROUP INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS For the period January 1, 2001 through June 28, 2001 (in thousands) Net loss $(1,690) Other comprehensive income Unrealized investment holding losses arising during the period, net of deferred income tax benefit of $22 (42) Reclassification adjustment for realized investment loss included in net income, net of deferred income tax benefit of $222 430 ------- TOTAL OTHER COMPREHENSIVE INCOME 388 ------- Comprehensive loss $(1,302) -------
See notes to consolidated financial statements. F-36 KAYE GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the period January 1, 2001 through June 28, 2001 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,690) Adjustments to reconcile net loss to net cash used in operating activities Deferred acquisition costs 677 Amortization of bond premium -- net 344 Deferred income taxes (2,735) Net realized loss on investments 1,077 Depreciation and amortization 1,816 Change in assets and liabilities Accrued interest and dividends (245) Premiums and other receivables 234 Prepaid expenses and other assets 1,414 Premiums payable and unearned commissions (10,158) Accounts payable and accrued liabilities (7,752) Unpaid losses and loss expenses 2,382 Unearned premium reserves (1,822) Income taxes payable (1,363) -------- NET CASH USED IN OPERATING ACTIVITIES (17,821) -------- CASH FLOWS FROM INVESTING ACTIVITIES Investments available - for - sale Purchase of fixed maturities (22,844) Purchase of equity securities (477) Maturities of fixed securities 2,320 Sales of fixed securities 13,553 Sales of equity securities 7,929 Purchase of fixed assets (615) Acquisition payments (1,124) -------- NET CASH USED IN INVESTING ACTIVITIES (1,258) -------- CASH FLOWS FROM FINANCING ACTIVITIES Acquisition debt-repayment (187) Notes and loan payable-repayment (731) Payment of dividends (636) Proceeds from issuance of common stock 31 Advanced proceeds from Hub International Limited 10,585 Receipts under deposit contracts 107 -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 9,169 -------- Net change in cash and cash equivalents (9,910) Cash and cash equivalents at beginning of period 39,513 -------- Cash and cash equivalents at end of period $ 29,603 --------
See notes to consolidated financial statements. F-37 KAYE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS Kaye Group Inc. (the "Company"), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged in a broad range of insurance brokerage, underwriting and related activities. The Company operates in two insurance business segments -- the Insurance Brokerage Companies Operations ("Brokerage Operations"), comprised of the Retail Brokerage Business and the Program Brokerage Business, and the Property and Casualty Companies Operations. In addition, Corporate Operations includes those activities that benefit the Company in its entirety and cannot be specifically identified to either the Brokerage Operations or the Property and Casualty Companies Operations. Such activities include debt servicing and public company expenses, including investor relations' costs. The Company's activities are conducted from offices in New York, New York, Arcadia, California, Westport, Connecticut, Woodbury, New York and Warwick, Rhode Island. Sale of the company On January 20, 2001, the Company reported that Hub International Limited ("HUB") had entered into a definitive agreement (the "Agreement") to acquire the Company through a merger transaction. Under the terms of the Agreement, shares of Kaye's common stock not held by affiliates or shareholders perfecting appraisal rights were converted to a right to receive $14 in cash. On June 28, 2001, the Company and HUB completed the merger, which has not been given effect in the accompanying consolidated financial statements. Prior to June 28, 2001 HUB had, however, transferred cash of $10,585,000 to the Company to settle payments for vested stock options and restricted stock held by employees; the cash is reflected in the accompanying financial statements as restricted cash and an advance from HUB, as well as recorded as a merger expense and as a payable to the employees. On June 27, 2001, all stock options issued by the Company became vested and were purchased with the payment of $8,140,000 in restricted cash advanced by HUB. Restricted stock was converted to the right to receive $14 in cash per share, totaling $2,445,000, which will be paid to stockholders upon the first anniversary of the merger. Additionally, with the merger the advances by HUB were contributed to the paid-in capital of the Company. Proposed sale of property and casualty companies On December 31, 2001, HUB, on behalf of the Company, announced that it had agreed to sell the Company's underwriting subsidiaries Old Lyme Insurance Company of Rhode Island, Inc. ("OLRI") and Old Lyme Insurance Ltd. ("OLB") to Fairfax Inc. ("Fairfax"), effective January 1, 2002. Completion of the transaction is subject to receipt of approval from and compliance with the requirements of applicable regulatory authorities. Fairfax is a subsidiary of Fairfax Financial Holdings Limited, and is HUB's largest shareholder with a 37% interest in HUB's common stock. Insurance brokerage companies operations The Retail Brokerage Business operates insurance brokerage businesses through four subsidiaries of the Company, the "Retail Brokerage Companies". The Retail Brokerage Companies offer commercial clients a full range of insurance brokerage services F-38 including procurement of property/casualty insurance, risk management consulting, bonding, loss prevention engineering, and group employee benefit consulting services. In addition, personal lines and life and health insurance coverage are placed on behalf of individual clients. The Retail Brokerage Business' primary strategy is to service middle market companies and organizations just below the Fortune 500 level for which other national brokers intensely compete. Within this middle market, the Retail Brokerage Business has developed particular expertise and knowledge of the risks facing a number of industry sectors including health care, real estate, retail, manufacturing, houses of worship, law firms, homes for the aged and fine arts. The Retail Brokerage Business services approximately 14,000 insureds. The Retail Brokerage Business is compensated for its services primarily in the form of commissions paid by insurance companies. The commission is usually a percentage of the premium paid by the insured. Commission rates depend upon the type of insurance, the particular insurance company, and the role in which the Retail Brokerage Business acts. In some cases a commission is shared with other agents or brokers who have acted jointly with the Retail Brokerage Business in connection with the transaction. The Retail Brokerage Business may also receive from an insurance company a contingent commission that is generally based on the profitability and volume of business placed with it by the Retail Brokerage Business over a given period of time. The Retail Brokerage Business may also receive fees from insureds in connection with consulting services relating to the marketing of insurance. Program Brokerage Corporation ("PBC" or the "Program Brokerage Business") is a subsidiary of the Company and operates a wholesale insurance brokerage business which offers retail insurance agents and brokers innovative solutions to the twin insurance problems of price and availability of coverage. It accomplishes this by organizing pools of similar risks into specially designed alternative distribution programs through which it places insurance for affinity groups (the "Programs"). The Program Brokerage Business is one of the leaders in the application of purchasing groups in the commercial insurance market. Approximately 82% of PBC's premium volume was generated by its own producers and approximately 1,000 unrelated retail insurance agent and broker producers serving approximately 14,000 insureds. The remaining 18% was derived from the Retail Brokerage Business. Approximately 35% of PBC's premium volume is directly or indirectly placed with two affiliates, OLRI and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB"). Property and casualty companies operations The Company conducts its property and casualty underwriting business through two insurance company subsidiaries (the "Insurance Companies"), OLRI and OLB. OLRI is a property and casualty insurance company licensed in Rhode Island and eligible as a surplus lines insurer in New York and New Jersey. OLB is a property and casualty insurance company organized and licensed under the laws of Bermuda. In states where the Insurance Companies are not admitted insurers or surplus lines insurers, the Insurance Companies underwrite risks through various reinsurance agreements. The Insurance Companies underwrite property risks (loss or physical damage to property) and OLRI underwrites casualty risks (legal liability for personal injury or damaged property of others) for insureds in the United States. Insurance is sold F-39 principally through the Programs marketed by PBC which insure various types of businesses and properties that have similar risk characteristics, such as apartments, condominiums, cooperatives, restaurants, building maintenance companies, automobile service stations, retail stores, funeral homes and pharmacies, among others. The Insurance Companies' strategy is to underwrite only the first "layer" of the property and casualty insurance provided under the Programs. Exposure to individual insureds on individual losses is thereby generally limited to between $10,000 and $25,000 per claim, depending on the Program. Under the Programs, the Insurance Companies' policies are sold in conjunction with policies issued by unaffiliated Program insurers that provide coverage for losses above the first layer of risk underwritten by the Insurance Companies. In addition, OLRI has issued policies on a selected basis with limits up to $1,000,000, with net retention of $50,000 of exposure and has reinsured the remaining limits with unaffiliated reinsurers rated A or better by A.M. Best Company ("A.M. Best"), a major rating agency for insurers. The Property and Casualty Companies Operations includes Claims Administration Corporation ("CAC"), a subsidiary of the Company which is responsible for the administration of a large majority of the claims submitted to the Insurance Companies. The administration of claims includes investigation, engagement of legal counsel, approval of settlements and the making of payments to, or on behalf of insureds. The Insurance Companies pay CAC for its services. CAC also provides claims administration service to certain unaffiliated Program insurers for a fee. 2. SIGNIFICANT ACCOUNTING POLICIES a. Basis of presentation The accompanying Consolidated Balance Sheet, Statement of Operations, Cash Flows, Stockholders' Equity and Comprehensive Loss (the "financial statements") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and predominant industry practice. The Consolidated Balance Sheet is presented on a segmented basis with inter-company balances eliminated. Identifiable assets by segment are those assets used in the Company's operations in each business segment. Corporate assets are principally cash and cash equivalents and an equity security investment. The Statement of Operations is segmented and presents the consolidated results of the Insurance Brokerage Companies segment, the Property and Casualty Companies segment and the Corporate segment. Intersegment transactions have not been eliminated. However, transactions within each segment are eliminated. Income or loss before income taxes of the two operating segments includes expenses incurred by Corporate on behalf of the segments, which are allocated to operations of the segments. The allocation is based upon total revenues of each segment except for the allocation of incentive compensation which is allocated based on the percentage of profits contributed to the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-40 b. Commission income Commission income is generally recognized on the effective date of the related policies. Unearned commissions represent commission income that is earned in installments on multiyear policies. Contingent commissions are recorded when collected or known. Commission and other adjustments are recorded when they occur and the Company maintains an allowance for estimated policy cancellations and commission returns which is periodically evaluated and adjusted as necessary. Effective May 31, 2001, the Company changed its method of accounting for commission income. Prior to that date, commission income was recorded when earned which was principally as of the billing date. Under the new method of accounting, adopted retroactive to January 1, 2001, the Company now records commission income generally on the effective date of insurance policies. The cumulative effect of the change on prior years resulted in additional income of $158,000 (net of income taxes of $82,000). For each of the three years ended December 31, 2000 the effect of this change on net income (loss) was not significant. This change was effected due to the pending merger with HUB (see Note 1) and the Company's desire to move to a methodology consistent with HUB's policy, which is considered preferable by management. As a result of the change, the Company's commission and fees-net was reduced by $1,196,000 during the period January 1, 2001 through June 28, 2001. c. Fixed assets Furniture, equipment, computer hardware and software, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed using the straight-line method. Fixed assets are depreciated over periods ranging from three to ten years, and leasehold improvements are amortized over the remaining terms of the leases which expire through 2010 or useful life, whichever is shorter. d. Intangible assets Acquired expiration lists, covenants not to compete and goodwill are carried at cost, less accumulated amortization which is computed using the straight-line method over the estimated useful life of the asset not to exceed twenty years. e. Investments Investments are stated at fair value. The difference between the cost and fair value is reflected as unrealized appreciation or depreciation, net of applicable deferred income taxes, as a separate component of stockholders' equity. Realized gains or losses from the sale of investments are determined on the basis of specific identification and are reflected as a component of revenues. Investment income is recognized when earned. The fair value of fixed maturities and equity securities is based on the closing price of the investments on June 28, 2001. If a decline in fair value of an investment is considered to be other than temporary, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. In evaluating whether a decline is other than temporary, management considers the duration and extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer, including events that may impact the issuer's operations and impair the earnings potential of the investment, and management's ability and intent to hold an investment for a sufficient period to allow for an anticipated recovery in fair value. F-41 Investments in equity securities in which the Company does not exert significant influence and there is no readily determinable fair value are carried at the lower of cost or market. f. Insurance premiums earned Insurance premiums are recognized as revenues ratably over the terms of the related policies in force. Unearned premiums are established to cover the unexpired portion of premiums written and are calculated using the daily pro rata method. Premiums earned are net of reinsurance ceded. g. Deferred acquisition costs Deferred acquisition costs include commissions incurred by the Insurance Companies that vary with and are attributed to new and renewal insurance policies or contracts. These costs are deferred and amortized over the applicable premium recognition period, generally one year. These deferred costs have been limited to the amount expected to be recovered from future earned premiums. Acquisition costs of $5,118,000, were amortized to expense for the period January 1, 2001 through June 28, 2001. h. Unpaid losses and loss expenses The estimated liability for unpaid losses and loss expenses is based on an evaluation of claims reported by policyholders. A provision which is based on historical experience and modified for current trends, is also included for losses and loss expenses which have been incurred but not reported. The methods of determining such estimates and establishing the resulting reserves are continually reviewed and modified to reflect current conditions, and any adjustments are reflected currently in results of operations. i. Reinsurance Assumed reinsurance premiums written, commission, and unpaid losses are accounted for based principally on the reports received from the ceding insurance companies and in a manner consistent with the terms of the related reinsurance agreements. Liabilities for unpaid losses, loss expenses and unearned premiums are stated gross of ceded reinsurance recoverables. Deferred acquisition costs are stated net of the amounts of reinsurance ceded, as are premiums written and earned, losses and loss expenses incurred, and amortized acquisition costs. j. Income taxes The Company recognizes deferred tax assets or liabilities for temporary differences between the financial reporting and tax basis of assets and liabilities based on enacted tax rates. The principal temporary differences relate to deferred acquisition costs, unearned premiums, discount for tax purposes of the unpaid losses and loss expense reserves, amortization of expiration lists, accrual adjustment for commission income and unrealized gains or losses on investments (see Note 9). k. Cash and cash equivalents Cash and cash equivalents include money market funds and certificates of deposit, including funds held in a fiduciary capacity for the Insurance Brokerage Companies, with a maturity of three months or less. The Company maintains cash with banks in excess of federally insured limits and is exposed to the credit risk from this concentration of cash. The Corporate restricted cash balance represents cash advanced F-42 from HUB and maintained in an escrow account for the purpose of paying compensation to participants of the terminated stock performance plan on the first anniversary of the Company's merger with HUB (see Note 1). l. Other income Property and Casualty Companies' other income includes non-recurring revenue from the discontinuation of agreements for claims administration relating to warranty contracts issued by a third party for which cash has already been received. m. Capitalized software policy Capitalized computer software costs (included in fixed assets on the Consolidated Balance Sheet) consist of costs to purchase software. All capitalized software costs are amortized on a straight line method over a period of three or five years. Amortization expense charged to operations was $307,000 for the period January 1, 2001 through June 28, 2001. n. Fair value of financial instruments The carrying amounts reported in the Consolidated Balance Sheet for cash and cash equivalents, receivables and premiums payable approximate those assets and liabilities fair values due to the short-term nature of the instruments. 3. CHANGES IN ACCOUNTING POLICIES a. Newly adopted accounting standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement is effective for all fiscal quarters and fiscal years beginning after December 31, 2000. The Company does not have any derivative instruments and therefore SFAS No. 133 has no impact on the Company's financial statements. b. Accounting standards not yet adopted In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Statement 141 requires that the purchase method of accounting be used for all business combinations subsequent to June 30, 2001 and specifies criteria for recognizing intangible assets acquired in a business combination. Statement 142 requires that goodwill and certain intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives. Statement No. 142 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 141 and 142 to have a material impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Disposal or Impairment of Long-Lived Assets". This statement requires a single accounting model for long-lived assets to be disposed of by sale, whether previously held or newly acquired. The statement provides guidance related to the disposal of long-lived assets F-43 and broadens the presentation of discontinued operations to include a component of an entity where the operations and cash flows are clearly distinguishable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to have a material impact on the Company's consolidated financial statements. 4. ACQUISITIONS Effective January 1, 1999, the Company, through one of its insurance brokerage subsidiaries, Kaye Insurance Associates, Inc. ("KIA"), purchased the assets, including customer lists, and certain liabilities of Woodbury, N.Y. -- based broker Seaman, Ross & Wiener, Inc. and related entities for an initial purchase price of $2,422,000 in cash and $500,000 in stock of the Company. During the period January 1, 2001 through June 28, 2001, earn out payments totaling $1,124,000 in cash and $208,000 in stock of the Company were recorded as customer lists of $993,000 and goodwill of $340,000. 5. FUNDS HELD IN FIDUCIARY CAPACITY Premiums collected by the Insurance Brokerage Companies but not yet remitted to insurance carriers were approximately $16,618,000 at June 28, 2001, some of which are restricted as to use by law in certain states in which the Insurance Brokerage Companies operate. These balances are held in cash and cash equivalents. The offsetting obligation is recorded in premiums payable. 6. INVESTMENTS Net investment income for the period January 1, 2001 through June 28, 2001 was derived from the following sources (in thousands): Insurance Brokerage Companies Cash and cash equivalents $ 448 ------ Property and Casualty Companies Fixed maturities 1,256 Equity securities 2 Cash and cash equivalents 337 Other 210 ------ Total investment income 1,805 Investment expenses (37) ------ 1,768 Corporate Cash and cash equivalents 16 ------ NET INVESTMENT INCOME $2,232 ------
F-44 Net realized gains or losses and the change in unrealized appreciation or depreciation on investments included in the Statement of Operations and the Statement of Stockholders Equity, respectively, are summarized below (in thousands): Net realized gains (losses) Fixed maturities Gross realized gains $ 259 Gross realized losses (4) Equity securities Gross realized gains 157 Gross realized losses (1,043) Other investments Gross realized losses (446) ------- NET REALIZED LOSS ON INVESTMENTS $(1,077) ------- Changes in unrealized appreciation Fixed maturities $ 148 Equity securities 440 ------- NET CHANGE IN UNREALIZED APPRECIATION $ 588 -------
Included in net realized loss on investments are write downs related to other than temporary impairments in equity securities of $530,000 and limited partnership investments of $446,000. The composition cost (amortized cost for fixed maturities) and estimated fair value of the Company's investments at June 28, 2001 are presented below (in thousands):
GROSS UNREALIZED HOLDING AGGREGATE AMORTIZED -------------- FAIR COST/COST GAINS LOSSES VALUE --------- ----- ------ --------- Fixed Maturities U.S. Government agencies and authorities $23,157 $135 $ (61) $23,231 States municipalities and subdivisions 26,781 317 (103) 26,995 Corporate 100 -- (65) 35 ------- ---- ----- ------- TOTAL FIXED MATURITIES $50,038 $452 $(229) $50,261 -------- ---- ----- -------- Equity Securities Common Stock $ 608 $ 51 $ -- $ 659 Preferred Stock 50 -- -- 50 ------- ---- ----- ------- TOTAL EQUITY SECURITIES $ 658 $ 51 $ -- $ 709 -------- ---- ----- --------
F-45 The amortized cost and estimated fair value of fixed maturities at June 28, 2001, by contractual maturity date, are listed below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
AGGREGATE AMORTIZED FAIR COST VALUE --------- --------- Due in one year or less $ 3,208 $ 3,163 Due after one year through five years 27,761 28,058 Due after five years through ten years 17,241 17,212 Due after ten years 1,828 1,828 ------- ------- TOTAL $50,038 $50,261 -------- --------
Fixed maturities and cash and cash equivalents carried at fair value of $3,404,000 were on deposit for governmental authorities, as required by law. Fixed maturities and cash equivalents carried at fair value of $30,163,000 have been deposited in trust funds or pledged to collateralize the obligations of OLRI to ceding companies under reinsurance agreements. In addition, OLB maintained bank letters of credit in the amount of $3,200,000. The Company's short-term investment of cash is maintained principally with seven banks and three institutional money market funds. To control this risk, the Company utilizes only high credit quality financial institutions. Additionally, under the insurance laws of the State of Rhode Island, where OLRI is domiciled, insurers and reinsurers are restricted as to the types of investments they may purchase and the concentration of risk they may accept in any one issuer or group of issuers. The Company complies with such laws which insure that the concentration of risk in its investment portfolio is at an acceptable and authorized level. 7. NOTES PAYABLE Notes payable consist of the following at June 28, 2001 (in thousands): Insurance Brokerage Note payable, due through 7/1/2002, interest at prime $ 469 Finance company note, due through 3/24/2002, interest at 7.75% 113 Current portion (488) ------- NOTES PAYABLE -- LONG TERM $ 94 ------- Corporate Term loan, due through 6/24/2002, interest at 7.8% $ 1,412 Current portion (1,412) ------- NOTES PAYABLE -- LONG TERM $ -- -------
The note payable, at prime, due through July 1, 2002, represents debt incurred related to a 1998 acquisition. The 7.8% Term Loan due through June 24, 2002 is secured by the stock of OLRI. Certain covenants exist on this loan, the most significant being the requirement to maintain a minimum GAAP net worth, minimum statutory surplus in the Insurance Companies, a F-46 fixed ratio of net premiums to surplus and a minimum debt service coverage. At June 28, 2001, the Company was in compliance with the covenants under the loan agreement. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the notes payable at June 28, 2001 approximates their carrying value. Interest expense in the accompanying consolidated statement of operations, was $452,000. 8. INTANGIBLE ASSETS Intangible assets at June 28, 2001 consisted of the following (in thousands): Customer lists $14,760 Goodwill 2,453 Covenant not to compete 400 ------- 17,613 Less accumulated amortization (5,485) ------- Intangible assets $12,128 -------
9. INCOME TAXES The Company and its wholly owned domestic subsidiaries are party to a Tax Allocation Agreement (the "Agreement"). The Agreement requires these companies to file a U.S. consolidated income tax return. The Agreement also provides that each member of the group will compute its separate tax liability or benefit on a separate return basis and pay or receive such amounts to or from the Company. The Company's effective income tax rate included in the Statement of Operations differs from the statutory rate on ordinary income before income taxes as follows (in thousands, except percentages):
% OF PRETAX AMOUNT INCOME ------- ----------- Income tax benefit computed at the statutory rate $(1,319) (34.0)% Increase (decrease) in taxes resulting from Tax-exempt investment income (318) (8.2)% Merger expenses 599 15.4 % State and local income taxes (652) (16.8)% Other (342) (8.8)% ------- ------- INCOME TAX BENEFIT $(2,032) (52.4)% ------ -----------
F-47 The source of the significant temporary differences and the related deferred tax effects are as follows (in thousands): Expiration lists $ 172 Unearned premium reserves 145 Accrual adjustment 82 Accrued incentive compensation (1,251) State and local income taxes (900) Non-deductible reserves (532) Deferred acquisition costs (230) Loss reserve discount (67) Other (154) ------- DEFERRED TAX BENEFIT $(2,735) -------
The components of the net deferred tax assets and liabilities, in the accompanying consolidated balance sheet at June 28, 2001, are as follows (in thousands): Deferred tax assets: Loss and loss expense reserves $ 1,936 Accrued incentive compensation 1,251 State and local income taxes 1,002 Non-deductible reserves 878 Unearned premium reserves 722 Other 154 ------- DEFERRED TAX ASSET BEFORE VALUATION ALLOWANCE 5,943 Valuation allowance 102 ------- TOTAL DEFERRED TAX ASSET 5,841 ------- Deferred tax liabilities: Deferred acquisition costs 1,148 Other accrual adjustments 1,288 Expiration lists 288 Unrealized gains on investments 92 ------- TOTAL DEFERRED TAX LIABILITY 2,816 ------- NET DEFERRED TAX ASSET $ 3,025 -------
The Company has state net operating loss carryforwards totaling $9,401,000 at June 28, 2001. Such net operating losses are currently available to offset our future state taxable income and begin to expire in 2016. A valuation allowance in the amount of $1,461,000 has been established for net operating losses in states where management does not believe the net operating losses will be realized. Management believes it is more likely than not that all remaining deferred tax assets are realizable based upon the past earnings history of the Company. OLB, as a Bermuda domiciled company, is not subject to federal income taxes but, rather, the Company is subject to federal income taxes based on OLB's taxable income for the entire year. Accordingly, the Company includes the taxable income of OLB in its separate company income for tax purposes, but for segment reporting the income is F-48 included with the Property and Casualty Companies. OLB has received an undertaking from the Bermuda Government exempting it from all taxes computed on profit or income, or computed on any capital asset gain or appreciation until 2016. 10. LEASE COMMITMENTS AND RENTALS Minimum annual rental commitments under various non-cancelable operating leases for office space and equipment are as follows (in thousands) for years ending June 28, 2002 $1,308 2003 982 2004 974 2005 959 2006 918 Thereafter 3,850 ------ 8,991 Sub-lease rental income (156) ------ Net rental commitments $8,835 ------
Effective August 1, 2001, the Company entered into a lease for office space for its main office in Manhattan, New York. The lease expires on August 31, 2010. The minimum rental commitment for the period August 1, 2001 to June 28, 2002 is $1,228,000, and thereafter is $12,565,000. Leases for office space include various escalation clauses, none of which individually or in the aggregate are material. Escalation clauses are accounted for on a straight-line basis over the remaining life of the lease. The leases also contain provisions for the payment of certain operating expenses and real estate taxes. Rent expense included in the Statement of Operations amounted to $2,219,000, net of sublease rental income of $204,000. 11. DEFINED CONTRIBUTION PLAN Substantially all officers and employees of the Company are entitled to participate in a qualified retirement savings plan (defined contribution plan). The cost to the Company was $281,000 for 2001. 12. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company and its subsidiaries are subject to various claims and lawsuits consisting primarily of alleged errors and omissions in connection with the placement of insurance. In the opinion of management, the ultimate resolution of all asserted and potential claims and lawsuits will not have a material effect on the consolidated financial position and results of operations of the Company. F-49 13. REINSURANCE The components of net written and net earned insurance premiums included in the Statement of Operations were as follows (in thousands): Written premiums Direct $ 3,212 Assumed 13,112 Ceded (1,653) ------- NET WRITTEN PREMIUMS $14,671 ------- Earned premiums Direct 4,831 Assumed 13,315 Ceded (1,354) ------- NET EARNED PREMIUMS $16,792 -------
OLRI assumes reinsurance under arrangements with unaffiliated insurance companies. The Insurance Brokerage Companies produce the business assumed under these arrangements. The business has limits varying from $25,000 to $100,000 per occurrence. Claim liabilities under these agreements are secured with fixed maturity securities and cash and cash equivalents, which are deposited in trust funds. Approximately $30,163,000 as of June 28, 2001 is held in these trust funds. In addition, OLB maintained bank letters of credit in the amount of $3,200,000 at June 28, 2001 to satisfy the reinsurance collateral requirement. OLRI underwrites a small book of business with limits up to $1,000,000 retaining the first $50,000 of exposure and reinsuring the balance on an excess of loss basis to other insurers or re-insurers. Under the terms of the reinsurance agreements, loss and loss adjustment expenses recovered (incurred) during the period January 1, 2001 through June 28, 2001 was $3,360,000. Commissions earned on reinsurance ceded for the period January 1, 2001 through June 28, 2001 was $337,000. Reinsurance has been placed with PXRE Reinsurance Company and The Hartford Steam Boiler Inspection and Insurance Co. which are rated A or better by A.M. Best. A contingent liability exists with respect to reinsurance ceded, which would become an ultimate liability of OLRI in the event that the assuming companies were unable to meet their obligations under the reinsurance agreements in force at June 28, 2001. On September 25, 2001, PXRE Reinsurance Company, a primary re-insurer of OLRI, has sent a notice of termination on all of the reinsurance contacts between Old Lyme Insurance Company of Rhode Island, Inc. and PXRE Reinsurance Corporation, effective on December 31, 2001 and March 31, 2002. The Company estimates the loss exposure due to cancellation of these contracts could vary from $500,000 to $800,000 for the calendar year 2002. The exposure is primarily related to certain reinsurance liability business. F-50 14. UNPAID LOSSES AND LOSS EXPENSES The following table sets forth a reconciliation of the changes in the reserves for losses and loss expenses for the period January 1, 2001 through June 28, 2001 (in thousands): Balance at January 1, 2001 $27,984 Less reinsurance recoverables (4,600) ------- Net balance 23,384 ------- Incurred related to Current year 7,298 Prior years (40) ------- TOTAL INCURRED 7,258 ------- Paid related to Current year 1,624 Prior years 6,082 ------- TOTAL PAID 7,706 ------- Net balance at June 28, 2001 22,936 Add reinsurance recoverables 7,430 ------- BALANCE $30,366 -------
Increased provision reductions relating to prior years were due to redundant property reserves. 15. STATUTORY FINANCIAL INFORMATION AND DIVIDEND RESTRICTIONS The Insurance Companies file separate financial statements in accordance with accounting practices prescribed or permitted by the insurance regulatory authorities where they are domiciled. These statutory accounting practices ("SAP") differ in certain respects from GAAP. These differences are primarily comprised of the accounting for prepaid acquisition costs, deferred income taxes, and fixed maturity and equity investments. F-51 The following is a reconciliation of statutory surplus and net income (loss) in accordance with SAP as of June 30, 2001 as reported to the Rhode Island and Bermuda insurance regulatory authorities to stockholder's equity and net income (loss) as determined in conformity with GAAP.
NET INCOME (LOSS) STOCKHOLDER'S EQUITY/ FOR THE STATUTORY SURPLUS SIX MONTHS AS OF ENDED JUNE 30, 2001 JUNE 30, 2001 --------------------- ----------------- Consolidated amount in accordance with GAAP $ 64,950 $(1,690) (Equity) in net assets and net loss of non-insurance companies (24,012) 4,676 -------- ------- Combined insurance companies amount in accordance with GAAP 40,938 2,986 Deferred acquisition costs (3,376) 677 Non-admitted assets, deferred income taxes and other (952) (237) -------- ------- Combined amount in accordance with SAP $ 36,610 $ 3,426 ---------------- -------------
The Insurance Companies are currently subject to various regulations that limit the maximum amount of dividends ultimately available to the Company without prior approval of insurance regulatory authorities. Accounting changes adopted to conform with the provisions of the NAIC Accounting Practices and Procedures manual -- version effective January 1, 2001 are reported as changes in SAP. The cumulative effect of changes in SAP is reported as an adjustment to unassigned funds in the period of the change in SAP. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at the date if the new SAP had been applied retrospectively for all prior periods. As a result of these changes, OLRI reported a change in SAP from the adoption of codification that increased unassigned funds (surplus) by $986,457 as of January 1, 2001. This surplus increase adjustment was related to deferred tax assets. 16. RELATED PARTY TRANSACTIONS The administrative support for OLB is provided by International Advisory Services, Ltd. ("IAS"), an insurance management company located in Bermuda. A director of IAS is an officer of OLB and is a director of the Company. Management fees paid to IAS under a service contract for the period January 1, 2001 through June 28, 2001 was $15,000. 17. STOCK PERFORMANCE AND STOCK OPTION PLANS In 1997, the Company adopted a stock Performance Plan, under which up to 350,000 shares of the Company's common stock could have been granted and awarded to key employees. In addition, the Company had a stock option plan. In connection with the Company's merger with HUB, all outstanding options and restricted stock became vested and the plans were terminated. On June 27, 2001, restricted cash advanced from HUB totaling $8,140,000 was paid to the stock option holders at an amount equal to F-52 the purchase price of $14 per share less the grant price of the related options. Additionally, HUB advanced restricted cash of $2,445,000 for amounts payable to the holders of restricted stock on the first anniversary of the acquisition date. Total compensation expense related to these plans of $10,585,000 has been included in merger expenses in the accompanying Consolidated Statement of Operations. 18. SUPPLEMENTAL CASH FLOW DISCLOSURES Supplemental cash flow disclosures for the period January 1, 2001 through June 28, 2001 are as follows (in thousands): Cash paid during the period for Interest expense $ 509 Income taxes 2,148 Non cash financing activity Reissuance of treasury stock 208
F-53 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KAYE GROUP INC.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Kaye Group Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. LOGO PricewaterhouseCoopers LLP New York, New York February 26, 2001 F-54 KAYE GROUP INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2000 and December 31, 1999 (in thousands, except par value per share) 2000 1999 -------- -------- ASSETS INSURANCE BROKERAGE COMPANIES: Current assets: Cash and cash equivalents (including short term investments, and funds held in a fiduciary capacity of $25,374 and $25,610) $ 26,591 $ 27,678 Premiums and other receivables 41,744 27,265 Prepaid expenses and other assets 2,025 1,717 -------- -------- Total current assets 70,360 56,660 Fixed assets (net of accumulated depreciation of $6,827 and $6,922) 5,816 3,770 Intangible assets (net of accumulated amortization of $4,808 and $3,845) 11,472 10,228 Other assets 665 195 -------- -------- Total assets 88,313 70,853 -------- -------- PROPERTY AND CASUALTY COMPANIES: Investments available-for-sale: Fixed maturities, at market value (amortized cost: 2000, $43,157; 1999, $42,273) 43,232 41,304 Equity securities, at market value (cost: 2000, $8,610; 1999, $3,873) 8,209 4,496 -------- -------- Total investments 51,441 45,800 Cash and cash equivalents 12,784 14,327 Accrued interest and dividends 862 873 Premiums receivable 1,985 2,333 Reinsurance recoverable on paid and unpaid losses 4,600 2,747 Prepaid reinsurance premiums 949 488 Deferred acquisition costs 4,053 4,313 Deferred income taxes 1,505 1,236 Other assets 5,935 4,520 -------- -------- Total assets 84,114 76,637 -------- -------- CORPORATE: Cash and cash equivalents 138 1,233 Prepaid expenses and other assets 59 153 Investments: Equity securities, at market value (cost: 2000, $308, and 1999, $243) 320 243 Deferred income taxes 67 93 -------- -------- Total assets 584 1,722 -------- -------- Total assets $173,011 $149,212 -------- --------
See notes to consolidated financial statements. F-55 KAYE GROUP INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2000 and December 31, 1999 (in thousands, except par value per share)
2000 1999 -------- -------- LIABILITIES INSURANCE BROKERAGE COMPANIES: Current liabilities: Premiums payable and unearned commissions $ 53,095 $ 42,161 Accounts payable and accrued liabilities 9,658 8,103 Notes payable 521 527 -------- -------- Total current liabilities 63,274 50,791 Notes payable 320 841 Deferred income taxes 1,083 491 -------- -------- Total liabilities 64,677 52,123 -------- -------- PROPERTY AND CASUALTY COMPANIES: Liabilities: Unpaid losses and loss expenses 27,984 23,969 Unearned premium reserves 13,697 13,694 Accounts payable and accrued liabilities 7,532 7,953 Other liabilities 567 245 -------- -------- Total liabilities 49,780 45,861 -------- -------- CORPORATE: Current liabilities: Accounts payable and accrued liabilities 254 300 Loan payable 1,343 1,241 Income taxes payable 187 366 -------- -------- Total current liabilities 1,784 1,907 Loan payable-long-term 728 2,070 -------- -------- Total liabilities 2,512 3,977 -------- -------- Total liabilities 116,969 101,961 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value; 1,000 shares authorized; none issued or outstanding Common stock, $.01 par value; 20,000 shares authorized; shares issued and outstanding (2000, 8,481; 1999, 8,458) 85 85 Paid -- in capital 18,019 18,019 Accumulated other comprehensive loss, net of deferred income tax benefit (2000, $107; 1999, $118) (207) (228) Unearned stock grant compensation (235) (254) Retained earnings 38,417 29,858 Common stock in Treasury, shares at cost (2000, 4; 1999, 28) (37) (229) -------- -------- Total stockholders' equity 56,042 47,251 -------- -------- Total liabilities and stockholders' equity $173,011 $149,212 -------- --------
See notes to consolidated financial statements. F-56 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2000, 1999 and 1998 (in thousands, except per share amounts)
2000 1999 1998 ------- ------- ------- INSURANCE BROKERAGE COMPANIES: Revenues: Commissions and fees -- net $42,066 $37,379 $35,356 Investment income 1,339 1,374 1,846 ------- ------- ------- Total revenues 43,405 38,753 37,202 ------- ------- ------- Expenses: Compensation and benefits 23,676 22,346 21,323 Amortization of intangibles 1,161 1,095 679 Other operating expenses 13,463 12,215 13,446 ------- ------- ------- Total operating expenses 38,300 35,656 35,448 ------- ------- ------- Interest expense 870 775 49 ------- ------- ------- Income before income taxes 4,235 2,322 1,705 ------- ------- ------- PROPERTY AND CASUALTY COMPANIES: Revenues: Net premiums written 30,028 27,821 24,538 Change in unearned premiums 458 (1,041) 151 ------- ------- ------- Net premiums earned 30,486 26,780 24,689 Net investment income 3,127 2,949 2,920 Net realized gain (loss) on investments 804 (16) 85 Other income 469 72 146 ------- ------- ------- Total revenues 34,886 29,785 27,840 ------- ------- ------- Expenses: Losses and loss expenses 12,270 9,754 8,496 Acquisition costs and general and administrative expenses 12,615 11,205 9,707 Total expenses 24,885 20,959 18,203 ------- ------- ------- Income before income taxes 10,001 8,826 9,637 ------- ------- ------- CORPORATE: Revenues -- Net investment income (loss) 107 206 (31) Expenses: Other operating expenses 480 309 314 Interest expense 234 316 443 ------- ------- ------- Net expenses before income taxes (607) (419) (788) ------- ------- ------- INCOME BEFORE INCOME TAXES 13,629 10,729 10,554 ------- ------- ------- Provision (benefit) for income taxes Current 3,887 3,261 3,422 Deferred 338 (36) (150) ------- ------- ------- Total provision for income taxes 4,225 3,225 3,272 ------- ------- ------- NET INCOME $ 9,404 $ 7,504 $ 7,282 ------- ------- ------- EARNINGS PER SHARE Basic $ 1.11 $ 0.89 $ 0.86 Diluted $ 1.09 $ 0.87 $ 0.85 Weighted average of shares outstanding -- basic 8,470 8,460 8,474 Weighted average shares outstanding and share equivalents outstanding -- diluted 8,613 8,630 8,593
See notes to consolidated financial statements. F-57 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,404 $ 7,504 $ 7,282 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred acquisition costs 260 (392) 18 Amortization of bond premium -- net 685 695 599 Deferred income taxes 338 (36) (150) Net realized loss (gains) on investments (868) 290 (85) Depreciation and amortization expense 2,892 2,381 1,813 Change in assets and liabilities: Accrued interest and dividends 11 88 (79) Premiums and other receivables (16,077) 14,071 (8,125) Prepaid expenses and other assets (1,646) (2,263) (1,253) Premiums payable and unearned commissions 10,952 (17,235) 18,371 Accounts payable and accrued liabilities 1,633 (311) 2,055 Unpaid losses and loss expenses 4,015 2,402 2,441 Unearned premium reserves 3 1,367 (251) Income taxes payable (179) (202) 552 -------- -------- -------- Net cash provided by operating activities 11,423 8,359 23,188 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments available -- for -- sale : Purchase of fixed maturities (10,270) (11,560) (15,012) Purchase of equity securities (7,589) (4,049) (200) Maturities of fixed securities 5,109 5,474 4,861 Sales of fixed securities 3,498 6,094 8,158 Sales of equity securities 3,280 832 425 Purchase of fixed assets (3,866) (1,347) (2,089) Acquisition payments (3,002) (5,203) (1,239) Funds held under deposit contracts: Sales of short-term investments 173 -------- -------- -------- Net cash used in investing activities (12,840) (9,759) (4,923) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition debt-repayment (375) (375) (657) Notes and loan payable-repayment (1,392) (1,489) (7,981) Proceeds from issuance of common stock 35 Acquisition of treasury stock (1,079) Payment of dividends (845) (847) (849) Proceeds from borrowings 5,000 Receipts (payments) under deposit contracts 304 (122) -------- -------- -------- Net cash used in financing activities (2,308) (3,755) (4,609) -------- -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (3,725) (5,155) 13,656 Cash and cash equivalents at beginning of period 43,238 48,393 34,737 -------- -------- -------- Cash and cash equivalents at end of period $ 39,513 $ 43,238 $ 48,393 -------- -------- --------
See notes to consolidated financial statements. F-58 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 2000, 1999 and 1998 (in thousands, except per share amounts)
COMMON STOCK ACCUMULATED ------------------- COMMON UNEARNED OTHER TOTAL OUTSTANDING PAR STOCK STOCK GRANT PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' SHARES VALUE IN TREASURY COMPENSATION CAPITAL (LOSS) EARNINGS EQUITY ----------- ----- ----------- ------------ ------- ------------- -------- ------------- Balance, January 1, 1998 8,474 $85 $17,942 $ 373 $16,768 $35,168 Change in unrealized appreciation, net of deferred income tax of ($88) 168 168 Net income 7,282 7,282 Dividends declared (per share -- $0.10) (849) (849) ----- --- ----- ----- ------- ----- ------- ------- Balance, December 31, 1998 8,474 85 17,942 541 23,201 41,769 Change in unrealized depreciation, net of deferred income tax of $398 (769) (769) Shares issued -- employee stock option plan 7 35 35 Shares issued -- stock performance plan 5 $(264) 42 (222) Amortization of unearned restricted stock 10 10 Net income 7,504 7,504 Dividends declared (per share -- $0.10) (847) (847) Acquisition of treasury stock net of reissuances (28) $(229) (229) ----- --- ----- ----- ------- ----- ------- ------- Balance, December 31, 1999 8,458 85 (229) (254) 18,019 (228) 29,858 47,251 Change in unrealized appreciation, net of deferred income tax of ($11) 21 21 Amortization of unearned restricted stock 19 19 Net income 9,404 9,404 Dividends declared (per share -- $0.10) (845) (845) Reissuance of treasury stock 23 192 192 ----- --- ----- ----- ------- ----- ------- ------- Balance, December 31, 2000 8,481 $85 $ (37) $(235) $18,019 $(207) $38,417 $56,042 ------- --- ------- -------- ------ -------- ------- ---------
F-59 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 ------ ------ ------ NET INCOME $9,404 $7,504 $7,282 ------ ------ ------ Other comprehensive income: Unrealized holding gains (losses) arising during the period, net of deferred income tax (benefit) liability (2000, $255; 1999, ($482); 1998, $116) 496 (932) 221 Less: reclassification adjustment for loss (gains) included in net income, net of deferred income tax (benefit) liability (2000, $244; 1999, ($84); 1998, $28) (475) 163 (53) ------ ------ ------ Total other comprehensive income 21 (769) 168 ------ ------ ------ COMPREHENSIVE INCOME $9,425 $6,735 $7,450 ------ ------ ------
See notes to consolidated financial statements. F-60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2000, 1999 and 1998 1) BUSINESS Kaye Group Inc. (the "Company"), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged in a broad range of insurance brokerage, underwriting and related activities. The Company operates in two insurance business segments -- the Insurance Brokerage Companies Operations ("Brokerage Operations"), comprised of the Retail Brokerage Business and the Program Brokerage Business, and the Property and Casualty Companies Operations. In addition, Corporate Operations includes those activities that benefit the Company in its entirety and cannot be specifically identified to either the Brokerage Operations or the Property and Casualty Companies Operations. Such activities include debt servicing and public company expenses, including investor relations costs. The Company's activities are conducted from offices in New York, New York, Arcadia, California, Westport, Connecticut, Woodbury, New York and Warwick, Rhode Island. Insurance Brokerage Companies Operations The Retail Brokerage Business operates insurance brokerage businesses through four subsidiaries of the Company, the "Retail Brokerage Companies". The Retail Brokerage Companies offers commercial clients a full range of insurance brokerage services including procurement of property/casualty insurance, risk management consulting, bonding, loss prevention engineering, and group employee benefit consulting services. In addition, personal lines and life and health insurance coverage are placed on behalf of individual clients. The Retail Brokerage Business' primary strategy is to service middle market companies and organizations just below the Fortune 500 level for which other national brokers intensely compete. Within this middle market, the Retail Brokerage Business has developed particular expertise and knowledge of the risks facing a number of industry sectors including health care, real estate, retail, manufacturing, houses of worship, law firms, homes for the aged and fine arts. During 2000, the Retail Brokerage Business serviced approximately 15,000 insureds. The Retail Brokerage Business is compensated for its services primarily in the form of commissions paid by insurance companies. The commission is usually a percentage of the premium paid by the insured. Commission rates depend upon the type of insurance, the particular insurance company, and the role in which the Retail Brokerage Business acts. In some cases a commission is shared with other agents or brokers who have acted jointly with the Retail Brokerage Business in connection with the transaction. The Retail Brokerage Business may also receive from an insurance company a contingent commission that is generally based on the profitability and volume of business placed with it by the Retail Brokerage Business over a given period of time. The Retail Brokerage Business may also receive fees from insureds in connection with consulting services relating to the marketing of insurance. Program Brokerage Corporation ("PBC" or the "Program Brokerage Business") is a subsidiary of the Company and operates a wholesale insurance brokerage business which offers retail insurance agents and brokers innovative solutions to the twin insurance problems of price and availability of coverage. It accomplishes this by F-61 organizing pools of similar risks into specially designed alternative distribution programs through which it places insurance for affinity groups (the "Programs"). The Program Brokerage Business is one of the leaders in the application of purchasing groups in the commercial insurance market. Approximately 73% of PBC's premium volume was generated by its own producers and approximately 800 unrelated retail insurance agent and broker producers serving approximately 10,500 insureds during 2000. The remaining 27% was derived from the Retail Brokerage Business. Approximately 35% of PBC's premium volume is directly or indirectly placed with two affiliates, Old Lyme Insurance Company of Rhode Island, Inc. ("OLRI") and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB"). Property and Casualty Companies Operations The Company conducts its property and casualty underwriting business through two insurance company subsidiaries (the "Insurance Companies"), OLRI and OLB. OLRI is a property and casualty insurance company licensed in Rhode Island and eligible as a surplus lines insurer in New York and New Jersey. OLB is a property and casualty insurance company organized and licensed under the laws of Bermuda. In states where the Insurance Companies are not admitted insurers or surplus lines insurers, the Insurance Companies underwrite risks through various reinsurance agreements. The Insurance Companies underwrite property risks (loss or physical damage to property) and OLRI underwrites casualty risks (legal liability for personal injury or damaged property of others) for insureds in the United States. Insurance is sold principally through the Programs marketed by PBC which insure various types of businesses and properties that have similar risk characteristics, such as apartments, condominiums, cooperatives, restaurants, building maintenance companies, automobile service stations, retail stores, funeral homes and pharmacies, among others. The Insurance Companies' strategy is to underwrite only the first "layer" of the property and casualty insurance provided under the Programs. Exposure to individual insureds on individual losses is thereby generally limited to between $10,000 and $25,000 per claim, depending on the Program. Under the Programs, the Insurance Companies' policies are sold in conjunction with policies issued by unaffiliated Program insurers that provide coverage for losses above the first layer of risk underwritten by the Insurance Companies. In addition, OLRI has issued policies on a selected basis with limits up to $3,500,000, with net retention on one policy of $100,000 of exposure and reinsuring the remaining limits with unaffiliated reinsurers rated A or better by A.M. Best Company ("A.M. Best"), a major rating agency for insurers. The Property and Casualty Companies Operations includes Claims Administration Corporation ("CAC"), a subsidiary of the Company which is responsible for the administration of a large majority of the claims submitted to the Insurance Companies. The administration of claims includes investigation, engagement of legal counsel, approval of settlements and the making of payments to, or on behalf of insureds. The Insurance Companies pay CAC for its services. CAC also provides claims administration service to certain of the unaffiliated Program insurers for a fee. F-62 2) SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying Consolidated Balance Sheets, Statements of Income, Cash Flows, Stockholders' Equity and Comprehensive Income (the "financial statements") have been prepared in accordance with generally accepted accounting principles ("GAAP") and predominant industry practice. The Consolidated Balance Sheets are presented on a segmented basis with inter- company balances eliminated. The Statements of Income are segmented and present the consolidated results of the Insurance Brokerage Companies segment, the Property and Casualty Companies segment and the Corporate segment. Intersegment transactions have not been eliminated. However, transactions within each segment are eliminated. For details on segment activity refer to Note 19. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year information has been reclassified to conform with the 2000 presentation. (b) Segment Reporting The accompanying consolidated financial statements have been prepared on a segmented basis. See Note 1 for segments and their respective operations. Income before income taxes of the two operating segments includes expenses incurred by Corporate on behalf of the segments, which are allocated to operations of the segments. The allocation is based upon total revenues of each segment except for the allocation of incentive compensation which is allocated based on the percentage of profits contributed to the Company. Identifiable assets by segment are those assets used in the Company's operations in each business segment. Corporate assets are principally cash and cash equivalents and an equity security investment. (c) Commission Income Commission income, together with the related accounts receivable from clients and premiums payable to insurance carriers, is recorded when earned which is principally as of the billing date. Commission income related to installment billing arrangements is recorded at the date of the initial billing. Unearned commissions represent commission income that is earned in installments on multiyear policies. Contingent commissions and commissions on premiums billed directly by insurance carriers are recorded when collected or known. Commission and other adjustments are recorded when they occur and the Company maintains an allowance for estimated policy cancellations and commission returns. (d) Fixed Assets Furniture, equipment, computer hardware and software, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed using the straight-line method. Fixed assets are depreciated over periods ranging from three to F-63 ten years, and leasehold improvements are amortized over the remaining terms of the leases which expire through 2010 or useful life which ever is shorter. (e) Intangible Assets Acquired expiration lists, covenants not to compete and goodwill are carried at cost, less accumulated amortization which is computed using the straight-line method over the estimated useful life of the asset not to exceed twenty years. (f) Investments Investments are stated at fair value. The difference between the cost and fair value is reflected as unrealized appreciation or depreciation, net of applicable deferred income taxes, as a separate component of stockholders' equity. Realized gains or losses from the sale of investments are determined on the basis of specific identification and are reflected as a component of revenues. Investment income is recognized when earned. The fair value of fixed maturities and equity securities is based on the closing price of the investments on December 31. If a decline in fair value of an investment is considered to be other than temporary, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. In evaluating whether a decline is other than temporary, management considers the duration and extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer, including events that may impact the issuer's operations and impair the earnings potential of the investment, and management's ability and intent to hold an investment for a sufficient period to allow for an anticipated recovery in fair value. Investments in equity securities in which the Company does not exert significant influence and there is no readily determinable fair value are carried at the lower of cost or market. (g) Insurance Premiums Earned Insurance premiums are recognized as revenues ratably over the terms of the related policies in force. Unearned premiums are established to cover the unexpired portion of premiums written and are calculated using the daily pro rata method. Premiums earned are net of reinsurance ceded. (h) Deferred Acquisition Costs Deferred acquisition costs include commissions incurred by the Insurance Companies that vary with and are attributed to new and renewal insurance policies or contracts. These costs are deferred and amortized over the applicable premium recognition period, generally one year. These deferred costs have been limited to the amount expected to be recovered from future earned premiums. Acquisition costs of $9,450,000, $8,292,000, and $7,630,000 were amortized to expense in 2000, 1999 and 1998, respectively. (i) Unpaid Losses and Loss Expenses The estimated liability for unpaid losses and loss expenses is based on an evaluation of claims reported by policyholders. A provision which is based on historical experience and modified for current trends, is also included for losses and loss expenses which have been incurred but not reported. The methods of determining such estimates and F-64 establishing the resulting reserves are continually reviewed and modified to reflect current conditions, and any adjustments are reflected currently in results of operations. (j) Reinsurance Assumed reinsurance premiums written, commission, and unpaid losses are accounted for based principally on the reports received from the ceding insurance companies and in a manner consistent with the terms of the related reinsurance agreements. Liabilities for unpaid losses, loss expenses and unearned premiums are stated gross of ceded reinsurance recoverables. Deferred acquisition costs are stated net of the amounts of reinsurance ceded, as are premiums written and earned, losses and loss expenses incurred, and amortized acquisition costs. (k) Income Taxes The Company recognizes deferred tax assets or liabilities for temporary differences between the financial reporting and tax basis of assets and liabilities based on enacted tax rates. The principal temporary differences relate to deferred acquisition costs, unearned premiums, discount for tax purposes of the unpaid losses and loss expense reserves, amortization of expiration lists, accrual adjustment for commission income and unrealized gains or losses on investments (see Note 8). (l) Cash and Cash Equivalents Cash and cash equivalents include money market funds and certificates of deposit, including funds held in a fiduciary capacity for the Insurance Brokerage Companies, with a maturity of three months or less. The Company maintains cash with banks in excess of federally insured limits and is exposed to the credit risk from this concentration of cash. (m) Earnings Per Share Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the effect of all potentially dilutive securities. Earnings per common share has been compiled below (in thousands, except per share amounts):
2000 1999 1998 ------ ------ ------ Net income (numerator) $9,404 $7,504 $7,282 ------ ------ ------ Weighted average common shares and effect of dilutive shares used in the computation of earnings per share: Average shares outstanding -- basic 8,470 8,460 8,474 Effect of dilutive shares 143 170 119 ------ ------ ------ Average shares outstanding -- diluted (denominator) 8,613 8,630 8,593 ------ ------ ------ Earnings per common share: Basic $ 1.11 $ 0.89 $ 0.86 Diluted $ 1.09 $ 0.87 $ 0.85
Options to purchase 594,250, 219,250 and 161,450, common shares at prices from $7.50 to $11.63, $7.88 to $11.63 and $7.06 to $11.63 per share were outstanding at December 31, 2000, 1999 and 1998, respectively, but were not included in the computation of earnings per diluted share for the respective years, because their exercise price was greater than the average market price of the common shares. These F-65 options expire through November 16, 2009, December 10, 2008 and December 31, 2007, respectively. (n) Capitalized Software Policy Capitalized computer software costs (included in fixed assets on the Consolidated Balance Sheets) consist of costs to purchase software. All capitalized software costs are amortized on a straight line method over a period of three or five years. Amortization expense charged to operations was $547,630 in 2000, $425,265 in 1999 and $199,272 in 1998. (o) Accounting Policy for Stock Compensation Plans The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock based compensation plans. Accordingly, no compensation expense has been recognized for its Stock Option Plan as the exercise price of the options equaled the market price of the stock at the date of grant. Compensation expense has been recognized for the Stock Performance Plan based on the market price at the date of the award. (p) Fair Value of Financial Instruments The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, receivables and premiums payable approximate those assets and liabilities fair values due to the short-term nature of the instruments. 3) CHANGES IN ACCOUNTING POLICIES (a) Newly Adopted Accounting Standards In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101 which provides guidance for applying generally accepted accounting principles relating to the timing of revenue recognition in financial statements filed with the SEC. The Company is recognizing revenue in accordance with SAB No. 101 and maintains an allowance for policy cancellations and commission returns. (b) Accounting Standards Not Yet Adopted In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement is effective for all fiscal quarters and fiscal years beginning after December 31, 2000. The statement is not expected to have a material impact on the financial position of the Company. 4) ACQUISITIONS Effective January 1, 1999, the Company, through one of its insurance brokerage subsidiaries, Kaye Insurance Associates, Inc. ("KIA"), purchased the assets, including customer lists, and certain liabilities of Woodbury, N.Y.-based broker Seaman, Ross & Wiener, Inc. ("SRW") and related entities for an initial purchase price of $2,422,000 in cash and $500,000 in stock of the Company. Additional payments of $4,458,000 in cash and $292,000 in stock of the Company have been made through December 31, 2000. F-66 The total purchase price is contingent on future billings related to the acquired customer lists and will increase significantly from the initial purchase price. This acquisition is being accounted for using the purchase method of accounting. Accordingly, intangible assets (including customer lists) of approximately $7,700,000 resulting from the allocation of the preliminary purchase price and payments made through December 31, 2000, are being amortized by using the straight-line method over a period of not more than twenty years. During 1998, the Company acquired certain assets and liabilities of Florida Insurance Associates, Inc. ("FIA"), Daniel V. Keane Agency, Inc. ("DVK"), and Laub Group of Florida, Inc. ("LGF") for cash of $275,000, $1,452,0000 and $201,000, respectively, paid through December 31, 2000 and estimated amounts payable in future periods of $656,000 (DVK). The total acquired intangible assets (including expiration lists) was $2,108,000 for DVK. These acquisitions were accounted for under the purchase method. During the first half of 2000, the Brokerage Operations sold the majority of the operations of LGF at no gain or loss, as well as certain assets and liabilities of FIA. 5) FUNDS HELD IN FIDUCIARY CAPACITY Premiums collected by the Insurance Brokerage Companies but not yet remitted to insurance carriers are approximately $25,374,000 and $25,610,000 at December 31, 2000 and 1999, respectively, some of which are restricted as to use by law in certain states in which the Insurance Brokerage Companies operate. These balances are held in cash and cash equivalents. The offsetting obligation is recorded in premiums payable. 6) INVESTMENTS Net investment income for the years ended December 31, 2000, 1999 and 1998 is derived from the following sources (in thousands):
2000 1999 1998 ------ ------ ------ INSURANCE BROKERAGE COMPANIES Cash and cash equivalents $1,339 $1,374 $1,846 ------ ------ ------ PROPERTY AND CASUALTY COMPANIES Fixed maturities 2,089 2,176 2,031 Equity securities 34 45 67 Cash and cash equivalents 729 532 791 Other 340 259 98 ------ ------ ------ Total investment income 3,192 3,012 2,987 Investment expenses (65) (63) (67) ------ ------ ------ 3,127 2,949 2,920 ------ ------ ------ CORPORATE Cash and cash equivalents 107 206 (31) ------ ------ ------ NET INVESTMENT INCOME $4,573 $4,529 $4,735 ------ ------ ------
F-67 Net realized gains or losses and the change in unrealized appreciation or depreciation on investments for the years ended December 31, 2000, 1999 and 1998 are summarized below (in thousands):
2000 1999 1998 ------- ------- ------- Net realized gains (losses): Fixed maturities: Gross realized gains $ 14 $ 37 $ 85 Gross realized losses (108) (13) Equity securities: Gross realized gains 1,142 4 Gross realized losses (244) (44) ------- ------- ------- NET REALIZED GAIN (LOSS) ON INVESTMENTS $ 804 $ (16) $ 85 ------- ------- ------- Change in unrealized appreciation (depreciation): Fixed maturities $ 1,044 $(1,586) $ 47 Equity securities (1,012) 419 209 ------- ------- ------- NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 32 $(1,167) $ 256 ------- ------- -------
The composition, cost (amortized cost for fixed maturities) and estimated market values of the Company's investments at December 31, 2000 and 1999 are presented below.
GROSS UNREALIZED HOLDING AGGREGATE -------------- FAIR COST GAINS LOSSES VALUE ------- ----- ------ --------- (in thousands) 2000 Fixed Maturities: U.S. Government(a) $ 3,792 $ 48 $ (6) $ 3,834 States(b) 35,804 287 (263) 35,828 Corporate 3,561 39 (30) 3,570 ------- ---- ----- ------- Total fixed maturities $43,157 $374 $(299) $43,232 ------- ---- ----- -------- Equity Securities: Common Stock $ 8,648 $ 12 $(594) $ 8,066 Preferred Stock 270 193 463 ------- ---- ----- ------- Total equity securities $ 8,918 $205 $(594) $ 8,529 ------- ---- ----- --------
F-68
GROSS UNREALIZED HOLDING AGGREGATE --------------- FAIR COST GAINS LOSSES VALUE ------- ----- ------- --------- (in thousands) 1999 Fixed Maturities: U.S. Government(a) $ 3,351 $ 6 $ (132) $ 3,225 States(b) 35,247 53 (836) 34,464 Corporate 3,675 7 (67) 3,615 ------- ---- ------- ------- Total fixed maturities $42,273 $ 66 $(1,035) $41,304 ------- ---- ------- -------- Equity Securities: Common Stock $ 4,066 $838 $ (215) $ 4,689 Preferred Stock 50 50 ------- ---- ------- ------- Total equity securities $ 4,116 $838 $ (215) $ 4,739 ------- ---- ------- --------
- --------------- (a) Includes U.S. Government agencies and authorities (b) Includes municipalities and subdivisions The amortized cost and estimated market value of fixed maturities at December 31, 2000, by contractual maturity date, are listed below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
AMORTIZED AGGREGATE COST FAIR VALUE --------- ---------- (in thousands) Due in one year or less $ 3,030 $ 3,035 Due after one year through five years 19,497 19,683 Due after five years through ten years 18,898 18,790 Due after ten years 1,732 1,724 ------- ------- TOTAL $43,157 $43,232 -------- --------
Fixed maturities and cash and cash equivalents carried at market value of $3,510,000 and $3,422,000, in 2000 and 1999, respectively, were on deposit for governmental authorities, as required by law. Fixed maturities and cash equivalents carried at market value of $27,328,000 and $22,270,000 in 2000 and 1999, respectively, have been deposited in trust funds or pledged to collateralize the obligations of OLRI to ceding companies under reinsurance agreements. In addition, OLB maintained a bank letter of credit in the amount of $700,000 at December 31, 2000 and 1999. The Company's short term investment of cash is maintained principally with seven banks and three institutional money market funds. To control this risk, the Company utilizes only high credit quality financial institutions. Additionally, under the insurance laws of the State of Rhode Island, where OLRI is domiciled, insurers and reinsurers are restricted as to the types of investments they may purchase and the concentration of risk they may accept in any one issuer or group of issuers. The Company complies with such laws which insure that the concentration of risk in its investment portfolio is at an acceptable and authorized level. F-69 7) NOTES PAYABLE Notes payable consist of the following in thousands at December 31:
2000 1999 ------- ------- INSURANCE BROKERAGE: Note payable, due through 7/1/2002, interest at prime $ 656 $ 1,031 Finance company note, due through 6/24/02, interest at 7.75% 185 320 Finance company note, due through 2000, interest at Prime rate plus 1/2% -- 17 Current portion (521) (527) ------- ------- NOTES PAYABLE -- LONG TERM $ 320 $ 841 ------- ------- CORPORATE: Term loan, due through 6/24/2002, interest at 7.8% $ 2,071 $ 3,311 Current portion (1,343) (1,241) ------- ------- NOTES PAYABLE -- LONG TERM $ 728 $ 2,070 ------- -------
The note payable, at 9%, due through July 1, 2002, represents debt incurred related to the DVK acquisition. The 7.8% Term Loan due through June 24, 2002 is secured by the stock of the Property and Casualty Companies. Certain covenants exist on this loan, the most significant being the requirement to maintain a minimum GAAP net worth, minimum statutory surplus in the Insurance Companies, a fixed ratio of net premiums to surplus and a minimum debt service coverage. At December 31, 2000, the Company was in compliance with the convenants under the loan agreement. In addition, the Company has available a $4,500,000 revolving line of credit through April 30, 2001 at LIBOR plus 175 basis points or the bank's base rate. The line is also secured by the stock of the Property and Casualty Companies. The proceeds are available for general operating needs and acquisitions. At December 31, 2000, no amount was outstanding on the revolving line of credit. A quarterly fee is assessed in the amount of .05% on the unused balance. The Company maintains a $700,000 letter of credit and has established trust funds in order to satisfy the collateral requirements of certain reinsurance agreements as of December 31, 2000 and 1999. The letter of credit is secured by certain cash deposits. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the notes payable at December 31, 2000 and 1999 approximates their carrying value. Interest expense in the accompanying consolidated statements of income for the years ended December 31, 2000, 1999 and 1998 was $1,104,000, $1,091,000 and $492,000, respectively. 8) INCOME TAXES The Company and its wholly owned domestic subsidiaries are party to a Tax Allocation Agreement (the "Agreement"). The Agreement requires these companies to file a U.S. consolidated income tax return. The Agreement also provides that each member of the group will compute its separate tax liability or benefit on a separate return basis and pay or receive such amounts to or from the Company. F-70 The Company's effective income tax rate for the years ended December 31, 2000, 1999 and 1998 differs from the statutory rate on ordinary income before income taxes as follows (in thousands, except percentages):
2000 1999 1998 --------------- --------------- --------------- % OF % OF % OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------ ------ ------ ------ ------ ------ Income taxes computed at the statutory rate $4,634 34.0% $3,648 34.0% $3,588 34.0% Increase (decrease) in taxes resulting from: Tax-exempt investment income (519) (3.8) (507) (4.7) (456) (4.3) State and local income taxes and other 110 0.8 84 0.8 140 1.3 ------ ----- ------ ----- ------ ----- PROVISION FOR INCOME TAXES $4,225 31.0% $3,225 30.1% $3,272 31.0% ----- ------ ----- ------ ----- ------
The source of the significant temporary differences and the related deferred tax effects are as follows:
2000 1999 1998 ----- ----- ----- (in thousands) Expiration lists $ 268 $ 395 $ 394 Accrual adjustment 167 60 (85) Unearned premium reserves 31 (71) 10 Deferred acquisition costs (88) 133 (6) Loss reserve discount (220) (353) (246) Other 180 (200) (217) ----- ----- ----- DEFERRED TAX EXPENSE (BENEFIT) $ 338 $ (36) $(150) ----- ----- -----
The components of the net deferred tax assets and liabilities, in the accompanying consolidated balance sheets at December 31, 2000 and 1999, are as follows:
2000 1999 ------ ------ (in thousands) Deferred tax assets: Loss and loss expense reserves $1,869 $1,649 Unearned premium reserves 867 898 Other 346 525 Unrealized losses on investments 107 118 Expiration lists (116) 152 ------ ------ Total deferred tax asset 3,073 3,342 ------ ------ Deferred tax liabilities: Deferred acquisition costs 1,378 1,466 Other accrual adjustments 1,206 1,038 ------ ------ Total deferred tax liability 2,584 2,504 ------ ------ NET DEFERRED TAX ASSET $ 489 $ 838 ------ ------
F-71 Management believes it is more likely than not that all deferred tax assets are realizable based upon the past earnings history of the Company. OLB, as a Bermuda domiciled company, is not subject to federal income taxes but, rather, the Company is subject to federal income taxes based on OLB's taxable income for the entire year. Accordingly, the Company includes the taxable income of OLB in its separate company income for tax purposes, but for segment reporting the income is included with the Property and Casualty Companies. OLB has received an undertaking from the Bermuda Government exempting it from all taxes computed on profit or income, or computed on any capital asset gain or appreciation until 2016. 9) LEASE COMMITMENTS AND RENTALS Minimum annual rental commitments under various non-cancelable operating leases for office space and equipment are as follows (in thousands):
YEARS ENDING DECEMBER 31, - ------------------------- 2001 $ 3,329 2002 1,324 2003 982 2004 949 2005 923 Thereafter 4,311 ------- 11,818 Sub-lease rental income (491) ------- NET RENTAL COMMITMENTS $11,327 -------
Leases for office space include various escalation clauses, none of which individually or in the aggregate are material. Escalation clauses are accounted for on a straight-line basis over the remaining life of the lease. The leases also contain provisions for the payment of certain operating expenses and real estate taxes. Rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to $3,324,000, $3,242,000 and $2,928,000, respectively, net of sublease rental income of $174,000, $48,000 and $48,000, respectively. 10) DEFINED CONTRIBUTION PLAN Substantially all officers and employees of the Company are entitled to participate in a qualified retirement savings plan (defined contribution plan). The cost to the Company was $434,000 $406,000 and $255,000 for 2000, 1999 and 1998, respectively. 11) COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company and its subsidiaries are subject to various claims and lawsuits consisting primarily of alleged errors and omissions in connection with the placement of insurance. In the opinion of management, the ultimate resolution of all asserted and potential claims and lawsuits will not have a material effect on the consolidated financial position and results of operations of the Company. As licensed brokers, the Insurance Brokerage Companies are or may become party to administrative inquiries and at times to administrative proceedings commenced by state insurance regulatory bodies. Certain subsidiaries were involved in an administrative investigation commenced in 1992 by the New York Insurance Department ("Depart- F-72 ment") relating to how property insurance policies were issued for the Residential Real Estate Program. As a result, the manner in which policies are structured for certain clients in this Program was altered, which has not had a material adverse effect on this Program. While the Company had discussions with the Department regarding settlement of such investigation, this matter has not been pursued for several years. If the matter is not closed or settled, the Department could institute formal proceedings against the subsidiaries seeking fines or license revocation. Management does not believe the resolution of this issue will have a material adverse effect on the Company. 12) REINSURANCE The components of net written and net earned insurance premiums were as follows for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ------- ------- ------- (in thousands) WRITTEN PREMIUMS: Direct $ 8,988 $12,120 $11,586 Assumed 23,139 16,668 13,207 Ceded (2,099) (967) (255) ------- ------- ------- Net written premiums $30,028 $27,821 $24,538 ------- ------- ------- EARNED PREMIUMS: Direct $11,070 $11,576 $11,652 Assumed 21,054 15,846 13,392 Ceded (1,638) (642) (355) ------- ------- ------- Net earned premiums $30,486 $26,780 $24,689 ------- ------- -------
OLRI assumes reinsurance under arrangements with unaffiliated insurance companies. The Insurance Brokerage Companies produce the business assumed under these arrangements. The business has limits varying from $25,000 to $100,000 per occurrence. Claim liabilities under these agreements are secured with fixed maturity securities and cash and cash equivalents, which are deposited in trust funds. Approximately $27,328,000 and $22,270,000 as of December 31, 2000 and 1999, respectively, are held in these trust funds. In addition, OLB maintained a bank letter of credit in the amount of $700,000 at December 31, 2000 and 1999 to satisfy the reinsurance collateral requirement. OLRI underwrites a small book of business with limits up to $3,500,000 with net retention on one policy of $100,000 and reinsures the balance on an excess of loss basis to other insurers or reinsurers. Under the terms of the reinsurance agreements, loss and loss adjustment expenses recovered (incurred) in 2000, 1999 and 1998 were $2,174,857, $(451,000), and $409,000, respectively. Commissions earned on reinsurance ceded in 2000, 1999 and 1998 were $347,000, $148,000 and $45,000, respectively. Reinsurance has been placed with PXRE Reinsurance Company and The Hartford Stream and Boiler Inspection and Insurance Co. which are rated A or better by A.M. Best. A contingent liability exists with respect to reinsurance ceded, which would become an ultimate liability of OLRI in the event that the assuming companies were unable to meet their obligations under the reinsurance agreements in force at December 31, 2000. F-73 13) UNPAID LOSSES AND LOSS EXPENSES The following table sets forth a reconciliation of the changes in the reserves for losses and loss expenses, including paid losses and loss expenses:
YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (in thousands) Balance at January 1, $23,969 $21,567 $19,126 Less: reinsurance recoverables (2,678) (3,220) (2,811) ------- ------- ------- Net balance 21,291 18,347 16,315 ------- ------- ------- Incurred related to: Current year 13,340 10,410 8,461 Prior years (1,070) (656) 35 ------- ------- ------- Total incurred 12,270 9,754 8,496 ------- ------- ------- Paid related to: Current year 2,809 2,188 1,877 Prior years 7,368 4,622 4,587 ------- ------- ------- Total paid 10,177 6,810 6,464 ------- ------- ------- Net balance at December 31, 23,384 21,291 18,347 Add: reinsurance recoverables 4,600 2,678 3,220 ------- ------- ------- BALANCE $27,984 $23,969 $21,567 ------- ------- -------
2000 and 1999 incurred provisions increased over prior year's amounts due to the growth of liability business. Incurred provision reductions in 2000 and 1999 relating to prior years were due to redundant property and liability reserves established in those years. Paid losses in 2000 and 1999 for both current and prior years increased over the prior year's amount due to the overall growth in business. 14) STATUTORY FINANCIAL INFORMATION AND DIVIDEND RESTRICTIONS The Insurance Companies file separate financial statements in accordance with accounting practices prescribed or permitted by the insurance regulatory authorities where they are domiciled. These statutory accounting practices ("SAP") differ in certain respects from GAAP. These differences are primarily comprised of the accounting for prepaid acquisition costs, deferred income taxes, and fixed maturity and equity investments. F-74 The following is a reconciliation of net income and surplus regarding policyholders in accordance with SAP as reported to the Rhode Island and Bermuda insurance regulatory authorities to net income and capital as determined in conformity with GAAP.
STATUTORY SURPLUS/ NET INCOME FOR YEARS STOCKHOLDERS' EQUITY ENDED AS OF DECEMBER 31, DECEMBER 31, --------------------- ------------------------- 2000 1999 2000 1999 1998 --------- --------- ------- ------ ------ (in thousands) Consolidated amount in accordance with GAAP $ 56,042 $ 47,251 $ 9,404 $7,504 $7,282 Deficit (equity) in net assets and net loss (income) of non- insurance companies (14,782) (10,083) (1,658) (226) (141) -------- -------- ------- ------ ------ Combined amount in accordance with GAAP 41,260 37,168 7,746 7,278 7,141 Deferred acquisition costs (4,053) (4,313) 260 (392) 18 Non-admitted assets, deferred income taxes and other (1,898) (341) (278) (292) (241) -------- -------- ------- ------ ------ COMBINED AMOUNT IN ACCORDANCE WITH SAP $ 35,309 $ 32,514 $ 7,728 $6,594 $6,918 -------- -------- ------- ------ ------
The Insurance Companies are currently subject to various regulations that limit the maximum amount of dividends ultimately available to the Company without prior approval of insurance regulatory authorities. Under SAP, approximately $3,811,000 of statutory surplus is available for distribution in 2001 without prior regulatory approval. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The new accounting guidance becomes effective January 1, 2001 and has been adopted by the State of Rhode Island. 15) RELATED PARTY TRANSACTIONS The administrative support for OLB is provided by International Advisory Services, Ltd. ("IAS"), an insurance management company located in Bermuda. A director of IAS is an officer of OLB and is a director of the Company. Management fees paid to IAS under a service contract for the years ended December 31, 2000, 1999 and 1998 were $20,000, $20,000 and $30,000, respectively. A director of the Company is also a director of, and had shared beneficial ownership of more than ten percent of the outstanding common stock of Sun Television and Appliances, Inc. ("Sun TV"). In 1994, Sun TV and a subsidiary of the Company entered into two agreements whereby the Company's subsidiary agreed to assume certain service contracts that were sold by Sun TV to its retail customers (the "Agreement") and contracted with Sun TV to have Sun TV provide repair services under certain service contracts. The Board of Directors believes that the agreements were commercially reasonable. On September 11, 1998, Sun TV filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code. The Company's subsidiary filed a proof of claim on March 11, 1999 for any and all amounts that are due and owing under the Agreement. F-75 16) DIVIDENDS AND TREASURY STOCK The Board of Directors of the Company declared annual dividends of $845,000 and $847,000 for the years ended December 2000 and 1999, respectively, of which $212,000 was unpaid at December 31, 2000 and 1999. In December 1998, the Board of Directors authorized for a two year period the repurchase, at management's discretion, of up to 300,000 shares of the Company's Common Stock. The Company's repurchases of shares of Common Stock are recorded as treasury stock and result in a reduction of stockholders' equity. When treasury shares are reissued the Company uses a first-in, first-out method and the excess of re-issuance price over repurchase cost is treated as an increase of paid-in capital. Net issuances/ (purchases) of treasury stock for the years ended December 31, 2000 and 1999 amounted to 23,176 shares and (27,657) shares, respectively. Treasury shares at December 31, 2000 and 1999 amounted to 4,481 and 27,657 shares, respectively at a cost of approximately $37,000 and $229,000. 17) STOCK PERFORMANCE AND STOCK OPTION PLANS On December 30, 1997, the Company adopted a Stock Performance Plan, under which up to 350,000 shares of the Company's common stock may be granted and awarded to key employees. The grant of stock under this plan is contingent upon criteria established by the Compensation Committee of the Company's Board of Directors. Awards are based on performance targets of the Company's stock based on increases in the market value of the Company's common stock from the price on the date the stock is initially granted by the Company. Shares must be granted, awarded, and vested before participants take full title to the performance stock. Awards vest on the occurrence of any of the following events, (i) fifteen years of continuous service with the Company from the date shares are granted to the participant, (ii) death or disability of the participant, (iii) immediately before a change of control (as defined under the plan), (iv) attaining the age of 65, or (v) immediately before a sale or merger (as defined under the plan). During 2000 and 1999, $0 and 26,016 shares of performance stock were granted under this plan, respectively. During July 1999, the Company awarded 33,844 shares of restricted stock from shares previously granted under the Stock Performance Plan to certain key employees. The market value of these shares awarded totaled approximately $264,000 and has been recorded as unearned stock grant compensation (net of amortization) as a separate component of stockholders' equity. Unearned compensation is being amortized to expense on a straight-line basis over the remaining vesting period. At December 31, 2000 and 1999, no performance stock under this plan was vested. F-76 In addition to the Stock Performance Plan, the Company has a stock option plan. Under the option plan a total of 1,350,000 shares of common stock are reserved for issuance. The option plan provides for the granting to directors, executives or other key employees (including officers) of the Company non-qualified stock options (NQO's) or incentive stock options (ISO's) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The Compensation Committee determines the terms of the options including the exercise price, number of shares subject to option and exercisability. The exercise price of all ISO's and NQO's under the plan is generally at least the fair market value of the common stock of the Company on the date of grant. A summary of the stock option activity and related information consists of the following:
2000 1999 1998 ---------------------- -------------------- -------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- --------- -------- --------- -------- --------- Outstanding at beginning of year 993,000 $6.70 659,200 $6.15 624,850 $6.12 Granted 144,250 7.41 361,800 7.63 54,500 6.46 Exercised (6,900) 5.06 Forfeited (7,540) 5.94 (21,100) 5.93 (20,150) 7.88 ---------- -------- -------- Outstanding at end of year 1,129,710 $7.55 993,000 $6.70 659,200 $6.15 ---------- -------- -------- Options exercisable at year-end 544,060 341,300 232,900 ---------- -------- -------- Weighted-average fair value of options granted during the year $ 3.09 $ 2.34 $ 2.17 ---------- -------- --------
F-77 The following table summarizes information about the stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------------- NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED- EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE PRICES AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE - -------- ----------- ---------------- -------------- ----------- -------------- $11.63 500 3.09 years $11.63 500 $11.63 $10.91 5,000 3.06 $10.91 5,000 $10.91 $10.00 75,500 2.62 $10.00 75,500 $10.00 $8.43 39,750 4.81 $ 8.43 39,750 $ 8.43 $8.24 20,000 8.82 $ 8.24 4,000 $ 8.24 $8.24 48,500 8.83 $ 8.24 9,700 $ 8.24 $8.03 15,000 6.83 $ 8.03 9,000 $ 8.03 $7.88 15,000 4.70 $ 7.88 15,000 $ 7.88 $7.50 252,500 8.95 $ 7.50 50,500 $ 7.50 $7.50 122,500 9.37 $ 7.50 24,500 $ 7.50 $7.50 750 9.88 $ 7.50 $7.41 160 8.12 $ 7.41 160 $ 7.41 $7.38 40,000 8.15 $ 7.38 8,000 $ 7.38 $7.07 1,000 9.78 $ 7.07 $7.06 10,000 5.37 $ 7.06 8,000 $ 7.06 $6.90 20,000 9.83 $ 6.90 $6.64 5,000 7.00 $ 6.64 3,000 $ 6.64 $6.60 21,800 7.94 $ 6.60 8,900 $ 6.60 $6.17 20,000 7.83 $ 6.17 8,000 $ 6.17 $5.06 156,750 6.15 $ 5.06 95,550 $ 5.06 $5.00 250,000 6.12 $ 5.00 173,000 $ 5.00 $4.97 10,000 6.50 $ 4.97 6,000 $ 4.97 --------- ------- 1,129,710 6.99 years $ 7.55 544,060 $ 6.58 ---------- -----------
Unless otherwise specified, the options vest and are exercisable at the rate of 20% per year and terminate ten years from date of grant. At December 31, 2000, 1999 and 1998, 544,060, 341,300 and 232,900 options were exercisable and there were 220,290, 0, and 40,800 options available for future grants, respectively. Had the compensation cost for the Company's stock based compensation plans been determined based on the fair value at the grant date for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
2000 1999 1998 ------ ------ ------ Net Income As reported $9,404 $7,504 $7,282 Pro forma 9,159 7,361 7,167 Earnings per share -- basic As reported 1.11 .89 .86 Pro forma 1.08 .87 .85 Earnings per share -- diluted As reported 1.09 .87 .85 Pro forma 1.06 .85 .84
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: (i) dividend yield of 1.3%, F-78 (ii) expected volatility range of 45%, (iii) risk-free interest rate of 6.63%, and (iv) expected life of 5 years. 18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 2000 and 1999 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods, have been made.
FOR THE THREE MONTHS ENDED ----------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------------- ----------------- ----------------- ----------------- 2000 1999 2000 1999 2000 1999 2000 1999 ------- ------- ------- ------- ------- ------- ------- ------- (in thousands, except for per share) Revenues $17,375 $16,083 $20,644 $17,739 $18,937 $16,599 $21,442 $18,323 ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 1,622 $ 1,359 $ 2,917 $ 2,123 $ 2,349 $ 1,723 $ 2,516 $ 2,299 ------- ------- ------- ------- ------- ------- ------- ------- Earnings per share: Basic $ 0.19 $ 0.16 $ 0.34 $ 0.25 $ 0.28 $ 0.20 $ 0.30 $ 0.27 Diluted 0.19 0.16 0.34 0.25 0.27 0.20 0.29 0.27 ------- ------- ------- ------- ------- ------- ------- ------- Weighted average shares outstanding: Basic 8,461 8,460 8,466 8,448 8,473 8,460 8,479 8,464 Diluted 8,669 8,605 8,570 8,590 8,610 8,655 8,625 8,667 ------- ------- ------- ------- ------- ------- ------- -------
19) BUSINESS SEGMENTS The Company operates in two insurance business segments, the Insurance Brokerage Companies and the Property and Casualty Companies. In addition, Corporate Operations include those activities that benefit the Company in its entirety and cannot be specifically identified to either the Insurance Brokerage Companies or the Property and Casualty Companies. Such activities include debt servicing and public company expenses, including investor relations costs. The identifiable segment assets, operating profits and income before income taxes and minority interests are shown on the accompanying consolidated balance sheets and statements of income. The following table is a summary of certain other segment information for the years ended December 31, 2000, 1999 and 1998:
BUSINESS SEGMENTS -- 2000 ------------------------- INSURANCE PROPERTY & BROKERAGE CASUALTY --------- ---------- (in thousands) Revenue from external sources $38,935 $30,486 Revenue from other segments 3,131 76 Depreciation and amortization expense 2,857 9,466 Interest income from other segments 275 Capital expenditures 3,866
F-79
BUSINESS SEGMENTS -- 1999 ------------------------- INSURANCE PROPERTY & BROKERAGE CASUALTY --------- ---------- (in thousands) Revenue from external sources $33,158 $26,780 Revenue from other segments 4,221 72 Depreciation and amortization expense 2,355 8,309 Interest income from other segments 192 Capital expenditures 1,347
BUSINESS SEGMENTS -- 1998 ------------------------- INSURANCE PROPERTY & BROKERAGE CASUALTY --------- ---------- (in thousands) Revenue from external sources $31,324 $24,689 Revenue from other segments 4,032 69 Depreciation and amortization expense 1,792 7,651 Capital expenditures 2,089
The foreign operations set forth below, relate solely to the operations of OLB, and its wholly owned subsidiary Park Brokerage, and business assumed from third party insurance companies. All such risks assumed originate in the United States.
2000 ------------------------------- FOREIGN DOMESTIC TOTAL ------- -------- -------- (in thousands) Consolidated Revenues $1,589 $76,809 $ 78,398 Income before income taxes 805 12,824 13,629 Identifiable assets 3,063 169,948 173,011
1999 1998 ----------------------------- ----------------------------- FOREIGN DOMESTIC TOTAL FOREIGN DOMESTIC TOTAL ------- -------- -------- ------- -------- -------- (in thousands) Consolidated Revenues $1,717 $67,027 $ 68,744 $2,092 $62,919 $ 65,011 Income before income taxes 1,055 9,674 10,729 1,169 9,385 10,554 Identifiable assets 2,648 146,564 149,212 2,936 157,647 160,583
There were no material inter-company revenue transactions between OLB and OLRI. F-80 20) SUPPLEMENTAL CASH FLOW DISCLOSURES
2000 1999 1998 ------ ------- ------- (in thousands) CASH PAID DURING THE PERIOD FOR: Interest expense $1,097 $ 968 $ 501 Income taxes $4,066 $ 3,463 $ 2,870 NON-CASH INVESTING AND FINANCING ACTIVITIES: Stock issued under Stock Performance Plan $ 222 DETAILS OF ACQUISITIONS: Purchase payments including outstanding payable $4,225 $ 7,784 $ 5,196 Amounts contingently payable (656) (1,578) (3,300) Reissuance of treasury stock (192) (628) Acquisition debt repayment (375) (375) (657) ------ ------- ------- Cash paid for acquisitions $3,002 $ 5,203 $ 1,239 ------ ------- -------
21) SUBSEQUENT EVENT On January 20, 2001, the Company reported that Hub International Limited ("Hub") had entered into a definitive agreement to acquire the Company through a merger transaction. Upon the merger, each holder of the Company's shares will receive $14.00 per share consisting of cash of $9.33 and $4.67 principal amount of 5 year 8.50% subordinate convertible debentures of Hub. Hub has the right to amend the merger consideration by replacing any or all of the convertible debentures with an equal amount of cash. Completion of this transaction, anticipated to occur in the second quarter of 2001, is subject to the receipt of satisfactory applicable regulatory approvals, approval of the merger by the shareholders of the Company, compliance with applicable legal and regulatory requirements and standard closing conditions. The holders of approximately 55% of the shares of the Company, under individual agreements, have agreed to vote in favor of the merger, and have granted Hub an irrevocable option to purchase their shares of the Company in the event that the merger is not completed. Immediately prior to the transaction all outstanding stock options shall become vested, and in return for their cancellation, the holders of options will receive a cash payment; and in return for the cancellation of all outstanding and awarded Performance Stock Shares, the holders will receive a cash payment at a later date. On completion of the transaction, the Company will record an expense of approximately $2,400,000 related to the cancellation of the awarded shares of the Stock Performance Plan. In addition, as a result of the transaction, the Company will incur related expenses of approximately $2.5 million during the period January 1, 2001 through completion of the transaction. F-81 SCHEDULE II KAYE GROUP INC. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS As of December 31, 2000 and 1999 (in thousands, except par value per share)
2000 1999 ------- ------- ASSETS Cash and cash equivalents $ 138 $ 1,233 Prepaid expenses and other assets 59 153 Investments: Equity securities, at market (cost: 2000, $308, and 1999, $243) 320 243 Deferred income taxes 67 93 Due from subsidiaries 2,427 890 Investment in subsidiaries 55,543 48,616 ------- ------- Total assets $58,554 $51,228 ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable and other liabilities $ 254 $ 300 Note payable 1,343 1,241 Income taxes payable 187 366 ------- ------- Total current liabilities 1,784 1,907 Note payable -- long term 728 2,070 ------- ------- Total liabilities 2,512 3,977 ------- ------- STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value; 1,000 shares authorized; none issued or outstanding Common stock, $.01 par value; 20,000 shares authorized; (2000, 8,481; 1999, 8,458 shares issued and outstanding) 85 85 Paid-in capital 18,019 18,019 Unearned stock grant compensation (235) (254) Common stock in Treasury, shares at cost (2000, 4; 1999, 28) (37) (229) Unrealized appreciation (depreciation) of investments, net of deferred income tax provision (benefit), (2000, ($107); 1999, ($118)) (207) (228) Retained earnings 38,417 29,858 ------- ------- Total stockholders' equity 56,042 47,251 ------- ------- Total liabilities and stockholders' equity $58,554 $51,228 ------- -------
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. F-82 SCHEDULE II KAYE GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME For the years ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 ------- ------- ------- REVENUES: Net investment income (loss) $ 107 $ 206 $ (31) Equity in income of subsidiaries 14,236 11,148 11,342 EXPENSES: Other operating expenses 480 309 314 Interest expense 234 316 443 ------- ------- ------- Income before income taxes 13,629 10,729 10,554 Provision for income taxes 4,225 3,225 3,272 ------- ------- ------- NET INCOME $ 9,404 $ 7,504 $ 7,282 ------- ------- -------
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. F-83 SCHEDULE II KAYE GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,404 $ 7,504 $ 7,282 Adjustment to reconcile net income to net cash provided by (used in) operating activities: Deferred income tax benefit 21 (93) (150) Restricted stock compensation 19 10 Equity in net income of subsidiaries (10,214) (8,115) (7,826) Dividends received from subsidiaries 3,900 3,886 4,060 Realized (gain) loss on investment (64) 274 Change in assets and liabilities: Prepaid expenses and other assets 94 95 (20) Due from subsidiaries (1,537) 1,228 1,294 Accounts payable and other liabilities (46) (211) (263) Income taxes payable (179) (202) 552 -------- ------- ------- Net cash provided by operating activities 1,398 4,376 4,929 -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (845) (847) (849) Notes payable-repayment (1,240) (1,145) (7,575) Reissuance (acquisition) of treasury stock 192 (571) Proceeds from borrowing 5,000 Capital contribution to subsidiary (600) (950) (1,200) -------- ------- ------- Net cash used in financing activities (2,493) (3,513) (4,624) -------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,095) 863 305 Cash and cash equivalents at beginning of period 1,233 370 65 -------- ------- ------- Cash and cash equivalents at end of period $ 138 $ 1,233 $ 370 -------- ------- ------- SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the period for: Interest expense $ 234 $ 316 $ 480 Income taxes $ 4,066 $ 3,463 $ 2,870
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. F-84 SCHEDULE II KAYE GROUP INC. (PARENT COMPANY ONLY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. CONDENSED FINANCIAL STATEMENTS Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto. 2. SIGNIFICANT ACCOUNTING POLICIES The Company carries its investment in subsidiaries under the equity method. All other accounting policies are consistent with those of the Company on a consolidated basis. F-85 SCHEDULE IV KAYE GROUP INC. REINSURANCE For The Years Ended December 31, 2000, 1999 and 1998 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - --------------- -------- -------------- --------------- ---------- -------------- PERCENTAGE INSURANCE GROSS CEDED TO OTHER ASSUMED FROM OF AMOUNT PREMIUMS EARNED AMOUNT COMPANIES OTHER COMPANIES NET AMOUNT ASSUMED TO NET - --------------- -------- -------------- --------------- ---------- -------------- 2000 $11,070 $1,638 $21,054 $30,486 69% 1999 $11,576 $ 642 $15,846 $26,780 59% 1998 $11,652 $ 355 $13,392 $24,689 54%
F-86 SCHEDULE VI KAYE GROUP INC. SUPPLEMENTAL INFORMATION CONCERNING INSURANCE COMPANIES OPERATIONS For the years ended December 31, 2000, 1999 and 1998 (in thousands)
COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN A ----------- ------------- -------- -------- -------- ---------- ----------------- ------------ - --------------- CLAIMS AND CLAIM ADJUSTMENT EXPENSES INCURRED RESERVES FOR DISCOUNT RELATED TO UNPAID CLAIMS IF ANY ----------------- AMORTIZATION DEFERRED AND CLAIM DEDUCTED NET (1) (2) OF DEFERRED AFFILIATION WITH ACQUISITION ADJUSTMENT IN UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEARS COSTS - ---------------- ----------- ------------- -------- -------- -------- ---------- ------- ------- ------------ Foreign $ 149 $ 246 N/A $ 709 $ 1,459 $ 130 $ 348 $ (88) $ 307 Domestic 3,904 27,738 N/A 12,988 29,027 2,924 12,992 (982) 9,143 ------ ------- --- ------- ------- ------ ------- ------- ------ 2000 $4,053 $27,984 N/A $13,697 $30,486 $3,054 $13,340 $(1,070) $9,450 -------- --------- ----- ------- ------- ------- ------ ------ -------- Foreign $ 152 $ 260 N/A $ 725 $ 1,598 $ 119 $ 375 $ (144) $ 335 Domestic 4,161 23,709 N/A 12,969 25,182 2,678 10,035 (542) 7,957 ------ ------- --- ------- ------- ------ ------- ------- ------ 1999 $4,313 $23,969 N/A $13,694 $26,780 $2,797 $10,410 $ (656) $8,292 -------- --------- ----- ------- ------- ------- ------ ------ -------- Foreign $ 193 $ 295 N/A $ 916 $ 1,957 $ 135 $ 313 $ 95 $ 414 Domestic 3,728 21,272 N/A 11,411 22,732 2,453 8,148 (60) 7,216 ------ ------- --- ------- ------- ------ ------- ------- ------ 1998 $3,921 $21,567 N/A $12,327 $24,689 $2,588 $ 8,461 $ 35 $7,630 -------- --------- ----- ------- ------- ------- ------ ------ -------- COLUMN J COLUMN K COLUMN L COLUMN A ----------- -------- --------- - --------------- PAID CLAIMS AND CLAIM OTHER AFFILIATION WITH ADJUSTMENT PREMIUMS OPERATING REGISTRANT EXPENSES WRITTEN EXPENSES - ---------------- ----------- -------- --------- Foreign $ 272 $ 1,443 $ 218 Domestic 9,905 28,584 2,947 ------- ------- ------ 2000 $10,177 $30,027 $3,165 -------- ------- ------- Foreign $ 296 $ 1,408 $ 66 Domestic 6,514 26,414 2,847 ------- ------- ------ 1999 $ 6,810 $27,822 $2,913 -------- ------- ------- Foreign $ 317 $ 1,742 $ 102 Domestic 6,147 22,796 2,178 ------- ------- ------ 1998 $ 6,464 $24,538 $2,280 -------- ------- -------
F-87 SHARES (HUB LOGO) COMMON SHARES PROSPECTUS JPMORGAN COCHRAN, CARONIA & CO. STEPHENS INC. BMO NESBITT BURNS FERRIS, BAKER WATTS Incorporated , 2002 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, COMMON SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON SHARES. NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING OF THE COMMON SHARES OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTION OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION. UNTIL , ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON SHARES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. - ------------------------------------------------------------------------ SEC registration fee........................................ $ 6,900.00 NASD filing fee............................................. 8,000.00 NYSE listing fee............................................ * Blue Sky fees and expenses.................................. * Printing and engraving expenses............................. * Attorneys' fees and expenses................................ * Accountants' fees and expenses.............................. * Transfer agent's and registrar's fees and expenses.......... * Miscellaneous............................................... * Total....................................................... $ * - ------------------------------------------------------------------------
* To be filed by amendment. The amounts set forth above are estimates except for the SEC registration fee, the NASD filing fee and the NYSE listing fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under the Business Corporations Act (Ontario), the Corporation may indemnify a present or former director or officer or a person who acts or acted at the Corporation's request as a director or officer of another corporation of which the Corporation is or was a shareholder or creditor, and his or her heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of the Corporation of such other corporation and provided that the director or officer acted honestly and in good faith with a view to the best interests of the Corporation, and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, such director or officer had reasonable grounds for believing that his or her conduct was lawful. Such indemnification may be made in connection with an action by or on behalf of the Corporation or such other corporation to procure a judgment in its favor only with court approval. A director or officer is entitled to indemnification from the Corporation as a matter of right if he or she was substantially successful on the merits in his or her defense of the action or proceeding and fulfilled the conditions set forth above. The by-laws of the Corporation provide that the Corporation shall indemnify a director or officer, a former director or officer or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor, and the heirs and legal representatives of such a person to the extent permitted by the Business Corporations Act (Ontario). The by-laws of the Corporation further provide that the Corporation may, to the extent permitted by the Business Corporations Act (Ontario), purchase and maintain insurance for the benefit of any director or officer, a former director or officer or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor. II-1 A policy of directors' and officers' liability insurance is maintained by the Corporation which insures, subject to certain exclusions, directors and officers for losses as a result of claims against the directors and officers of the Corporation in their capacity as directors and officers and also reimburses the Corporation for payments made pursuant to the indemnity provided by the Corporation pursuant to the Business Corporations Act (Ontario) and the by-laws of the Corporation. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information reflects sales by the registrant of unregistered securities within the past three years:
- ------------------------------------------------------------------------------------------------------- NUMBER OF PRICE PER DATE ISSUED TO (NUMBER OF HOLDERS) SHARES SOLD SHARE - ------------------------------------------------------------------------------------------------------- 1/20/99................ Fairfax and wholly-owned subsidiaries for cash 5,400,000 C$10.00 1/20/99................ In exchange for 2,838,080 special warrants* 2,838,080 13.50 2/10/99................ Initial Public Offering in Canada 865,624 13.50 4/30/99................ Group Five Planned Insurance Services Inc. and The 247,857 14.00 Independent Brokerage Group Inc.** 5/31/99................ P. Moauro & Associates Inc.** 11,765 17.00 5/31/99................ Paul Ayotte Insurance Broker Ltd.** 52,941 17.00 5/31/99................ Paul Ayotte Insurance Brokers (Kapuskasing) Ltd.** 61,441 17.00 6/30/99................ Page Insurance Ltd.** 11,764 17.00 6/30/99................ Pro-Form Insurance Services Inc.** 24,264 17.00 6/30/99................ Evans-Bastion Insurance Agencies Ltd.** 63,000 17.00 6/30/99................ Mointra Services Inc. and Cambridge Insurance 82,353 17.00 Brokers Ltd.** 7/8/99................. Assurance Murdoch Crevier Inc.** 57,584 17.00 7/31/99................ Affinity Brokerage Network Inc., Segger & Associates 130,853 17.00 Ltd., APS Financial Corporation and APS Financial Brokerage Inc.** 7/31/99................ Revelstoke Agencies Ltd. and Ken Magnes Agencies 9,189 18.50 Ltd.** 7/31/99................ KMS Insurance Services Ltd. and Underwriting 55,985 17.00 Alliance Group Inc.** 7/31/99................ Allan Tolsma Agencies Ltd. and Allan Tolsma Agencies 41,000 17.00 (Colwood) Ltd.** 7/31/99................ Feder & Associates Insurance Brokers Ltd. and 20,000 17.00 Canadian Block Managers Inc.** 8/3/99................. Assurances Cloutier & Cloutier Inc.** 13,889 18.00 8/3/99................. Gestion S. Lamanque Inc.** 2,673 17.00 8/31/99................ Parson Brown & Company Limited** 126,555 17.00 8/31/99................ TOS Insurance Services Ltd.*** 417,358 17.00 9/30/99................ Tenax Employee Benefits and Consulting Inc.** 26,176 17.00
II-2
- ------------------------------------------------------------------------------------------------------- NUMBER OF PRICE PER DATE ISSUED TO (NUMBER OF HOLDERS) SHARES SOLD SHARE - ------------------------------------------------------------------------------------------------------- 10/27/99............... Mack & Parker, Inc.** 1,102,593 C$19.00 10/31/99............... Salmon Arm Insurance Agency Ltd.**** 74,510 20.00 11/1/99................ NILA Financial & Insurance Services Inc.** 42,500 20.00 11/20/99............... S & P Agencies (1980) Ltd. and G. B. Ventures Ltd.** 8,700 20.00 11/30/99............... Bytown Insurance Brokers Inc.** 15,000 20.00 12/31/99............... McIntosh Insurance Services Inc.** 4,620 20.00 12/31/99............... Executive Share Purchase Plan 41,992 20.00 6/30/00 3,258 1/14/00................ Executive Share Purchase Plan 5,882 17.00 2/2/00................. Executive Share Purchase Plan 5,000 20.00 4/1/00................. Blais, Chalifour, Couillard, McCarthy, Thabet inc. 18,640 18.00 and Les Placements Stefrasco Inc.** 4/3/00................. Executive Share Purchase Plan 5,000 20.00 6/30/00................ C. J. McCarthy Insurance Agency, Inc.** 464,470 15.00 7/1/00................. NILA Financial Group Inc.** 20,000 20.00 7/12/00................ Executive Share Purchase Plan 99,748 20.00 7/12/00................ Executive Share Purchase Plan 1,851 13.50 7/27/00................ Executive Share Purchase Plan 1,750 20.00 11/6/00................ Price adjustment pursuant to November 30, 1998 4,564 10.00 Merger Agreement 1/1/01................. Assurances Dumas & Associes Inc.** 50,879 17.00 6/18/01................ J. P. Flanagan Corporation** 680,000 17.00 6/26/01................ Executive Share Purchase Plan 186,999 17.00 7/19/01................ Bruce Guthart for cash 439,526 13.00 7/20/01................ Burnham Stewart Group, Inc.** 1,422,834 17.00 320,266 16.28 7/26/01................ Executive Share Purchase Plan 500 10.00 7/30/01................ Executive Share Purchase Plan 150 10.00 8/15/01................ Executive Share Purchase Plan 600 10.00 9/27/01................ Executive Share Purchase Plan 2,353 17.00 9/28/01................ Executive Share Purchase Plan 800 10.00 10/9/01................ Executive Share Purchase Plan 258 13.50 10/30/01............... Executive Share Purchase Plan 289 13.50 12/28/01............... Executive Share Purchase Plan 11,765 17.00 - -------------------------------------------------------------------------------------------------------
* The 2,838,080 special warrants (exchangeable into one share each) were issued on a private placement basis at a price of C$13.50 per special warrant. Fairfax purchased, through certain of its wholly-owned subsidiaries, 1,185,184 special warrants. ** Shares issued from treasury in partial consideration of the acquisition of the indicated brokerage(s). *** Shares issued from treasury in partial consideration of the acquisition of the TOS Insurance Services Ltd., Lakeview Insurance Services Ltd., Colwood Insurance Services Inc., Defieux Saxelby Insurance Services Inc., Smallwood Insurance Services Ltd. (50% ownership) and Brentwood Insurance Agencies Ltd. (50% ownership). **** Shares issued from treasury in partial consideration of the acquisition of the Salmon Arm Insurance Agency Ltd., Revelstoke Insurance Services Ltd., Habaro Management Ltd., Habaro Leasing Corporation, Beacon Underwriting Ltd., BMI Holdings Ltd., Healthy Holdings Ltd., Freedom Holdings Canada Ltd., 382407 B. C. Ltd., Maribrook Investments Ltd. and Bencan Investments Ltd. The sales of the above securities were deemed to be exempt from registration under the Securities Act, with respect to offshore transactions, in reliance on Regulation S and, with respect to sales to II-3 U.S. persons, in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated under Section 4(2) of the Securities Act, or, with respect to issuances to employees, Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution of the securities and appropriate legends were affixed to the instruments representing the securities issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 1. EXHIBITS.
- --------------------------------------------------------------------------- EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement.* 3.1 -- Articles of Incorporation of the Registrant. 3.2 -- By-laws of the Registrant. 4.1 -- Specimen Certificate representing Common Shares. 5.1 -- Opinion of Torys LLP as to the legality of the Common Shares.* 10.1 -- Agreement and Plan of Merger between Hub International Limited, 416 Acquisition Inc. and Kaye Group Inc. dated January 19, 2001. 10.2 -- Executive Share Purchase Plan. 10.3 -- Employee Share Purchase Plan. 10.4 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and Martin P. Hughes. 10.5 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and Martin P. Hughes. 10.6 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and Richard A. Gulliver. 10.7 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and Richard A. Gulliver. 10.8 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and Dennis J. Pauls. 10.9 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and Dennis J. Pauls. 10.10 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and W. Kirk James. 10.11 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and W. Kirk James. 10.12 -- Employment Agreement dated as of June 28, 2001 among Kaye Group Inc., Hub International Limited and Bruce D. Guthart. 10.13 -- Employment Agreement dated as of January 1, 2002 among Barton Insurance Brokers Ltd., Hub International Limited and R. Craig Barton. 10.14 -- Form of Restricted Share Purchase Plan.* 10.15 -- Amended and Restated Credit Agreement dated as of June 21, 2001 between Hub International Limited and Bank of Montreal.
II-4
- --------------------------------------------------------------------------- EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------------------------------------------------------------------------- 10.16 -- Debenture dated as of June 28, 2001 between Hub International Limited and Royal Trust Corporation of Canada as Trustee for Zurich Insurance Company, as amended. 10.17 -- Debenture dated as of June 28, 2001 between Hub International Limited and Odyssey Reinsurance Corporation. 10.18 -- Debenture dated as of June 28, 2001 between Hub International Limited and United States Fire Insurance Company. 10.19 -- Credit Agreement dated as of July 19, 2001, as amended, between Hub International Limited and Bank of America, N.A. 10.20 -- Credit Agreement dated as of July 19, 2001, as amended, between Hub International Limited and LaSalle Bank National Association. 21.1 -- List of Registrant's subsidiaries. 23.1 -- Consent of PricewaterhouseCoopers LLP. 23.2 -- Consent of PricewaterhouseCoopers LLP. 23.3 -- Consent of Torys LLP (included in its opinion in Exhibit 5.1).* 24.1 -- Powers of Attorney (included on the signature page of this Registration Statement). - ---------------------------------------------------------------------------
* To be filed by amendment. ITEM 2. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the SEC 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 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus 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. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such name as required by the Underwriters to permit prompt delivery to each purchaser. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has duly caused the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago in the State of Illinois on March 21, 2002. Hub International Limited By: /s/ MARTIN P. HUGHES -------------------------------------- Name: Martin P. Hughes Title: Chairman and Chief Executive Officer II-6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Martin P. Hughes and Richard A. Gulliver his true and lawful attorneys-in-fact and agents, each of whom may act alone, with full powers of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to sign any related registration statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, 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 and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, and hereby ratifying and confirming all that such attorneys-in-fact and agents 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 date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARTIN P. HUGHES Director and Principal March 21, 2002 - ----------------------------------------------------- Executive Officer Martin P. Hughes /s/ DENNIS J. PAULS Principal Financial and March 21, 2002 - ----------------------------------------------------- Accounting Officer Dennis J. Pauls /s/ RICHARD A. GULLIVER Director March 21, 2002 - ----------------------------------------------------- Richard A. Gulliver /s/ R. CRAIG BARTON Director March 21, 2002 - ----------------------------------------------------- R. Craig Barton /s/ ANTHONY F. GRIFFITHS Director March 21, 2002 - ----------------------------------------------------- Anthony F. Griffiths /s/ BRUCE D. GUTHART Director March 21, 2002 - ----------------------------------------------------- Bruce D. Guthart /s/ JEAN MARTIN Director March 21, 2002 - ----------------------------------------------------- Jean Martin /s/ PAUL MURRAY Director March 21, 2002 - ----------------------------------------------------- Paul Murray /s/ JOHN VARNELL Director March 21, 2002 - ----------------------------------------------------- John Varnell
II-7 AUTHORIZED REPRESENTATIVE Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the Authorized Representative has duly signed this registration statement below on March 21, 2002. HUB U.S. HOLDINGS, INC. By: /s/ W. KIRK JAMES -------------------------------------- Name: W. Kirk James Title: Secretary II-8 INDEX OF EXHIBITS
- ------------------------------------------------------------------------------------------- EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGES - ------------------------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement.* 3.1 -- Articles of Incorporation of the Registrant. 3.2 -- By-laws of the Registrant. 4.1 -- Specimen Certificate representing Common Shares. 5.1 -- Opinion of Torys LLP as to the legality of the Common Shares.* 10.1 -- Agreement and Plan of Merger between Hub International Limited, 416 Acquisition Inc. and Kaye Group Inc. dated January 19, 2001. 10.2 -- Executive Share Purchase Plan. 10.3 -- Employee Share Purchase Plan. 10.4 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and Martin P. Hughes. 10.5 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and Martin P. Hughes. 10.6 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and Richard A. Gulliver. 10.7 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and Richard A. Gulliver. 10.8 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and Dennis J. Pauls. 10.9 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and Dennis J. Pauls. 10.10 -- Employment Agreement dated as of March 19, 2002 between Hub International Limited and W. Kirk James. 10.11 -- Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between Hub International Limited and its subsidiaries and W. Kirk James. 10.12 -- Employment Agreement dated as of June 28, 2001 among Kaye Group Inc., Hub International Limited and Bruce D. Guthart. 10.13 -- Employment Agreement dated as of January 1, 2002 among Barton Insurance Brokers Ltd., Hub International Limited and R. Craig Barton. 10.14 -- Form of Restricted Share Purchase Plan.* 10.15 -- Amended and Restated Credit Agreement dated as of June 21, 2001 between Hub International Limited and Bank of Montreal. 10.16 -- Debenture dated as of June 28, 2001 between Hub International Limited and Royal Trust Corporation of Canada as Trustee for Zurich Insurance Company, as amended.
II-9
- ------------------------------------------------------------------------------------------- EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGES - ------------------------------------------------------------------------------------------- 10.17 -- Debenture dated as of June 28, 2001 between Hub International Limited and Odyssey Reinsurance Corporation. 10.18 -- Debenture dated as of June 28, 2001 between Hub International Limited and United States Fire Insurance Company. 10.19 -- Credit Agreement dated as of July 19, 2001, as amended, between Hub International Limited and Bank of America, N.A. 10.20 -- Credit Agreement dated as of July 19, 2001, as amended, between Hub International Limited and LaSalle Bank National Association. 21.1 -- List of Registrant's subsidiaries. 23.1 -- Consent of PricewaterhouseCoopers LLP. 23.2 -- Consent of PricewaterhouseCoopers LLP. 23.3 -- Consent of Torys LLP (included in its opinion in Exhibit 5.1).* 24.1 -- Powers of Attorney (included on the signature page of this Registration Statement). - -------------------------------------------------------------------------------------------
* To be filed by amendment. II-10 EX-3.1 3 t06723ex3-1.txt ARTICLES OF INCORPORATION OF THE REGISTRANT For Ministry Use Only A l'usage exclusif du ministere Exhibit 3.1 Ontario Corporation Number Numero de la societe en Ontario 1327064 ARTICLES OF INCORPORATION STATUTS CONSTITUTIFS Form 1 Business Corporations Act Formule 1 Loi sur les societes par actions 1. The name of the corporation is: Denomination sociale de la societe: THE HUB GROUP LIMITED 2. The address of the registered office: Adresse du siege social:
95 Wellington Street West, Suite 800 - ------------------------------------------------------------------------------- (Street & Number, or R.R. Number & if Multi-Office Building give Room No.) (Rue et numero, ou numero de la R.R. et, s'il s'agit d'un edifice a bureaux, numero du bureau) Toronto, Ontario M5J 2N7 - ------------------------------------------------------------------------------- (Name of Municipality or Post Office) (Postal Code) (Nom de la municipalite ou du bureau de poste) (Code postal) 3. Number (or minimum and maximum number) of Nombre (ou nombres minimal et maximal) directors is: d'administrateurs: minimum of 3, maximum of 10 4. The first director(s) is/are: Premier(s) administrateur(s):
Resident Canadian State First name, initials and surname Residence address, giving Street & No. or R.R. No., Yes or No Prenom, initiales et nom de famille Municipality and Postal Code Resident Adresse personnelle, y compris la rue et le numero, le canadien numero de la R.R., le nom de la municipalite et le code postal Oui/Non - ----------------------------------------------------------------------------------------------------------------------- Jean D. DuGuay 408-60 Mountview Avenue Yes Toronto, Ontario M6P 2L4 Jennifer Brown 401-67 High Park Blvd. Yes Toronto, Ontario M6R 1M9 Jennifer Henry Apt. 2, 281 Evelyn Avenue Yes Toronto, Ontario M6P 2Z8
1. 5. Restrictions, if any, on business the corporation may Limites, s'il y a lieu, imposees aux activites commerciales carry on or on powers the corporation may exercise. ou aux pouvoirs de la societe.
none 6. The classes and any maximum number of shares that Categories et nombre maximal, s'il y a lieu, d'actions que the corporation is authorized to issue: la societe est autorisee a emettre:
an unlimited number of preference shares, issuable in series and an unlimited number of common shares 2. 7. Rights, privileges, restrictions and conditions Droits, privileges, restrictions et conditions, s'il y a lieu, rattaches (if any) attaching to each class of shares and a chaque categorie d'actions et pouvoirs des administrateurs relatifs a directors authority with respect to any class of chaque categorie d'actions qui peut etre emise en serie: shares which may be issued in series:
see pages 3A to 3D 3. The rights, privileges, restrictions and conditions attached to the preference shares and common shares are: 1. PREFERENCE SHARES The Preference Shares, as a class, shall be designated as Preference Shares and shall have attached thereto the following rights, privileges, restrictions and conditions: 1.1. DIRECTORS' RIGHT TO ISSUE IN ONE OR MORE SERIES The Preference Shares may be issued a any time or from time to time in one or more series. Before any shares of a series are issued, the board of directors of the Corporation shall fix the number of shares that will form such series and shall, subject to the limitations set out in the Articles, determine the designation, rights, privileges, restrictions and conditions to be attached to the Preference Shares of such series, the whole subject to the filing with the Director (as defined in the Business Corporations Act (the "Act")) of Articles of Amendment containing a description of such series including the rights, privileges, restrictions and conditions determined by the board of directors of the Corporation. 1.2. RANKING OF THE PREFERENCE SHARES The Preference Shares of each series shall rank on a parity with the Preference Shares of every other series with respect to dividends and return of capital in the event of the liquidation, dissolution or winding-up of the Corporation, and shall be entitled to a preference over the Common Shares of the Corporation and over any other shares ranking junior to the Preference Shares with respect to priority in payment of dividends and in the distribution of assets in the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs. If any cumulative dividends, whether or not declared, or declared non-cumulative dividends or amounts payable on a return of capital in the event of the liquidation, dissolution or winding-up of the Corporation are not paid in full in 3A respect of any series of the Preference Shares, the Preference Shares of all series shall participate rateably in respect of such dividends in accordance with the sums that would be payable on such shares if all such dividends were declared and paid in full, and in respect of such return of capital in accordance with the sums that would be payable on such return of capital if all sums so payable were paid in full; provided, however, that if there are insufficient assets to satisfy in full all such claims as aforesaid, the claims of the holders of the Preference Shares with respect to return of capital shall be paid and satisfied first and any assets remaining thereafter shall be applied towards the payment and satisfaction of claims in respect of dividends. The Preference Shares of any series may also be given such other preferences not inconsistent with the rights, privileges, restrictions and conditions attached to the Preference Shares as a class over the Common Shares of the Corporation and over any other shares ranking junior to the Preference Shares as may be determined in the case of such series of Preference Shares. 1.3. VOTING RIGHTS Except as hereinafter referred to or as required by law or unless provision is made in the Articles relating to any series of Preference Shares that such series is entitled to vote, the holders of the Preference Shares as a class shall not be entitled as such to receive notice of, to attend or to vote at any meeting of the shareholders of the Corporation; provided, however, that the holders of Preference Shares shall be entitled to notice of meetings of shareholders called for the purpose of authorizing the dissolution of the Corporation or the sale, lease or exchange of all or substantially all the property of the Corporation other than in the ordinary course of the business of the Corporation. 3B 1.4. AMENDMENT WITH APPROVAL OF HOLDERS OF THE PREFERENCE SHARES The rights, privileges, restrictions and conditions attached to the Preference Shares as a class may be added to, changed or removed but only with the approval of the holders of the Preference Shares given as hereinafter specified. 1.5. APPROVAL OF HOLDERS OF THE PREFERENCE SHARES The approval of the holders of the Preference Shares to add to, change or remove any right, privilege, restriction or condition attaching to the Preference Shares as a class or in respect of any other matter requiring the consent of the holders of the Preference Shares may be given in such manner as may then be required by law, subject to a minimum requirement that such approval be given by resolution signed by all the holders of the Preference Shares or passed by the affirmative vote of at least 2/3 of the votes cast at a meeting of the holders of the Preference Shares duly called for that purpose. The formalities to be observed with respect to the giving of notice of any such meeting or any adjourned meeting, the quorum required therefor and the conduct thereof shall be those from time to time prescribed by the by-laws of the Corporation with respect to meetings of shareholders, or if not so prescribed, as required by the Act as in force at the time of the meeting. On every poll taken at every meeting of the holders of the Preference Shares as a class, or at any joint meeting of the holders of two or more series of Preference Shares, each holder of Preference Shares entitled to vote thereat shall have one vote in respect of each Preference Share held. 2. COMMON SHARES The holders of the Common Shares shall be entitled to vote at all meetings of shareholders of the Corporation except meetings at which only the holders of the Preference Shares as a class or the holders of one or more series of the Preference Shares are entitled to vote, and shall be entitled to one vote at all such meetings in respect of each Common Share held. 3C After payment to the holders of the Preference Shares of the amount or amounts to which they may be entitled, the holders of the Common Shares shall be entitled to receive any dividend declared by the board of directors of the Corporation and to receive the remaining property of the Corporation upon dissolution. 3D 8. The issue, transfer or ownership of shares is/is not L'emission, le transfert ou la propriete d'actions est/n'est restricted and the restrictions (if any) are as follows: pas restreint. Les restrictions, s'il y a lieu, sont les suivantes:
The transfer of shares of the Corporation shall be restricted in that no shareholder shall be entitled to transfer any share or shares without either: (a) the approval of the directors of the Corporation expressed by a resolution passed at a meeting of the board of directors or by an instrument or instruments in writing signed by a majority of the directors; or (b) the approval of the holders of at least a majority of the shares of the Corporation entitling the holders thereof to vote in all circumstances (other than holders of shares who are entitled to vote separately as a class) for the time being outstanding expressed by a resolution passed at a meeting of the holders of such shares or by an instrument or instruments in writing signed by the holders of a majority of such shares. 4.
9. Other provisions, if any, are: Autres dispositions, s'il y a lieu:
(a) The number of shareholders of the Corporation, exclusive of persons who are in its employment and exclusive of persons who having been formerly in the employment of the Corporation, were, while in that employment, and have continued after the termination of that employment to be, shareholders of the Corporation, is limited to not more than fifty, two or more persons who are the joint registered owners of one or more shares being counted as one shareholder. (b) Any invitation to the public to subscribe for securities of the Corporation is prohibited. 5. 10. The names and addresses of the incorporators are Nom et adresse des fondateurs First name, initials and surname or corporate name Full residence address or address of registered office or Prenom, Initiale et nom de famille ou denomination of principal place of business giving street & No. or R.R. sociale No., municipality and postal code Adresse personnelle au complet, adresse du siege social ou adresse de l'etablissement principal, y compris la rue et le numero, le numero de la R.R., le nom de la municipalite et le code postal Jean D. DuGuay 408-60 Mountview Avenue Toronto, Ontario M6P 2L4 Jennifer Brown 401-67 High Park Blvd. Toronto, Ontario M6R 1M9 Jennifer Henry Apt. 2, 281 Evelyn Avenue Toronto, Ontario M6P 2Z8 These articles are signed in duplicate. Les presents statuts sont signes en double exemplaire.
Signatures of incorporators (signatures des fondateurs) /s/ Jean D. DuGuay -------------------------- Jean D. DuGuay /s/ Jennifer Brown -------------------------- Jennifer Brown /s/ Jennifer Henry -------------------------- Jennifer Henry 6. 5. The amendment has been duly authorized as required La modification a ete dument autorisee conformement by Sections 168 & 170 (as applicable) of aux article 168 et 170 (selon le cas) de la Loi sur les the Business Corporations Act. societes par actions. 6. The resolution authorizing the amendment was Les actionnaires ou les administrateurs (selon le cas) de approved by the shareholders/directors (as la societe ont approuve la resolution autorisant le applicable) of the corporation on modification le
2000, September, 14th - -------------------------------------------------------------------------------- (Year, Month, Day) (annee, mois, jour) These articles are signed in duplicate. Les presents statuts sont signes en double exemplaire.
THE HUB GROUP LIMITED -------------------------------------------- (Name of Corporation) (Denomination sociale de la societe) By:/Par: /s/ W. Kirk James ----------------------------------- (Signature) (Description of Office) (Signature) (Fonction) W. KIRK JAMES, Secretary 2. For Ministry Use Only Ontario Corporation Number A l'usage exclusif du ministere Numero de la societe en Ontario 1327064 ARTICLES OF AMENDMENT STATUTS DE MODIFICATION Form 3 Business Corporations Act Formule 3 Loi sur les societes par actions 1. The name of the corporation is: Denomination sociale de la societe: THE HUB GROUP LIMITED 2. The name of the corporation is changed to (if Nouvelle denomination sociale de la societe (s'il y a lieu): applicable): 3. Date of incorporation/amalgamation: Date de la constitution ou de la fusion:
1998 November 25 - -------------------------------------------------------------------------------- (Year, Month, Day) (annee, mois, jour) 4. The articles of the corporation are amended as Les statuts de la societe sont modifies de la facon suivante. follows:
The certificate and articles of the Corporation dated November 25, 1998 are amended as follows: 1. To remove the restrictions on the issue, transfer or ownership of shares as set out in article 8 and to substitute therefore the following: "There shall be no restrictions on the issue, transfer or ownership of shares." 2. To delete paragraphs (a) and (b) of article 9 and substitute therefore the word "None". 1. 5. The amendment has been duly authorized as required La modification a ete dument autorisee conformement aux by Sections 168 & 170 (as applicable) of the Business articles 168 et 170 (selon le cas) de la Loi sur les societes Corporations Act. par actions. 6. The resolution authorizing the amendment was Les actionnaires ou les administrateurs (selon le cas) de approved by the shareholders/directors (as applica- la societe ont approuve la resolution autorisant la ble) of the corporation on modification le
1999 January 22 - -------------------------------------------------------------------------------- (Year, Month, Day) (annee, mois, jour) These articles are signed in duplicate. Les presents status sont signes en double exemplaire.
THE HUB GROUP LIMITED ----------------------------------- (Name of Corporation) (Denomination sociale de la societe) By:/Par /s/ Bradley Martin --------------------------- (Signature) (Description of) (Signature) (Fonction) Bradley Martin -- Secretary 2. Ontario Corporation Number Numero de la societe en Ontario 1327064 ARTICLES OF AMENDMENT STATUTS MODIFICATION Form 3 Business Corporations Act Formule 3 Loi sur les societe par actions 1. The name of the corporation is: Denomination sociale de la societe: THE HUB GROUP LIMITED 2. The name of the corporation is changed to (if Nouvelle denomination sociale de la societe (s'il y a lieu): applicable): HUB INTERNATIONAL LIMITED 3. Date of incorporation/amalgamation: Date de la constitution ou de la fusion:
1998, November, 25th - -------------------------------------------------------------------------------- (Year, Month, Day) (annee, mois, jour) 4. The articles of the corporation are amended as Les statuts de la societe sont modifies de la facon suivante. follows:
The name of the Corporation is changed from THE HUB GROUP LIMITED to HUB INTERNATIONAL LIMITED. 1. EX-3.2 4 t06723ex3-2.txt BY-LAWS OF THE REGISTRANT EXHIBIT 3.2 HUB INTERNATIONAL LIMITED By-Law No. 1 - Amendment Passed by the Directors as of June 28, 2001 and confirmed by the Shareholders on May , 2002 Section 5 relating to Officers of the Corporation, be amended as follows: NOW THEREFORE BE IT RESOLVED THAT: "5.1 General - The directors may from time to time appoint a Chairman of the Board, a President, one or more PRESIDENTS OF DIVISIONS OR OPERATIONAL UNITS, one or more Vice-Presidents, a Secretary, a Treasurer and such other officers as the directors may determine. 5.3 President - Unless the directors otherwise determine, the President shall be appointed from among the directors and shall be the CHIEF OPERATING OFFICER of the Corporation and shall have general supervision of its business and affairs and in the absence of the Chairman of the Board AND THE CHIEF EXECUTIVE OFFICER, the President shall be chairman of meetings of directors and shareholders when present." BY-LAW NO. 1 of THE HUB GROUP LIMITED (the "Corporation") 1. INTERPRETATION 1.1. Expressions used in this By-law shall have the same meanings as corresponding expressions in the Business Corporations Act (Ontario) (the "Act"). 2. CORPORATE SEAL 2.1. Until changed by the directors, the corporate seal of the Corporation shall be in the form impressed in the margin hereof. 3. FINANCIAL YEAR 3.1. Until changed by the directors, the financial year of the Corporation shall end on the last day of December in each year. 4. DIRECTORS 4.1. Number. The number of directors shall be not fewer than the minimum and not more than the maximum provided in the articles. At each election of directors the number elected shall be such number as shall be determined from time to time by special resolution or, if the directors are empowered by special resolution to determine the number, by the directors. 4.2. Quorum. A quorum of directors shall be two-fifths of the number of directors or such greater number as the directors or shareholders may from time to time determine. 4.3. Calling of Meetings. Meetings of the directors shall be held at such time and place within or outside Ontario as the Chairman of the Board, the President or any two directors may determine. A majority of meetings of directors need not be held within Canada in any financial year. 4.4. Notice of Meetings. Notice of the time and place of each meeting of directors shall be given to each director by telephone not less than 48 hours before the time of the meeting or by written notice not less than four days before the date of the meeting, provided that the first meeting immediately following a meeting of shareholders at which directors are elected may be held without notice if a quorum is present. Meetings may be held without notice if the directors waive or are deemed to waive notice. 4.5. Chairman. The Chairman of the Board, or in his absence the President if a director, or in his absence a director chosen by the directors at the meeting, shall be chairman of any meeting of directors. 4.6. Voting at Meetings. At meetings of directors each director shall have one vote and questions shall be decided by a majority of votes. In case of an equality of votes the Chairman of the meeting shall have a second or casting vote. 5. OFFICERS 5.1. General. The directors may from time to time appoint a Chairman of the Board, a President, one or more Vice-Presidents, a Secretary, a Treasurer and such other officers as the directors may determine. 5.2. Chairman of the Board. The Chairman of the Board, if any, shall be appointed from among the directors and when present shall be chairman of meetings of directors and shareholders and shall have such other powers and duties as the directors may determine. 5.3. President. Unless the directors otherwise determine the President shall be appointed from among the directors and shall be the chief executive officer of the Corporation and shall have general supervision of its business and affairs and in the absence of the Chairman of the Board shall be chairman of meetings of directors and shareholders when present. 5.4. Vice-President. A Vice-President shall have such powers and duties as the directors or the chief executive officer may determine. 5.5. Secretary. The Secretary shall give required notices to shareholders, directors, auditors and members of committees, act as secretary of meetings of directors and shareholders when present, keep and enter minutes of such meetings, maintain the corporate records of the Corporation, have custody of the corporate seal and shall have such other powers and duties as the directors or the chief executive officer may determine. 5.6. Treasurer. The Treasurer shall keep proper accounting records in accordance with the Act, have supervision over the safekeeping of securities and the deposit and disbursement of funds of the Corporation, report as required on the financial position of the Corporation, and have such other powers and duties as the directors or the chief executive officer may determine. 5.7. Assistants. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and performed by such assistant unless the directors or the chief executive officer otherwise direct. 5.8 Term of Office. Each officer shall hold office until his successor is elected or appointed, provided that the directors may at any time remove any officer from office but such removal shall not affect the rights of such officer under any contract of employment with the Corporation. 6. INDEMNIFICATION AND INSURANCE 6.1. Indemnification of Directors and Officers. The Corporation shall indemnify a director or officer, a former director or officer or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor, and the heirs and legal representative of such a person to the extent permitted by the Act. 6.2. Insurance. The Corporation may purchase and maintain insurance for the benefit of any person referred to in the preceding section to the extent permitted by the Act. 7. SHAREHOLDERS 7.1. Quorum. A quorum for the transaction of business at a meeting of shareholders shall be two persons present and each entitled to vote at the meeting. 7.2. Casting Vote. In case of an equality of votes at a meeting of shareholders the Chairman of the meeting shall have a second or casting vote. 7.3. Scrutineers. The Chairman at any meeting of shareholders may appoint one or more persons (who need not be shareholders) to act as scrutineer or scrutineers at the meeting. 8. DIVIDENDS AND RIGHTS 8.1. Declaration of Dividends. Subject to the Act, the directors may from time to time declare dividends payable to the shareholders according to their respective rights and interest in the Corporation. 8.2 Cheques. A dividend payable in money shall be paid by cheque to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by prepaid ordinary mail to such registered holder at the address of such holder in the Corporation's securities register, unless such holder otherwise directs. In the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the order of all such joint holders and mailed to them at their address in the Corporation's securities register. The mailing of such cheque as aforesaid, unless the same is not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Corporation is required to and does withhold. 8.3 Non-Receipt of Cheques. In the event of non-receipt of any dividend cheque by the person to whom it is sent as aforesaid, the Corporation shall issue to such person a replacement cheque for a like amount on such terms as to indemnity, reimbursement of expenses and evidence of non-receipt and of title as the directors may from time to time prescribe, whether generally or in any particular case. 8.4 Unclaimed Dividends. Any dividend unclaimed after a period of six years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Corporation. 9. EXECUTION OF INSTRUMENTS 9.1 Deeds, transfers, assignments, agreements, proxies and other instruments may be signed on behalf of the Corporation by any two directors or by a director and an officer or by one of the Chairman of the Board, the President and a Vice-President together with one of the Secretary and the Treasurer or in such other manner as the directors may determine; except that insider trading reports may be signed on behalf of the Corporation by any one director or officer of the Corporation. 10. NOTICE 10.1 A notice mailed to a shareholder, director, auditor or member of a committee shall be deemed to have been given when deposited in a post office or public letter box. 10.2 Accidental omission to give any notice to any shareholder, director, auditor or member of a committee or non-receipt of any notice or any error in a notice not affecting the substance thereof shall not invalidate any action taken at any meeting held pursuant to such notice. RESOLVED THAT the foregoing by-law is made a by-law of the Corporation by the signature hereto of the sole director of the Corporation pursuant to the Business Corporations Act (Ontario), this 25th day of November, 1998. /s/ Jean D. DuGuay ----------------------------------- Jean D. DuGuay /s/ Jennifer Brown ----------------------------------- Jennifer Brown /s/ Jennifer Henry ----------------------------------- Jennifer Henry RESOLVED THAT the foregoing by-law is confirmed as a by-law of the Corporation by the signature hereto of the sole shareholder of the Corporation pursuant to the Business Corporations Act (Ontario), this 25th day of November, 1998. /s/ Jean D. DuGuay ----------------------------------- Jean D. DuGuay EX-4.1 5 t06723ex4-1.txt SPECIMEN CERTIFICATE REPRESENTING COMMON SHARES EXHIBIT 4.1 [SYMBOL HUB INTERNATIONAL] HUB International INCORPORATED UNDER THE LAWS OF THE PROVINCE OF ONTARIO CONSTITUEE SOUS L'AUTORITE DES LOIS DE LA PROVINCE D'ONTARIO CUSIP 44332P 10 1 NUMBER - NUMERO _____________________ SHARES - ACTIONS ____________________ This certifies that Les presentes attestent que is the registered holder of est le porteur inscrit de FULLY PAID AND NON-ASSESSABLE COMMON SHARES OF THE CAPITAL STOCK OF ACTIONS ORDINAIRES ENTIEREMENT LIBEREES DU CAPITAL ACTIONS DE HUB INTERNATIONAL LIMITED (COMMON ORDINAIRES) transferable on the books of the Corporation by the transferables dans les livres de la societe par le porteur registered holder hereof in person or by attorney duly inscrit personnellement ou par sen fonde de pouvoir authorized upon surrender of this certificate properly dument autorise sur remise du present certificat dument endorsed. This certificate is not valid until undersigned endosse. Le present certificat ne sera valide que lorsque by a Transfer Agent and registered by a Registrar of contresigne par un agent ils transferts et enregistre par un the Corporation. agent charge de la tenue des registres de la societe. In Witness Whereof the Corporation has caused this En foi de quoi, la societe a signe le present certificat certificate to be signed by its duly authorized officers. par ses dirigeants dument autorises. Dated - Date: Countersigned and Registered Contresigne et enregistre CIBC MELLON TRUST COMPANY COMPAGNIE TRUST CIBC MELLON Transfer Agent and Registrar Agent des transferts et agent charge de la tenue des registres Signature /s/ Martin P Hughes By - Par _____________________________________________________ President and Chief Operating Officer Authorized Officer - Dingear : autorise President et chef de l'exploitation Chairman of the Board and Chief Executive Officer President du conseil et chef de la direction Transferable, in Canada, at the principal offices of CIBC Mellon Transferables, au Canada, aux bureaux principaux de Compagne Trust Company of Canada in Toronto, Montreal and Vancouver. Trust CIBC Mellon a Toronto, Montreal et Vancouver.
For value received _______ hereby sell, assign and transfer unto ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME, ADDRESS AND S.I.N. OF ASSIGNEE) ________________________________________________________________________________ SOCIAL INSURANCE NUMBER [ ][ ][ ]-[ ][ ][ ]-[ ][ ][ ] ________________________________________________________________________________ _________________________________________________________________________ Shares of the Capital Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________________ _______________________________________________________________________ Attorney to transfer the said stock on the Books of the within-named Corporation with full power of substitution in the premises. Dated___________________ ____________________________ In the presence of ____________________________ Signature Guaranteed by: NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER EX-10.1 6 t06723ex10-1.txt AGREEMENT & PLAN OF MERGER EXHIBIT 10.1 ================================================================================ AGREEMENT AND PLAN OF MERGER Among HUB INTERNATIONAL LIMITED, 416 ACQUISITION INC. and KAYE GROUP INC. Dated as of January 19, 2001 ================================================================================ TABLE OF CONTENTS ARTICLE I THE MERGER
Page ---- SECTION 1.01. The Merger..........................................................................................1 SECTION 1.02. Closing.............................................................................................2 SECTION 1.03. Effective Time......................................................................................2 SECTION 1.04. Effects of the Merger...............................................................................2 SECTION 1.05. Certificate of Incorporation and By-Laws of the Surviving Corporation...............................2 SECTION 1.06. Directors and Officers of the Surviving Corporation.................................................2
ARTICLE II CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES SECTION 2.01. Conversion of Company Common Stock..................................................................3 SECTION 2.02. Dissenting Shares...................................................................................3 SECTION 2.03. Exchange of Certificates............................................................................4 SECTION 2.04. Election to Increase the Cash Component.............................................................6 SECTION 2.05. Stock Transfer Books................................................................................6 SECTION 2.06. Company Stock Options...............................................................................6 SECTION 2.07. Company Restricted Stock............................................................................7 SECTION 2.08. Interest on Merger Consideration....................................................................9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 3.01. Organization and Qualification; Subsidiaries.......................................................10 SECTION 3.02. Certificate of Incorporation and By-Laws...........................................................10 SECTION 3.03. Capitalization.....................................................................................11 SECTION 3.04. Authority Relative to This Agreement...............................................................11 SECTION 3.05. No Conflict; Required Filings and Consents.........................................................12 SECTION 3.06. Permits; Compliance................................................................................13 SECTION 3.07. SEC Filings; Financial Statements..................................................................13 SECTION 3.08. Undisclosed Liabilities............................................................................14 SECTION 3.09. Absence of Certain Changes or Events...............................................................14 SECTION 3.10. Absence of Litigation..............................................................................15 SECTION 3.11. Employee Benefit Matters...........................................................................15 SECTION 3.12. Material Contracts.................................................................................17 SECTION 3.13. Environmental Matters..............................................................................19 SECTION 3.14. Title to Properties; Absence of Liens and Encumbrances.............................................20 SECTION 3.15. Intellectual Property..............................................................................20 SECTION 3.16. Taxes..............................................................................................21 SECTION 3.17. Board Approval; Vote Required......................................................................22
i SECTION 3.18. Employment Agreements and other Affiliate Transactions.............................................22 SECTION 3.19. Insurance..........................................................................................22 SECTION 3.20. State Takeover Statutes............................................................................22 SECTION 3.21. Labor Matters......................................................................................23 SECTION 3.22. Brokers............................................................................................24 SECTION 3.23. Title to Insurance Business........................................................................24 SECTION 3.24. Absence of Restrictions on Conduct of Business.....................................................24 SECTION 3.25. Computer Systems...................................................................................24 SECTION 3.26. Insurance Companies................................................................................24 SECTION 3.27. No Downgrading of Rating...........................................................................24 SECTION 3.28. Fairness Opinion...................................................................................25 SECTION 3.29. Insurance Company Organization and Qualification; Subsidiaries.....................................25 SECTION 3.30. Insurance Company Certificate of Incorporation and By-Laws.........................................26 SECTION 3.31. Insurance Company Capitalization...................................................................26 SECTION 3.32. Insurance Company Permits; Compliance..............................................................27 SECTION 3.33. Insurance Company Financial Statements.............................................................27 SECTION 3.34. Undisclosed Liabilities of the Insurance Companies.................................................27 SECTION 3.35. Absence of Certain Changes or Events With Respect to the Insurance Companies....................................................................................28 SECTION 3.36. Absence of Insurance Company Litigation............................................................28 SECTION 3.37. Insurance Company Material Contracts...............................................................28 SECTION 3.38. Insurance Company Taxes............................................................................30 SECTION 3.39. Absence of Restrictions on Conduct of Insurance Company Business...................................30 SECTION 3.40. Insurance Company Computer Systems.................................................................31 SECTION 3.41. No Downgrading of Rating of Insurance Companies....................................................31
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB SECTION 4.01. Organization and Qualification; Subsidiaries.......................................................31 SECTION 4.02. Articles of Incorporation and By-Laws..............................................................31 SECTION 4.03. Authority Relative to This Agreement...............................................................31 SECTION 4.04. Capitalization.....................................................................................32 SECTION 4.05. No Conflict; Required Filings and Consents.........................................................32 SECTION 4.06. Permits; Compliance................................................................................33 SECTION 4.07. Filings; Financial Statements......................................................................34 SECTION 4.08. Undisclosed Liabilities............................................................................34 SECTION 4.09. Taxes..............................................................................................35 SECTION 4.10. Operations of Merger Sub...........................................................................35 SECTION 4.11. Financing..........................................................................................35 SECTION 4.12. Brokers............................................................................................35 SECTION 4.13. Affiliate Transactions.............................................................................35 SECTION 4.14. Authorization of Parent Convertible Debentures.....................................................36 SECTION 4.15. Indebtedness of Parent.............................................................................36
ii ARTICLE V CONDUCT OF BUSINESSES PENDING THE MERGER SECTION 5.01. Conduct of Business by the Company Pending the Merger..............................................37 SECTION 5.02. Notification of Certain Matters....................................................................39
ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.01. Registration Statement; Company Proxy Statement....................................................40 SECTION 6.02. Company Stockholders' Meeting......................................................................41 SECTION 6.03. Access to Information; Confidentiality.............................................................41 SECTION 6.04. No Solicitation or Negotiation.....................................................................42 SECTION 6.05. Directors' and Officers' Indemnification and Insurance.............................................43 SECTION 6.06. Further Action; Consents; Filings..................................................................44 SECTION 6.07. Consent of Holders of Restricted Stock.............................................................44 SECTION 6.08. Public Announcements...............................................................................45 SECTION 6.09. Parent Shareholders' Meeting.......................................................................45 SECTION 6.10. Affiliates.........................................................................................45 SECTION 6.11. Board Nomination...................................................................................45 SECTION 6.12. Certain Funding of the Company.....................................................................45 SECTION 6.13. Parent Debentures..................................................................................45 SECTION 6.14. Filing With Insurance Regulatory Authorities.......................................................46
ARTICLE VII CONDITIONS TO THE MERGER SECTION 7.01. Conditions to the Merger...........................................................................46 SECTION 7.02. Conditions to the Obligations of Parent and Merger Sub.............................................47 SECTION 7.03. Conditions to the Obligations of the Company.......................................................48
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. Termination........................................................................................48 SECTION 8.02. Effect of Termination..............................................................................50 SECTION 8.03. Amendment..........................................................................................51 SECTION 8.04. Waiver.............................................................................................51 SECTION 8.05. Fees and Expenses..................................................................................51
ARTICLE IX GENERAL PROVISIONS SECTION 9.01. Notices............................................................................................52 SECTION 9.02. Non-Survival of Representations, Warranties and Agreements.........................................53 SECTION 9.03. Parties in Interest................................................................................54 SECTION 9.04. Certain Definitions................................................................................54
iii SECTION 9.05. Severability.......................................................................................56 SECTION 9.06. Specific Performance...............................................................................57 SECTION 9.07. Governing Law; Forum...............................................................................57 SECTION 9.08. Headings...........................................................................................57 SECTION 9.09. Counterparts.......................................................................................57 SECTION 9.10. Entire Agreement...................................................................................57 SECTION 9.11. Waiver of Jury Trial...............................................................................58
iv GLOSSARY OF DEFINED TERMS
Location of Defined Term Definition Acquisition Proposal......................................... section 9.04(a) Action........................................................section 3.10 Affiliate.....................................................section 6.10 Agreement.....................................................Recitals beneficial owner..............................................section 9.04(c) Bermuda Co....................................................section 3.30(a) Bermuda Co. Common Stock......................................section 3.32(b) Blue Sky Laws.................................................section 3.05(b) Board.........................................................Recitals business day..................................................section 9.04(a) Canadian GAAP.................................................section 4.07(b) Cash Component................................................section 2.01(a) Certificate of Merger.........................................section 1.02 Certificates..................................................section 2.03(b) Closing.......................................................section 1.02 Closing Date..................................................section 1.02 Code..........................................................section 2.03(e) Company.......................................................Preamble Company Balance Sheet.........................................section 3.07(b) Company Benefit Plans.........................................section 3.11(a) Company Board Approval........................................section 3.17(a) Company Common Stock..........................................Recitals Company Disclosure Schedule...................................section 3.01(b) Company Material Contracts....................................section 3.12(a) Company Permits...............................................section 3.06(a) Company Proxy Statement.......................................section 3.23 Company SEC Reports...........................................section 3.07(a) Company Stock Option Plan.....................................section 2.05 Company Stock Options.........................................section 2.05 Company Stockholders' Approval................................section 3.04 Company Stockholders' Meeting.................................section 6.02 Company Stockholders' Vote....................................section 3.04 Company Subsidiaries..........................................section 3.01(a) Computer Systems..............................................section 9.04(e) Confidentiality Agreement.....................................section 6.03(b) control.......................................................section 9.04(f) Debenture Component...........................................section 2.01(a) DGCL..........................................................Recitals Dissenting Shares ............................................section 2.02 Effective Time................................................section 1.03
v Employee Termination.........................................section 2.07(c) Environmental Laws...........................................section 3.13 Environmental Permits........................................section 3.13 ERISA........................................................section 3.11(a) Excess Debenture Component...................................section 2.04(f) Exchange Act.................................................section 3.05(b) Exchange Agent...............................................section 2.03(a) Exchange Fund................................................section 2.03(a) Expenses.....................................................section 8.05(b) Fee..........................................................section 8.05(a) Governmental Entity..........................................section 3.05(b) Hazardous Substances.........................................section 3.13 HSR Act......................................................section 3.05(b) Insignificant Insurance Subsidiaries.........................section 3.30(d) Insurance Companies..........................................section 3.30(a) Insurance Company Balance Sheets.............................section 3.34 Insurance Company Material Contracts.........................section 3.38(a) Insurance Company Permits....................................section 3.33 Insurance Company Subsidiaries...............................section 3.30(a) Insurance Financial Statements...............................section 3.34 Intellectual Property........................................section 3.15 IRS..........................................................section 3.11(a) Law..........................................................section 3.05(a) Liens........................................................section 3.14(b) Material Adverse Effect......................................section 9.04(h) Merger.......................................................Preamble Merger Consideration.........................................section 2.01(a) Merger Sub...................................................Preamble Multiemployer Plan...........................................section 3.11(b) Multiple Employer Plan.......................................section 3.11(b) Nasdaq.......................................................section 3.05(b) Order........................................................section 7.01(c) OSC..........................................................section 4.05(b) Parent.......................................................Preamble Parent Common Shares.........................................section 4.04 Parent Debentures............................................section 9.04(i) Parent Preferred Shares......................................section 4.04 Parent Reports...............................................section 4.07 Parent Shareholders' Approval................................section 4.03 Parent Shareholders' Meeting.................................section 6.10 Parent Share Options.........................................section 4.04 Parent Share Option Plans....................................section 4.04 Parent Permits...............................................section 4.05 Parent Subsidiaries..........................................section 4.04 Payment Time.................................................section 2.07(d)
vi Performance Stock Plan.......................................section 9.04(k) person.......................................................section 9.04(j) Principal Stockholders.......................................Recitals Related Party Transactions...................................section 4.04(c) Restricted Share.............................................section 2.07(a) Registration Statement.......................................section 6.01(a) Representatives..............................................section 6.03(b) Required Consents............................................section 3.05(b) Rhode Island Co..............................................section 3.30 Rhode Island Co. Common Stock................................section 3.32(a) SEC..........................................................section 2.04(b) Securities Act...............................................section 3.05(b) Significant Insurer..........................................section 3.27 subsidiary...................................................section 9.04(l) Superior Proposal............................................section 9.04(m) Surviving Corporation........................................section 1.01 Taxes........................................................section 9.04(n) TSE..........................................................section 4.05(b) U.S. GAAP....................................................3.07(b) Vested Share Consideration...................................section 2.07(a) Vested Share Right...........................................section 2.07(a) Voting Agreements............................................Recitals
vii AGREEMENT AND PLAN OF MERGER dated as of January 19, 2001 (this "Agreement") among Hub International Limited, a corporation organized under the laws of Ontario ("Parent"), 416 Acquisition Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and Kaye Group Inc., a Delaware corporation (the "Company"). W I T N E S S E T H WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have each determined that it is in the best interests of each corporation and its respective stockholders to merge Merger Sub with and into the Company; WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have approved and declared advisable this Agreement and the merger of Merger Sub with and into the Company (the "Merger") in accordance with the Delaware General Corporation law (the "DGCL") upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding share of common stock, par value $ .01 per share, of the Company ("Company Common Stock"), other than shares owned by Parent, Merger Sub or the Company, and other than Dissenting Shares (as defined in Section 2.02(a) below), will be converted into the right to receive a combination of Parent Debentures (as defined herein) and cash, without interest thereon, except as otherwise provided in Section 2.08 hereof, per share of Company Common Stock, as provided for herein; WHEREAS, on the date hereof, and as a condition and inducement to Parent's willingness to enter into this Agreement, Parent, Merger Sub and certain stockholders of the Company who collectively hold a majority of the outstanding shares of the Company (the "Principal Stockholders") have entered into stock option and voting agreements (the "Voting Agreements") pursuant to which such stockholders agreed (i) to vote to approve the Merger and adopt this Agreement, (ii) to grant an option to Parent to purchase their Company Common Stock and (iii) to take certain other actions in furtherance of the Merger upon the terms and subject to the conditions set forth in the Voting Agreements; and WHEREAS, Parent intends to issue and sell to Fairfax Financial Holdings Limited certain securities to obtain financing for a portion of the aggregate Merger Consideration (as defined herein); NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree as follows: ARTICLE I THE MERGER Section 1.01. The Merger. Upon the terms and subject to the conditions set forth in this Agreement and in accordance with the DGCL, at the Effective Time (as defined in Section 1.03 herein) Merger Sub shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). SECTION 1.02. Closing. The closing of the Merger (the "Closing") shall take place at 10:00 a.m. (New York time) at the offices of Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022-6069 on a date to be specified by the parties hereto (the "Closing Date"), which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions), unless another time, date or place is agreed to by the parties hereto. SECTION 1.03. Effective Time. On the Closing Date, the parties shall file a certificate of merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware in such form as is required by, and executed in accordance with, the relevant provisions of the DGCL and shall make all other filings or recordings required by applicable law in connection with the Merger. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware or at such later date or time as is agreed upon by the parties and specified in the Certificate of Merger (the time the Merger becomes effective being hereinafter referred to as the "Effective Time"). SECTION 1.04. Effects of the Merger. The Merger shall have the effects as provided in this Agreement, the Certificate of Merger and the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions and duties of the Company and Merger Sub shall become the debts, liabilities, obligations, restrictions and duties of the Surviving Corporation. SECTION 1.05. Certificate of Incorporation and By-Laws of the Surviving Corporation. (a) At the Effective Time, the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Certificate of Incorporation. (a) Unless otherwise determined by Parent prior to the Effective Time, and subject to Section 6.05(a), the By-Laws of the Company, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation until thereafter amended as provided by law, the Certificate of Incorporation of the Surviving Corporation and such By-Laws. SECTION 1.06. Directors and Officers of the Surviving Corporation. (a) The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation. 2 (a) The officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified or until their earlier death, resignation or approval. ARTICLE II CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES SECTION 2.01. Conversion of Company Common Stock. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub or the Company: (a) Conversion of Company Common Stock. Subject to Sections 2.02 and 2.07, each issued and outstanding share of Company Common Stock (other than shares to be canceled pursuant to Section 2.01(b)) shall be automatically converted into the right to receive $14 (the "Merger Consideration") payable as follows: (A) net amount of $9.3334 in cash, without interest thereon, except as otherwise provided in Section 2.08 hereof (the "Cash Component"), and (B) $4.6666 principal amount of a Parent Debenture (the "Debenture Component"). Pursuant to Section 2.04, Parent may elect to increase the Cash Component and decrease the Debenture Component as provided therein. As of the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Company Common Stock shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, without interest, except as otherwise provided in Section 2.08 hereof. (b) Cancellation of Treasury Stock and Parent-Owned Stock. Each share of Company Common Stock owned by Parent or any direct or indirect wholly owned subsidiary of Parent or held in the treasury of the Company or any Company Subsidiary shall be canceled and extinguished without any conversion thereof and no payment or distribution shall be made with respect thereto. (c) Conversion of Merger Sub Common Stock. Each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation. SECTION 2.02. Dissenting Shares. (a) Notwithstanding any provision of this Agreement to the contrary, shares of Company Common Stock that are outstanding immediately prior to the Effective Time and which are held by stockholders who shall have not voted in favor of the Merger or consented thereto in writing and who shall have demanded properly in writing appraisal for such shares in accordance with section 262 of the DGCL (collectively, the "Dissenting Shares") shall not be converted into, or represent the right to receive, the Merger Consideration. Such stockholders shall be entitled to receive payment of the appraised value of such shares held by them in accordance with the provisions of such section 262, except that all 3 Dissenting Shares held by stockholders who shall have failed to perfect or who effectively shall have withdrawn or lost their rights to appraisal of such shares under such section 262 shall thereupon be deemed to have been converted into and to have become exchangeable for, as of the Effective Time, the right to receive the Merger Consideration, without any interest thereon, upon surrender, in the manner provided in Section 2.03, of the certificate or certificates that formerly evidenced such shares. (b) The Company shall give Parent (i) prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other instruments served pursuant to the DGCL and received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the DGCL. The Company shall not, except with the prior written consent of Parent, make any payment with respect to any demands for appraisal or offer to settle or settle any such demands. SECTION 2.03. Exchange of Certificates. (a) Exchange Agent. Immediately after the Effective Time, Parent shall deposit, or shall cause to be deposited, with a bank or trust company designated by Parent and reasonably acceptable to the Company (the "Exchange Agent"), for the benefit of the holders of Company Common Stock, for exchange in accordance with this Article II through the Exchange Agent, (i) certificates evidencing the Parent Debentures issuable pursuant to Section 2.01(a) as of the Effective Time and (ii) cash, in an aggregate amount sufficient to pay the total cash payable to the holders of shares of Company Common Stock pursuant to Section 2.01(a) (such cash and certificates of Parent Debentures being hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions from Parent, deliver the Parent Debentures and cash contemplated to be issued or paid pursuant to Section 2.01 out of the Exchange Fund. Except as contemplated by Sections 2.03(c) and (g) hereof, the Exchange Fund shall not be used for any other purpose. (a) Exchange Procedures. As promptly as practicable after the Effective Time, Parent shall instruct the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (other than shares of Company Common Stock that have been cancelled pursuant to Section 2.01(b)) (the "Certificates"), and whose shares of Company Common Stock were converted into the right to receive the Merger Consideration pursuant to Section 2.01, (i) a letter of transmittal (which shall be in customary form, shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall have such other conditions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates pursuant to such letter of transmittal in exchange for the Merger Consideration. Upon surrender to the Exchange Agent of a Certificate for cancellation together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration and the Certificate so surrendered shall forthwith be cancelled. Subject to Section 2.03(e), under no circumstances will any holder of a Certificate be entitled to receive any part of the Merger Consideration until such holder shall have surrendered such Certificate. In the event of a transfer of ownership of shares 4 of Company Common Stock which is not registered in the transfer records of the Company, the Merger Consideration may be paid in accordance with this Article II to the transferee if the Certificate evidencing such shares of Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.02, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration. Except as otherwise provided in Section 2.08 hereof, no interest shall be paid or will accrue on any cash payable to holders of Certificates pursuant to provisions of this Article II on the Merger Consideration. (c) No Liability. Neither Parent nor the Surviving Corporation shall be liable to any holder of shares of Company Common Stock in respect of any Merger Consideration that is delivered to a public official pursuant to any abandoned property, escheat or similar Law. If any Certificate shall not have been surrendered prior to six months after the Effective Time (or immediately prior to such earlier date on which any Merger Consideration would otherwise escheat to or become the property of any Governmental Entity (as defined in Section 3.05(b))), any such Merger Consideration, except to the extent permitted by applicable Law, will become the property of the Surviving Corporation, free and clear of all claims or interest of any person previously entitled thereto. (d) Withholding. Each of the Surviving Corporation, Parent and the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as it is required to deduct and withhold under the U.S. Internal Revenue Code of 1986, as amended (the "Code"), or any provision of any state, local or foreign tax law, with respect to the making of such payment. To the extent that amounts are so withheld by the Surviving Corporation, Parent or the Exchange Agent, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of shares of Company Common Stock in respect of which such deduction and withholding were made by the Surviving Corporation, Parent or the Exchange Agent, as the case may be. (e) Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond, in such reasonable amount as the Surviving Corporation may direct, as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration, without any interest thereon. (f) No Fractional Debentures. Parent Debentures issued upon the surrender for exchange of Certificates shall be issued only in principal amounts of $1,000 and integral multiples thereof. If the aggregate principal amount of Debenture Component due to a holder of a Certificate pursuant to Section 2.01(a) above is less than $1,000, then such holder shall receive cash in lieu of such Debenture Component. If the aggregate principal amount of Debenture Component due to a holder of a Certificate pursuant to Section 2.01(a) above exceeds $1,000, 5 then, with respect to that amount of Debenture Component that exceeds $1,000 or the nearest integral multiple thereof (the "Excess Debenture Component"), such holder shall receive cash in lieu of the Excess Debenture Component. (g) Investment of Exchange Fund. The Exchange Fund may be invested by the Exchange Agent, pursuant to instructions from Parent and on behalf of the stockholders of the Company, in securities issued or guaranteed by the United States government or certificates of deposit of commercial banks that have, or are members of a group of commercial banks that has, consolidated total assets of not less than $500,000,000. Any net profit resulting from, or interest or income produced by, such investments shall be payable to the Surviving Corporation or Parent, as Parent directs. (h) No Further Rights in Company Common Stock. All Parent Debentures issued or cash paid upon conversion of the Company Common Stock in accordance with the terms hereof shall be deemed to have been issued and paid in full satisfaction of all rights pertaining to such Company Common Stock. SECTION 2.04. Election to Increase the Cash Component. Notwithstanding anything to the contrary herein, Parent may in its sole discretion, on any date prior to the effectiveness of the Registration Statement (as defined herein) with the Securities and Exchange Commission (the "SEC"), elect to increase the Cash Component up to $14 and decrease the Debenture Component correspondingly. The Parent shall evidence any such election by delivering a written notice to the Company stating the Cash Component and Debenture Component. SECTION 2.05. Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and, thereafter, there shall be no further registration of transfers of shares of Company Common Stock theretofore outstanding on the records of the Company. From and after the Effective Time, the holders of Certificates representing shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares of Company Common Stock formerly represented thereby, except as otherwise provided in this Agreement or by Law. SECTION 2.06. Company Stock Options. Prior to the Effective Time, all outstanding stock options (the "Company Stock Options") issued under the Company's Amended and Restated Stock Option Plan (the "Company Stock Option Plan") shall become vested (i.e., such Company Stock Options shall become fully exercisable as to all shares of Company Common Stock covered thereby and as to which such Company Stock Options have not been previously exercised) and, immediately prior to the Effective Time, for each Company Stock Option, the holder of each such Company Stock Option (an "Optionee") shall be entitled to receive, in settlement and cancellation thereof, an amount of cash equal to the product of (A) the difference between the Merger Consideration and the exercise price per share of Company Common Stock provided in each Company Stock Option, and (B) the number of shares of Company Common Stock covered by such Company Stock Option, which payment shall be made to each Optionee immediately prior to the Effective Time by the Company. As of the 6 Effective Time, the Company shall cause the Company Stock Option Plan and each outstanding Company Stock Option to terminate. SECTION 2.07. Company Restricted Stock. (a) Immediately prior to the Merger, each holder (a "Performance Stock Holder") of shares of Company Common Stock granted pursuant to the Stock Performance Plan (as defined herein) prior to the date hereof (each a "Performance Stock Share"), which Performance Stock Share is (i) outstanding immediately prior to the Effective Time and (ii) either (x) has vested pursuant to, and in accordance with, the terms of the Performance Stock Plan or (y) will as a result of the Merger become vested pursuant to, and in accordance with, the Performance Stock Plan, shall be cancelled and such Performance Stock Holder shall be entitled to a right (a "Vested Share Right") to receive in full payment therefor and settlement thereof an amount of cash equal to $14 per Performance Stock Share without interest thereon (the "Vested Share Consideration") less applicable withholding taxes. The Board of Directors of the Company (the "Board") shall cause the Performance Stock Plan to terminate as of the Effective Time and each Performance Stock Share outstanding at the Effective Time shall be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such Performance Stock Shares shall cease to have any rights with respect thereto except as set forth in this Section 2.07. (b) The aggregate amount of the Vested Share Consideration that could become payable pursuant to Section 2.07(a), which the parties agree is currently equal to $2,668,070, subject to adjustment in accordance with the terms hereof (the "Escrow Fund"), shall be paid by the Parent to a mutually agreeable escrow agent (the "Escrow Agent") as soon as practicable after the Effective Time pursuant to an escrow agreement mutually agreeable to the Parent, the Company and the Escrow Agent (the "Escrow Agreement"). The Escrow Agreement shall provide that the entire Escrow Fund shall be paid promptly after the first anniversary of the Effective Time, and, except as provided below, not before that time, to the One-Year Qualified Holders (as defined below). Payment of the Escrow Fund to the One-Year Qualified Holders shall be made pro rata to each such holder according to the number of his or her Performance Stock Shares that were cancelled pursuant to Section 2.07(a) above. (c) A "One-Year Qualified Holder" shall mean any Performance Stock Holder (i) who continues to be employed by the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries on the first anniversary of the Effective Time or (ii) whose employment with the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries was terminated on or prior to the first anniversary of the Effective Time only by reason of one of the following: (x) by such Performance Stock Holder's death or disability (as defined in the Company's applicable medical or disability plan), (y) by the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries without Cause (as defined below); or (z) by the Performance Stock Holder for Good Reason (as defined below). Upon any Performance Stock Holder's death after the Effective Time but on or before the first anniversary thereof, any such holder's heirs shall be entitled to receive as promptly as practicable all payments in respect of such Vested Share Right without waiting until the first anniversary of the Effective Time. Upon any Performance Stock Holder's termination from employment without Cause by the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries, or 7 termination by the Performance Stock Holder for Good Reason, after the Closing Date but on or before the first anniversary thereof, any such holder shall be entitled to receive as promptly as practicable all payments in respect of such Vested Share Right without waiting until the first anniversary of the Effective Time. (d) For purposes of Section 2.07(c): (x) "Cause" shall mean (i) a breach by the Performance Stock Holder of the provisions of his or her Employment Agreement, which breach shall not have been cured by the Performance Stock Holder within thirty (30) days following notice thereof by the employer, the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries to the Performance Stock Holder, (ii) the commission of gross negligence or bad faith by the Performance Stock Holder in the course of the Performance Stock Holder's employment, (iii) the commission by the Performance Stock Holder of a criminal act of fraud, theft or dishonesty causing damages to the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries or (iv) the Performance Stock Holder's conviction of (or plea of nolo contendere to) any felony, or misdemeanor involving moral turpitude if such misdemeanor results in financial harm to or adversely affects the goodwill of the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries; and (y) "Good Reason" shall mean: (i) the assignment to the Performance Stock Holder of any duties substantially inconsistent with the position with the Company or its direct or indirect subsidiaries that the Performance Stock Holder held immediately prior to the Effective Time, or a significant adverse alteration in the nature or status of the Performance Stock Holder's responsibilities or the conditions of the Performance Stock Holder's employment from those in effect immediately prior to the Effective Time, excluding for this purpose an isolated and inadvertent action not taken in bad faith and which is remedied by the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries, promptly after receipt of notice thereof given by the Performance Stock Holder; (ii) a material reduction by the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries in the Performance Stock Holder's annual base salary as in effect on the date hereof or as the same may be increased from time to time, except for across-the-board salary reductions similarly affecting most key personnel of the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries and most key personnel of any person in control of the Parent; (iii) any failure by the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries, as applicable, to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Surviving Corporation or the 8 Parent, as applicable, to assume expressly and agree to perform the provisions of any employment agreement to which the Performance Stock Holder is a party in the same manner and to the same extent that the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries would be required to perform if no such succession had taken place; (iv) the relocation of the offices at which the Performance Stock Holder is principally employed immediately prior to the Effective Time hereunder to a location more than 35 miles from such location, or the imposition of any requirement by the Surviving Corporation, the Parent or any of their direct or indirect subsidiaries that the Performance Stock Holder be based anywhere other than the offices at which the Performance Stock Holder is principally employed immediately prior to the Effective Time, except for business related travel to an extent substantially consistent with the Performance Stock Holder's business travel obligations immediately prior to the Effective Time; or (v) the failure by the Parent or the Surviving Corporation, as the case may be, to continue to provide the Performance Stock Holder with benefits substantially similar to those enjoyed by the Performance Stock Holder under any of the life insurance, medical, accident, disability or other employee benefit or compensation plans of the Company or any of the Company Subsidiaries in which the Performance Stock Holder was participating at the Effective Time or the failure by the Parent or the Surviving Corporation, as the case may be, to provide the Performance Stock Holder with the number of paid vacation days to which the Performance Stock Holder is entitled on the basis of years of service with the Company or any of its subsidiaries, as the case may be, in accordance with the normal vacation policies of the Company or any such subsidiary, as the case may be, in effect at the Effective Time, unless such failure or taking of action similarly affects most key personnel of the Parent and its subsidiaries. SECTION 2.08. Interest on Merger Consideration. If the Effective Time shall not have occurred on or before the 180th day (the "Interest Date") following the date on which the Company Proxy Statement (as defined herein) is filed with the SEC, then the Merger Consideration shall be adjusted by adjusting each of the Cash Component and the Debenture Component to reflect the accrual of interest at a rate of 8.5% per annum for the period beginning on the day immediately following the Interest Date and ending on the date of the Effective Time. Notwithstanding the previous sentence, no interest shall accrue and no adjustment to the Merger Consideration shall be made if the Company shall have failed in any material respect to comply with Section 6.06. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY As an inducement to enter into this Agreement, the Company hereby represents and warrants to Parent and Merger Sub that: 9 SECTION 3.01. Organization and Qualification; Subsidiaries. (a) Each of the Company and each operating subsidiary of the Company with total assets in excess of $50,000 on its balance sheet at September 30, 2000 (collectively, the "Company Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted except where the failure to be so organized, existing or in good standing or to have such power, authority, and governmental approvals would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect (as defined in Section 9.04). The Company and each of the Company Subsidiaries is duly qualified or licensed as a foreign corporation or organization to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect. (b) Section 3.01(b) of the disclosure schedule prepared by the Company and delivered by the Company to Parent prior to the execution of this Agreement and forming a part of this Agreement (the "Company Disclosure Schedule") sets forth a true and complete list of all the Company Subsidiaries, together with the jurisdiction of incorporation of each Company Subsidiary and the percentage of the outstanding capital stock of each Company Subsidiary owned by the Company and each Company Subsidiary, and separately identifies all subsidiaries of the Company that are not Company Subsidiaries (collectively, the "Insignificant Subsidiaries"). Except as set forth in Section 3.01(b) of the Company Disclosure Schedule, neither the Company nor any Company Subsidiary directly or indirectly owns, or has outstanding contractual obligations to acquire, any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. (c) None of the Insignificant Subsidiaries has any liabilities or obligation of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), except for such liabilities and obligations as would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect on the Company or any Company Subsidiary. SECTION 3.02. Certificate of Incorporation and By-Laws. The Company has heretofore made available to Parent a complete and correct copy of the Certificate of Incorporation and the By-Laws, each as amended to date, of the Company and each Company Subsidiary. Such Certificates of Incorporation and By-Laws are in full force and effect. Neither the Company nor any Company Subsidiary is in violation of any of the provisions of its 10 Certificate of Incorporation or By-Laws. True and complete copies of all minute books of the Company have been made available by the Company to Parent. SECTION 3.03. Capitalization. (a) The authorized capital stock of the Company consists of (a) 20,000,000 shares of Company Common Stock and (b) 1,000,000 shares of preferred stock, par value $1.00 per share, of the Company (the "Company Preferred Stock"). As of the date hereof, (a) 8,481,471 shares of Company Common Stock and (b) no shares of Company Preferred Stock were issued and outstanding. All of the issued and outstanding shares of Company Common Stock are validly issued, fully paid and nonassessable. 4,481 shares of Company Common Stock and no shares of Company Preferred Stock, are held in the treasury of the Company or by any Company Subsidiary and 1,350,000 shares of Company Common Stock have been duly reserved for future issuance pursuant to the Company Stock Option Plan. There are no issued or outstanding bonds, debentures, notes, convertible notes or other indebtedness of the Company having the right to vote on any matters on which stockholders of the Company may vote. Except for the Company Stock Options granted pursuant to the Company Stock Option Plans or pursuant to agreements or arrangements described in Section 3.03 of the Company Disclosure Schedule, there are no options, warrants or other rights, agreements, arrangements or commitments of any character to which the Company or any Company Subsidiary is a party relating to the issued or unissued stock of the Company or any Company Subsidiary or conditionally or absolutely obligating the Company or any Company Subsidiary to issue or sell any shares of stock of, or other equity interests in, the Company or any Company Subsidiary. Section 3.03(a) of the Company Disclosure Schedule sets forth all Company Stock Options, including the relevant vesting times and exercise periods. All shares of Company Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and non-assessable. There are no outstanding obligations (whether conditional or absolute) of the Company or any Company Subsidiary to repurchase, redeem or otherwise acquire any shares or other equity interests of Company Common Stock or any shares or other equity interests of any Company Subsidiary. Each outstanding share of stock or other equity interest of each Company Subsidiary is duly authorized, validly issued, fully paid and non-assessable and each such share or other equity interest owned by the Company or another Company Subsidiary is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Company's or such other Company Subsidiary's voting rights, charges and other encumbrances of any nature whatsoever. (b) Restricted Stock. Section 3.03(b) of the Company Disclosure Schedule sets forth a true and complete list of each holder of Restricted Shares, and identifies how many Restricted Shares of each such holder (i) are vested as of the date hereof and (ii) may be vested, whether by reason of the Merger (assuming only for purposes of this Section 3.03(b) that the Effective Time is at December 31, 2001) or otherwise at December 31, 2001. SECTION 3.04. Authority Relative to This Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement and perform its obligations hereunder and to consummate the Merger and the other transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company and the 11 consummation by the Company of the Merger and the other transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the Merger and the other transactions contemplated by this Agreement (other than with respect to the Merger, the approval and adoption of this Agreement and the Merger by the affirmative vote of holders of a majority of the Company Common Stock (the "Company Stockholders' Approval") entitled to vote on the matter (the "Company Stockholders' Vote"), and the filing of the Certificate of Merger with the Secretary of State of the State of Delaware as required by the DGCL). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent and Merger Sub, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The Board has approved this Agreement, the Merger and the other transactions contemplated herein and such approvals are sufficient so that the restrictions on business combinations set forth in Section 203(a) of the DGCL shall not apply to the Merger. SECTION 3.05. No Conflict; Required Filings and Consents. (a) Except as set forth in Section 3.05 of the Company Disclosure Schedule, the execution and delivery of this Agreement do not, and performance of this Agreement by the Company will not, (i) conflict with or violate the Certificate of Incorporation or By-Laws of the Company or any equivalent organizational documents of any Company Subsidiary, (ii) conflict with or violate any federal, national, state, provincial, municipal or local law, statute, ordinance, rule, regulation, order, injunction, judgment or decree ("Law") applicable to the Company or any Company Subsidiary or by which any property or asset of the Company or any Company Subsidiary is bound or affected, or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any Company Subsidiary pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation, except, with respect to clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect on the Company or the Insurance Companies. (b) Except as set forth in Section 3.05(b) of the Company Disclosure Schedule, the execution and delivery of this Agreement by the Company do not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any federal, national, state, provincial, municipal or local government, any instrumentality, subdivision, court, administrative agency or commission or other authority thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing or any other governmental or quasi-governmental authority (a "Governmental Entity"), except (i) for (A) the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the requirements of other applicable competition laws, (B) the requisite approvals of insurance 12 regulatory authorities (including, without limitation, the insurance regulatory authorities of Rhode Island), (C) applicable requirements, if any, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), state securities or "blue sky" laws (the "Blue Sky Laws") and state takeover laws, (D) the DGCL with respect to the filing of the Delaware Certificate of Merger and (E) the rules and regulations of the Nasdaq National Market (the "Nasdaq") (the foregoing clauses (i)(A) through (E) being referred to collectively as the "Required Consents") and (ii) where the failure to obtain any such consent, approval, authorization or permit, or to make any such filing or notification, would not prevent or materially delay consummation of the Merger, or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect on the Company or the Insurance Companies. SECTION 3.06. Permits; Compliance. (a) Except as disclosed in Section 3.06(a) of the Company Disclosure Schedule, each of the Company and the Company Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for the Company or any Company Subsidiary to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Company Permits") except where the failure to obtain any such Company Permits would not prevent or materially delay consummation of the Merger, or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect. As of the date hereof, no suspension or cancellation of any of the Company Permits is pending or, to the knowledge of the Company, threatened. (b) Except as disclosed in Section 3.06(b) of the Company Disclosure Schedule, neither the Company nor any Company Subsidiary is in conflict with, or in default or violation of, any (i) Law applicable to the Company or any Company Subsidiary or by which any property or asset of the Company or any Company Subsidiary is bound or affected, (ii) note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any Company Subsidiary is a party or by which the Company or any Company Subsidiary or any property or asset of the Company or any Company Subsidiary is bound or affected or (iii) Company Permits, except in each case for any such conflicts, defaults or violations that would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.07. SEC Filings; Financial Statements. (a) The Company has filed all forms, reports and documents required to be filed by it with the SEC since December 31, 1998 and has heretofore delivered or made available to Parent, in the form filed with the SEC, (i) its Annual Reports on Form 10-K for the fiscal years ended December 31, 1998 and 1999, (ii) its Quarterly Reports on Form 10-Q for the periods ended March 31, 2000, June 30, 2000 and September 30, 2000, (iii) all proxy statements relating to the Company's meetings of stockholders (whether annual or special) held since May 1, 1998 and (iv) all other forms, reports 13 and other registration statements (other than Quarterly Reports on Form 10-Q not referred to in clause (ii) above) filed by the Company with the SEC since April 1, 1998 (the forms, reports and other documents referred to in clauses (i), (ii), (iii) and (iv) above being, collectively, the "Company SEC Reports") and (v) complete (i.e., unredacted) copies of each exhibit to the Company SEC Reports filed with the SEC. The Company SEC Reports (i) were prepared in accordance with either the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations promulgated thereunder, and (ii) did not, at the time they were filed, or, if amended, as of the date of such amendment, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. No Company Subsidiary is required to file any form, report or other document with the SEC. (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Company SEC Reports was prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Regulation S-X adopted by the SEC) and each presented in all material respects, the consolidated financial position, results of operations and cash flows of the Company and the consolidated subsidiaries of the Company as at the respective dates thereof and for the respective periods indicated therein, except as otherwise noted therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments which would not have had, individually or in the aggregate, a Material Adverse Effect). The balance sheet of the Company contained in the Company SEC Reports as of September 30, 2000 is hereinafter referred to as the "Company Balance Sheet". (c) The Company has heretofore furnished to Parent a complete and correct copy of any amendments or modifications that have not been filed with the SEC to all agreements, documents or other instruments that previously had been filed by the Company with the SEC and are currently in effect. SECTION 3.08. Undisclosed Liabilities. Except for those liabilities that are disclosed in Section 3.08 of the Company Disclosure Schedule or are fully reflected or reserved against on the Company Balance Sheet, neither the Company nor any Company Subsidiary has outstanding any liability or obligation of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), except for liabilities and obligations that have been incurred since the date of the Company Balance Sheet in the ordinary course of business, that would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and that would not, individually or in the aggregate, have a Material Adverse Effect. With respect to liabilities or obligations concerning the matters addressed in Sections 3.07, 3.11, 3.13, and 3.16, the provisions of such Sections and not this Section 3.08 shall apply. SECTION 3.09. Absence of Certain Changes or Events. From September 30, 2000 through the date hereof, except as set forth in Section 3.09 of the Company Disclosure Schedule, (a) each of the Company and the Company Subsidiaries has conducted its business 14 only in the ordinary course and (b) there has not been any circumstance, event, occurrence, change or effect that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. SECTION 3.10. Absence of Litigation. Except as specifically disclosed in Section 3.10 of the Company Disclosure Schedule, there is no litigation, suit, claim, action, proceeding or investigation (an "Action") pending or, to the knowledge of the Company, threatened against the Company or any Company Subsidiary, or against any property or asset of the Company or any Company Subsidiary, before any court, arbitrator or Governmental Entity, domestic or foreign which the Company reasonably believes, individually or in the aggregate, could result in liability of the Company or any Company Subsidiary in amounts in excess of $50,000. Except as specifically disclosed in Section 3.10 of the Company Disclosure Schedule, neither the Company nor any Company Subsidiary nor any property or asset of the Company or any Company Subsidiary is subject to any continuing order of, consent decree, settlement agreement or similar written agreement with, or, to the knowledge of the Company, continuing investigation by, any Governmental Entity, or any order, writ, judgment, injunction, decree, determination or award of any Governmental Entity that would prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement or would, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.11. Employee Benefit Matters. (a) Plans and Material Documents. Section 3.11 (a) of the Company Disclosure Schedule lists (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance or other benefit plans, programs or arrangements, and all employment, consulting, termination, severance or other contracts or agreements, whether legally enforceable or not, to which the Company or any Company Subsidiary is a party, with respect to which the Company or any Company Subsidiary has any obligation or which are maintained, contributed to or sponsored by the Company or any Company Subsidiary for the benefit of any current or former employee, consultant, officer or director of the Company or any Company Subsidiary, (ii) each employee benefit plan for which the Company or any Company Subsidiary could incur liability under section 4069 of ERISA in the event such plan has been or were to be terminated, (iii) any plan in respect of which the Company or any Company Subsidiary could incur liability under section 4212(c) of ERISA and (iv) any contracts, arrangements or understandings between the Company or any Company Subsidiary and any employee of the Company or any Company Subsidiary including, without limitation, any contracts, arrangements or understandings relating to a sale of the Company or any Company Subsidiary (collectively, the "Company Benefit Plans"). Except as disclosed in Section 3.11(a) of the Company Disclosure Schedule, each Company Benefit Plan is in writing and the Company has made available to Parent a true and complete copy of each Company Benefit Plan and a true and complete copy of each material document, if any, prepared in connection with each such Company Benefit Plan, including, without limitation, a copy of (i) each trust or other funding arrangement currently in effect, (ii) the current summary plan description and any subsequent summary of material modifications, (iii) the most recently 15 filed Internal Revenue Service (the "IRS") Form 5500, (iv) the most recently received IRS determination letter for each such Company Benefit Plan and (v) the most recently prepared actuarial report and financial statement in connection with each such Company Benefit Plan. Except as disclosed in Section 3.11(a) of the Company Disclosure Schedule, there are no other employee benefit plans, programs, arrangements or agreements, whether formal or informal, whether in writing or not, to which the Company or any Company Subsidiary is a party, with respect to which the Company or any Company Subsidiary has any obligation or which are maintained, contributed to or sponsored by the Company or any Company Subsidiary for the benefit of any current or former employee, consultant, officer or director of the Company or any Company Subsidiary. Neither the Company nor any Company Subsidiary has any express or implied commitment, whether legally enforceable or not, (i) to create, incur liability with respect to or cause to exist any other employee benefit plan, program or arrangement, (ii) to enter into any contract or agreement to provide compensation or benefits to any individual or (iii) to modify, change or terminate any Company Benefit Plan, other than with respect to a modification, change or termination required by ERISA or the Code. (b) Absence of Certain Types of Plans. Except as disclosed in Section 3.11(b) of the Company Disclosure Schedule, none of the Company Benefit Plans is a multiemployer plan (within the meaning of section 3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan") or a single employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for which the Company or any Company Subsidiary could incur liability under Section 4063 or 4064 of ERISA (a "Multiple Employer Plan"). Except as disclosed in Section 3.11(b) of the Company Disclosure Schedule, none of the Company Benefit Plans (i) provides for the payment of separation, severance, termination or similar-type benefits to any person, (ii) obligates the Company or any Company Subsidiary to pay separation, severance, termination or similar-type benefits solely or partially as a result of any transaction contemplated by this Agreement, or (iii) obligates the Company or any Company Subsidiary to make any payment or provide any benefit as a result of a "change in control", within the meaning of such term under Section 280G of the Code. None of the Company Benefit Plans provides for or promises retiree medical, disability or life insurance benefits to any current or former employee, officer or director of the Company or any Company Subsidiary. Each of the Company Benefit Plans is subject only to the Laws of the United States or a political subdivision thereof. (c) Compliance. Except as disclosed in Section 3.11(c) of the Company Disclosure Schedule, to the knowledge of the Company, each Company Benefit Plan is now and always has been operated in all respects in accordance with its terms and the requirements of all applicable laws and regulations and rules promulgated thereunder, including, without limitation, ERISA and the Code, except for such non-compliance as would not result in a Material Adverse Effect or has not or would not be reasonably likely to result in a significant expense to the Company. The Company and all Company Subsidiaries have performed all material obligations required to be performed by them under, are not in any material respect in default under or in material violation of, and have no knowledge of any such default or violation by any other party with respect to, any Company Benefit Plan. No action, claim or proceeding is pending or, to the knowledge of the Company, threatened with respect to any Company Benefit Plan (other than 16 claims for benefits in the ordinary course) and, to the knowledge of the Company, no fact or event exists that could reasonably give rise to any such action, claim or proceeding. (d) Qualification of Certain Plans. Each Company Benefit Plan that is intended to be qualified under section 401(a) of the Code or section 401(k) of the Code has received a favorable determination letter from the IRS covering all of the provisions applicable to the Company Benefit Plan, and no fact or event has occurred since the date of such determination letter or letters from the IRS that is likely to adversely affect the qualified status of any such Company Benefit Plan or the exempt status of any such trust. (e) Absence of Certain Liabilities. To the knowledge of the Company, there has not been any nonexempt prohibited transaction (within the meaning of Section 406 and 408 of ERISA or Section 4975 of the Code) with respect to any Company Benefit Plan. Neither the Company nor any Company Subsidiary has incurred any liability that has not been satisfied under, arising out of or by operation of Title IV of ERISA, including, without limitation, any liability in connection with (i) the termination or reorganization of any employee benefit plan subject to Title IV of ERISA, (ii) the withdrawal from any Multiemployer Plan within the five-year period immediately preceding the date of this Agreement or (iii) the withdrawal from any Multiple Employer Plan, and no fact or event exists which could give rise to any such liability. (f) Plan Contributions and Funding. All contributions, premiums or payments required to be made with respect to any Company Benefit Plan have been made on or before their due dates. All such contributions have been fully deductible for income tax purposes and no such deduction has been challenged or disallowed by any Governmental Entity and no fact or event exists which could give rise to any such challenge or disallowance. (g) Severance Payments. Except as disclosed in Section 3.11(g) of the Company Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee, officer or director of the Company or any Company Subsidiary to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, (ii) accelerate the time of payment or vesting, or increase the amount, of compensation due any such employee, officer or director or (iii) constitute a "change of control" under any Company Benefit Plan. (h) There is no Company Benefit Plan that is not subject to United States law. SECTION 3.12. Material Contracts. (a) Subsections (i) through (xi) of Section 3.12(a) of the Company Disclosure Schedule contain a list of the following types of contracts and agreements to which the Company or any Company Subsidiary is a party (such contracts, agreements and arrangements as are required to be set forth in Section 3.12(a) of the Company Disclosure Schedule being the "Company Material Contracts"): (i) each contract and agreement which (A) has or is likely to involve consideration of more than $100,000, in the aggregate, during one or more of the calendar years ending December 31, 2000 or 2001 or (B) is likely to involve 17 consideration of more than $100,000, in the aggregate, over the remaining term of such contract, and which, in either case, cannot be canceled by the Company or any Company Subsidiary without penalty or further payment and without more than 90 days' notice; (ii) all management contracts (excluding contracts for employment) and contracts with other consultants which have or are likely to involve consideration of more than $100,000, including any contracts involving the payment of royalties or other amounts calculated based upon the revenues or income of the Company or any Company Subsidiary or income or revenues related to any product of the Company or any Company Subsidiary to which the Company or any Company Subsidiary is a party; (iii) all contracts and agreements evidencing indebtedness for borrowed money; (iv) all contracts and agreements with any Governmental Entity to which the Company or any Company Subsidiary is a party; (v) all contracts and agreements that limit, or purport to limit, the ability of the Company or any Company Subsidiary to compete in any line of business or with any person or entity or in any geographic area or during any period of time; (vi) other than those entered into in the ordinary course of business, all material contracts or arrangements that result in any person or entity holding a power of attorney from the Company or any Company Subsidiary that relates to the Company, any Company Subsidiary or their respective businesses; (vii) all contracts, agreements, commitments and instruments relating to any obligation to engage in a merger, consolidation, business combination, share exchange or business acquisition, or for the purchase or sale of any assets of the Company or any of the Company Subsidiaries other than in the ordinary course of business; (viii) other than those entered into in the ordinary course of business, all contracts, agreements, commitments and instruments that include any indemnification, contribution or support obligations in an amount which would reasonably be expected to exceed $100,000 or which in the aggregate would reasonably be expected to exceed $100,000; (ix) all contracts, agreements, commitments and instruments that obligate capital expenditures involving total payments of more than $100,000; (x) all contracts, agreements, commitments and instruments that obligate the Company or any Company Subsidiary to issue or sell any capital stock; and (xi) all other contracts and agreements, whether or not made in the ordinary course of business, which are material to the Company or any Company Subsidiary or the conduct of their respective businesses, or the absence of which would prevent or 18 materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement or would, individually or in the aggregate, have a Material Adverse Effect. (b) Except as would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect, (i) each Company Material Contract is a legal, valid and binding agreement in full force and effect, and none of the Company Material Contracts is in default by its terms or has been canceled by the other party and no event has occurred that with notice or lapse of time or both would constitute a default, (ii) to the Company's knowledge, no other party is in breach or violation of, or default (where applicable) under, any Company Material Contract; (iii) no Company or Company Subsidiary is in receipt of any claim of default (where applicable) under any such agreement and (iv) neither the execution of this Agreement nor the consummation of the Merger or any other transaction contemplated herein shall constitute default, give rise to cancellation rights, or otherwise adversely affect any of the Company's rights under any Company Material Contract. The Company has furnished or made available to Parent true and complete copies of all Company Material Contracts, including any amendments thereto. SECTION 3.13. Environmental Matters. Except as described in Section 3.13 of the Company Disclosure Schedule and as would not, individually or in the aggregate, have a Material Adverse Effect, (a) the Company and the Company Subsidiaries have not violated and are not in violation of any Environmental Law (as defined below); (b) none of the properties currently or formerly owned, leased or operated by the Company and the Company Subsidiaries (including, without limitation, soils and surface and ground waters) are or were contaminated with any Hazardous Substance (as defined below); (c) neither the Company nor the Company Subsidiaries are liable for any off-site contamination by Hazardous Substances; (d) the Company and the Company Subsidiaries are not liable under any Environmental Law (including, without limitation, pending or threatened liens); (e) the Company and the Company Subsidiaries have all permits, licenses and other authorizations required under any Environmental Law ("Environmental Permits"); (f) the Company and the Company Subsidiaries are in compliance with their Environmental Permits; and (g) neither the execution of this Agreement nor the consummation of the transactions contemplated herein will require any investigation, remediation or other action with respect to Hazardous Substances, or any notice to or consent of Governmental Entities or third parties, pursuant to any applicable Environmental Law or Environmental Permit, including, without limitation, the Connecticut Transfer Act. "Environmental Law" means any applicable federal, state, local or foreign law relating to (A) releases of Hazardous Substances or materials containing Hazardous Substances; (B) the manufacture, handling, transport, use, treatment, storage or disposal of Hazardous Substances or materials containing Hazardous Substances; or (C) otherwise relating to pollution or protection of the environment, health, safety or natural resources. "Hazardous Substances" means (i) those substances defined in or regulated under the following federal statutes and their state counterparts, as each may be amended from time to time, and all regulations thereunder: the Hazardous Materials Transportation Act, the Resource 19 Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal Insecticide, Fungicide, and Rodenticide Act and the Clean Air Act; (ii) petroleum and petroleum products, including crude oil and any fractions thereof; (iii) natural gas, synthetic gas, and any mixtures thereof; (iv) polychlorinated biphenyls, asbestos and radon; (v) any other contaminant; and (vi) any substance, material or waste regulated by any federal, state, local or foreign Governmental Entity pursuant to any Environmental Law. SECTION 3.14. Title to Properties; Absence of Liens and Encumbrances. (a) Section 3.14(a)(i) of the Company Disclosure Schedule lists the real property interests owned by the Company and the Company Subsidiaries. Section 3.14(a)(ii) of the Company Disclosure Schedule lists all real property leases to which the Company or any Company Subsidiary is a party, and each amendment thereto. Other than the owned real property identified in Section 3.14(a)(i) of the Company Disclosure Schedule and leaseholds created under the real property leases identified in Section 3.14(a) of the Company Disclosure Schedule, the Company and the Company Subsidiaries have no ownership or leasehold interest in any real property. (b) Except as would not, individually or in the aggregate, have a Material Adverse Effect, each of the Company and the Company Subsidiaries has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any liens, pledges, charges, claims, security interests or other encumbrances of any sort ("Liens"), except for Liens in respect of obligations not yet due, which are owed in respect of taxes or which otherwise are owed to landlords, carriers, warehousepersons or laborers, except for such Liens or other imperfections of title and encumbrances, if any, which are not material in character, amount or extent, and which do not materially detract from the value, or materially interfere with the present or contemplated use, of the property subject thereto or affected thereby. SECTION 3.15. Intellectual Property. (a) The Company and the Company Subsidiaries own or possess adequate licenses or other valid rights to use all material Intellectual Property (as defined below) used or held for use in connection with the business of the Company and the Company Subsidiaries as currently conducted. (b) To the knowledge of the Company, no current or prior use of any Intellectual Property by the Company or any of the Company Subsidiaries or current or prior product sold, imported or offered for sale by the Company and the Company Subsidiaries infringes on or otherwise violates the rights of any person and such use, sale, importation and offer to sell is and has been in accordance with all applicable licenses pursuant to which the Company or any of the Company Subsidiaries acquired the right to use such Intellectual Property other than as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. (c) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Company Subsidiaries is being used or enforced in a matter that would result in the abandonment, cancellation or unenforceability of such Intellectual Property 20 other than as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. (d) To the knowledge of the Company, and except as would not, individually or in the aggregate, have a Material Adverse Effect, (i) there has been no misappropriation of any material trade secrets or other material confidential Intellectual Property of the Company or any Company Subsidiary by any person, (ii) no employee, independent contractor or agent of the Company or any Company Subsidiary has misappropriated any trade secrets of any other person in the course of such performance as an employee, independent contractor or agent and (iii) no employee, independent contractor or agent of Company or any Company Subsidiary is in default or breach of any term of any employment agreement, non-disclosure agreement, assignment of invention agreement or similar agreement or contract relating in any way to the protection, ownership, development, use or transfer of the Company's and the Company Subsidiaries' Intellectual Property. "Intellectual Property" means all trademarks, trademark rights, trade name, trade name rights, trade dress and other indications of origin, brand names, certification rights, service marks, applications for trademarks and for service marks, know-how and other proprietary rights and information; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, patent rights and trade secrets; proprietary writings and other works, whether copyrightable or not, in any jurisdiction; and any similar intellectual property or proprietary rights. SECTION 3.16. Taxes. The Company and the Company Subsidiaries have filed all United States federal, state, local and non-United States Tax returns and reports due and required to be filed by them and have paid and discharged all Taxes required to be paid or discharged, other than (a) such Taxes, returns or reports as are being contested in good faith by appropriate proceedings and (b) such Taxes, returns or reports or other occurrences that would not, individually or in the aggregate, have a Material Adverse Effect. No United States (federal, state or local) or non-United States taxing authority or agency is asserting in writing or threatening to assert in writing against the Company or any Company Subsidiary any deficiency or claim for any Taxes or interest thereon or penalties in connection therewith. Neither the Company nor any Company Subsidiary has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of any Tax. The accruals and reserves for Taxes reflected in the Company Balance Sheet are adequate to cover all Taxes accruable through such date (including interest and penalties, if any, thereon) in accordance with U.S. GAAP. Neither the Company nor any Company Subsidiary has made an election under Section 341(f) of the Code. There are no Tax liens upon any property or assets of the Company or any of the Company Subsidiaries except liens for current Taxes not yet due. Neither the Company nor any of the Company Subsidiaries has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by the Company or any of the Company Subsidiaries, and the IRS has not initiated or proposed any such adjustment or change in accounting method, in either case which adjustment or change would have a Material Adverse Effect. 21 SECTION 3.17. Board Approval; Vote Required. (a) The Board, by resolutions duly adopted by unanimous vote at a meeting duly called and held and not subsequently rescinded or modified in any way on or prior to the date hereof (the "Company Board Approval"), has duly (i) approved this Agreement and the Merger, and determined that the execution, delivery and performance of this Agreement is advisable and (ii) recommended that the stockholders of the Company approve the Merger and this Agreement and directed that this Agreement and the transactions contemplated hereby be submitted for consideration by the Company's stockholders at the Company Stockholders' Meeting (as hereinafter defined). (b) The Company Stockholders' Approval is the only vote of the holders of any class or series of capital stock of the Company necessary to approve and adopt this Agreement, the Merger and the other transactions contemplated by this Agreement. SECTION 3.18. Employment Agreements and other Affiliate Transactions. Except as disclosed in Section 3.18 of the Company Disclosure Schedule and except for the ownership of shares of Company Common Stock and Company Options pursuant to the Company Benefit Plans, there are no material contracts, commitments, agreements, arrangements or other transactions between the Company or any of the Company Subsidiaries, on the one hand, and any (i) officer or director of the Company or, (ii) officer or director of any of the Company Subsidiaries pursuant to which the Company or any Company Subsidiary is obligated to make payments totaling more then $100,000, (iii) record or beneficial owner of five percent or more of the voting securities of the Company or (iv) person or entity known to the Company that directly or indirectly controls, is controlled by, or is under common control with any such officer, director or beneficial owner, on the other hand. SECTION 3.19. Insurance. Section 3.19 of the Company Disclosure Schedule contains a true, correct and complete list of all policies of insurance to which each of the Company and the Company Subsidiaries are a party or are a beneficiary or named insured. The Company has provided or made available to Parent true, correct and complete copies of all policies of insurance to which each of the Company and the Company Subsidiaries are a party or are a beneficiary or named insured that Parent has requested from the Company or its representatives. The Company and the Company Subsidiaries maintain insurance coverage with reputable insurers in such amounts and covering such risks as are in accordance with normal industry practice for companies engaged in businesses similar to that of the Company and the Company Subsidiaries (taking into account the cost and availability of such insurance). SECTION 3.20. State Takeover Statutes. (a) Except for Section 203 of the DGCL, no "fair price", "moratorium", "control share acquisition" or other similar anti-takeover statute or regulation is applicable, by reason of the Company's being a party to the Merger or this Agreement or the transactions contemplated hereby or thereby. Neither the Company nor any of the Company Subsidiaries is a party to any "stockholder rights" plan or any similar anti-takeover plan or device. (b) Prior to the time this Agreement was executed, the Board has taken all action necessary, if any, to exempt under or make not subject to Section 203 of the DGCL (i) the execution of this Agreement, (ii) the Merger and (iii) the other transactions contemplated hereby. 22 SECTION 3.21. Labor Matters. (a) Except as set forth in Section 3.21 of the Company Disclosure Schedule, to the knowledge of the Company and the Company Subsidiaries (i) there are no controversies pending or, to the knowledge of the Company, threatened between the Company or any Company Subsidiary and any of their respective employees, which controversies would prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement or would, individually or in the aggregate, have a Material Adverse Effect; (ii) neither the Company nor any Company Subsidiary is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company or any Company Subsidiary, nor, to the knowledge of the Company, are there any activities or proceedings of any labor union to organize any such employees; (iii) neither the Company nor any Company Subsidiary has breached or otherwise failed to comply with any provision of any such agreement or contract, and there are no grievances outstanding against the Company or any Company Subsidiary under any such agreement or contract which have resulted, or are reasonably likely to result, in, individually or in the aggregate, a Material Adverse Effect; (iv) there are no unfair labor practice complaints pending against the Company or any Company Subsidiary before the National Labor Relations Board or any current union representation questions involving employees of the Company or any Company Subsidiary; and (v) there is no strike, slowdown, work stoppage or lockout, or, to the knowledge of the Company, threat thereof, by or with respect to any employees of the Company or any Company Subsidiary. (b) Except as set forth in Section 3.21(b) of the Company Disclosure Schedule, to the knowledge of the Company and the Company Subsidiaries, the Company and the Company Subsidiaries are in compliance with all applicable laws relating to the employment of labor, including those related to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by the appropriate Governmental Entity and has withheld and paid to the appropriate Governmental Entity or are holding for payment not yet due to such Governmental Entity all amounts required to be withheld from employees of the Company or any Company Subsidiary and are not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing except for any non-compliance that would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay the Company from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect. The Company and the Company Subsidiaries have paid in full to all employees or adequately accrued for in accordance with U.S. GAAP consistently applied all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees and there is no claim against the Company or any Company Subsidiary with respect to payment of wages, salary or overtime pay that has been asserted or, to the Company's knowledge, is now pending or threatened before any Governmental Entity with respect to any persons currently or formerly employed by the Company or any Company Subsidiary except for any such claims that would not, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor any Company Subsidiary is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Entity relating to employees or employment practices. There is no charge or proceeding with respect to a violation of any occupational safety or health standards that has been asserted or, to the Company's knowledge, is now pending or threatened with 23 respect to the Company or any Company Subsidiary. To the Company's knowledge, there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted or is now pending or threatened before the United States Equal Employment Opportunity Commission, or any other Governmental Entity in any jurisdiction in which the Company or any Company Subsidiary have employed or employ any person. SECTION 3.22. Brokers. No broker, finder or investment banker (other than ZS Fund L.P. ("ZS") and Fox-Pitt, Kelton Inc. ("Fox-Pitt")) is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company has heretofore made available upon request to Parent complete and correct copies of all agreements between the Company, ZS and Fox-Pitt pursuant to which such firms would be entitled to any payment relating to the Merger or any other transactions, which payments to ZS and Fox-Pitt will not exceed $950,000 in the aggregate. SECTION 3.23. Title to Insurance Business. Except as set forth in Section 3.23 of the Company Disclosure Schedule, to the knowledge of the Company, no employee or producer of the Company or any of its subsidiaries, nor any other person, has any agreement by which they have a claim, right, title or interest in or to the book of insurance business serviced by the Company or any Company Subsidiary. SECTION 3.24. Absence of Restrictions on Conduct of Business. Other than ordinary course regulatory restrictions, no oral or written contract, license or permit restricts the ability of the Company or any Company Subsidiary to own, possess or use its assets or conduct its business or operations in any geographic area or restricts in any way the full participation of any employees, producers or agents of the Company or any Company Subsidiary in the operation of such business. SECTION 3.25. Computer Systems. Other than in respect of ordinary course maintenance and repairs, the Computer Systems of the Company and each Company Subsidiary are operational except where a failure to be so operational would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.26. Insurance Companies. Listed in Section 3.26 of the Company Disclosure Schedule are the names and addresses of the ten most significant insurance companies (each a "Significant Insurer") to the business of the Company and the Company Subsidiaries as a whole, as determined by the aggregate amount of premium received by the Company and the Company Subsidiaries from such insurance company during the fiscal year ended September 1, 2000. SECTION 3.27. No Downgrading of Rating. As of the date hereof, and except for any downgrading which may occur solely as a result of the Merger or the Related Party Transactions, there has not occurred any downgrading, nor has the Company become aware of any pending or threatened downgrading, of the Company's or any of the Company Subsidiaries' rating by A.M. Best. 24 SECTION 3.28. Fairness Opinion. The Company has received a written opinion from Fox-Pitt stating that the Merger Consideration is fair to the stockholders of the Company from a financial point of view and has delivered a copy of such written opinion to Parent. SECTION 3.29. Insurance Company Organization and Qualification; Subsidiaries. (a) Each of Old Lyme Insurance Company of Rhode Island, Inc. ("Rhode Island Co.") and Old Lyme Insurance Company Ltd. ("Bermuda Co.", and together with Rhode Island Co., the "Insurance Companies") and each subsidiary of the Insurance Companies (collectively, the "Insurance Company Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted. Each of the Insurance Companies and each of the Insurance Company Subsidiaries is duly qualified or licensed as a foreign corporation or organization to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Material Adverse Effect (as defined in Section 9.04). (b) Section 3.29(b) of the Company Disclosure Schedule sets forth a true and complete list of all the Insurance Company Subsidiaries, together with the jurisdiction of incorporation of each Insurance Company Subsidiary and the percentage of the outstanding capital stock of each Insurance Company Subsidiary owned by the Insurance Company and each Insurance Company Subsidiary, and separately identifies all subsidiaries of each of the Insurance Companies that are not Insurance Company Subsidiaries (collectively, the "Insignificant Insurance Subsidiaries"). Except as set forth in Section 3.29(b) of the Company Disclosure Schedule, neither the Insurance Company nor any Insurance Company Subsidiary directly or indirectly owns, or has outstanding contractual obligations to acquire, any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. (c) Each of the Insurance Companies and each of the Insurance Company Subsidiaries is licensed as an authorized insurer in each jurisdiction in which it presently writes insurance for the type of insurance it presently writes in such jurisdictions and meets in all material respects all statutory and regulatory requirements of all Governmental Entities (as hereinafter defined) which have jurisdiction over it to be an authorized insurer. Section 3.29(c) of the Company Disclosure Schedule sets forth each state in which each of the Insurance Companies and each of the Insurance Company Subsidiaries is an admitted or non-admitted insurer; and for each state in which it is nonadmitted, whether it has been approved or not disapproved. (d) None of the Insignificant Insurance Subsidiaries have any liabilities, except for such liabilities as would not prevent or materially delay consummation of the Merger and would not, individually or in the aggregate, have a Material Adverse Effect on the Insurance Companies or any Insurance Company Subsidiaries. 25 SECTION 3.30. Insurance Company Certificate of Incorporation and By-Laws. The Company has heretofore made available to Parent a complete and correct copy of the Certificate of Incorporation and the By-Laws, each as amended to date, of each of the Insurance Companies and each Insurance Company Subsidiary. Such Certificates of Incorporation and By-Laws are in full force and effect. Neither the Insurance Companies nor any Insurance Company Subsidiary is in violation of any of the provisions of its Certificate of Incorporation or By-Laws. True and complete copies of all minute books of each of the Insurance Companies have been made available by the Company to Parent. SECTION 3.31. Insurance Company Capitalization. (a) The authorized capital stock of Rhode Island Co. consists of (a) 10,000,000 shares of common stock, par value $14.50 per share ("Rhode Island Co. Common Stock") and (b) 100,000 shares of preferred stock, par value $1.00 per share ("Rhode Island Co. Preferred Stock"). As of the date hereof, 200,000 shares of Rhode Island Co. Common Stock were issued and outstanding and 100,000 shares of Rhode Island Co. Preferred Stock were issued and outstanding. All of the issued and outstanding shares of Rhode Island Co. Common Stock are validly issued, fully paid and nonassessable and are held by the Company, free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on Rhode Island Co.'s voting rights, charges and other encumbrances of any nature whatsoever. (b) The authorized capital stock of Bermuda Co. consists of 100,000 shares of common stock, par value $1.20 per share ("Bermuda Co. Common Stock"). As of the date hereof, 100,000 shares of Bermuda Co. Common Stock were issued and outstanding. All of the issued and outstanding shares of Bermuda Co. Common Stock are validly issued, fully paid and nonassessable and are held by the Company, free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Bermuda's voting rights, charges and other encumbrances of any nature whatsoever. (c) There are no issued or outstanding bonds, debentures, notes, convertible notes or other indebtedness of either Insurance Company having the right to vote on any matters on which stockholders of such Insurance Company may vote. There are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued stock of either of the Insurance Companies or any Insurance Company Subsidiary or conditionally or absolutely obligating either of the Insurance Companies or any Insurance Company Subsidiary to issue or sell any shares of stock of, or other equity interests in, the Insurance Companies or any Insurance Company Subsidiary. Neither of the Insurance Companies nor any Insurance Company Subsidiary have outstanding obligations (whether conditional or absolute) to repurchase, redeem or otherwise acquire any shares or other equity interests of Common Stock or any shares or other equity interests of any Insurance Company Subsidiary. Each outstanding share of stock or other equity interest of each Insurance Company Subsidiary is duly authorized, validly issued, fully paid and non-assessable and each such share or other equity interest owned by the Insurance Companies or another Insurance Company Subsidiary is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on such Insurance Company's or such other Insurance Company Subsidiary's voting rights, charges and other encumbrances of any nature whatsoever. 26 SECTION 3.32. Insurance Company Permits; Compliance. (a) Except as disclosed in Section 3.32(a) of the Company Disclosure Schedule, each of the Insurance Companies and the Insurance Company Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for each of the Insurance Companies or any Insurance Company Subsidiary to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Insurance Company Permits") except where the failure to obtain any such Insurance Company Permits, would not, individually or in the aggregate, have a Material Adverse Effect. As of the date hereof, no suspension or cancellation of any of the Insurance Company Permits is pending or, to the knowledge of the Company, threatened. (b) Except as disclosed in Section 3.32(b) of the Company Disclosure Schedule, neither the Insurance Companies nor any Insurance Company Subsidiary is in conflict with, or in default or violation of, (i) any Law applicable to the Insurance Companies or any Insurance Company Subsidiary or by which any property or asset of the Insurance Companies or any Insurance Company Subsidiary is bound or affected, (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Insurance Companies or any Insurance Company Subsidiary is a party or by which the Insurance Companies or any Insurance Company Subsidiary or any property or asset of the Insurance Companies or any Insurance Company Subsidiary is bound or affected or (iii) any Insurance Company Permits, except in each case for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.33. Insurance Company Financial Statements. True and complete copies of the audited statutory financial statements of each of the Insurance Companies as of December 31, 1999 and for the year ended December 31, 1999, together with all related notes and schedules thereto and (ii) the unaudited financial statements of the Insurance Companies as of September 30, 2000 and for the period then ended (the "Insurance Financial Statements") are attached as Section 3.33 of the Company Disclosure Schedule. The Insurance Financial Statements were prepared in conformity with the statutory accounting practices prescribed or permitted by the state or nation of domicile for each the Insurance Companies applied on a consistent basis throughout the periods indicated, and each presents fairly, in all material respects, the financial position of the Insurance Company to which it relates as at the respective dates thereof and for the respective periods indicated therein, except as otherwise noted therein. The balance sheets of each of Rhode Island Co. and Bermuda Co. contained in the Insurance Financial Statements as of September 30, 2000 are hereinafter referred to as the "Insurance Company Balance Sheets". SECTION 3.34. Undisclosed Liabilities of the Insurance Companies. Except for those liabilities that are disclosed in Section 3.34 of the Company Disclosure Schedule or are fully reflected or reserved against on the Insurance Company Balance Sheets, neither the Insurance Companies nor any Insurance Company Subsidiary has outstanding any liability or obligation of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), except for liabilities and obligations that have been incurred 27 since the date of the Insurance Company Balance Sheets in the ordinary course of business and that would not, individually or in the aggregate, have a Material Adverse Effect. With respect to liabilities or obligations concerning the matters addressed in Section 3.38, the provisions of such Section and not this Section 3.34 shall apply. SECTION 3.35. Absence of Certain Changes or Events With Respect to the Insurance Companies. From September 30, 2000 through the date hereof, except as set forth in Section 3.35 of the Company Disclosure Schedule, (a) each of the Insurance Companies and each of the Insurance Company Subsidiaries has conducted its business only in the ordinary course, (b) since such date, there has not been any circumstance, event, occurrence, change or effect that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect and (c) neither the Insurance Companies nor any Insurance Company Subsidiary has taken or permitted any action that if taken or permitted after the date hereof would constitute a breach of any of the covenants set forth in Section 5.01. SECTION 3.36. Absence of Insurance Company Litigation. Except as specifically disclosed in Section 3.36 of the Company Disclosure Schedule and except for claims under policies in the ordinary course, there is no Action pending against the Insurance Companies or any Insurance Company Subsidiary, or against any property or asset of the Insurance Companies or any Insurance Company Subsidiary, before any court, arbitrator or Governmental Entity, domestic or foreign which the Company reasonably believes, individually or in the aggregate, would be reasonably likely to result in liability of any Insurance Company or any Insurance Company Subsidiary in amounts in excess of $50,000. Except as specifically disclosed in Section 3.36 of the Company Disclosure Schedule, neither the Insurance Companies nor any Insurance Company Subsidiary nor any property or asset of the Insurance Company or any Insurance Company Subsidiary is subject to any continuing order of, consent decree, settlement agreement or similar written agreement with, or, to the knowledge of the Company, continuing investigation by, any Governmental Entity, or any order, writ, judgment, injunction, decree, determination or award of any Governmental Entity that would, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.37. Insurance Company Material Contracts. (a) Subsections (i) through (x) of Section 3.37 of the Company Disclosure Schedule contain a list of the following types of contracts and agreements to which either of the Insurance Companies or any Insurance Company Subsidiary is a party (such contracts, agreements and arrangements as are required to be set forth in Section 3.37 of the Company Disclosure Schedule being the "Insurance Company Material Contracts"): (i) each contract and agreement which (A) has or is likely to involve consideration of more than $50,000, in the aggregate, during one or more of the calendar years ending December 31, 2000 or 2001 or (B) is likely to involve consideration of more than $50,000, in the aggregate, over the remaining term of such contract, and which, in either case, cannot be canceled by either of the Insurance Companies or any Insurance Company Subsidiary without penalty or further payment and without more than 90 days' notice; 28 (ii) all management contracts (excluding contracts for employment) and contracts with other consultants which has or is likely to involve consideration of more than $50,000, including any contracts involving the payment of royalties or other amounts calculated based upon the revenues or income of each of the Insurance Companies or any Insurance Company Subsidiary or income or revenues related to any product of either of the Insurance Companies or any Insurance Company Subsidiary to which either of the Insurance Companies or any Insurance Company Subsidiary is a party; (iii) all contracts and agreements evidencing indebtedness for borrowed money; (iv) all contracts and agreements with any Governmental Entity to which either of the Insurance Companies or any Insurance Company Subsidiary is a party; (v) all contracts and agreements that limit, or purport to limit, the ability of either of the Insurance Companies or any Insurance Company Subsidiary to compete in any line of business or with any person or entity or in any geographic area or during any period of time; (vi) other than in those entered into in the ordinary course of business, all contracts, agreements, commitments and instruments that obligate either of the Insurance Companies or any Insurance Company Subsidiary to make any payments or issue or pay in excess of $50,000 to any employee or consultant or make any payments or issue or pay anything of value to any affiliate, director or officer; (vii) all contracts, agreements, commitments and instruments that include any indemnification, contribution or support obligations in an amount which would reasonably be expected to exceed $50,000 or which in the aggregate would reasonably be expected to exceed $50,000; (viii) other than in those entered into in the ordinary course of business, all contracts, agreements, commitments and instruments that obligate capital expenditures involving total payments of more than $50,000; (ix) all contracts, agreements, commitments and instruments that obligate either of the Insurance Companies or any Insurance Company Subsidiary to issue or sell any capital stock; and (x) all other contracts and agreements, whether or not made in the ordinary course of business, which are material to either of the Insurance Companies or any Insurance Company Subsidiary or the conduct of their respective businesses, or the absence of which would, individually or in the aggregate, have a Material Adverse Effect. (b) Except as would not, individually or in the aggregate, have a Material Adverse Effect, (i) each Insurance Company Material Contract is a legal, valid and binding 29 agreement in full force and effect, and none of the Insurance Company Material Contracts is in default by its terms or has been canceled by the other party and no event has occurred that with notice or lapse of time or both would constitute a default, (ii) to the Company's knowledge, no other party is in breach or violation of, or default (where applicable) under, any Insurance Company Material Contract; (iii) neither of the Insurance Companies nor any Insurance Company Subsidiary is in receipt of any claim of default (where applicable) under any such agreement; and (iv) neither the execution of this Agreement nor the consummation of the Merger or any other transaction contemplated herein shall constitute default, give rise to cancellation rights, or otherwise adversely affect any of either of the Insurance Company's rights under any Insurance Company Material Contract. The Company has furnished or made available to Parent true and complete copies of all Insurance Company Material Contracts, including any amendments thereto. SECTION 3.38. Insurance Company Taxes. The Insurance Companies and the Insurance Company Subsidiaries have filed all United States federal, state, local and non-United States Tax returns and reports due and required to be filed by them and have paid and discharged all Taxes due and required to be paid or discharged, other than (a) such Taxes, returns or reports as are being contested in good faith by appropriate proceedings and (b) such Taxes, returns or reports or other occurrences that would not, individually or in the aggregate, have a Material Adverse Effect. No United States (federal, state or local) or non-United States taxing authority or agency is asserting in writing or threatening to assert in writing against the Insurance Companies or any Insurance Company Subsidiary any deficiency or claim for any Taxes or interest thereon or penalties in connection therewith. Neither the Insurance Companies nor any Insurance Company Subsidiary has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of any Tax. The accruals and reserves for Taxes reflected in the Company Balance Sheet are adequate to cover all Taxes accruable through such date (including interest and penalties, if any, thereon) in accordance with U.S. GAAP. Neither the Insurance Company nor any Insurance Company Subsidiary has made an election under Section 341(f) of the Code. There are no Tax liens upon any property or assets of the Insurance Companies or any of the Insurance Company Subsidiaries except liens for current Taxes not yet due. Neither the Insurance Companies nor any of the Insurance Company Subsidiaries has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by the Insurance Companies or any of the Insurance Company Subsidiaries, and the IRS has not initiated or proposed any such adjustment or change in accounting method, in either case which adjustment or change would have a Material Adverse Effect. SECTION 3.39. Absence of Restrictions on Conduct of Insurance Company Business. Other than ordinary course regulatory restrictions, no oral or written contract, license or permit restricts the ability of the Insurance Companies or any Insurance Company Subsidiary to own, possess or use its assets or conduct its business or operations in any geographic area or restricts in any way the full participation of any employees, producers or agents of the Insurance Companies or any Insurance Company Subsidiary in the operation of such business. 30 SECTION 3.40. Insurance Company Computer Systems. Other than in respect of ordinary course maintenance and repairs, the Computer Systems of each of the Insurance Companies and each Insurance Company Subsidiary are operational, except where a failure to be so operational would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.41. No Downgrading of Rating of Insurance Companies. As of the date hereof, and except for any downgrading which may occur solely as a result of the Merger or the Related Party Transactions, there has not occurred any downgrading, nor has the Company become aware of any pending or overtly threatened downgrading, of either of the Insurance Company's or any of the Insurance Company Subsidiaries' rating by A.M. Best. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB As an inducement to the Company to enter into this Agreement, Parent and Merger Sub hereby, jointly and severally, represent and warrant to the Company that: SECTION 4.01. Organization and Qualification; Subsidiaries. Parent is a corporation duly organized and validly existing under the laws of Ontario. Merger Sub is a corporation duly organized under the laws of the State of Delaware, and each of Parent and Merger Sub has all requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing or in good standing or to have such power, authority and governmental approvals would not prevent or materially delay the consummation of the transactions contemplated by this Agreement. SECTION 4.02. Articles of Incorporation and By-Laws. Parent has heretofore made available to the Company a complete and correct copy of the Articles of Incorporation and By-Laws, each as amended to date, of Parent and the Certificate of Incorporation and By-Laws of Merger Sub. Such respective organizational documents are in full force and effect and neither Parent nor Merger Sub is in violation of any of the provisions of its respective organizational documents. SECTION 4.03. Authority Relative to This Agreement. Each of Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Merger and the other transactions contemplated by this Agreement. The execution and delivery of this Agreement by each of Parent and Merger Sub and the consummation by each of Parent and Merger Sub of the Merger and the other transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of Parent or Merger Sub are necessary to authorize this Agreement or to consummate the Merger and the other transactions contemplated by this Agreement (other than, if required, the approval and adoption of the Related Party Transactions (as defined herein) by the requisite vote of approval of the shareholders of Parent (the "Parent Shareholders' Approval") entitled to vote on the matter and the filing of the Certificate of Merger with the Secretary of State of the State of 31 Delaware as required by the DGCL). The board of directors of Parent, by resolutions duly adopted by vote at a meeting duly called and held and not subsequently rescinded or modified in any way on or prior to the date hereof, has duly approved this Agreement and the Merger, and determined that the execution, delivery and performance of this Agreement is advisable. This Agreement has been duly and validly executed and delivered by each of Parent and Merger Sub and, assuming the due authorization, execution and delivery by the Company, constitutes the legal, valid and binding obligation of each of Parent and Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its terms. SECTION 4.04. Capitalization. (a) The authorized capital stock of Parent consists of (a) an unlimited number of common shares of Parent (the "Parent Common Shares") and (b) an unlimited number of preference shares of Parent (the "Parent Preferred Shares"). As of the date hereof, (a) 18,585,654 Parent Common Shares and (b) no Parent Preferred Shares were issued and outstanding. All of the issued and outstanding Parent Common Shares are validly issued, fully paid and nonassessable. No Parent Common Shares or Parent Preferred Shares are held in the treasury of Parent or by any subsidiary of Parent (the "Parent Subsidiaries"). There are no issued or outstanding bonds, debentures, notes, convertible notes or other indebtedness of Parent having the right to vote on any matters on which shareholders of Parent may vote. Except for the agreements or arrangements described in Section 4.04 of the Parent Disclosure Schedule, there are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued stock of Parent or conditionally or absolutely obligating Parent or any Subsidiary to issue or sell any shares of stock of, or other equity interests in, Parent. Section 4.04 of Parent Disclosure Schedule sets forth details regarding the Parent Executive Share Purchase Plan, including the relevant vesting times. All Parent Common Shares subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and non-assessable. There are no outstanding obligations (whether conditional or absolute) of Parent to repurchase, redeem or otherwise acquire any shares or other equity interests of Parent Common Shares. Each outstanding share of stock or other equity interest of each Parent Subsidiary is duly authorized, validly issued, fully paid and non-assessable and each such share or other equity interest owned by Parent is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on Parent's voting rights, charges and other encumbrances of any nature whatsoever. SECTION 4.05. No Conflict; Required Filings and Consents. (a) The execution and delivery of this Agreement by each of Parent and Merger Sub do not, and the performance of this Agreement will not, (i) conflict with or violate the Articles of Incorporation or By-Laws of Parent or the Certificate of Incorporation or By-Laws of Merger Sub, (ii) assuming that all consents, approvals, authorizations and permits described in Section 4.05(b) have been obtained and all filings and notifications described in Section 4.05(b) have been made, conflict with or violate any Law applicable to Parent or Merger Sub or by which any property or asset of Parent or Merger Sub is bound or affected or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of Parent or Merger Sub pursuant to, any 32 note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation, except, with respect to clauses (ii) and (iii) of this Section 4.05(a), for any such conflicts, violations, breaches, defaults or other occurrences that would not prevent or materially delay the consummation of the transactions contemplated by, or otherwise prevent Parent and Merger Sub from performing their material obligations under, this Agreement. (b) The execution and delivery of this Agreement by each of Parent and Merger Sub do not, and the performance of this Agreement by each of Parent and Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except for (A) the pre-merger notification requirements of the HSR Act and the requirements of other applicable competition laws, (B) the requisite approvals of insurance regulatory authorities (including, without limitation, the insurance regulatory authorities of Rhode Island), (C) applicable requirements, if any, of the Exchange Act, the Securities Act or Blue Sky Laws and state takeover laws, (D) the DGCL with respect to the filing of the Delaware Certificate of Merger, (E) all filings, consents, approvals and authorizations to be made with or received from the Toronto Stock Exchange (the "TSE") and the Ontario Securities Commission (the "OSC") in connection with the Related Party Transactions, (F) the approval of the TSE in connection with the issuance of the Parent Debentures and the underlying Parent Common Shares and (G) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications would not prevent or materially delay the consummation of the transactions contemplated by, or otherwise prevent Parent and Merger Sub from performing their material obligations under, this Agreement. (c) As used in this Agreement, "Related Party Transactions" means the issuance and sale by Parent of certain convertible debentures to Fairfax Financial Holdings Limited and the Parent Debentures and the Company Common Stock underlying such securities and the sale of the capital stock of the Insurance Companies by the Surviving Corporation to a subsidiary of Fairfax Financial Holdings Limited. SECTION 4.06. Permits; Compliance. (a) Except as disclosed in Section 4.06(a) of the Parent Disclosure Schedule, each of Parent and the Parent Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for Parent or any Parent Subsidiary to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Parent Permits") except where the failure to obtain any such Parent Permits, would not prevent or materially delay consummation of the Merger, or otherwise prevent or materially delay Parent from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect. As of the date hereof, no suspension or cancellation of any of the Parent Permits is pending or, to the knowledge of Parent, threatened. (b) Except as disclosed in Section 4.06(b) of the Parent Disclosure Schedule, neither Parent nor any Parent Subsidiary is in conflict with, or in default or violation of, (i) any Law applicable to Parent or any Parent Subsidiary or by which any property or asset of Parent or any Parent Subsidiary is bound or affected, (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or 33 any Parent Subsidiary is a party or by which Parent or any Parent Subsidiary or any property or asset of Parent or any Parent Subsidiary is bound or affected or (iii) any Parent Permits, except in each case for any such conflicts, defaults or violations that would not prevent or materially delay consummation of the Merger or otherwise prevent or materially delay Parent from performing its obligations under this Agreement and would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 4.07. Filings; Financial Statements. (a) Parent has filed all reports, schedules, forms, statements and other documents required to be filed by it with the TSE and the OSC since December 31, 1998 (collectively, including all exhibits thereto and any registration statement filed since such date, the "Parent Reports"). As of the respective dates they were filed, (i) the Parent Reports complied in all material respects with the requirements of the TSE and the OSC, as the case may be and (ii) none of the Parent Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Parent Reports was prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Canadian GAAP) and each presented or will present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of Parent and its consolidated subsidiaries as at the respective dates thereof and for the respective periods indicated therein, except as otherwise noted therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments which are not expected to be material, individually or in the aggregate). (c) Parent has heretofore furnished to the Company a complete and correct copy of any amendments or modifications (which have not yet been filed with the TSE or the OSC but which are required to be filed) to agreements, documents or other instruments which previously had been filed by Parent with the TSE or the OSC. (d) Both before and after giving effect to the direct and indirect liabilities and obligations of the Parent arising under this Agreement, whether absolute or contingent, the Parent: (i) is solvent (i.e., the aggregate fair value of its assets exceeds the sum of its liabilities); (ii) has adequate working capital; and (iii) is able to pay its debts as they mature. SECTION 4.08. Undisclosed Liabilities. Except for those liabilities that are disclosed in Section 4.08 of the Parent Disclosure Schedule or are fully reflected or reserved against on the balance sheet of Parent contained in the Parent Reports as of September 30, 2000 (the "Parent Balance Sheet"), neither Parent nor any Parent Subsidiary has outstanding any liability or obligation of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), except for liabilities and obligations that have been incurred since the date of the Parent Balance Sheet in the ordinary course of business, that would not prevent or materially delay consummation of the Merger or otherwise prevent or 34 materially delay Parent from performing its obligations under this Agreement and that would not, individually or in the aggregate, have a Material Adverse Effect. With respect to liabilities or obligations concerning the matters addressed in Sections 4.07 and 4.09, the provisions of such Sections and not this Section 4.08 shall apply. SECTION 4.09. Taxes. Parent and the Parent Subsidiaries have filed all United States federal, state, local and non-United States Tax returns and reports due and required to be filed by them and have paid and discharged all Taxes required to be paid or discharged, other than (a) such Taxes, returns or reports as are being contested in good faith by appropriate proceedings and (b) such Taxes, returns or reports or other occurrences that would not, individually or in the aggregate, have a Material Adverse Effect. No United States (federal, state or local) or non-United States taxing authority or agency is asserting in writing or threatening in writing to assert against Parent or any Parent Subsidiary any deficiency or claim for any Taxes or interest thereon or penalties in connection therewith. Neither Parent nor any Parent Subsidiary has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of any Tax. The accruals and reserves for Taxes reflected in the Parent Balance Sheet are adequate to cover all Taxes accruable through such date (including interest and penalties, if any, thereon) in accordance with Canadian GAAP. Parent and the Parent Subsidiaries have withheld from all payments made by them, or otherwise collected, and have remitted all amounts in respect of Taxes required to be withheld, collected or remitted by them to the applicable governmental authorities within the required time periods, except where the failure to so withhold or remit such amounts would not result in a Material Adverse Effect. There are no Tax liens upon any property or assets of Parent or any of the Parent Subsidiaries except liens for current Taxes not yet due. SECTION 4.10. Operations of Merger Sub. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities and has conducted its operations only as contemplated by this Agreement. SECTION 4.11. Financing. Parent has financing arrangements that will provide sufficient funds to pay, or cause Merger Sub to pay, the aggregate Merger Consideration in connection with the Merger and consummate the Merger. SECTION 4.12. Brokers. Except as disclosed in Section 4.12 of the Parent Disclosure Schedule, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Parent or Merger Sub. SECTION 4.13. Affiliate Transactions. Except as disclosed in Section 4.13 of the Parent Disclosure Schedule and except for the ownership of Parent Common Shares and Parent Share Options pursuant to the Parent Share Option Plans, there are no material contracts, commitments, agreements, arrangements or other transactions between Parent or any of Parent Subsidiaries, on the one hand, and any (i) officer or director of Parent or any of Parent Subsidiaries, (ii) record or beneficial owner of five percent or more of the voting securities of Parent or (iii) person or entity known to Parent that directly or indirectly controls, is controlled 35 by, or is under common control with any such officer, director or beneficial owner, on the other hand. SECTION 4.14. Authorization of Parent Convertible Debentures. The Parent Convertible Debentures have been duly authorized by Parent and, when executed, authenticated, issued and delivered in accordance with the indenture under which the Parent Debentures will be issued, will constitute legal, valid and binding obligations of Parent enforceable against Parent in accordance with their terms. The Parent Convertible Debentures will, when issued, be registered under the Securities Act and registered or exempt from registration under the applicable Blue Sky Laws. SECTION 4.15. Indebtedness of Parent. Section 4.15 of the Parent Disclosure Schedule contains a true, correct and complete list of all of the Parent's indebtedness for borrowed money and Parent is not in default in any material respect of any of its obligations thereunder. SECTION 4.16. Additional Representations and Warranties of Parent. (a) Parent is a reporting issuer in good standing under the Securities Act (Ontario) and has been a reporting issuer for the last twelve months. (b) The issued and outstanding Parent Common Shares in the capital of Parent are listed and posted for trading on the TSE and Parent is not in material default of any of the policies or by-laws of the TSE. (c) No securities commission, stock exchange or similar regulatory authority has issued or is threatening to issue any order preventing or suspending trading in any securities of Parent, nor has Parent received a notice that any such order is pending. (d) The Parent Common Shares issuable upon conversion of the Parent Debentures have been, or will be prior to the Effective Time, duly reserved and authorized for issuance, and such Parent Common Shares, when issued and delivered upon due conversion of the Parent Debentures, will be fully paid and non-assessable shares in the capital of Parent listed and posted for trading on the TSE. (e) The issuance and delivery of the Parent Debentures to the holders of Company Common Stock and of the Parent Common Shares upon the conversion of the Parent Debentures is exempt from the prospectus and registration requirements of the Securities Act (Ontario), and no prospectus or other document must be filed with, proceeding taken against or approval, permit, consent or authorization to be obtained, from the Ontario Securities Commission under applicable securities laws, rules, regulations, notices and policies in Ontario. (f) Neither the Parent Debentures nor the Parent Common Shares issuable upon the conversion of the Parent Debentures will be subject to a "hold period" under applicable securities laws, rules, regulations, notices and policies in Ontario, provided that: 36 (i) at the time of the first trade of such security, the Parent is a reporting issuer in Ontario and has been a reporting issuer in Ontario for at least 12 months; (ii) in the case of a person or company in a special relationship with Parent, the person or company effecting the first trade of such security has reasonable grounds to believe Parent is not in default under the Securities Act (Ontario) and the regulations made thereunder; (iii) disclosure to the OSC has been made of the issuance of the Parent Debentures and the Parent Common Shares issuable upon the conversion of the Parent Debentures; (iv) no unusual effort is made to prepare the market or to create a demand for the securities and no extraordinary commission or consideration is paid for the trade; and (v) the trade is not a "control block distribution". ARTICLE V CONDUCT OF BUSINESSES PENDING THE MERGER SECTION 5.01. Conduct of Business by the Company Pending the Merger. Except as contemplated by this Agreement, the Company agrees that, between the date of this Agreement and the Effective Time, unless Parent shall otherwise consent in writing (which consent shall not be unreasonably withheld or delayed), the businesses of the Company and the Company Subsidiaries shall be conducted only in, and the Company and the Company Subsidiaries shall not take any action except in, the ordinary course of business; and the Company shall use its reasonable best efforts to preserve substantially intact the business organization of the Company and the Company Subsidiaries, maintain their rights and keep available the services of the current officers, employees and consultants of the Company and the Company Subsidiaries and to preserve the current relationships of the Company and the Company Subsidiaries with customers, licensors, licensees and other persons with which the Company or any Company Subsidiary has significant business relations and where the loss of any such relationship would, either individually or in the aggregate, have a Material Adverse Effect. By way of amplification and not limitation, except as contemplated by this Agreement, neither the Company nor any of its subsidiaries shall, between the date of this Agreement and the Effective Time, directly or indirectly, do, or propose to do, any of the following without the prior written consent of Parent: (a) amend or otherwise change its Certificate of Incorporation or By-Laws or equivalent organizational documents; (b) transfer, issue, sell, pledge, lease, license, dispose, grant, encumber, or authorize for transfer, issuance, sale, pledge, lease, license, disposition, grant or 37 encumbrance (i) any shares of its stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or any Company Subsidiary or (ii) any assets of the Company or any Company Subsidiary except in the ordinary course of business; (c) authorize, declare, set aside, make or pay any dividend payment or other distribution, payable in cash, stock, property or otherwise, with respect to any of its stock, except for regular quarterly dividends on Company Common Stock declared and paid in cash at times consistent with past practice in an aggregate amount not in excess of $0.025 per share of Company Common Stock; (d) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets or any other business combination) any interest in any corporation, partnership, other business organization or any division thereof or all or substantially all of the assets of any such entity, except for ordinary course organizations affiliated to a purchasing group of the Company or any Company Subsidiary; (f) incur any material indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse the obligations of any person, or make any loans, advances or capital contributions to any person or grant any security interest in any of its assets except in the ordinary course of business if the same would not be reasonably likely to have a Material Adverse Effect; (g) enter into any lease for the principal location of the Company in New York City; (h) authorize, or make any commitment with respect to, any capital expenditures that are, in the aggregate, in excess of $500,000 for the Company and its subsidiaries taken as a whole; (i) other than to facilitate the consummation of the transactions contemplated hereby, waive any stock repurchase or acceleration rights in any material respect, amend or change the terms of any options or restricted stock in any material respect, or reprice options granted under any Company Stock Option Plan or authorize cash payments in exchange for any options granted under any such plans (except to implement the amendments to the Performance Stock Plan previously authorized by the Board); (j) (i) increase the compensation payable or to become payable to its directors, officers or employees (except for increases in the ordinary course of business and consistent and with current budgets, as disclosed in Section 5.01(j) of the Company Disclosure Schedule, in salaries or wages of employees of the Company or any Company Subsidiary or directors or officers of the Company or any Company Subsidiary who are 38 employed at will by the Company or such Company Subsidiaries), (ii) grant any rights to severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company or any Company Subsidiary (except in the ordinary course of business to any employee of the Company or any Company Subsidiary who are not directors or officers of the Company or any Company Subsidiary), or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund or policy for the benefit of any director, officer or employee, (iii) take any affirmative action to accelerate the vesting of any stock-based compensation, or (iv) hire or retain any person other than as an employee at will if such person's aggregate annual or annualized compensation is expected to be in excess of $100,000; (k) take any action with respect to accounting principles or procedures, other than reasonable and usual actions in the ordinary course of business or required actions pursuant to a change in applicable statutory or generally accepted accounting principles; (l) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) of more than $500,000 individually or in the aggregate, other than the payment, discharge or satisfaction, in the ordinary course of business, of liabilities reflected or reserved against in the Company Balance Sheet or subsequently incurred in the ordinary course of business; (m) take any action that results in any of the conditions to the Merger set forth in Article VII not being satisfied, except any action as may be required by applicable Law; or (n) announce an intention to authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing. SECTION 5.02. Notification of Certain Matters. Parent shall give prompt notice to the Company, and the Company shall give prompt notice to Parent, of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause (A) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect or (B) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied in any material respect and (ii) any failure of Parent or the Company, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.02 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 39 ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.01. Registration Statement; Company Proxy Statement. (a) As promptly as practicable after the execution of this Agreement, (i) Parent and the Company shall prepare the Company Proxy Statement and (ii) Parent and the Company shall prepare and file with the SEC a registration statement on Form F-4 (together with all amendments thereto, the "Registration Statement") in which the Company Proxy Statement shall be included as a prospectus, in connection with the registration under the Securities Act of the Parent Debentures to be issued to the stockholders of the Company pursuant to the Merger. Parent and the Company each shall use their reasonable best efforts to cause the Registration Statement to become effective as promptly as practicable, and, prior to the effective date of the Registration Statement, Parent shall take all or any action required under any applicable federal or state securities Laws in connection with the issuance of the Parent Debentures. Each party shall furnish all information concerning such party and its affiliates that the other party may reasonably request in connection with such actions and the preparation of the Registration Statement and the Company Proxy Statement. As promptly as practicable after the Registration Statement shall have become effective, the Company shall mail the Company Proxy Statement to its stockholders. Subject to Section 6.04(b), the Company Proxy Statement shall include the Company Board Approval. (b) Parent and Merger Sub shall cooperate with the Company in the preparation of the Company Proxy Statement. Parent and the Company each will advise the other, promptly after they receive notice thereof, of the time when the Registration Statement has become effective or any supplement or amendment has been filed, of the issuance of any stop order, or of any request by the SEC for amendment of the Company Proxy Statement or the Registration Statement or comments thereon and responses thereto or requests by the SEC for additional information. Each party shall give the other party and its counsel the opportunity to review the Company Proxy Statement or Registration Statement, as applicable, including all amendments and supplements thereto, prior to their being filed with the SEC and shall give the other party and its counsel the opportunity to review all responses to requests for additional information and replies to comments prior to their being filed with, or sent to, the SEC. Each of the Company, Parent and Merger Sub agrees to use its reasonable best efforts, after consultation with the other parties hereto, to respond promptly to all such comments of and requests by the SEC and to cause the Company Proxy Statement and all required amendments and supplements thereto to be mailed to the holders of shares of Company Common Stock entitled to vote at the Company Stockholders' Meeting at the earliest practicable time. (c) The information supplied by the Company for inclusion in the Registration Statement and the Company Proxy Statement shall not, at (i) the time the Company Proxy Statement is cleared by the SEC, (ii) the time the Company Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of the Company, (iii) the time of the Company Stockholders' Meeting, and (iv) the Effective Time, contain any untrue statement of a material fact or fail to state any material fact required to be stated therein or necessary in 40 order to make the statements therein, in light of the circumstances under which they were made, not misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Stockholders' Meeting that has become false or misleading. If, at any time prior to the Effective Time, any event or circumstance relating to the Company or any Company Subsidiary, or any of their respective officers or directors, that should be set forth in an amendment or a supplement to the Registration Statement or the Company Proxy Statement should be discovered by the Company, the Company shall promptly inform Parent. The Company Proxy Statement and all other documents for which the Company is responsible in connection with the Merger or the other transactions contemplated by this Agreement will comply as to form and substance in all material respects with the applicable requirements of the Securities Act and the Exchange Act. (d) The information supplied by Parent for inclusion in the Registration Statement and the Company Proxy Statement shall not, at (i) the time the Registration Statement is declared effective, (ii) the time the Company Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of Parent and the Company, (iii) the time of the Company Stockholders' Meeting and (iv) the Effective Time, contain any untrue statement of a material fact or fail to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Stockholders' Meeting that has become false or misleading. If, at any time prior to the Effective Time, any event or circumstance relating to Parent or Merger Sub, or their respective officers or directors, should be discovered by Parent which should be set forth in an amendment or a supplement to the Registration Statement and the Company Proxy Statement, Parent shall promptly inform the Company. SECTION 6.02. Company Stockholders' Meeting. The Company, acting through the Board, shall, in accordance with applicable law and the Company's Certificate of Incorporation and By-Laws, (i) duly call, give notice of, convene and hold a meeting of the holders of Company Common Stock as promptly as practicable after the date on which the Company Proxy Statement is cleared by the SEC for the purpose of voting upon the approval of the Merger, this Agreement and other transactions contemplated herein (the "Company Stockholders' Meeting") and (ii) subject to Section 6.04 hereof, (A) include in the Company Proxy Statement the unanimous recommendation of the Board that the stockholders of the Company approve and adopt this Agreement, the Merger and the other transactions contemplated by this Agreement and (B) use its best efforts to obtain such approval and adoption. SECTION 6.03. Access to Information; Confidentiality. (a) From the date hereof until the Effective Time, the Company shall, and shall cause the Company Subsidiaries and the officers, directors, employees, auditors and agents of the Company and the Company Subsidiaries to, afford the officers, employees and agents of Parent and Merger Sub and persons providing or proposing to provide Parent or Merger Sub with financing for the Merger and other transactions contemplated by this Agreement and other representatives (collectively, the "Parent Representatives") of Parent complete access at all reasonable times to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and 41 each Company Subsidiary, and shall furnish Parent and Merger Sub and persons providing or proposing to provide Parent or Merger Sub with financing for the Merger and other transactions contemplated by this Agreement with such financial, operating and other data and information as Parent or Merger Sub, through its officers, employees or agents, may reasonably request. (b) From the date hereof until the Effective Time, Parent shall, and shall cause the Parent Subsidiaries and the officers, directors, employees, auditors and agents of Parent and the Parent Subsidiaries to, afford the officers, employees and agents of the Company and other representatives (collectively, the "Company Representatives", and, together with the Parent Representatives, the "Representatives") of the Company complete access at all reasonable times to the officers, employees, agents, properties, offices, plants and other facilities, books and records of Parent and each Parent Subsidiary, and shall furnish the Company with such financial, operating and other data and information as the Company, through its officers, employees or agents, may reasonably request. (c) Each party to this Agreement shall comply with, and shall cause its Representatives to comply with, all of their obligations under the Confidentiality Agreements listed in Section 6.03(c) of each of the Company Disclosure Schedule and the Parent Disclosure Schedule (the "Confidentiality Agreements"). All information obtained by a party or any of its Representatives pursuant to (a) or (b) above shall be subject to the Confidentiality Agreements. SECTION 6.04. No Solicitation or Negotiation. (a) Neither the Company nor any Company Subsidiary shall, directly or indirectly, through any officer, director, agent or otherwise, (i) solicit, initiate or encourage the submission of, any Acquisition Proposal (as defined in Section 9.04) or (ii) except as required by the fiduciary duties of the Board under applicable law after having received advice from outside legal counsel and after giving prior written notice to Parent and Merger Sub and entering into a customary confidentiality agreement on terms no less favorable to the Company than those contained in the Confidentiality Agreement, participate in any discussions or negotiations regarding, or furnish to any person, any information with respect to, or otherwise cooperate in any way with respect to, or assist or participate in, facilitate or encourage, any unsolicited proposal that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal. (b) Except as set forth in this Section 6.04(b), neither the Board nor any committee thereof shall (i) withdraw, modify or change, or propose to withdraw, modify or change, in a manner adverse to Parent or Merger Sub, the approval or recommendation by the Board or any such committee of this Agreement, the Merger or any other transaction contemplated hereby, (ii) approve or recommend, or propose to approve or recommend, any Acquisition Proposal or (iii) enter into any agreement with respect to any Acquisition Proposal. Notwithstanding the foregoing, in the event that, prior to obtaining the Company Stockholders' Approval, the Board determines in good faith that it is required to do so by its fiduciary duties under applicable law after having received advice from outside legal counsel, the Board may withdraw or modify its approval or recommendation of the Merger, but only to terminate this Agreement in accordance with Section 8.01(j) (and, concurrently with such termination, cause the Company to enter into an agreement with respect to a Superior Proposal). 42 (c) The Company shall, and shall direct or cause its directors, officers, employees, representatives and agents to, immediately cease and cause to be terminated any discussions or negotiations with any parties that may be ongoing with respect to any Acquisition Proposal. (d) The Company shall promptly advise Parent orally and in writing of (i) any Acquisition Proposal or any request for information with respect to any Acquisition Proposal, the material terms and conditions of such Acquisition Proposal or request and the identity of the person making such Acquisition Proposal or request and (ii) any changes in any such Acquisition Proposal or request. (e) The Company agrees, except as required by the Board's fiduciary duties under applicable law after having received advice from outside legal counsel, not to release any third party from, or waive any provision of, any confidentiality or standstill agreement to which the Company is a party. SECTION 6.05. Directors' and Officers' Indemnification and Insurance. (a) The Bylaws of the Surviving Corporation shall contain the respective provisions that are set forth, as of the date of this Agreement, in Article Nine of the Certificate of Incorporation of the Company, which provisions shall not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would affect adversely the rights thereunder of individuals who at or at any time prior to the Effective Time were directors, officers, employees, fiduciaries or agents of the Company (or their estates or personal representatives), unless such modifications shall be required by law. (b) For a period of six years after the Effective Time, the Surviving Corporation shall maintain in effect the current directors' and officers' liability insurance policies maintained by the Company (provided that the Surviving Corporation may substitute therefor policies of substantially similar coverage containing terms and conditions that are not on the whole materially less favorable) with respect to claims arising from facts or events that occurred prior to the Effective Time; provided, however, that in no event shall the Surviving Corporation be required to expend pursuant to this Section 6.05(b) more than an amount per year equal to 125% of current annual premiums paid by the Company for such insurance (which premiums the Company represents and warrants to be approximately $278,000 per year in the aggregate) (the "Maximum Premium") unless the directors agree to reimburse the Surviving Corporation in full for the amount by which the annual premium exceeds the Maximum Premium. (c) In the event the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each case, proper provision shall be made so that the successors and assigns of the Surviving Corporation or, at Parent's option, Parent, shall assume the obligations set forth in this Section 6.05. 43 SECTION 6.06. Further Action; Consents; Filings. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts expeditiously to (i) take, or cause to be taken, all appropriate action and do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the Merger and the other transactions contemplated by this Agreement, (ii) obtain from Governmental Entities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Parent or the Company or any of their respective subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated by this Agreement and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement, the Merger and the other transactions contemplated by this Agreement that are required under (A) the Exchange Act and the Securities Act and the rules and regulations thereunder and any other applicable federal or state securities laws, (B) the HSR Act and any other antitrust regulations, (C) the rules and regulations of all relevant insurance regulatory authorities and (D) any other applicable Law. The parties hereto shall cooperate with each other in connection with the making of all such filings, including by providing copies of all such documents to the nonfiling party and its advisors prior to filing and, if requested, by accepting all reasonable additions, deletions or changes suggested in connection therewith. (b) (i) Each party to this Agreement shall give any notices to third parties, and use its reasonable best efforts to obtain any third party consents (without making any payments therefor), (A) necessary, proper or advisable to consummate the transactions contemplated by this Agreement, (B) required to be disclosed in the Company Disclosure Schedule or the Parent Disclosure Schedule (as applicable) or (C) required to prevent a Material Adverse Effect from occurring prior to or after the Effective Time. (ii) From the date of this Agreement until the Effective Time, each party to this Agreement shall promptly notify the other party in writing of any pending or, to the knowledge of such party, threatened action, suit, arbitration or other proceeding or investigation by any Governmental Entity or any other person (i) challenging or seeking damages in connection with the Merger or the conversion of Company Common Stock into the Merger Consideration pursuant to the Merger, (ii) seeking to restrain or prohibit the consummation of the Merger or otherwise limiting the right of Parent or its subsidiaries to own or operate all or any portion of the businesses or assets of the Company or its subsidiaries, or (iii) which could reasonably be expected to have a Material Adverse Effect. Each of the parties hereto agrees to cooperate and use its reasonable best efforts to vigorously contest and resist any such action, including administrative or judicial actions, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) that is in effect and that restricts, prevents or prohibits consummation of the Merger, including, without limitation, by vigorously pursuing all available avenues of administrative and judicial appeal. SECTION 6.07. Consent of Holders of Restricted Stock. Prior to the Effective Time, and in accordance with the terms and conditions of the Performance Stock Plan, the Company shall obtain from each holder of Restricted Shares written consent to the cancellation 44 of such Restricted Shares in consideration for the payment provided herein, and shall take all such other actions as may be necessary so that the terms of Section 2.07 may be carried out and so that, except for the Vested Share Rights (as described in Section 2.07), no person will continue to have any rights with respect to the Restricted Shares or pursuant to the Performance Stock Plan at any time after the Effective Time. SECTION 6.08. Public Announcements. Parent and the Company agree that no public release or announcement concerning the Merger and other transactions contemplated in this Agreement shall be issued by either party without the prior consent of the other party (which consent shall not be unreasonably withheld), except as such release or announcement may be required by Law or the rules or regulations of the Nasdaq or the TSE, in which case the party required to make the release or announcement shall use its best efforts to allow the other party reasonable time to comment on such release or announcement in advance of such issuance. SECTION 6.09. Parent Shareholders' Meeting. If required, Parent, acting through its Board of Directors, shall, in accordance with applicable law and the Parent's Certificate of Incorporation and By-Laws, and no later than May 10, 2001, duly call, give notice of, convene and hold a meeting (the "Parent Shareholders' Meeting") of holders of the Parent Common Shares for the purpose of obtaining the Parent Shareholders' Approval. SECTION 6.10. Affiliates. Prior to the Effective Time, the Company shall deliver to Parent a list of names and addresses of those Persons who are, in the Company's reasonable judgment, on such date, affiliates (within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act (each such Person being an "Affiliate")) of the Company. The Company shall provide Parent with such information and documents as Parent shall reasonably request for purposes of reviewing such list. The Company shall use its reasonable best efforts to deliver or cause to be delivered to Parent, prior to the Effective Time, an affiliate letter substantially in the form attached hereto as Exhibit 6.10, executed by each of the Affiliates of the Company identified in the foregoing list and any Person who shall, to the knowledge of the Company, have become an Affiliate of the Company subsequent to the delivery of such list. SECTION 6.11. Board Nomination. As soon as practicable after the Effective Time, Parent shall cause Bruce Guthart to become a member of the Board of Directors of Parent. Prior to the Effective Time, Parent shall cause Bruce Guthart to become a member of the board of directors of Merger Sub. SECTION 6.12. Certain Funding of the Company. In the event the Company is required to repay its indebtedness to Summit Bank and/or has its loan availability reduced or terminated in order to consummate the Merger or as a result of signing this Agreement, Parent will provide or cause to be provided a substantially equivalent loan facility to the Company or assist in such repayment. SECTION 6.13. Parent Debentures. Parent shall make or cause to be made all required filings under the Securities Act and the Trust Indenture Act of 1939, as amended, to register the offer and sale of the Parent Debentures. 45 SECTION 6.14. Filing With Insurance Regulatory Authorities. Parent shall cause a Form A to be filed with the appropriate insurance regulatory authority with respect to the Merger within 30 business days of the date of this Agreement. ARTICLE VII CONDITIONS TO THE MERGER SECTION 7.01. Conditions to the Merger. The respective obligations of the Company, Parent and Merger Sub to consummate the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived, in whole or in part, to the extent permitted by applicable Law: (a) Approval. Each of the Company Stockholders' Approval and Parent Shareholders' Approval shall have been obtained. (b) No Order. No Governmental Entity, nor any court of competent jurisdiction or arbitrator, shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, judgment, decree, injunction, executive order or award (whether temporary, preliminary or permanent) (collectively, "Order") that is then in effect, and has the effect of making the Merger illegal or otherwise restricting, preventing or prohibiting consummation of the Merger or any other transactions contemplated by this Agreement. (c) Consents. All consents, approvals and authorizations (including, without limitation, the Required Consents which, for greater clarity, include the consents and approvals of the Rhode Island insurance regulatory authorities) legally required to be obtained to consummate the Merger and the other transactions contemplated in and by this Agreement shall have been obtained from and made with all Governmental Entities. (d) Antitrust Waiting Periods. Any waiting period (and any extensions thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. (e) Actions. No Action shall have been brought and remain pending by any Governmental Entity or other person, entity or group that seeks to prevent or delay the consummation of the transactions contemplated by this Agreement. (f) Effective Registration Statement. If any Parent Debentures are to be issued, the Registration Statement shall have been declared effective by the SEC under the Securities Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceeding for that purpose shall have been initiated by the SEC. 46 SECTION 7.02. Conditions to the Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to consummate the Merger are subject to the satisfaction or waiver (where permissible) of the following additional conditions: (a) Representations and Warranties. Each of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the date hereof and as of the Effective Time, as though made at and as of the Effective Time, except that those representations and warranties that address matters only as of a particular date shall remain true and correct as of such date, and Parent shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of the Company to that effect. (b) Agreements and Covenants. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and Parent shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of the Company to that effect. (c) Consents. All consents from third parties under any Company Material Contract required as a result of the transactions contemplated by this Agreement shall have been obtained. (d) Regulatory Consents. All consents, approvals and authorizations required to be made with or received from the TSE and the OSC under applicable laws, rules and regulations regarding the Related Party Transactions have been received. (e) Actions. No Action shall have been brought and remain pending by any Governmental Entity or other person, entity or group that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. (f) Employment Agreement. Bruce Guthart, the president of the Company, has executed an employment agreement, together with a related management bonus agreement and restricted stock arrangement, substantially in the form of Exhibit A to this Agreement, and such employment agreement shall be in full force and effect as of the Closing Date. (g) Waiver. Prior to the Closing Date, Schenendorf Seaman, Inc., formerly known as Seaman, Ross & Weiner, Inc. ("SRW"), ASCO Risk Management Corp., formerly known as Amsco Coverage Corp. ("Amsco") and DS Risk Management Corp., formerly known as D.S.I. Associates, Inc. ("DSI"), shall have delivered a written and executed waiver (the "Waiver") of all of their respective rights to receive securities of the Company under the Asset Purchase Agreement among Kaye Insurance Associates, Inc., SRW, Amsco and DSI, Douglas Schenendorf and Alex Seaman dated as of January 1, 1999, pursuant to which SRW, Amsco and DSI shall have agreed to accept cash in lieu of securities of the Company and the Company shall have delivered to Parent an executed copy of such Waiver. 47 SECTION 7.03. Conditions to the Obligations of the Company. The obligations of the Company to consummate the Merger are subject to the satisfaction or waiver (where permissible) of the following additional conditions: (a) Representations and Warranties. Each of the representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct in all material respects as of the date hereof and as of the Effective Time, as though made on and as of the Effective Time, except that those representations and warranties that address matters only as of a particular date shall remain true and correct in all material respects as of such date, and the Company shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of Parent to that effect. (b) Agreements and Covenants. Each of Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time (provided that any agreement or covenant that is qualified by materiality or by reference to a Material Adverse Effect shall have been performed or complied with in all respects on or prior to the Effective Time) and the Company shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of Parent to that effect. (c) Parent Common Shares. The Parent Common Shares shall continue to be posted for trading on the TSE and that number of Parent Common Shares which may be issued upon the conversion of the Parent Debentures have been reserved for issuance by Parent at the Effective Time. (d) Change of Control. Fairfax Financial Holdings Limited and its affiliates shall not have sold or otherwise disposed of such number of Parent Common Shares to cause it or they at the Closing Date to no longer beneficially own at least 30% of the outstanding Parent Common Shares and to no longer beneficially own more Parent Common Shares than any other shareholder of Parent. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. Termination. This Agreement may be terminated and the Merger and the other transactions contemplated by this Agreement may be abandoned at any time prior to the Effective Time, notwithstanding any requisite approval and adoption of this Agreement and the transactions contemplated by this Agreement, as follows: (a) by mutual written consent of each of Parent, Merger Sub and the Company duly authorized by the Boards of Directors of each of Parent, Merger Sub and the Company; 48 (b) by either Parent, Merger Sub or the Company if the Effective Time shall not have occurred on or before December 31, 2001; provided, however, that the right to terminate this Agreement under this Section 8.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by either Parent or the Company, if there shall be any Order of a Governmental Entity (whether temporary, preliminary or permanent) which is then in effect and has the effect of making consummation of the Merger illegal or otherwise preventing or prohibiting consummation of the Merger; provided, however, that the provisions of this Section 8.01(c) shall not be available to any party whose failure to fulfill its obligations hereunder shall have been the cause of, or shall have resulted in, such Order; (d) by Parent if the TSE or the OSC shall have indicated in writing that it has made a final and nonappealable determination that it will not grant a consent, approval or authorization referred to under Section 7.02(d) of this Agreement; (e) by Parent if (i) the Board withholds, withdraws, modifies or changes the Company Board Approval in a manner adverse to Parent or shall have resolved to do so, (ii) the Board shall have recommended to the stockholders of the Company an Acquisition Proposal or shall have resolved to do so or shall have entered into any letter of intent or similar document or any agreement, contract or commitment accepting any Acquisition Proposal, (iii) the Company shall have failed to include the Company Board Approval in the Company Proxy Statement, (iv) if management of the Company shall fail to certify that the Board has not withdrawn, modified or changed, or resolved to do any of the foregoing with respect to, its recommendation in favor of the approval of the Merger and this Agreement within five business days after Parent requests in good faith, based on its good faith belief that such certification is desired under the circumstances, (v) a tender offer or exchange offer for 30% or more of the outstanding shares of stock of the Company is commenced and, within five business days after such offer is commenced, the Board fails to recommend against acceptance of such tender offer or exchange offer by its stockholders (including by taking no position with respect to the acceptance of such tender offer or exchange offer by its stockholders) or (vi) the Company Stockholders' Meeting is not held within 45 days after the date on which the Registration Statement shall have become effective; (f) by either Parent or the Company if this Agreement and the transactions contemplated herein shall fail to receive the requisite vote for approval at the Company Stockholders' Meeting; (g) by either Parent or the Company if this Agreement and the transactions contemplated herein shall fail to receive the requisite vote for approval at the Parent Shareholders' Meeting; 49 (h) by Parent upon a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in either Section 7.02(a) or (b) would not be satisfied (a "Terminating Company Breach"); provided, however, that, if such Terminating Company Breach is curable by the Company through the exercise of all reasonable efforts and the Company continues to exercise all reasonable efforts, Parent may not terminate this Agreement under this Section 8.01(h) for a period of 30 days from the date on which Parent delivers to the Company written notice setting forth in reasonable detail the circumstances giving rise to such Terminating Company Breach; provided further that if, within such 30 day period, the Company does cure such Terminating Company Breach so that the conditions set forth in either Section 7.02(a) or (b) would no longer be breached thereby, then Parent shall not be entitled to terminate this Agreement pursuant to this Section 8.01(h). (i) by the Company upon a breach of any representation, warranty, covenant or agreement on the part of Parent or Merger Sub set forth in this Agreement, or if any representation or warranty of Parent or Merger Sub shall have become untrue, in either case such that the conditions set forth either in Section 7.03(a) or (b) would not be satisfied (a "Terminating Parent Breach"); provided, however, that, if such Terminating Parent Breach is curable by Parent through the exercise of all reasonable efforts and Parent continues to exercise all reasonable efforts, Company may not terminate this Agreement under this Section 8.01(i) for a period of 30 days from the date on which the Company delivers to Parent written notice setting forth in reasonable detail the circumstances giving rise to such Terminating Parent Breach; provided further that if, within such 30 day period, Parent does cure such Terminating Company Breach so that the conditions set forth in either Section 7.03(a) or (b) would no longer be breached thereby, then the Company shall not be entitled to terminate this Agreement pursuant to this Section 8.01(i) (j) by the Company, upon approval of the Board, if prior to the Company Stockholders' Approval, the Board determines in good faith that it is required to do so by its fiduciary duties under applicable law after having received advice from outside legal counsel in order to enter into an agreement with respect to a Superior Proposal, upon five business days' prior written notice to Parent, setting forth in reasonable detail the identity of the person making, and the final terms and conditions of, the Superior Proposal and after duly considering any proposals that may be made by Parent during such five business day period; provided, however, that any termination of this Agreement pursuant to this Section 8.01(j) shall not be effective until the Company has made full payment of all amounts provided under Section 8.05; or (k) by Parent, if the Company shall have breached its obligations under Section 6.04. SECTION 8.02. Effect of Termination. In the event of termination of this Agreement pursuant to Section 8.01, this Agreement shall forthwith become void, there shall be 50 no liability under this Agreement on the part of Parent, Merger Sub or the Company or any of their respective officers or directors, and all rights and obligations of each party hereto shall cease, subject to the remedies of the parties set forth in Section 8.05; provided, however, that nothing herein shall relieve any party from liability for the willful breach of any of its representations, warranties, covenants or agreements set forth in this Agreement and that the Confidentiality Agreement shall survive termination of this Agreement. SECTION 8.03. Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after the approval of the Merger and this Agreement by the stockholders of the Company, no amendment may be made that would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger. This Agreement may not be amended, except by an instrument in writing signed by the parties hereto. SECTION 8.04. Waiver. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any obligation or other act of any other party hereto, (b) waive any inaccuracy in the representations and warranties contained herein of any other party hereto or in any document delivered pursuant hereto, and (c) waive compliance with any agreement of any other party hereto or condition contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. SECTION 8.05. Fees and Expenses. (a) In the event that (i) this Agreement is terminated pursuant to Section 8.01(e), 8.01(j) or 8.01(k); or (ii) this Agreement is terminated pursuant to Section 8.01(f) or 8.01(h) and the Company enters into an agreement with respect to an Acquisition Proposal, or an Acquisition Proposal is consummated, in each case within 12 months after such termination, and the Company shall not theretofore have been required to pay the Fee to Parent pursuant to Section 8.05(a)(i) or 8.05(a)(ii); then, in any such event, the Company shall pay Parent promptly (but in no event later than 10 business days after the first of such events shall have occurred) a fee equal to $3,855,000 (the "Fee"), which amount shall be payable in immediately available funds, plus all Expenses (as hereinafter defined). (b) If Parent shall fail to receive the requisite vote for approval at the Parent Shareholders' Meeting and as a result Parent is unable to consummate the transaction, then, in such event, Parent shall pay the Company promptly (but in no event later than 10 business days after the failure to receive the requisite vote for approval) the Fee, which amount shall be payable in immediately available funds, plus all Expenses. 51 (c) If this Agreement is terminated for any reason whatsoever and a party hereto is in material breach of its material covenants and agreements contained in this Agreement or is in material breach of its representations and warranties contained in this Agreement, such party shall, whether or not any payment is made pursuant to Section 8.05(a), reimburse the other party hereto and their respective stockholders and affiliates (not later than five business days after submission of statements therefor) for all out-of-pocket expenses and fees (including, without limitation, all fees of counsel, accountants, experts and consultants and their respective stockholders and affiliates) incurred or accrued by either of them or on their behalf in connection with the Merger or other transactions contemplated by this Agreement and for which such party or its stockholders or affiliates is liable (all the foregoing being referred to herein collectively as the "Expenses"); provided, however, that in no event shall either party be obligated to pay Expenses incurred by the other party in excess of $1,000,000. (d) Except as set forth in this Section 8.05, all costs and expenses incurred in connection with this Agreement, the Voting Agreements and the Merger or other transactions contemplated by this Agreement shall be paid by the party incurring such expenses, whether or not the Merger and other transactions contemplated by this Agreement are consummated, except that the Company and Parent each shall pay one-half of all Expenses relating to printing and filing of the Registration Statement and the Proxy Statement, and all SEC and other regulatory filing fees incurred in connection with the Registration Statement and the Proxy Statement. (e) In the event that the Company shall fail to pay the Fee or any Expenses when due, the term "Expenses" shall be deemed to include the costs and expenses actually incurred or accrued by Parent and Merger Sub and their respective stockholders and affiliates (including, without limitation, fees and expenses of counsel) in connection with the collection under and enforcement of this Section 8.05, together with interest on such unpaid Fee and Expenses, commencing on the date that the Fee or such Expenses became due, at a rate equal to the rate of interest publicly announced by Citibank, N.A., from time to time, in the City of New York, as such bank's Base Rate plus 2%. (f) In the event that Parent shall fail to pay any Expenses when due, the term "Expenses" shall be deemed to include the costs and expenses actually incurred or accrued by the Company and their respective stockholders and affiliates (including, without limitation, fees and expenses of counsel) in connection with the collection under and enforcement of this Section 8.05, together with interest on such unpaid Expenses, commencing on the date that such Expenses became due, at a rate equal to the rate of interest publicly announced by Citibank, N.A., from time to time, in the City of New York, as such bank's Base Rate plus 2%. ARTICLE IX GENERAL PROVISIONS SECTION 9.01. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by facsimile or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following 52 addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 9.01): if to Parent or Merger Sub: Hub International Limited 214 King Street West, Suite 314 Toronto, Ontario M5H 3S6 Facsimile No.: (416) 593-8717 Attention: W. Kirk James with a copy to: Shearman & Sterling 199 Bay Street, Suite 4405 Toronto, Ontario Facsimile No.: (416) 360-2958 Attention: Brice T. Voran, Esq. if to the Company: Kaye Group Inc. 122 East 42nd Street New York, NY 10168 Facsimile No.: (212) 986-2278 Attention: President with a copy to: Jenkens & Gilchrist Parker Chapin LLP The Chrysler Building 405 Lexington Avenue New York, NY 10174 Facsimile No.: (212) 704-6288 Attention: James Alterbaum, Esq. and Ivy Fischer, Esq. 122 East 42nd Street New York, NY 10168 Facsimile No.: (212) 338-2973 SECTION 9.02. Non-Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement and any certificate delivered 53 pursuant hereto by any person shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 8.01, as the case may be, except that the agreements set forth in Section 6.05 shall survive the Effective Time indefinitely and those set forth in Sections 6.03(c), 6.08, 6.11, 8.02, 8.05 and this Article IX shall survive termination of this Agreement indefinitely unless a different period is set forth in any such Section. SECTION 9.03. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, other than Section 6.05 (which is intended to be for the benefit of the persons covered thereby and may be enforced by such persons). SECTION 9.04. Certain Definitions. For purposes of this Agreement, the term: (a) "Acquisition Proposal" means (i) any proposal or offer from any person relating to any direct or indirect acquisition of (A) 30% or more of the fair market value of the assets of the Company and its subsidiaries taken as a whole or (B) over 30% of any class of equity securities of the Company or of any Company Subsidiary; (ii) any tender offer or exchange offer, as defined pursuant to the Exchange Act, that, if consummated, would result in any person beneficially owning 30% or more of any class of equity securities of the Company or any Company Subsidiary; (iii) any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company or any Company Subsidiary, other than the transactions contemplated by this Agreement; (iv) any person or entity shall have acquired, after the date hereof, beneficial ownership or the right to acquire beneficial ownership of, or any "group" (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder; provided, however, that any "group" formed or deemed formed by persons taking actions in furtherance of this Agreement shall not be deemed to constitute a group) shall have been formed that beneficially owns or has the right to acquire beneficial ownership of, 30% or more of any class of equity securities of the Company or any person, entity or "group" beneficially owning, as of the date hereof, 30% or more of any class of equity securities of the Company shall have acquired, after the date hereof, beneficial ownership or the right to acquire beneficial ownership of an additional 1% of such class of equity securities of the Company; (v) the declaration or payment by the Company, of an extraordinary dividend on any of its shares of capital stock or the effectuation by the Company of a recapitalization or other type of transaction that would involve either a change in the Company's outstanding capital stock or a distribution of assets of any kind to the holders of such capital stock; (vi) the repurchase by the Company of shares of Company Common Stock or (vii) any other transaction the consummation of which would reasonably be expected to impede, interfere with, prevent or materially delay consummation of the Merger or the transactions contemplated by this Agreement. 54 (b) "affiliate" of a specified person means a person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with such specified person. (c) "beneficial owner" with respect to any shares means a person who shall be deemed to be the beneficial owner of such shares (i) that such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or indirectly, (ii) that such person or any of its affiliates or associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding, or (iii) that are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or associates or person with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares. (d) "business day" means any day on which both the principal offices of the SEC in Washington, D.C. are open to accept filings, or, in the case of determining a date when any payment is due, any day (other than a Saturday or a Sunday) on which banks are not required or authorized to close in The City of New York. (e) "Computer Systems" shall mean all computer, hardware, software, systems, and equipment (including embedded microcontrollers in non-computer equipment) embedded within or required to operate the current products of the Company and the Company Subsidiaries, and/or material to or necessary for the Company and the Company Subsidiaries to carry on their businesses as currently conducted. (f) "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, as trustee or executor, by contract or credit arrangement or otherwise. (g) "Material Adverse Effect" means (i) when used in connection with the Company or a Company Subsidiary any circumstance, event, occurrence, change or effect that is or will be materially adverse to the business, operations, properties, condition (financial or otherwise), assets (tangible or intangible), liabilities (including contingent liabilities) or results of operations of the Company and the Company Subsidiaries taken as a whole, (ii) when used in connection with the Insurance Companies or Insurance Company Subsidiaries any circumstance, event, occurrence, change or effect that is materially adverse to the business, operations, properties, condition (financial or otherwise), assets (tangible or intangible), liabilities (including contingent liabilities) or results of operations of the Insurance Companies and their subsidiaries taken as a whole, and (iii) when used in connection with the Parent or 55 Merger Sub means any circumstance, event, occurrence, change or effect that is or is likely to be materially adverse to the business, operations, properties, condition (financial or otherwise), assets (tangible or intangible), liabilities (including contingent liabilities) or results of operations of the Parent and its subsidiaries taken as a whole. (h) "Parent Debentures" means the 8.5% convertible subordinated debentures due 2006 that shall be issued pursuant to an indenture (the form of which is attached hereto as Exhibit B) by Parent to holders of the Company Common Stock in accordance with the provisions of Article II hereof, as a component of the Merger Consideration. (i) "Performance Stock Plan" shall mean the Company's Performance Stock Plan. (j) "person" means an individual, corporation, partnership, limited partnership, syndicate, person (including, without limitation, a "person" as defined in section 13(d)(3) of the Exchange Act), trust, association or entity or government, or political subdivision, agency or instrumentality of a government. (k) "subsidiary" or "subsidiaries" of the Company, the Surviving Corporation, Parent or any other person means an affiliate controlled by such person, directly or indirectly, through one or more intermediaries. (l) "Superior Proposal: means any Acquisition Proposal on terms which the Board determines, in its good faith judgment (after having received the advice of a financial advisor of recognized reputation), to be more favorable to the Company's stockholders than the Merger and for which financing, to the extent required, is then committed. (m) "Taxes" shall mean any and all taxes, fees, levies, duties, tariffs, imposts and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity or taxing authority, including, without limitation: taxes or other charges on or with respect to income, franchise, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value-added or gains taxes; license, registration and documentation fees; and customers' duties, tariffs and similar charges. (n) "$" or "dollar" means a United States dollar. SECTION 9.05. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect as long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any party. Upon determination that any such term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall 56 negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Agreement be consummated as originally contemplated to the fullest extent possible. SECTION 9.06. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. SECTION 9.07. Governing Law; Forum. Except to the extent that the Merger is mandatorily governed by the DGCL, this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that state and without regard to any applicable conflicts of law principles. All Actions arising out of or relating to this Agreement shall be heard and determined in the United States District Court for the Southern District of New York. Each of the parties to this Agreement (a) consents to submit itself to the personal jurisdiction of the United States District Court for the Southern District of New York for the purpose of any Action arising out of or relating to this Agreement brought by any party hereto, and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated herein may not be enforced in or by any of the above-named courts. Parent agrees that it may be served with process in the State of New York and irrevocably appoints Odyssey Reinsurance Corporation, 1 Liberty Plaza, New York, New York 10006, as the agent of Parent to accept service of process relating to any Action arising out of or relating to this Agreement. SECTION 9.08. Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.09. Counterparts. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. SECTION 9.10. Entire Agreement. This Agreement (including the Company Disclosure Schedule and the Parent Disclosure Schedule), the Voting Agreements and the Confidentiality Agreements constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Agreement shall not be assigned (whether pursuant to a merger, by operation of law or otherwise), except that Parent and Merger Sub may assign all or any of their rights and obligations hereunder to any affiliate of Parent, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. 57 SECTION 9.11. Waiver of Jury Trial. Each of the parties hereto hereby waives to the fullest extent permitted by applicable law any right it may have to a trial by jury with respect to any litigation directly or indirectly arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement. Each of the parties hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce that foregoing waiver and (b) acknowledges that it and the other hereto have been induced to enter into this Agreement and the transactions contemplated by this Agreement, as applicable, by, among other things, the mutual waivers and certifications in this Section 9.11. 58 IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. HUB INTERNATIONAL LIMITED By: /s/ W. Kirk James ---------------------------------------- Name: W. Kirk James Title: Vice President & General Counsel 416 ACQUISITION INC. By: /s/ W. Kirk James ---------------------------------------- Name: W. Kirk James Title: President KAYE GROUP INC. By: /s/ Michael P. Sabanos ---------------------------------------- Name: Michael P. Sabanos Title: Executive Vice President & Chief Financial Officer 59 FORM OF AFFILIATE LETTER FOR AFFILIATES OF THE COMPANY [____________], [____] Hub International Limited 214 King Street West, Suite 314 Toronto, Ontario M5H 3S6 Ladies and Gentlemen: I have been advised that as of the date of this letter I may be deemed to be an "affiliate" of Kaye Group Inc., a Delaware corporation (the "Company"), as the term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and/or (ii) used in and for purposes of Accounting Series Releases 130 and 135, as amended, of the Commission. Pursuant to the terms of the Agreement and Plan of Merger, dated as of January 19, 2001 (the "Merger Agreement"), among Hub International Limited, a corporation organized under the laws of Ontario ("Parent"), 416 Acquisition Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and the Company, Merger Sub will be merged with and into the Company (the "Merger"). Capitalized terms used in this letter agreement without definition shall have the meanings assigned to them in the Merger Agreement. As a result of the Merger, I may receive the 8.5% Subordinated Convertible Debentures due 2006 (the "Parent Debentures")to be issued by Parent on the Closing Date pursuant to an indenture among Parent and o, as trustee. I would receive such Parent Debentures in exchange for shares (or upon exercise of options for shares) owned by me of common stock, par value $.01 per share, of the Company (the "Company Common Stock"). 1. I represent, warrant and covenant to Parent that in the event I receive any Parent Debentures as a result of the Merger: A. I shall not make any sale, transfer or other disposition of the Parent Debentures in violation of the Act or the Rules and Regulations. 60 B. I have carefully read this letter and the Merger Agreement and discussed the requirements of such documents and other applicable limitations upon my ability to sell, transfer or otherwise dispose of the Parent Debentures, to the extent I felt necessary, with my counsel or counsel for the Company. C. I have been advised that the issuance of the Parent Debentures to me pursuant to the Merger has been registered with the Commission under the Act on a Registration Statement on Form F-4. However, I have also been advised that, because at the time the Merger is submitted for a vote of the stockholders of the Company, (a) I may be deemed to be an affiliate of the Company and (b) the distribution by me of the Parent Debentures has not been registered under the Act, I may not sell, transfer or otherwise dispose of the Parent Debentures issued to me in the Merger unless (i) such sale, transfer or other disposition is made in conformity with the volume and other limitations of Rule 145 promulgated by the Commission under the Act, (ii) such sale, transfer or other disposition has been registered under the Act, or (iii) in the opinion of counsel reasonably acceptable to Parent, such sale, transfer or other disposition is otherwise exempt from registration under the Act. D. I understand that Parent is under no obligation to register the sale, transfer or other disposition of the Parent Debentures by me or on my behalf under the Act or, except as provided in paragraph 2(A) below, to take any other action necessary in order to make compliance with an exemption from such registration available. E. I understand that there will be placed on the certificates for the Parent Debentures issued to me, or any substitutions therefor, a legend stating in substance: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED [_______ ___, ______] BETWEEN THE REGISTERED HOLDER HEREOF AND HUB INTERNATIONAL LIMITED, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF HUB INTERNATIONAL LIMITED." F. I understand that unless a sale or transfer is made in conformity with the provisions of Rule 145, or pursuant to a registration statement, Parent reserves the right to put the following legend on the certificates issued to my transferee: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO RECEIVED SUCH SECURITIES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SECURITIES HAVE BEEN 61 ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933." G. Execution of this letter should not be considered an admission on my part that I am an "affiliate" of the Company as described in the first paragraph of this letter, nor as a waiver of any rights I may have to object to any claim that I am such an affiliate on or after the date of this letter. 2. By Parent's acceptance of this letter, Parent hereby agrees with me as follows: A. For so long as and to the extent necessary to permit me to sell the Parent Debentures pursuant to Rule 145 and, to the extent applicable, Rule 144 under the Act, Parent shall (a) use its reasonable best efforts to (i) file, on a timely basis, all reports and data required to be filed with the Commission by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and (ii) furnish to me upon request a written statement as to whether Parent has complied with such reporting requirements during the 12 months preceding any proposed sale of the Parent Debentures by me under Rule 145, and (b) otherwise use its reasonable efforts to permit such sales pursuant to Rule 145 and Rule 144. Parent hereby represents to me that it has filed all reports required to be filed with the Commission under Section 13 of the 1934 Act during the preceding 12 months. B. It is understood and agreed that certificates with the legends set forth in paragraphs 1(E) and 1(F) above will be substituted by delivery of certificates without such legends if (i) one year shall have elapsed from the date the undersigned acquired the Parent Debentures received in the Merger and the provisions of Rule 145(d)(2) are then available to the undersigned, (ii) two years shall have elapsed from the date the undersigned acquired the Parent Debentures received in the Merger and the provisions of Rule 145(d)(3) are then applicable to the undersigned, or (iii) Parent has received either an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to Parent, or a "no action" letter obtained by the undersigned from the staff of the Commission, to the effect that the restrictions imposed by Rule 145 under the Act no longer apply to the undersigned. _________________ Name of Affiliate 62 EX-10.2 7 t06723ex10-2.txt EXECUTIVE SHARE PURCHASE PLAN EXHIBIT 10.2 THE HUB GROUP LIMITED EXECUTIVE SHARE PURCHASE PLAN January 1999 THE HUB GROUP LIMITED EXECUTIVE SHARE PURCHASE PLAN ARTICLE 1. GENERAL 1.1. DEFINITIONS For the purpose of this Plan, the following terms shall have the following meanings: (a) "BOARD" means the Board of Directors of the Company; (b) "COMPANY" means The Hub Group Limited and any successor corporation, and any reference herein to action by the Company means action by or under the authority of its Board of Directors; (c) "EXECUTIVE" means a person employed by, or providing services pursuant to a written services agreement to, a Participating Company, whether or not on a full time basis, who is an officer or director of a Participating Company and who, in the opinion of the Company, bears a substantial responsibility for the management and growth of a Participating Company, and who has been designated by the Board as an Executive for purposes of this Plan; (d) "MARKET VALUE" means, with reference to Shares on a certain date, the weighted average trading price of the Shares on The Toronto Stock Exchange (or, if the Shares are not listed on The Toronto Stock Exchange, such other exchange as is designated by the Board) for the five trading days prior to that date, provided that, if the Shares are not listed on any stock exchange, "Market Value" shall be determined by the Board, acting reasonably; (e) "PARTICIPANT" means an Executive who has elected to participate in this Plan, who has applied for and been granted a loan pursuant to the provisions of this Plan and on whose behalf the Trustee has purchased Shares, so long as the loan or any part thereof remains outstanding or so long as any Shares purchased have not vested pursuant to Section 2.8 and the personal representatives, heirs and assigns of such Executive; (f) "PARTICIPATING COMPANY" means the Company and each of its Subsidiaries that shall have elected to participate in this Plan with the consent of the Company and, when referred to in the context of a loan, shall mean the Participating Company by which or through which the loan was made or arranged, as the case may be; (g) "PLAN" means this Executive Share Purchase Plan and any amendments or supplements thereto; -2- (h) "REPAYMENT DATE" means the date on which a loan made under this Plan is to be paid in full; (i) "REPAYMENT PERCENTAGE" has the meaning given to that term in section 2.7(c); (j) "RETIREMENT" means in respect of a particular Participant, such person's retirement, at normal retirement age applicable in the Participating Company, from employment with such Participating Company or, in the case of a Participant who has a written agreement of employment with the respective Participating Company, in accordance with such agreement of employment (and, for the purpose of this agreement "written agreement of employment" shall include a producer or other written services agreement); (k) "SHARES" means fully paid and non-assessable Common Shares of the Company; (l) "SPECIFIED MAXIMUM" has the meaning given to that term in section 1.2.1. (m) "SUBSIDIARY" means a company, at least a majority of the voting stock of which, except for qualifying shares, is beneficially held, directly or indirectly, by the Company or another Subsidiary; and (n) "TRUSTEE" means the trustee from time to time appointed for purposes of this Plan pursuant to section 2.12 or the trustee from time to time. 1.2. SHARES ISSUABLE UNDER THIS PLAN 1.2.1. The maximum number of Shares (the "Specified Maximum") which may be reserved for issuance from treasury under this Plan is 1,000,000. The aggregate number of Shares reserved for issuance which may be issued to any one person or to associates of that person under this Plan shall be 5% of all issued voting shares of the Company (on a non-diluted basis) less the aggregate number of voting shares of the Company reserved for issuance to such person or associates of such person under any other employee stock option plan, options for services, employee stock purchase plans or other share compensation arrangements (or the lesser of such other percentages as may from time to time be prescribed by the stock exchanges on which the voting shares of the Company are then listed). For the purposes of this section, the terms "associate" and "share compensation arrangement" have the meaning assigned to those terms under the applicable rules of The Toronto Stock Exchange. 1.2.2. No fractional shares shall be issued under this Plan and the Board may determine the manner in which fractional share value shall be treated. 1.2.3. In the event of any change in the outstanding Shares by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares, or other corporate change, the Board shall make, subject to the prior approval of the relevant stock exchanges, appropriate substitution or adjustment in the number or kind of shares or other securities reserved for issuance pursuant to the Plan; provided, however, that no substitution or adjustment shall obligate the Company to issue or sell fractional shares. In the event of the reorganization of the Company or the amalgamation, merger or consolidation of the Company -3- with another corporation, the Board may make such provision for the protection of the rights of Participants as the Board in its discretion deems appropriate. 1.3. APPLICABLE LAW The laws of the Province of Ontario shall apply to this Plan, any amendments thereto, and the administration thereof, and all rights and obligations thereunder shall be determined in accordance with such laws. 1.4. WORDS, ETC. In the Plan, words importing the singular number include the plural and vice versa and words importing the masculine gender include feminine and neuter genders. ARTICLE 2. THE PLAN 2.1. PURPOSE The purpose of this Plan is to advance the interests of the Company and its Subsidiaries by encouraging and enabling the acquisition of a share interest in the Company by certain executives of the Company and its Subsidiaries. 2.2. ELIGIBILITY The Board shall determine the Executives who shall be eligible to participate in this Plan and the maximum number of Shares which each eligible Executive is entitled to buy under this Plan. In making such determination, the Board shall consider, but shall not be bound by, any recommendation made by the President of the Participating Company that employs, or has contracted for services of, the respective Executive. 2.3. PARTICIPATION Participation in this Plan shall be entirely voluntary and any decision not to participate shall not affect an Executive's employment with any Participating Company. An Executive who is eligible may elect to participate in this Plan by submitting an application for a loan from a Participating Company in accordance with the provisions of section 2.4, and such application shall for all purposes be deemed to be an application to participate in this Plan. 2.4. APPLICATION FOR LOAN An Executive may apply to a Participating Company for a loan to such Executive appropriate to purchase a number of Shares (up to the maximum established for such Executive pursuant to section 2.2) in blocks of 10, to be advanced to and used by the Trustee for the purchase from the Company or in the market of Shares for the account of the Participant. The whole or any part of the loan may be granted by a Participating Company (subject to applicable law) or arranged by a Participating Company to be made by any other third party acceptable to such Participating Company. -4- 2.5. PURCHASE OF SHARES The amount of any loan granted to a Participant pursuant to the provisions of section 2.4 shall be used for the purchase by the Trustee of Shares in the market or, if determined by the Board or by regulation, shall be used for the purchase by the Trustee of Shares from the Company. The price for which Shares shall be purchased by the Trustee from the Company and issued by the Company shall be equal to the Market Value of Shares on the trading day immediately preceding the day as of which the Shares are authorized to be issued as determined by resolution of the Board from time to time. Where the Trustee purchases Shares in the market the purchase price allocated to the Shares shall be the actual purchase price of the Shares or as otherwise determined by the Board. In addition to the amount of any loan granted to a Participant pursuant to section 2.4, the Company will provide the Trustee with all additional amounts required to make such market purchases. The Trustee shall make all purchases in the open market as soon as is practicably possible after receipt from the Participant or the Company of the amounts required to make such market purchase or as otherwise instructed in writing by the Participant. All Shares purchased by the Trustee pursuant to the provisions of this section 2.5 shall be allotted and issued to the Trustee and the certificates in respect thereof shall be registered in the name of the Trustee. Unless and until a Participant shall become disentitled under this Plan, and subject to the provisions of this Plan, all rights with respect to Shares held by the Trustee on behalf of a Participant, including voting rights, shall be exercised by the Participant, and any dividends payable on such Shares shall be paid to the Participant so long as those Shares are held by the Trustee on behalf of the Participant. 2.6. SHARES AS SECURITY All Shares purchased by the Trustee pursuant to the provisions of section 2.5 and the certificates representing the Shares, together with any Shares issued to a Participant as a result of a stock split (or a stock dividend in lieu of a stock split) of the Shares (the "Additional Shares") and the certificates representing such Additional Shares, shall be held by the Trustee as security for repayment of the loan as provided in section 2.7 and, notwithstanding the repayment of the loan, shall also be held by the Trustee until such Shares shall have become vested in the Participant as provided in section 2.8. In the event that the Market Value of the Shares and the Additional Shares held by the Trustee as security for repayment of the loan is greater or less than the outstanding amount of the loan, the Company will have the authority to require increases or permit decreases in the number of Shares held by the Trustee as security. 2.7. REPAYMENT OF LOANS (a) All loans shall have a term of 10 years and shall be repayable in full on the last day of the term thereof or such earlier date as provided for herein. -5- (b) Except as provided for in section 2.10(a), Participants shall not be required to make payments of any interest on the principal amount of any loan from time to time outstanding. (c) Unless otherwise approved by the Company, a Participant shall only be permitted to prepay the balance of each loan outstanding after the first anniversary date of the loan and then, during each year that the loan remains outstanding thereafter, only to the extent of 10 percent (the "Repayment Percentage") of the original amount of the loan provided that the allowed prepayment shall at all times be calculated on a cumulative basis and carried forward if not made in prior years. (d) Notwithstanding sections 2.5 and 2.7(c), unless otherwise approved by the Company, all dividends received on the shares and the proceeds from the sale of any Shares of a Participant shall be used by the Participant to repay the outstanding loans of such Participant. 2.8. RIGHTS OF PARTICIPANT WITH RESPECT TO SHARES HELD BY TRUSTEE (a) The provisions of this section 2.8 shall apply with respect to all Shares (including Additional Shares) held by the Trustee notwithstanding the repayment in whole or in part of loans. Shares which have vested pursuant to the provisions of this section 2.8 shall not be released to a Participant as long as they are held as security for a loan pursuant to the provisions of section 2.6. (b) All Shares acquired by the Trustee on behalf of a Participant shall be held by the Trustee until the Shares (including Additional Shares) become vested and the Shares (including Additional Shares) shall not become vested except as hereinafter provided. Certificates for Shares which become vested and which are not being held by the Trustee as security for a loan shall be delivered by the Trustee to the Participant on whose behalf such Shares are held. (c) Except as hereinafter provided, the number of Shares (including Additional Shares) of a Participant that become vested shall be equal to that percentage of the original number of Shares (together with the Additional Shares) acquired by the Trustee on the Participant's behalf equal to the Repayment Percentage on each anniversary of the date on which the Shares are authorized to be issued, so that the number of Shares (together with the Additional Shares) of a Participant equal to the Repayment Percentage of the original number of Shares (together with the Additional Shares) will become vested on the first anniversary; the number equal to two times the Repayment Percentage of such original number of Shares (together with the Additional Shares) will have become vested, on a cumulative basis, on the second anniversary; and so on from time to time until all such original number of Shares (together with the Additional Shares) will have become vested on the tenth anniversary of the date on which the Shares are authorized to be issued. (d) Notwithstanding section 2.8(c), the Shares (including Additional Shares) of a Participant held by the Trustee on his behalf shall become vested upon the death or, at the discretion of the Company, on the Retirement of the Participant. -6- (e) The Company may in its sole discretion determine that in certain circumstances, such as early retirement or termination of employment or a services agreement, or in the event that the Market Value of the Shares exceeds the amount of the loan outstanding, all or a portion of the Shares of a Participant held by the Trustee on his behalf shall become vested without further effluxion of time. (f) The Shares (including Additional Shares) of a Participant held by the Trustee on the Participant's behalf which have not yet become vested at the time a Participant becomes disentitled under this Plan shall not become vested on or after the time a Participant ceases to be a Participant, except at the discretion of the Company. (g) Each Participant shall by accepting Shares issued to him under this Plan, grant, and does hereby grant, to the Company the right, for a period of 90 days following the time at which the Company gives notice to the Trustee, pursuant to section 2.10(a), that the Participant has become disentitled under this Plan, to purchase any Shares which have not been vested in the Participant at a price equal to their original purchase price. 2.9. EVENTS OF DISENTITLEMENT (a) The following events shall be events of disentitlement under this Plan: (i) if the Participant retires from the employ of a Participating Company before the Participant's normal time of retirement; and (ii) if the Participant resigns or is dismissed from employment with a Participating Company. (b) Notwithstanding section 2.9(a), if a Participant: (i) dies before repayment in full of all loans made to the Participant pursuant to this Plan, the Participant's representatives shall be the Participant (with respect to all Shares purchased prior to the death of the original Participant) in lieu of the deceased and shall not become disentitled under this Plan unless and until the Company otherwise determines; or (ii) reaches Retirement or suffers a disability within the meaning of the Participant's employment or services agreement before repayment in full of all loans made to the Participant pursuant to this Plan he shall not become disentitled under this Plan unless and until the Company otherwise determines. 2.10. IN CASE OF DISENTITLEMENT (a) If an event of disentitlement described in section 2.9 shall have occurred, the Participant connected with the event shall become disentitled under this Plan immediately unless the Company, in its discretion, determines that the Participant shall not become disentitled until a later date. The Company may, at any time after the Participant becomes disentitled, in its sole discretion, give notice to the Trustee and the Participant that the Participant is disentitled under this Plan and the amount of any loan to such Participant -7- will become immediately due and payable. In the event that a Participant fails to repay the full amount of any loan on it becoming due (whether under this provision or any other provision of this Plan), such outstanding amount will accrue interest for payment by the Participant at the prime rate of interest as quoted by the Company's principal bank at such time plus 2%. (b) If a notice of disentitlement is given to the Trustee pursuant to the provisions of section 2.10(a), the Trustee may at any time and from time to time sell on the open market and without notice to the Participant disentitled under this Plan that number of the Shares (including Additional Shares) which have vested but which have not been released and, if required, that number of the Shares (including Additional Shares) which have not yet vested, held by the Trustee on behalf of the Participant, required to repay in full the outstanding loans, as contemplated by section 2.10(c) and for the purposes of this section, such Shares (including Additional Shares) shall be deemed to have vested. (c) If any loans in favour of any Participant with respect to whom a notice of disentitlement has been issued are outstanding, the Trustee shall apply the net proceeds from any sale of the Shares (including Additional Shares) to the payment of any unpaid principal of the loans. The Participant shall remain liable to the Participating Company or the third party lender, as the case may be, for the balance, if any, unpaid on the loans. (d) Subject to any sale and application provided for in sections 2.10(b) and 2.10(c), respectively, above, the Trustee shall provide to the Participant with respect to whom a notice of disentitlement has been issued the unsold Shares (including Additional Shares) of the Participant which have become vested pursuant to section 2.8. (e) Subject to section 2.10(b) and any application provided for in section 2.10(c), the Trustee shall sell to the Company, if the Company has exercised the purchase option available to it in section 2.8(g), in fulfillment of the right of the Company to purchase described in that section, unsold Shares (including Additional Shares) of the Participant disentitled under this Plan which have not become vested and which are designated at the price set out in section 2.8(g). If the Company has not exercised such option or upon completion of the exercise of such option, as the case may be, all unsold Shares (including Additional Shares) shall be vested and delivered to the Participant. (f) Subject to the provisions of this section 2.10, if the Trustee holds Shares (including Additional Shares) of a Participant with respect to whom a notice of disentitlement has been issued, some of which have vested and some of which have not, or the Trustee holds Shares of such Participant which were acquired for different original prices by the Trustee on behalf of the Participant, and if, on any sale of Shares (including Additional Shares), the Trustee shall sell less than all such Shares (including Additional Shares), the Trustee shall in its sole discretion identify the Shares (including Additional Shares) so sold as vested and/or not vested and shall identify such Shares (including Additional Shares) with the original prices as the Trustee shall determine. 2.11. ACCOUNTS AND STATEMENTS The Trustee shall maintain records indicating the number of Shares purchased on behalf of each Participant, the number of Shares (including Additional Shares) in respect of each -8- Participant which have been disentitled from time to time and the repayments made by each Participant in respect of each loan granted to him pursuant to the provisions of this Plan. Upon written request therefor from any Participant, the Trustee shall furnish to such Participant a statement indicating the number of Shares (including Additional Shares) held by the Trustee on his behalf and the balance outstanding in respect of each loan granted to him. Each of such statements shall be deemed to have been accepted by the Participant as correct unless written notice to the contrary has been received by the Trustee within 30 days after the mailing of such statement to the Participant. 2.12. THE TRUSTEE The Company shall appoint an independent trust company to act as Trustee of this Plan. The Company may at any time or times remove any Trustee so appointed and may appoint a successor or successors to fill any vacancy created by any reason whatever. The Trustee may delegate to any Participating Company or to any corporation authorized to carry on the business of a trust corporation in Canada the duty to maintain records and to furnish statements in connection with all aspects of this Plan. The Trustee shall not be liable for any action or failure to act under or in connection with this Plan of the person to whom it has delegated the said duty, except for its own bad faith. The Trustee shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability or expense that may be imposed upon or reasonably incurred by it in connection with or resulting from any claim, action, suit or proceeding to which it may be a party or in which it may be involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by it in satisfaction of a judgment in any such action, suit or proceeding, except a judgment in favour of the Company based upon a finding of its bad faith; subject, however, to the condition that, upon the assertion of or institution of any such claim, action, suit or proceeding against it, it shall in writing give the Company an opportunity, at its own expense, to handle and defend the same before it undertakes to handle and defend it on its own behalf. The Trustee shall be entitled to rely on all certificates, reports, opinions and other documents furnished by any broker, accountant or auditor or counsel to the Company and shall be fully protected and indemnified by the Company in respect of any acts done in good faith and in reliance on such certificates, reports, opinions or documents. 2.13. PARTICIPANT'S RIGHT NOT TRANSFERABLE Except as provided herein: (a) No right of interest of any Participant in any of the Shares (including Additional Shares) purchased on the Participant's behalf under this Plan shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise in any manner but excluding devolution by death or mental incompetency; and (b) No attempted assignment or transfer thereof shall be effective. Notwithstanding the foregoing, assignments or transfers may be effected with the approval of the Company and the appropriate regulatory authorities, if required. -9- 2.14. INTERPRETATION AND REGULATIONS (a) The Company may make, amend and repeal at any time and from time to time such regulations not inconsistent herewith, as it may deem necessary or advisable for the issuance of Shares under this Plan, the carrying out of any sales made pursuant to this Plan and generally for the proper administration and operation of this Plan. In particular, the Company may delegate to any person, group of persons or corporation, such administrative duties and powers as it may see fit. (b) The Company may amend or discontinue this Plan at any time, provided that no amendment shall be made to this Plan except with the prior receipt of the approval of The Toronto Stock Exchange. No such amendment will, without the consent of a Participant, alter or impair the Participant's rights under this Plan. (c) Notwithstanding the foregoing sections 2.14(a) and (b), the Company shall have the power to interpret the provisions of this Plan and to make regulations and formulate administrative provisions for carrying them out and to make such changes in this Plan and in the regulations and administrative provisions as, from time to time, the Company deems proper and in its best interests, and the Trustee shall observe same, provided that no such changes shall alter or impair a Participant's rights in respect of a loan already made or Shares already purchased in accordance with this Plan except with the consent of the Participant. All decisions and interpretations of the Company respecting this Plan and all rules and regulations made from time to time pursuant hereto, shall be binding and conclusive on the Company and on all Participants in this Plan and their respective legal representative and on all Participants eligible under this Plan to participate herein. 2.15. COSTS The Company shall pay all costs of administering this Plan. EX-10.3 8 t06723ex10-3.txt EMPLOYEE SHARE PURCHASE PLAN EXHIBIT 10.3 THE HUB GROUP LIMITED EMPLOYEE SHARE PURCHASE PLAN JANUARY, 1999 TABLE OF CONTENTS ARTICLE 1. INTERPRETATION, PURPOSE, ETC. 1.1. Definitions............................................................................................ 1 1.2. Introduction and Purpose............................................................................... 2 1.3. Reserved Shares........................................................................................ 2 1.4. Governing Law.......................................................................................... 2 ARTICLE 2. SHARE PURCHASE PLAN 2.1. Participation.......................................................................................... 3 2.1.1. Eligibility............................................................................... 3 2.1.2. Enrolment................................................................................. 3 2.1.3. Registered Retirement Savings Plan........................................................ 3 2.2. Employee Contributions................................................................................. 3 2.2.1. Employee Contributions.................................................................... 3 2.2.2. Changes, Termination and Re-Enrolment..................................................... 4 2.3. Administration......................................................................................... 4 2.3.1. The Plan Managers......................................................................... 4 2.3.2. The Administrator......................................................................... 4 2.3.3. Costs and Expenses........................................................................ 4 2.4. Investment............................................................................................. 5 2.4.1. Remittance and Holding of Employee Contributions.......................................... 5 2.4.2. Purchase of Shares using Employee Contributions........................................... 5 2.4.3. Reinvestment of Dividends................................................................. 5 2.4.4. Reporting of Account Activities........................................................... 5 2.4.5. Purchases on the Open Market.............................................................. 5 2.5. Distribution of Shares................................................................................. 6 2.5.1. Ownership and Voting of Purchased Shares.................................................. 6 2.5.2. Delivery of Certificates.................................................................. 6 2.6. Withdrawal From the Plan............................................................................... 6 2.6.1. Voluntary Withdrawal from the Plan........................................................ 6 2.6.2. Withdrawal Upon Termination, Death or Disability.......................................... 7 ARTICLE 3. GENERAL 3.1. Amendment or Termination............................................................................... 7 3.2. Capital Adjustments.................................................................................... 8 3.3. Compliance with Legislation............................................................................ 8 3.4. Fractional Shares...................................................................................... 8
-ii- 3.5. Market Fluctuation................................................................................... 8 3.6. Income Taxes......................................................................................... 9 3.7. Assignment of Interest............................................................................... 9 3.8. Trading on Undisclosed Information................................................................... 9
ARTICLE 1. INTERPRETATION, PURPOSE, ETC. 1.1. DEFINITIONS In this Plan, the following words and phrases have, unless otherwise indicated, the following meanings: (a) "ACCRUED EMPLOYEE CONTRIBUTIONS" on a Share Purchase Date means the aggregate of Employee Contributions remitted to the Administrator from but excluding the previous Share Purchase Date to and including that Share Purchase Date. (b) "ADMINISTRATOR" has the meaning given to that term in section 2.3.2. (c) "BROKER" means a registered broker or dealer selected by the Administrator in its sole discretion. (d) "CONSULTANT" means (i) an individual (including an individual whose services are contracted for through a corporation) or (ii) a corporation, in either case, designated by the Plan Managers and with whom the Employer has a contract for substantial ongoing services. (e) "ELIGIBLE EMPLOYEE" has the meaning given to that term in section 2.1.1. (f) "EMPLOYEE CONTRIBUTION" has the meaning given to that term in section 2.2.1. (g) "EMPLOYEE REMITTANCE" has the meaning given to that term in section 2.2.1. (h) "EMPLOYER" means The Hub Group Limited. (i) "ENROLMENT DATE" has the meaning given to that term in section 2.1. (j) "PARTICIPANT" means an Eligible Employee who has elected to participate in the Plan. (k) "PLAN" means the Employer's employee share purchase plan, as amended from time to time. (l) "PLAN MANAGERS" has the meaning given to that term in section 2.3.1. (m) "PURCHASE PRICE" on a certain date means (i) with respect to purchases on a Share Purchase Date from treasury, an amount equal to the weighted average trading prices of the Shares on The Toronto Stock Exchange for the five (5) trading days prior to that date, (ii) with respect to purchases on a Share Purchase Date on the open market, an amount equal to the weighted average price of the open market purchases of the Shares with respect to that date, as effected in accordance with section 2.4.5 and (iii) with respect to purchases using cash dividends on a -2- Reinvestment Date in accordance with section 2.4.3, an amount equal to the weighted average price of the open market purchases of the Shares with respect to that date, as effected in accordance with section 2.4.5; provided that, (i) in the event that the Shares are not listed on The Toronto Stock Exchange but are listed on some other exchange, references to The Toronto Stock Exchange shall be deemed to be references to such other exchange as designated by the board of directors of Employer, and (ii) if the Shares are not listed on any exchange, the board of directors of Employer shall determine the Purchase Price, acting reasonably. (n) "PURCHASED SHARES" means Shares that have been actually purchased in the name of the Participant pursuant to sections 2.4.2 and 2.4.3. (o) "REINVESTMENT DATE" has the meaning given to that term in section 2.4.3. (p) "RRSP" has the meaning given to that term in section 2.1.3. (q) "SHARE PURCHASE DATE" has the meaning given to that term in section 2.4.2. (r) "SHARES" means the common shares of the Employer. (s) "SUBSIDIARY" has the meaning given to that term in the Securities Act (Ontario), as amended from time to time. 1.2. INTRODUCTION AND PURPOSE The purpose of the Plan is to make available to Eligible Employees of the Employer and its Subsidiaries a means of purchasing the Employer's Shares, to more closely align their interests with the performance of the Employer and to encourage Eligible Employees to remain with the Employer and its Subsidiaries on a long-term basis. Participation in the Plan by any Eligible Employee is voluntary and the Employer is not making any recommendation to its employees as to whether they should or should not participate. 1.3. RESERVED SHARES The maximum number of Shares that are reserved for issuance from treasury under the Plan is 1,000,000 Shares. 1.4. GOVERNING LAW This Plan is to be governed by and interpreted in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. -3- ARTICLE 2. SHARE PURCHASE PLAN 2.1. PARTICIPATION 2.1.1. ELIGIBILITY All full-time employees or Consultants who have completed three months continuous service with the Employer or any Subsidiary are eligible to participate in the Plan (an "ELIGIBLE EMPLOYEE"). 2.1.2. ENROLMENT Eligible Employees may elect to enrol as Participants in the Plan as of the first day of any month in which they are eligible (an "ENROLMENT DATE") by signing and delivering to the Employer, at least 30 days prior to any Enrolment Date, appropriate forms provided by the Employer. 2.1.3. REGISTERED RETIREMENT SAVINGS PLAN An Eligible Employee may elect on the enrolment form to have Shares purchased pursuant to this Plan be registered as part of a registered retirement savings plan ("RRSP") of which the Eligible Employee is the sole annuitant. If this election is made, all references in this Plan to a Participant will be deemed to include that registered retirement savings plan. By giving the Employer a written request and subject to the Participant completing any required forms and fulfilling any other requirements, a Participant may request (i) that all or a portion of Purchased Shares previously acquired pursuant to this Plan and held outside of an RRSP be registered as part of an RRSP or (ii) that all or a portion of Purchased Shares previously acquired pursuant to this Plan and held in an RRSP be removed from that RRSP. 2.2. EMPLOYEE CONTRIBUTIONS 2.2.1. EMPLOYEE CONTRIBUTIONS Participants may contribute for investment under the Plan, an amount which is not more than ten (10%) per cent (or such greater amount as approved by the Plan Managers) of their regular gross salary, excluding bonuses, deferred compensation or any special incentive compensation payments (an "EMPLOYEE CONTRIBUTION"). For each Eligible Employee who is compensated on an alternative basis (e.g., commissions), the Plan Managers will determine an amount which will be deemed to constitute that Eligible Employee's "regular gross salary". A Participant may elect to make the Employee Contribution by way of payment from that Participant, through payroll deductions or in such other manner as is acceptable to the Plan Managers (an "EMPLOYEE REMITTANCE"). If a Participant's regular salary changes, -4- any payroll deduction previously requested will not be changed unless and until the Participant requests a change. 2.2.2. CHANGES, TERMINATION AND RE-ENROLMENT By giving the Employer a written request at least 30 days in advance of any Enrolment Date, a Participant may change the designated amount of Employee Remittance as of that Enrolment Date. Employee Remittances may be terminated at any time, effective as soon as practicable after the participant's written request is received by the Employer. After termination, an Eligible Employee may elect to re-enrol in the Plan. However, a new Employee Remittance authorization on re-enrolment in the Plan shall not become effective prior to the Enrolment Date next following the six-month period beginning with the effective date of the termination. In the event a Participant changes the designated amount of Employee Remittance or re-enrols after termination, no additional change shall be made within the three month period following the effective date of such change or within a three month period following the effective date of any re-enrolment in the plan. 2.3. ADMINISTRATION 2.3.1. THE PLAN MANAGERS The Plan is managed by the board of directors of Employer or a committee of the board or an officer of the Employer duly appointed for this purpose by the board (the "PLAN MANAGERS"). The Plan Managers are empowered to make and enforce rules with respect to the administration of the Plan, to interpret the Plan, to resolve any ambiguities and to decide questions of eligibility to participate. The Plan Managers may appoint an individual and delegate to that person certain duties and powers of the Plan Managers. This individual does not have any fixed term and may be removed at any time by the Plan Managers. The individual may participate in the Plan, if otherwise eligible. 2.3.2. THE ADMINISTRATOR The Employer has designated a trust company (the "ADMINISTRATOR") to administer the Plan in accordance with its terms. The Administrator will open and maintain separate accounts in the names of each of the Participants and arrange purchases of the Shares. The Administrator will hold all Purchased Shares acquired in respect of a Participant as trustee on behalf and for the benefit of that Participant. The Employer may, in its discretion, substitute another entity as Administrator under the Plan and the Administrator may terminate its services, provided such substitution or termination, as the case may be, shall be on 60 days notice given by the party effecting the action. The current Administrator is The Royal Trust Corporation of Canada. 2.3.3. COSTS AND EXPENSES The Employer pays all administration expenses in connection with the operation of the Plan, including, without limitation, all commissions for purchases of the Shares. Commissions and other charges in connection with sales, withdrawals and share certificate issuing fees, including all taxes payable on the issuance or disposition of Shares, are payable by the Participants who order the transactions for their account. -5- 2.4. INVESTMENT 2.4.1. REMITTANCE AND HOLDING OF EMPLOYEE CONTRIBUTIONS Employee Contributions will be held by the Employer and remitted by the Employer to the Administrator immediately prior to each Share Purchase Date. All Employee Contributions held by the Employer prior to a Share Purchase Date will be held with a Canadian chartered bank and any interest earned thereon will be used by the Employer to offset costs associated with maintaining the Plan. 2.4.2. PURCHASE OF SHARES USING EMPLOYEE CONTRIBUTIONS All Employee Contributions are to be invested in Shares. On the first trading day of each month or as soon thereafter as is practicable (a "SHARE PURCHASE DATE"), the Administrator will purchase on behalf of the Participant as many Shares at the Purchase Price as can be purchased using that Participant's Accrued Employee Contributions. Shares will be purchased at the Purchase Price from treasury or, at the Employer's option, on the open market in accordance with section 2.4.5. 2.4.3. REINVESTMENT OF DIVIDENDS All cash dividends received on Purchased Shares shall be reinvested in Shares on the Share Purchase Date following the dividend payment date (the "REINVESTMENT DATE"). The Administrator will apply all cash dividends received by the Administrator on Purchased Shares of a Participant to purchase on behalf of the Participant on the open market in accordance with section 2.4.5 as many Shares at the Purchase Price as can be purchased using the cash dividends received. All other distributions to holders of Shares including, without limitation, all other securities, property or rights, will be distributed to a Participant in such a manner as the Plan Managers, in their sole discretion, deem appropriate. 2.4.4. REPORTING OF ACCOUNT ACTIVITIES Each Participant receives quarterly confirmation from the Administrator reflecting all changes in the amount of Purchased Shares owned by the Participant. 2.4.5. PURCHASES ON THE OPEN MARKET If the Administrator receives notice from the Employer 14 days prior to a Share Purchase Date, some or all of the purchases using Employee Contributions may be made on the open market. All purchases using cash dividends as described in section 2.4.3 shall be made on the open market. The Administrator will arrange for purchases in respect of the Share Purchase Date and/or Reinvestment Date using Brokers at dates and times selected in the Administrator's sole discretion provided that (i) purchases using all Accrued Employee Contributions available for a given Share Purchase Date and/or purchases using all cash dividends will be completed as soon as practicable after the Share Purchase Date and/or Reinvestment Date, and (ii) purchases will be effected through the facilities -6- of The Toronto Stock Exchange or such other Canadian market upon which the Shares are listed and posted for trading from time to time. 2.5. DISTRIBUTION OF SHARES 2.5.1. OWNERSHIP AND VOTING OF PURCHASED SHARES Participants acquire full beneficial ownership of all Purchased Shares as of the date of the purchase. Notwithstanding any other provision of this agreement, no fractional Share certificates will be issued. Whole Shares allocated to a Participant's account will be voted by the Administrator in accordance with the directions, if any, of the Participant and if no direction has been received will not be voted. 2.5.2. DELIVERY OF CERTIFICATES All Purchased Shares are registered in the name of the Administrator and held in trust by the Administrator on behalf and for the benefit of the Participants. By giving the Employer thirty (30) days advance written notice, a Participant may request that the Administrator deliver to that Participant a certificate registered in the name of the Participant in respect of any or all of the Purchased Shares. 2.6. WITHDRAWAL FROM THE PLAN 2.6.1. VOLUNTARY WITHDRAWAL FROM THE PLAN Participants may withdraw from the Plan at any time by cancelling their Employee Remittance authorizations. The Participant may either request that: (a) in the case of Purchased Shares not held in an RRSP, (i) the full Purchased Shares in the account be transferred to another account maintained by that Participant, (ii) a certificate representing the full Purchased Shares in the account be delivered to the Participant or (iii) all full Purchased Shares and any fractional interest in Shares in the Participant's account be sold and the net proceeds be remitted to the Participant; and (b) in the case of Purchased Shares held in an RRSP, (i) the full Purchased Shares in the account be transferred to another RRSP account maintained for that Participant, (ii) all full Purchased Shares and any fractional interest in Shares in the Participant's account be sold and the net proceeds remitted to another RRSP account maintained for that Participant or (iii) all full Purchased Shares and any fractional interest in Shares in the Participant's account be sold and the net proceeds (less any deductions in respect of taxes) be remitted to the Participant. The Participant may not thereafter re-enrol in the Plan prior to the Enrolment Date next following a period of six months commencing with the date of such cancellation. -7- 2.6.2. WITHDRAWAL UPON TERMINATION, DEATH OR DISABILITY Upon the death, disability or termination of employment of a Participant, that Participant will be deemed to have withdrawn from the Plan as of the date of death, disability or termination. The Participant (or the Participant's authorized representatives) may either request that (a) in the case of Purchased Shares not held in an RRSP, (i) the full Purchased Shares in the account be transferred to another account maintained by that Participant or for the benefit of the Participant's estate, (ii) a certificate representing the whole Purchased Shares in the account be delivered to the Participant or the Participant's authorized representatives or (iii) all whole Purchased Shares and any fractional interest in Shares in the Participant's account be sold and the net proceeds be remitted to the Participant or the Participant's authorized representatives; and (b) in the case of Purchased Shares held in an RRSP, (i) the full Purchased Shares in the account be transferred to another RRSP account maintained for that Participant, (ii) whole full Purchased Shares and any fractional interest in Shares in the Participant's account be sold and the net proceeds remitted to another RRSP account maintained for that Participant or (iii) whole full Purchased Shares and any fractional interest in Shares in the Participant's account be sold and the net proceeds (less any deductions in respect of taxes) be remitted to the Participant or the Participant's authorized representatives. If the Participant (or the Participant's authorized representative) do not make an election within thirty (30) days after the date the Participant is deemed to have withdrawn from the Plan, then (a) in the case of Purchased Shares not held in an RRSP, a certificate representing the whole Purchased Shares in the account will be delivered to the Participant or the Participant's authorized representatives; and (b) in the case of Purchased Shares held in an RRSP, all whole Purchased Shares and any fractional interest in Shares in the Participant's account will be sold and the net proceeds (less any deductions in respect of taxes) will be remitted to the Participant or the Participant's authorized representatives. ARTICLE 3. GENERAL 3.1. AMENDMENT OR TERMINATION Subject to receiving all necessary regulatory approvals, the Employer reserves the right to discontinue use of any form of Employee Remittance at any time such action is deemed advisable, in its judgment, and the Employer also reserves the right to amend or discontinue the Plan at any time. Any such amendment or termination will not result in the forfeiture by any Participant of any Purchased Shares, dividends or other distributions in respect of Purchased -8- Shares, effective before the effective date of amendment or termination of the Plan. Any amendment to this Plan is subject to the prior receipt of the approval of The Toronto Stock Exchange. 3.2. CAPITAL ADJUSTMENTS If there is any change in the outstanding Shares by reason of a stock split, recapitalization, consolidation, combination or exchange of shares, or other fundamental corporate change, the Plan Managers will make, subject to any prior approval required of relevant stock exchanges or other applicable regulatory authorities, if any, appropriate substitutions or adjustments; provided, however, that no substitution or adjustment will obligate the Employer to issue or sell fractional shares. In the event of the reorganization of the Employer or the amalgamation or consolidation of the Employer with another corporation, the Plan Managers may make such provision for the protection of the rights of Participants as the Plan Managers in their discretion deem appropriate. The determination of the Plan Managers, as to any adjustment or as to there being no need for adjustment, will be final and binding on all parties. 3.3. COMPLIANCE WITH LEGISLATION The Plan Managers may postpone or adjust the issue of any Shares pursuant to this Plan as the Plan Managers in their discretion may deem necessary in order to permit the Employer to effect or maintain registration of this Plan or the Shares issuable pursuant thereto under the securities laws of any applicable jurisdiction, or to determine that the Shares and this Plan are exempt from such registration. The Employer is not obligated by any provision of this Plan to sell or issue Shares in violation of any applicable law. In addition, while the Shares are listed on a stock exchange, the Employer will have no obligation to issue any Shares pursuant to this Plan unless the Shares have been duly listed, upon official notice of issuance, on a stock exchange on which the Shares are listed for trading. 3.4. FRACTIONAL SHARES No fractional Shares may be issued under the Plan and nothing in this Plan will obligate the Employer to issue or sell fractional shares. The Plan Managers may determine the manner in which fractional Share value will be treated. 3.5. MARKET FLUCTUATION THERE IS NO GUARANTEE UNDER THE PLAN AGAINST LOSS BECAUSE OF MARKET FLUCTUATION. IN SEEKING THE BENEFITS OF PARTICIPATION IN THE PLAN, A PARTICIPANT MUST ACCEPT THE RISK OF A DECLINE IN THE MARKET PRICE OF THE SHARE. -9- 3.6. INCOME TAXES The sale and disposition of Shares generally results in the recognition of a taxable gain or loss under Canadian tax law by the Participant. In the event dividends are paid, the Participant will be subject to the payment of income tax on the dividends. Canadian tax laws are complex and subject to change and the Participant is responsible for determining how such tax laws and changes may affect their tax position. The Participant should contact their own financial or personal advisor to determine what effect, if any, participation in the Plan may have on the Participant's tax and other responsibilities. 3.7. ASSIGNMENT OF INTEREST Until certificates for Purchased Shares are delivered to the Participant, no right of a Participant under the Plan and no interest in Purchased Shares is capable, either in whole or in part, of being sold, assigned, pledged or hypothecated, whether by way of security or otherwise. 3.8. TRADING ON UNDISCLOSED INFORMATION Participants in the Plan are reminded that trading based on insider or undisclosed information is an illegal activity and that people conducting securities transactions based on such insider or undisclosed information are subject to prosecution. EX-10.4 9 t06723ex10-4.txt EMPLOYMENT AGREEMENT - HUB & MARTIN P. HUGHES Exhibit 10.4 EXECUTIVE EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT dated March 19, 2002. BETWEEN: MARTIN P. HUGHES (the "Executive") -and- HUB INTERNATIONAL LIMITED, a corporation incorporated pursuant to the laws of Ontario ("Hub International") In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows. 1. INTERPRETATION (1) In this Agreement: (a) "Agreement" means this agreement, all schedules attached hereto and any amendments made to any of the foregoing by written agreement between the Executive and Hub International; (b) "Basic Compensation" means the compensation defined in Schedule "B"; (c) "Benefits" means the benefits defined in Schedule "B"; (d) "Bonus" means the bonus defined in Schedule "B"; (e) "Cause" means (i) a material breach by the Executive of the provisions of this Agreement, which breach shall not have been cured by the Executive within thirty (30) days following written notice thereof by Hub International to the Executive, (ii) the commission of gross negligence by the Executive in the course of the Executive's employment, which commission has a material adverse effect on Hub International, (iii) the commission by the Executive of a criminal act of fraud, theft or dishonesty causing material damages to Hub International, (iv) the Executive's conviction of (or plead of nolo contendere to) any felony, or misdemeanor involving moral turpitude if such misdemeanor results in material financial harm to or materially adversely affects the goodwill of Hub International, (v) any breach by the Executive of the Confidentiality, Non-Solicitation and Insider Agreement of even -2- date herewith, or (vi) such other act or omission that a court of competent jurisdiction declares in a written ruling to be a breach of the Executive's responsibilities hereunder of such materiality as to justify a termination of the Executive's employment by Hub International; (f) "Confidentiality, Non-Solicitation and Insider Agreement" means the Executive Confidentiality, Non-Solicitation and Insider Agreement entered into by the parties hereto, of even date herewith; (g) "Current Location" means Hub International's executive offices at 55 East Jackson Boulevard, Chicago, Illinois; (h) "Death" means a natural death and, in addition, is deemed to include a continuous period of at least ninety (90) consecutive business days during which time the Executive has not been in the offices of Hub International during normal working hours and the Executive's whereabouts are unknown to Hub International; (i) "Disability" means the mental or physical state of the Executive is such that the Executive would qualify for disability benefits, in accordance with Hub International's group benefits insurance policy at the relevant time; (j) "Good Reason" means (i) the breach of the terms of this Agreement by Hub International or any successor thereto, excluding any inadvertent breach that is rectified within a reasonable period of time under the circumstances; (ii) the direct or indirect assignment to the Executive of any duties or reporting responsibilities, materially inconsistent with the Services (as contemplated as of the date hereof or in any mutually-agreed written amendment hereto) (excluding any isolated and inadvertent assignment that is remedied by Hub International within thirty (30) days after receipt of notice from the Executive); (iii) a reduction in the Executive's Basic Compensation or a reduction in the Benefits that is not reimbursed; (iv) any failure by Hub International to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Hub International to assume expressly and agree to perform the provisions of this Agreement in the same manner and to the same extent that Hub International would be required to perform if no such succession had taken place; (v) the failure by Hub International to continue to provide the Executive with the Benefits; (vi) the relocation of the Current Location to a location that is outside a thirty-five (35) mile radius of the Current Location, unless such new location is no further than the Current Location is from the Executive's then current residence. (k) "Hub International" means Hub International Limited; -3- (l) "Restricted Stock Plan" means a restricted stock purchase plan that includes substantially the same terms as those set out in Schedule "D" attached hereto that is generally applicable to senior employees or consultants with companies of The Hub Group who are resident in the United States; (m) "Schedule" means a schedule to this Agreement; (n) "Section" means a section or subsection of this Agreement; (o) "Services" means the duties and the responsibilities set out in Schedule "A", as the same may be amended or extended by mutual agreement of the parties from time to time; (p) "Subsidiaries" means the "subsidiary companies," as defined in the Securities Act (Ontario), of Hub International; (q) "The Hub Group" means Hub International and the Subsidiaries; and (r) "Vacation" means the vacation to which Executive is entitled, as contemplated in Schedule "B". (2) It is agreed by and between the parties hereto that the Schedules referred to herein, as itemized below and attached hereto, shall form a part of this Agreement and this Agreement shall be construed as incorporating such Schedules: Schedule "A" - Services Schedule "B" - Basic Compensation, Benefits and Vacation Schedule "C" - Alternative Dispute Resolution Schedule "D" - Restricted Stock Plan 2. EMPLOYMENT (1) Hub International agrees to employ the Executive for the purpose of providing the Services, and the Executive accepts such employment. (2) During the term of the Executive's employment with Hub International, the Executive agrees to devote the whole of the Executive's business time and attention to the provision of the Services in a conscientious and competent manner and with the utmost integrity. (3) The Executive shall perform the Services primarily at the Current Location. Subject to reimbursement for related expenses in accordance with Section 3(3) and subject to Section 4, it is understood and agreed that the Executive may be called upon, on occasion, to travel outside of the City of Chicago on behalf of Hub International, but that the Executive shall not be required to move his residence from the Chicago area as a condition of this Agreement. -4- 3. REMUNERATION AND BENEFITS (1) Hub International shall pay the Executive the Basic Compensation and Benefits (as applicable) in such payment periods as are established from time to time by Hub International for its employees, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. (2) The Executive shall be entitled to and Hub International shall provide the Benefits. (3) Hub International shall reimburse the Executive for reasonable travel and other business expenses incurred by the Executive in performing the Services, in accordance with approved budgets. (4) The Executive shall be entitled to the Vacation, to be scheduled at the mutual convenience of the parties. (5) The Executive shall be entitled to the rights set out in Schedule "D" in connection with the Restricted Stock Plan which Hub agrees to implement as soon as reasonably practicable having regard to all the circumstances, including the requirements of applicable law and any shareholder consent that may be required. (6) The Executive shall be paid a Bonus, if any, in accordance with Schedule "B". 4. TERM AND TERMINATION (1) The parties acknowledge that the Executive has been employed by Hub International since the commencement date set out in Schedule "A" and agree that this Agreement codifies the existing arrangements regarding the Executive's employment. (2) This Agreement and the employment of the Executive hereunder shall be for an indefinite term, subject to termination in accordance with the terms of this Agreement. (3) This Agreement and the employment of the Executive may be terminated by Hub International for any reason whatsoever upon prior written notice to the Executive, or by the Executive for Good Reason upon written notice to Hub International, provided that, in the event that the Agreement is terminated in accordance with this Section 4(3), the Executive shall, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts, be paid: (a) the Basic Compensation and entitled to receive the Benefits for the period up to the effective date of termination; and (b) (i) an amount equal to twelve (12) months' Basic Compensation; (ii) a ratable portion, based on the days elapsed in the then current year to the effective date of termination, of an amount equal to the most recent prior Bonus paid to the Executive; and (iii) the value of the group insurance and automobile benefits or -5- allowance components of the Benefits, all on a semi-monthly basis over the ensuing twelve (12) months, provided that in the event that the Executive breaches any of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, effective as at the date of such breach the Executive shall cease to be entitled to any further payment under Section 4(3)(b) or by way of any other damages, compensation or pay in lieu of notice; and provided further that in no event shall the Executive be paid an amount that is less than the prescribed minimum under applicable employment standards legislation. (4) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated immediately by Hub International, for Cause, without further obligation to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the date of termination. (5) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated by Hub International on notice to the Executive due to the Disability of the Executive, upon ninety (90) days' written notice to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (6) Notwithstanding Section 4(2) and 4(3), this Agreement shall be terminated immediately upon the Death of the Executive or, unless otherwise agreed by the parties, upon the Executive's attaining sixty-five (65) years of age, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (7) In the event of termination of this Agreement in accordance with the terms hereof, the provisions of the Confidentiality, Non-Solicitation and Insider Agreement shall continue in full force and effect. 5. DISPUTE RESOLUTION Subject to, and without diminishing, the rights of the corporations of The Hub Group to seek and obtain equitable relief in accordance with the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, the parties agree to submit any disputes to mediation in accordance with the procedures set out in Schedule "C". 6. GENERAL PROVISIONS (1) In the event any payment, distribution or other benefit received by the Executive under this Agreement or any other contract or arrangement (including, but not limited to, any acceleration of the ability to exercise any stock option or the vesting of any stock or other property or any payment made to the Executive in connection with a change of control of Hub International or any severance payment provided herein) (a "Payment") would be subject to the excise tax imposed by section 4999 -6- of the Internal Revenue Code of 1986 (such excise tax, together with any similar tax under any new or replacement provision to such Section 4999, are hereinafter collectively referred to as the "Excise Tax"), including any payment, distribution or other benefit that when aggregated with any other payment, distribution or other benefit (whether or not such is received or made pursuant to this Agreement) results in the imposition of the Excise Tax, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes, including without limitation, any Excise Tax or other tax imposed upon any amounts received under this Section 6(1), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All determinations required to be made under this Section 6(1), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Hub International's independent accounting firm which shall provide detailed supporting calculations both to Hub International and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been or will be a Payment, or such earlier time as is requested by Hub International. (2) The provisions hereof, when the context permits, shall enure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Executive and the successors and assigns of Hub International, respectively. (3) This Agreement shall be construed in accordance with the laws of the State of Illinois. (4) If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. However, if any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in the Confidentiality, Non-Solicitation and Insider Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement in any other jurisdiction. (5) Any notice, demand, request, consent, approval or waiver required or permitted to be given hereunder shall be in writing and may be given to the party for whom it is intended by personally delivering it to such party or by mailing the same by prepaid registered mail: -7- (a) In the case of Hub International, to: Hub International Limited 55 East Jackson Boulevard Chicago, IL 60604 Attention: General Counsel (b) In the case of the Executive, to the Executive's last known address. Any such notice or other documents delivered personally shall be deemed to have been received by and given to the addressee on the day of delivery and any such notice or other documents mailed, as aforesaid, shall be deemed to have been received by and given to the addressee on the third (3rd) business day following the date of mailing. Any party may at any time give notice to the other of any change of address. (6) All amounts referred to herein are in United States currency unless otherwise indicated. IN WITNESS THEREOF the parties hereto have hereunto executed this Agreement as of the day and year first above written. HUB INTERNATIONAL LIMITED By: /s/ Richard A. Gulliver - ---------------------------------------- Name: Richard A. Gulliver Title: President and Chief Operating Officer I have authority to bind the corporation. SIGNED AND DELIVERED in the presence of: ) ) /s/ W. Kirk James - ----------------------------------- (Signature) ) ) W. Kirk James /s/ Martin P. Hughes - ----------------------------------- --------------------- (Print Name) ) MARTIN P. HUGHES ) -8- SCHEDULE "A" COMMENCEMENT DATE The Executive's employment with Hub International commenced on October 27, 1999. SERVICES The Executive shall report to the Board of Directors of Hub International. The Executive shall perform such reasonable duties as shall assigned from time to time in connection with the Executive's position as Chairman and Chief Executive Officer of Hub International (the "Services"). SCHEDULE "B" BASIC COMPENSATION o Annual salary of $350,000.00 (the "Basic Compensation") BONUS o The Executive shall be paid such annual bonus (the "Bonus"), if any, as may declared by Hub International's Compensation Committee (the "Compensation Committee") in its sole discretion, of an amount not to exceed 100% of the annual Basic Compensation. The Compensation Committee shall determine the amount of the Bonus, if any, taking into consideration not only the Executive's individual performance, but also Hub International's performance as a company relative to its growth and profitability targets for the applicable year. The Bonus, if any, shall be paid to the Executive on or before March 15 of the year immediately following the year in respect of which it is declared payable, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. The Executive Committee may develop for the Executive such performance-based criteria as may be necessary and are reasonable to take into consideration in order to allow Hub International to deduct as an expense all remuneration, including any Bonus, paid to the Executive under this Agreement in the applicable year. BENEFITS o Group insurance (including medical, extended health, dental, short and long term disability and life insurance) and such other benefits as are made available to employees of Hub International, provided that the Executive qualifies for coverage under such plans. o Exclusive use of a company car. o Matching contribution by Hub International on the Executive' behalf to Hub International's employee 401(k) retirement savings plan equal to 3% of the Executive's Basic Compensation, subject to applicable law. VACATION The Executive shall be entitled to a maximum of four (4) weeks' vacation per year to be scheduled at the mutual convenience of the parties (the "Vacation"). -10- SCHEDULE "C" ALTERNATIVE DISPUTE RESOLUTION o Disputes will be submitted to mediation before a mediator in Chicago, Illinois, as a condition precedent to the initiation of litigation by any party to this Agreement; provided, however, that any party may seek injunctive relief in a court of competent jurisdiction to preserve the status quo pending the completion of mediation. The mediator shall be chosen by mutual agreement of the parties; provided, however, that if the parties are unable to agree upon a mediator within ten (10) days, they shall each, within the further period of five (5) days, choose a mediator and the two mediators shall choose, within the ensuing period of ten (10) days a separate and independent mediator who shall then serve as the sole mediator for the purposes of this Schedule "C". If either party fails to name a mediator within the further period of five (5) days aforesaid, the mediator chosen by the other party shall serve as the sole mediator for the purposes of this Schedule "C". o At such time as a dispute shall arise that is submitted to mediation, each of the parties shall execute such mediation agreement in such form as shall then be used by the chosen mediator or mediation firm for such purposes and shall join in a request that the mediator provide an evaluation of the parties' cases and of the likely resolution of the dispute if not settled. The cost of the mediator and mediation shall be borne equally by the parties. o In the event that one party to this Agreement is willing to accept the mediator's proposed resolution of the dispute, if any, but the other party (the "Contesting Party") is not so willing, the Contesting Party may elect to pursue a claim in a court of competent jurisdiction. In the event that the final determination of the rights of the Contesting Party by such court of competent jurisdiction is less advantageous to the Contesting Party than the mediator's proposed resolution of the dispute, the Contesting Party shall be deemed to have agreed to pay the other party's costs and expenses of litigation of such claim(s), including reasonable attorneys' fees. -11- SCHEDULE "D" RESTRICTED STOCK PLAN o The Executive shall receive units (the "Units") allowing the Executive to acquire up to 44,130 common shares under the Restricted Stock Plan (the "Awarded Shares"), subject to the following terms: o The terms of the Units (including number) shall be adjusted or modified, from time to time, to take into account any stock splits, stock dividends or other changes or adjustments occurring with respect to the common shares of Hub International. o No payment of cash consideration will be required to acquire the Awarded Shares. o As a precondition to the award, any shares previously allocated to the Executive under Hub International's Executive Share Purchase Plan will be sold to Hub International at original cost or sold on the open market, as the parties may decide, and the proceeds therefrom used to pay out the corresponding loan from Bank of Montreal. Excess proceeds, if any, arising from a sale on the open market will be paid to Hub International, subject to payment of such amount, if any, as may be required to reimburse the Executive for income tax arising from such sale. o Fifty percent (50%) of the Units shall be exercisable on the fifth (5th) anniversary of the commencement date set out in Schedule "A" (the "Commencement Date") and the remaining Units shall be exercisable on the tenth (10th) anniversary of the Commencement Date, provided that all unexercised Units shall immediately be exercisable upon normal retirement or upon termination without Cause or for Good Reason. Units will be exercisable pro rata in the event of Death or Disability (that is, at the rate of 10% per year). Subject to the foregoing, the Executive shall forfeit any unexercised Units in the event of Death or Disability or if the Executive's employment is terminated by Hub International for Cause or by the Executive without Good Reason. o The parties acknowledge that the Restricted Stock Plan is currently under design and, when in final form, may be subject to the approval of the shareholders of Hub International. Accordingly, the provisions of the Restricted Stock Plan and the Units may be modified from those set out above to accommodate applicable laws, regulatory requirements and tax considerations. EX-10.5 10 t06723ex10-5.txt EXECUTIVE AGREEMENT - HUB & MARTIN P. HUGHES Exhibit 10.5 EXECUTIVE CONFIDENTIALITY, NON-SOLICITATION AND INSIDER AGREEMENT TO: HUB INTERNATIONAL LIMITED AND ITS SUBSIDIARIES (collectively, "Hub International") - -------------------------------------------------------------------------------- WHEREAS: A. the undersigned (the "Executive") and Hub International have entered into an employment agreement dated as at the date hereof whereby Hub International employs the Executive (the "Employment Agreement"); and B. the defined terms "Cause" and "Good Reason" used in this Agreement have the meanings given to them in the Employment Agreement; NOW THEREFORE for good and valuable consideration, including the employment of the Executive by Hub International, the Executive agrees as follows: 1. PROPERTY. The Executive acknowledges and agrees that all books of business, policies of insurance, documents, computer records, vouchers and other books, papers and records connected with the business of Hub International, whether paid for, serviced or produced by the respective corporation of Hub International or not, are the property of the respective corporation and shall be at all times open to the respective corporation for the purposes of examination, and shall be turned over and surrendered to the respective corporation or its representatives upon the order of the respective corporation or on the termination of the Executive's relationship with Hub International for any reason whatsoever. 2. CONFIDENTIALITY. The Executive acknowledges that in the course of carrying out the Executive's duties to Hub International, the Executive will have access to and will be entrusted with confidential information concerning the business and corporate affairs of the corporations of Hub International and their clients ("Confidential Information"), including information pertaining to the respective corporation's relationships with insurance carriers and lenders, compensation structures, client underwriting and policy renewal information, internal accounting procedures, policies and information, unique insurance product features, insurance programs developed by the respective corporation (with or without the assistance of the Executive), marketing strategies, e-commerce strategies, personnel and training procedures. The term "Confidential Information" shall be deemed to include all such information that the Executive currently possesses as a result of the Executive's prior employment, if any, by any of the corporations of Hub International. The Executive agrees that all Confidential Information acquired by the Executive or disclosed to the Executive shall be held in the strictest confidence. The Executive shall not disclose any Confidential Information to any other person during the term of the Executive's relationship with Hub International or at any 2 time thereafter without the prior written consent of the respective corporation, except as may be required for the Executive to fulfil the Executive's duties to Hub International or as may be required by law. Neither during the term of the Executive's relationship with Hub International nor at any time thereafter will the Executive make use of any Confidential Information for the Executive's own benefit or for the benefit of any other person or persons, firm, partnership, association or corporation other than Hub International, or assist others in so doing; provided that nothing herein shall prohibit the Executive from using Confidential Information that: (a) was readily available to the public at the time such information was available to the Executive; (b) became readily available to the public after the time such information was made available to the Executive other than through a breach of this Agreement; (c) is lawfully and in good faith obtained by the Executive from an independent third party without a breach of obligations of confidentiality or of this Agreement; or (d) is information and expertise that was known to the Executive prior to the date of this Agreement or any prior agreement of employment, services or confidentiality between the Executive and any of the corporations of Hub International. The Executive shall have the burden of proof in establishing that any item of Confidential Information falls within one of the foregoing exceptions. The Executive acknowledges and agrees that the disclosure of any Confidential Information to competitors of Hub International or to the general public may be highly detrimental to the business interests of Hub International. The Executive acknowledges and agrees that the right of Hub International to maintain Confidential Information as confidential constitutes a proprietary right that the respective corporation is entitled to protect. Unless otherwise agreed to by the respective corporation, all Confidential Information shall be and shall remain the sole and exclusive property of the respective corporation. The Executive shall return to Hub International, forthwith upon the effective date of termination of the Executive's relationship with Hub International for any reason whatsoever, all records of Confidential Information in the possession of the Executive which were acquired in connection with the Executive's employment by Hub International. The Executive agrees that in the event of any breach of this Section 2, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the other respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of this Section 2. 3. NON-SOLICITATION 3 (a) The Executive agrees that the Executive will not, without the prior written consent of Hub International Limited, either during the term of the Executive's employment with Hub International or at any time within a period of two (2) years following the cessation thereof for any reason whatsoever (the "Restricted Period"), either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as principal, agent, employee, shareholder, or in any other capacity whatsoever, directly or indirectly, approach or solicit any client, employee or producer of Hub International except for the benefit of Hub International or attempt to direct any such client, Executive or producer away from Hub International. Without limiting the generality of the foregoing, the Executive shall not directly or indirectly approach or solicit any of the clients comprising the book of insurance business serviced by Hub International while the Executive is employed by Hub International for the purpose of selling insurance or consulting as to the purchase or sale of insurance during the Restricted Period, other than on behalf of Hub International. (b) The Executive shall pay to Hub International a sum equal to two (2) times the annual commissions and fees generated by clients obtained by the Executive in violation of Section 3(a). For each such client, the annual commissions and fees shall be the greater of the amount generated in the year preceding and the amount generated in the year following the date upon which the client becomes a client of the competing business. (c) The amount payable by the Executive under Section 3(b) shall be paid in cash and as soon as it is determinable and may be set off by Hub International against any amount owing or to become owing by any corporation of Hub International to the Executive. The Executive acknowledges that the said amount is a reasonable calculation of the respective corporation's liquidated damages given the interest of the respective corporation in maintaining its client base and the future profits which would be foregone by the corporation if the Executive violates the provisions of Section 3(a). The Executive further acknowledges that the payment by the Executive pursuant to Section 3(b) shall in no way limit the other remedies to which the respective corporation of Hub International may be entitled as a result of the Executive's breach of Section 3(a). Without limiting the generality of the foregoing, the Executive recognizes that a breach by the Executive of any of the covenants contained in Section 3(a) would result in damages to the respective corporation of Hub International on an ongoing basis and that Hub International may not be adequately compensated for such damages by the payment of the amounts contemplated in Section 3(b). The Executive agrees that in the event of any such breach, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of Section 3(a). 4. NON-COMPETITION. The Executive covenants and agrees that the Executive will not, without the prior written consent of Hub International, during the Restricted Period, either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as 4 principal, agent, employee, shareholder, or in any other capacity whatsoever carry on or be engaged in any aspect of the insurance agency business in the United States or Canada, or advise, lend money to, guarantee the debts or obligations of, or permit the Executive's name or any part thereof to be used or employed by any other person or persons, firm, partnership, association, company, corporation or any other entity engaged in any aspect of the insurance agency business in the United States or Canada. Notwithstanding the foregoing, the provisions of this Section 4 shall not: (a) apply in the event that this Agreement is terminated by Hub International without Cause or by the Executive for Good Reason, including in accordance with Section 5(2) of the Employment Agreement; or (b) prohibit the Executive from directly or indirectly owning up to 10% of the issued capital stock of any public company the price of whose shares is quoted in a published newspaper of general circulation. 5. DISCLOSURE OF MATERIAL INFORMATION. The Executive acknowledges that common shares of Hub International Limited are traded on the Toronto Stock Exchange and that, subject to certain exceptions, as a publicly traded company Hub International Limited has an obligation not to disseminate material information related to the company unless disclosure of such information is made contemporaneously to the public. The Executive therefore agrees not to make any public disclosure of material information related to Hub International without the prior written consent of Hub International Limited. The Executive further acknowledges that unauthorized disclosure by the Executive of internal information relating to Hub International could result in liability under insider trading legislation for Hub International Limited and/or the Executive. Notwithstanding the foregoing, the Executive undertakes and agrees to disclose unpublished material information related to Hub International to the Executive's immediate supervisor, Hub International Limited's General Counsel or such other person of authority employed by Hub International Limited as may be appropriate under the circumstances, if the Executive has reason to believe that such information is not then known to the appropriate person(s) of authority employed by Hub International Limited who would, in the normal course, determine whether Hub International Limited must disclose such information to the public. 6. INSIDER TRADING. The Executive acknowledges that if the Executive is in possession of any material information that relates to Hub International that has not yet been made public, the Executive must refrain from trading in Hub International Limited's shares (buying or selling) until the material information has been made public and the Executive agrees to advise others to whom the Executive divulges unpublished material information that they have the same responsibility. 7. CODE OF ETHICS. The Executive acknowledges that the Executive has received, read and understands Hub International Limited's "Insider Trading Code of Ethics and Disclosure Requirements" and agrees to comply therewith. 8. GROUNDS FOR DISMISSAL. The Executive acknowledges and agrees that due to the significance of the matters addressed herein and the negative consequences that may follow a contravention of any of the terms hereof, a breach by the Executive of any of the Executive's obligations hereunder may result in the Executive's immediate 5 dismissal and that such breach shall be deemed to be included in the definition of "Cause". 9. RESTRICTIONS NECESSARY. The Executive agrees that all restrictions in this Agreement are necessary and fundamental to the protection of the business of the corporations of Hub International and are reasonable. 10. ENFORCEABILITY. If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. If any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in this Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of this Agreement in any other jurisdiction. 11. GOVERNING LAW. This Agreement shall be interpreted in accordance with the laws of the State of Illinois. . DATED this 19th day of March, 2001. /s/ W. Kirk James /s/ Martin P. Hughes - --------------------------------- ---------------------------------- WITNESS SIGNATURE EXECUTIVE SIGNATURE W. Kirk James Martin P. Hughes - --------------------------------- ---------------------------------- PRINT WITNESS NAME PRINT EXECUTIVE NAME EX-10.6 11 t06723ex10-6.txt EMPLOYMENT AGREEMENT - HUB & RICHARD A. GULLIVER Exhibit 10.6 EXECUTIVE EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT dated March 19, 2002. BETWEEN: RICHARD A. GULLIVER (the "Executive") -and- HUB INTERNATIONAL LIMITED, a corporation incorporated pursuant to the laws of Ontario ("Hub International") In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows. 1. INTERPRETATION (1) In this Agreement: (a) "Agreement" means this agreement, all schedules attached hereto and any amendments made to any of the foregoing by written agreement between the Executive and Hub International; (b) "Basic Compensation" means the compensation defined in Schedule "B"; (c) "Benefits" means the benefits defined in Schedule "B"; (d) "Bonus" means the bonus defined in Schedule "B"; (e) "Cause" means (i) a material breach by the Executive of the provisions of this Agreement, which breach shall not have been cured by the Executive within thirty (30) days following written notice thereof by Hub International to the Executive, (ii) the commission of gross negligence by the Executive in the course of the Executive's employment, which commission has a material adverse effect on Hub International, (iii) the commission by the Executive of a criminal act of fraud, theft or dishonesty causing material damages to Hub International, (iv) the Executive's conviction of (or plead of nolo contendere to) any felony, or misdemeanor involving moral turpitude if such misdemeanor results in material financial harm to or materially adversely affects the goodwill of Hub International, (v) any breach by the Executive of the Confidentiality, Non-Solicitation and Insider Agreement of even date -2- herewith, or (vi) such other act or omission that a court of competent jurisdiction declares in a written ruling to be a breach of the Executive's responsibilities hereunder of such materiality as to justify a termination of the Executive's employment by Hub International; (f) "Confidentiality, Non-Solicitation and Insider Agreement" means the Executive Confidentiality, Non-Solicitation and Insider Agreement entered into by the parties hereto, of even date herewith; (g) "Current Location" means Hub International's executive offices at 55 East Jackson Boulevard, Chicago, Illinois; (h) "Death" means a natural death and, in addition, is deemed to include a continuous period of at least ninety (90) consecutive business days during which time the Executive has not been in the offices of Hub International during normal working hours and the Executive's whereabouts are unknown to Hub International; (i) "Disability" means the mental or physical state of the Executive is such that the Executive would qualify for disability benefits, in accordance with Hub International's group benefits insurance policy at the relevant time; (j) "Good Reason" means (i) the breach of the terms of this Agreement by Hub International or any successor thereto, excluding any inadvertent breach that is rectified within a reasonable period of time under the circumstances; (ii) the direct or indirect assignment to the Executive of any duties or reporting responsibilities, materially inconsistent with the Services (as contemplated as of the date hereof or in any mutually-agreed written amendment hereto) (excluding any isolated and inadvertent assignment that is remedied by Hub International within thirty (30) days after receipt of notice from the Executive); (iii) a reduction in the Executive's Basic Compensation or a reduction in the Benefits that is not reimbursed; (iv) any failure by Hub International to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Hub International to assume expressly and agree to perform the provisions of this Agreement in the same manner and to the same extent that Hub International would be required to perform if no such succession had taken place; (v) the failure by Hub International to continue to provide the Executive with the Benefits; (vi) the relocation of the Current Location to a location that is outside a thirty-five (35) mile radius of the Current Location, unless such new location is no further than the Current Location is from the Executive's then current residence. (k) "Hub International" means Hub International Limited; -3- (l) "Restricted Stock Plan" means a restricted stock purchase plan that includes substantially the same terms as those set out in Schedule "D" attached hereto that is generally applicable to senior employees or consultants with companies of The Hub Group who are resident in the United States; (m) "Schedule" means a schedule to this Agreement; (n) "Section" means a section or subsection of this Agreement; (o) "Services" means the duties and the responsibilities set out in Schedule "A", as the same may be amended or extended by mutual agreement of the parties from time to time; (p) "Subsidiaries" means the "subsidiary companies," as defined in the Securities Act (Ontario), of Hub International; (q) "The Hub Group" means Hub International and the Subsidiaries; and (r) "Vacation" means the vacation to which Executive is entitled, as contemplated in Schedule "B". (2) It is agreed by and between the parties hereto that the Schedules referred to herein, as itemized below and attached hereto, shall form a part of this Agreement and this Agreement shall be construed as incorporating such Schedules: Schedule "A" - Services Schedule "B" - Basic Compensation, Benefits and Vacation Schedule "C" - Alternative Dispute Resolution Schedule "D" - Restricted Stock Plan 2. EMPLOYMENT (1) Hub International agrees to employ the Executive for the purpose of providing the Services, and the Executive accepts such employment. (2) During the term of the Executive's employment with Hub International, the Executive agrees to devote the whole of the Executive's business time and attention to the provision of the Services in a conscientious and competent manner and with the utmost integrity. (3) The Executive shall perform the Services primarily at the Current Location. Subject to reimbursement for related expenses in accordance with Section 3(3) and subject to Section 4, it is understood and agreed that the Executive may be called upon, on occasion, to travel outside of the City of Chicago on behalf of Hub International, but that the Executive shall not be required to move his residence from the Chicago area as a condition of this Agreement. -4- 3. REMUNERATION AND BENEFITS (1) Hub International shall pay the Executive the Basic Compensation and Benefits (as applicable) in such payment periods as are established from time to time by Hub International for its employees, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. (2) The Executive shall be entitled to and Hub International shall provide the Benefits. (3) Hub International shall reimburse the Executive for reasonable travel and other business expenses incurred by the Executive in performing the Services, in accordance with approved budgets. (4) The Executive shall be entitled to the Vacation, to be scheduled at the mutual convenience of the parties. (5) The Executive shall be entitled to the rights set out in Schedule "D" in connection with the Restricted Stock Plan which Hub agrees to implement as soon as reasonably practicable having regard to all the circumstances, including the requirements of applicable law and any shareholder consent that may be required. (6) The Executive shall be paid a Bonus, if any, in accordance with Schedule "B". 4. TERM AND TERMINATION (1) The parties acknowledge that the Executive has been employed by Hub International since the commencement date set out in Schedule "A" and agree that this Agreement codifies the existing arrangements regarding the Executive's employment. (2) This Agreement and the employment of the Executive hereunder shall be for an indefinite term, subject to termination in accordance with the terms of this Agreement. (3) This Agreement and the employment of the Executive may be terminated by Hub International for any reason whatsoever upon prior written notice to the Executive, or by the Executive for Good Reason upon written notice to Hub International, provided that, in the event that the Agreement is terminated in accordance with this Section 4(3), the Executive shall, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts, be paid: (a) the Basic Compensation and entitled to receive the Benefits for the period up to the effective date of termination; and (b) (i) an amount equal to twelve (12) months' Basic Compensation; (ii) a ratable portion, based on the days elapsed in the then current year to the effective date of termination, of an amount equal to the most recent prior Bonus paid to the Executive; and (iii) the value of the group insurance and automobile benefits or -5- allowance components of the Benefits, all on a semi-monthly basis over the ensuing twelve (12) months, provided that in the event that the Executive breaches any of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, effective as at the date of such breach the Executive shall cease to be entitled to any further payment under Section 4(3)(b) or by way of any other damages, compensation or pay in lieu of notice; and provided further that in no event shall the Executive be paid an amount that is less than the prescribed minimum under applicable employment standards legislation. (4) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated immediately by Hub International, for Cause, without further obligation to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the date of termination. (5) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated by Hub International on notice to the Executive due to the Disability of the Executive, upon ninety (90) days' written notice to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (6) Notwithstanding Section 4(2) and 4(3), this Agreement shall be terminated immediately upon the Death of the Executive or, unless otherwise agreed by the parties, upon the Executive's attaining sixty-five (65) years of age, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (7) In the event of termination of this Agreement in accordance with the terms hereof, the provisions of the Confidentiality, Non-Solicitation and Insider Agreement shall continue in full force and effect. 5. DISPUTE RESOLUTION Subject to, and without diminishing, the rights of the corporations of The Hub Group to seek and obtain equitable relief in accordance with the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, the parties agree to submit any disputes to mediation in accordance with the procedures set out in Schedule "C". 6. GENERAL PROVISIONS (1) In the event any payment, distribution or other benefit received by the Executive under this Agreement or any other contract or arrangement (including, but not limited to, any acceleration of the ability to exercise any stock option or the vesting of any stock or other property or any payment made to the Executive in connection with a change of control of Hub International or any severance payment provided herein) (a "Payment") would be subject to the excise tax imposed by section 4999 -6- of the Internal Revenue Code of 1986 (such excise tax, together with any similar tax under any new or replacement provision to such Section 4999, are hereinafter collectively referred to as the "Excise Tax"), including any payment, distribution or other benefit that when aggregated with any other payment, distribution or other benefit (whether or not such is received or made pursuant to this Agreement) results in the imposition of the Excise Tax, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes, including without limitation, any Excise Tax or other tax imposed upon any amounts received under this Section 6(1), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All determinations required to be made under this Section 6(1), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Hub International's independent accounting firm which shall provide detailed supporting calculations both to Hub International and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been or will be a Payment, or such earlier time as is requested by Hub International. (2) The provisions hereof, when the context permits, shall enure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Executive and the successors and assigns of Hub International, respectively. (3) This Agreement shall be construed in accordance with the laws of the State of Illinois. (4) If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. However, if any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in the Confidentiality, Non-Solicitation and Insider Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement in any other jurisdiction. (5) Any notice, demand, request, consent, approval or waiver required or permitted to be given hereunder shall be in writing and may be given to the party for whom it is intended by personally delivering it to such party or by mailing the same by prepaid registered mail: -7- (a) In the case of Hub International, to: Hub International Limited 55 East Jackson Boulevard Chicago, IL 60604 Attention: General Counsel (b) In the case of the Executive, to the Executive's last known address. Any such notice or other documents delivered personally shall be deemed to have been received by and given to the addressee on the day of delivery and any such notice or other documents mailed, as aforesaid, shall be deemed to have been received by and given to the addressee on the third (3rd) business day following the date of mailing. Any party may at any time give notice to the other of any change of address. (6) All amounts referred to herein are in United States currency unless otherwise indicated. IN WITNESS THEREOF the parties hereto have hereunto executed this Agreement as of the day and year first above written. HUB INTERNATIONAL LIMITED By: /s/ Martin P. Hughes - ------------------------------------ Name: Martin P. Hughes Title: Chairman and Chief Executive Officer I have authority to bind the corporation. SIGNED AND DELIVERED in the presence of: ) ) /s/ W. Kirk James - ----------------------------------- (Signature) ) ) W. Kirk James ) /s/ Richard A. Gulliver - ----------------------------------- ) ----------------------- (Print Name) ) RICHARD A. GULLIVER ) -8- SCHEDULE "A" COMMENCEMENT DATE The Executive's employment with Hub International commenced on November 30, 1998. The parties agree that the Employment Agreement dated November 30, 1998 between the parties is terminated upon the date of this Agreement and is hereafter superceded by this Agreement. SERVICES The Executive shall report to the Board of Directors and the Chief Executive Officer of Hub International. The Executive shall perform such reasonable duties as shall assigned from time to time in connection with the Executive's position as President and Chief Operating Officer of Hub International (the "Services"). SCHEDULE "B" BASIC COMPENSATION o Annual salary of $300,000.00 (the "Basic Compensation") BONUS o The Executive shall be paid such annual bonus (the "Bonus"), if any, as may declared by Hub International's Compensation Committee (the "Compensation Committee") in its sole discretion, of an amount not to exceed $200,000.00. The Compensation Committee shall determine the amount of the Bonus, if any, taking into consideration not only the Executive's individual performance, but also Hub International's performance as a company relative to its growth and profitability targets for the applicable year. The Bonus, if any, shall be paid to the Executive on or before March 15 of the year immediately following the year in respect of which it is declared payable, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. The Executive Committee may develop for the Executive such performance-based criteria as may be necessary and are reasonable to take into consideration in order to allow Hub International to deduct as an expense all remuneration, including any Bonus, paid to the Executive under this Agreement in the applicable year. BENEFITS o Group insurance (including medical, extended health, dental, short and long term disability and life insurance) and such other benefits as are made available to employees of Hub International, provided that the Executive qualifies for coverage under such plans. o Automobile allowance of $750.00 per month. o Matching contribution by Hub International on the Executive' behalf to Hub International's employee 401(k) retirement savings plan equal to 3% of the Executive's Basic Compensation, subject to applicable law. VACATION The Executive shall be entitled to a maximum of four (4) weeks' vacation per year to be scheduled at the mutual convenience of the parties (the "Vacation"). -10- SCHEDULE "C" ALTERNATIVE DISPUTE RESOLUTION o Disputes will be submitted to mediation before a mediator in Chicago, Illinois, as a condition precedent to the initiation of litigation by any party to this Agreement; provided, however, that any party may seek injunctive relief in a court of competent jurisdiction to preserve the status quo pending the completion of mediation. The mediator shall be chosen by mutual agreement of the parties; provided, however, that if the parties are unable to agree upon a mediator within ten (10) days, they shall each, within the further period of five (5) days, choose a mediator and the two mediators shall choose, within the ensuing period of ten (10) days a separate and independent mediator who shall then serve as the sole mediator for the purposes of this Schedule "C". If either party fails to name a mediator within the further period of five (5) days aforesaid, the mediator chosen by the other party shall serve as the sole mediator for the purposes of this Schedule "C". o At such time as a dispute shall arise that is submitted to mediation, each of the parties shall execute such mediation agreement in such form as shall then be used by the chosen mediator or mediation firm for such purposes and shall join in a request that the mediator provide an evaluation of the parties' cases and of the likely resolution of the dispute if not settled. The cost of the mediator and mediation shall be borne equally by the parties. o In the event that one party to this Agreement is willing to accept the mediator's proposed resolution of the dispute, if any, but the other party (the "Contesting Party") is not so willing, the Contesting Party may elect to pursue a claim in a court of competent jurisdiction. In the event that the final determination of the rights of the Contesting Party by such court of competent jurisdiction is less advantageous to the Contesting Party than the mediator's proposed resolution of the dispute, the Contesting Party shall be deemed to have agreed to pay the other party's costs and expenses of litigation of such claim(s), including reasonable attorneys' fees. -11- SCHEDULE "D" RESTRICTED STOCK PLAN o The Executive shall receive units (the "Units") allowing the Executive to acquire up to 35,817 common shares under the Restricted Stock Plan (the "Awarded Shares"), subject to the following terms: o The terms of the Units (including number) shall be adjusted or modified, from time to time, to take into account any stock splits, stock dividends or other changes or adjustments occurring with respect to the common shares of Hub International. o No payment of cash consideration will be required to acquire the Awarded Shares. o Fifty percent (50%) of the Units shall be exercisable on the fifth (5th) anniversary of the commencement date set out in Schedule "A" (the "Commencement Date") and the remaining Units shall be exercisable on the tenth (10th) anniversary of the Commencement Date, provided that all unexercised Units shall immediately be exercisable upon normal retirement or upon termination without Cause or for Good Reason. Units will be exercisable pro rata in the event of Death or Disability (that is, at the rate of 10% per year). Subject to the foregoing, the Executive shall forfeit any unexercised Units in the event of Death or Disability or if the Executive's employment is terminated by Hub International for Cause or by the Executive without Good Reason. o The parties acknowledge that the Restricted Stock Plan is currently under design and, when in final form, may be subject to the approval of the shareholders of Hub International. Accordingly, the provisions of the Restricted Stock Plan and the Units may be modified from those set out above to accommodate applicable laws, regulatory requirements and tax considerations. o The parties acknowledge and agree that the Executive's loan in the principal amount of US$397,147.00 with Bank of Montreal related to the 52,444 shares currently allocated to the Executive under Hub International's Executive Share Purchase Plan will be paid by Hub International provided that the Executive is continuously employed by Hub International for the period of ten (10) years from the Commencement Date. EX-10.7 12 t06723ex10-7.txt EXECUTIVE CONFIDENTIALITY AGREEMENT - R.A.GULLIVER Exhibit 10.7 EXECUTIVE CONFIDENTIALITY, NON-SOLICITATION AND INSIDER AGREEMENT TO: HUB INTERNATIONAL LIMITED AND ITS SUBSIDIARIES (collectively, "Hub International") - -------------------------------------------------------------------------------- WHEREAS: A. the undersigned (the "Executive") and Hub International have entered into an employment agreement dated as at the date hereof whereby Hub International employs the Executive (the "Employment Agreement"); and B. the defined terms "Cause" and "Good Reason" used in this Agreement have the meanings given to them in the Employment Agreement; NOW THEREFORE for good and valuable consideration, including the employment of the Executive by Hub International, the Executive agrees as follows: 1. PROPERTY. The Executive acknowledges and agrees that all books of business, policies of insurance, documents, computer records, vouchers and other books, papers and records connected with the business of Hub International, whether paid for, serviced or produced by the respective corporation of Hub International or not, are the property of the respective corporation and shall be at all times open to the respective corporation for the purposes of examination, and shall be turned over and surrendered to the respective corporation or its representatives upon the order of the respective corporation or on the termination of the Executive's relationship with Hub International for any reason whatsoever. 2. CONFIDENTIALITY. The Executive acknowledges that in the course of carrying out the Executive's duties to Hub International, the Executive will have access to and will be entrusted with confidential information concerning the business and corporate affairs of the corporations of Hub International and their clients ("Confidential Information"), including information pertaining to the respective corporation's relationships with insurance carriers and lenders, compensation structures, client underwriting and policy renewal information, internal accounting procedures, policies and information, unique insurance product features, insurance programs developed by the respective corporation (with or without the assistance of the Executive), marketing strategies, e-commerce strategies, personnel and training procedures. The term "Confidential Information" shall be deemed to include all such information that the Executive currently possesses as a result of the Executive's prior employment, if any, by any of the corporations of Hub International. The Executive agrees that all Confidential Information acquired by the Executive or disclosed to the Executive shall be held in the strictest confidence. The Executive shall not disclose any Confidential Information to any other person during the term of the Executive's relationship with Hub International or at any 2 time thereafter without the prior written consent of the respective corporation, except as may be required for the Executive to fulfil the Executive's duties to Hub International or as may be required by law. Neither during the term of the Executive's relationship with Hub International nor at any time thereafter will the Executive make use of any Confidential Information for the Executive's own benefit or for the benefit of any other person or persons, firm, partnership, association or corporation other than Hub International, or assist others in so doing; provided that nothing herein shall prohibit the Executive from using Confidential Information that: (a) was readily available to the public at the time such information was available to the Executive; (b) became readily available to the public after the time such information was made available to the Executive other than through a breach of this Agreement; (c) is lawfully and in good faith obtained by the Executive from an independent third party without a breach of obligations of confidentiality or of this Agreement; or (d) is information and expertise that was known to the Executive prior to the date of this Agreement or any prior agreement of employment, services or confidentiality between the Executive and any of the corporations of Hub International. The Executive shall have the burden of proof in establishing that any item of Confidential Information falls within one of the foregoing exceptions. The Executive acknowledges and agrees that the disclosure of any Confidential Information to competitors of Hub International or to the general public may be highly detrimental to the business interests of Hub International. The Executive acknowledges and agrees that the right of Hub International to maintain Confidential Information as confidential constitutes a proprietary right that the respective corporation is entitled to protect. Unless otherwise agreed to by the respective corporation, all Confidential Information shall be and shall remain the sole and exclusive property of the respective corporation. The Executive shall return to Hub International, forthwith upon the effective date of termination of the Executive's relationship with Hub International for any reason whatsoever, all records of Confidential Information in the possession of the Executive which were acquired in connection with the Executive's employment by Hub International. The Executive agrees that in the event of any breach of this Section 2, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the other respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of this Section 2. 3. NON-SOLICITATION 3 (a) The Executive agrees that the Executive will not, without the prior written consent of Hub International Limited, either during the term of the Executive's employment with Hub International or at any time within a period of two (2) years following the cessation thereof for any reason whatsoever (the "Restricted Period"), either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as principal, agent, employee, shareholder, or in any other capacity whatsoever, directly or indirectly, approach or solicit any client, employee or producer of Hub International except for the benefit of Hub International or attempt to direct any such client, Executive or producer away from Hub International. Without limiting the generality of the foregoing, the Executive shall not directly or indirectly approach or solicit any of the clients comprising the book of insurance business serviced by Hub International while the Executive is employed by Hub International for the purpose of selling insurance or consulting as to the purchase or sale of insurance during the Restricted Period, other than on behalf of Hub International. (b) The Executive shall pay to Hub International a sum equal to two (2) times the annual commissions and fees generated by clients obtained by the Executive in violation of Section 3(a). For each such client, the annual commissions and fees shall be the greater of the amount generated in the year preceding and the amount generated in the year following the date upon which the client becomes a client of the competing business. (c) The amount payable by the Executive under Section 3(b) shall be paid in cash and as soon as it is determinable and may be set off by Hub International against any amount owing or to become owing by any corporation of Hub International to the Executive. The Executive acknowledges that the said amount is a reasonable calculation of the respective corporation's liquidated damages given the interest of the respective corporation in maintaining its client base and the future profits which would be foregone by the corporation if the Executive violates the provisions of Section 3(a). The Executive further acknowledges that the payment by the Executive pursuant to Section 3(b) shall in no way limit the other remedies to which the respective corporation of Hub International may be entitled as a result of the Executive's breach of Section 3(a). Without limiting the generality of the foregoing, the Executive recognizes that a breach by the Executive of any of the covenants contained in Section 3(a) would result in damages to the respective corporation of Hub International on an ongoing basis and that Hub International may not be adequately compensated for such damages by the payment of the amounts contemplated in Section 3(b). The Executive agrees that in the event of any such breach, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of Section 3(a). 4. NON-COMPETITION. The Executive covenants and agrees that the Executive will not, without the prior written consent of Hub International, during the Restricted Period, either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as 4 principal, agent, employee, shareholder, or in any other capacity whatsoever carry on or be engaged in any aspect of the insurance agency business in the United States or Canada, or advise, lend money to, guarantee the debts or obligations of, or permit the Executive's name or any part thereof to be used or employed by any other person or persons, firm, partnership, association, company, corporation or any other entity engaged in any aspect of the insurance agency business in the United States or Canada. Notwithstanding the foregoing, the provisions of this Section 4 shall not: (a) apply in the event that this Agreement is terminated by Hub International without Cause or by the Executive for Good Reason, including in accordance with Section 5(2) of the Employment Agreement; or (b) prohibit the Executive from directly or indirectly owning up to 10% of the issued capital stock of any public company the price of whose shares is quoted in a published newspaper of general circulation. 5. DISCLOSURE OF MATERIAL INFORMATION. The Executive acknowledges that common shares of Hub International Limited are traded on the Toronto Stock Exchange and that, subject to certain exceptions, as a publicly traded company Hub International Limited has an obligation not to disseminate material information related to the company unless disclosure of such information is made contemporaneously to the public. The Executive therefore agrees not to make any public disclosure of material information related to Hub International without the prior written consent of Hub International Limited. The Executive further acknowledges that unauthorized disclosure by the Executive of internal information relating to Hub International could result in liability under insider trading legislation for Hub International Limited and/or the Executive. Notwithstanding the foregoing, the Executive undertakes and agrees to disclose unpublished material information related to Hub International to the Executive's immediate supervisor, Hub International Limited's General Counsel or such other person of authority employed by Hub International Limited as may be appropriate under the circumstances, if the Executive has reason to believe that such information is not then known to the appropriate person(s) of authority employed by Hub International Limited who would, in the normal course, determine whether Hub International Limited must disclose such information to the public. 6. INSIDER TRADING. The Executive acknowledges that if the Executive is in possession of any material information that relates to Hub International that has not yet been made public, the Executive must refrain from trading in Hub International Limited's shares (buying or selling) until the material information has been made public and the Executive agrees to advise others to whom the Executive divulges unpublished material information that they have the same responsibility. 7. CODE OF ETHICS. The Executive acknowledges that the Executive has received, read and understands Hub International Limited's "Insider Trading Code of Ethics and Disclosure Requirements" and agrees to comply therewith. 8. GROUNDS FOR DISMISSAL. The Executive acknowledges and agrees that due to the significance of the matters addressed herein and the negative consequences that may follow a contravention of any of the terms hereof, a breach by the Executive of any of the Executive's obligations hereunder may result in the Executive's immediate 5 dismissal and that such breach shall be deemed to be included in the definition of "Cause". 9. RESTRICTIONS NECESSARY. The Executive agrees that all restrictions in this Agreement are necessary and fundamental to the protection of the business of the corporations of Hub International and are reasonable. 10. ENFORCEABILITY. If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. If any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in this Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of this Agreement in any other jurisdiction. 11. GOVERNING LAW. This Agreement shall be interpreted in accordance with the laws of the State of Illinois. . DATED this 19th day of March, 2001. /s/ W. Kirk James /s/ Richard A. Gulliver - --------------------------------- ---------------------------------- WITNESS SIGNATURE EXECUTIVE SIGNATURE W. Kirk James Richard A. Gulliver - --------------------------------- ---------------------------------- PRINT WITNESS NAME PRINT EXECUTIVE NAME EX-10.8 13 t06723ex10-8.txt EMPLOYMENT AGREEMENT - HUB & DENNIS J. PAULS Exhibit 10.8 EXECUTIVE EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT dated March 19, 2002. BETWEEN: DENNIS J. PAULS (the "Executive") -and- HUB INTERNATIONAL LIMITED, a corporation incorporated pursuant to the laws of Ontario ("Hub International") In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows. 1. INTERPRETATION (1) In this Agreement: (a) "Agreement" means this agreement, all schedules attached hereto and any amendments made to any of the foregoing by written agreement between the Executive and Hub International; (b) "Basic Compensation" means the compensation defined in Schedule "B"; (c) "Benefits" means the benefits defined in Schedule "B"; (d) "Bonus" means the bonus defined in Schedule "B"; (e) "Cause" means (i) a material breach by the Executive of the provisions of this Agreement, which breach shall not have been cured by the Executive within thirty (30) days following written notice thereof by Hub International to the Executive, (ii) the commission of gross negligence by the Executive in the course of the Executive's employment, which commission has a material adverse effect on Hub International, (iii) the commission by the Executive of a criminal act of fraud, theft or dishonesty causing material damages to Hub International, (iv) the Executive's conviction of (or plead of nolo contendere to) any felony, or misdemeanor involving moral turpitude if such misdemeanor results in material financial harm to or materially adversely affects the goodwill of Hub International, (v) any breach by the Executive of the Confidentiality, Non-Solicitation and Insider Agreement of even date -2- herewith, or (vi) such other act or omission that a court of competent jurisdiction declares in a written ruling to be a breach of the Executive's responsibilities hereunder of such materiality as to justify a termination of the Executive's employment by Hub International; (f) "Confidentiality, Non-Solicitation and Insider Agreement" means the Executive Confidentiality, Non-Solicitation and Insider Agreement entered into by the parties hereto, of even date herewith; (g) "Current Location" means Hub International's executive offices at 55 East Jackson Boulevard, Chicago, Illinois; (h) "Death" means a natural death and, in addition, is deemed to include a continuous period of at least ninety (90) consecutive business days during which time the Executive has not been in the offices of Hub International during normal working hours and the Executive's whereabouts are unknown to Hub International; (i) "Disability" means the mental or physical state of the Executive is such that the Executive would qualify for disability benefits, in accordance with Hub International's group benefits insurance policy at the relevant time; (j) "Good Reason" means (i) the breach of the terms of this Agreement by Hub International or any successor thereto, excluding any inadvertent breach that is rectified within a reasonable period of time under the circumstances; (ii) the direct or indirect assignment to the Executive of any duties or reporting responsibilities, materially inconsistent with the Services (as contemplated as of the date hereof or in any mutually-agreed written amendment hereto) (excluding any isolated and inadvertent assignment that is remedied by Hub International within thirty (30) days after receipt of notice from the Executive); (iii) a reduction in the Executive's Basic Compensation or a reduction in the Benefits that is not reimbursed; (iv) any failure by Hub International to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Hub International to assume expressly and agree to perform the provisions of this Agreement in the same manner and to the same extent that Hub International would be required to perform if no such succession had taken place; (v) the failure by Hub International to continue to provide the Executive with the Benefits; (vi) the relocation of the Current Location to a location that is outside a thirty-five (35) mile radius of the Current Location, unless such new location is no further than the Current Location is from the Executive's then current residence. (k) "Hub International" means Hub International Limited; -3- (l) "Restricted Stock Plan" means a restricted stock purchase plan that includes substantially the same terms as those set out in Schedule "D" attached hereto that is generally applicable to senior employees or consultants with companies of The Hub Group who are resident in the United States; (m) "Schedule" means a schedule to this Agreement; (n) "Section" means a section or subsection of this Agreement; (o) "Services" means the duties and the responsibilities set out in Schedule "A", as the same may be amended or extended by mutual agreement of the parties from time to time; (p) "Subsidiaries" means the "subsidiary companies," as defined in the Securities Act (Ontario), of Hub International; (q) "The Hub Group" means Hub International and the Subsidiaries; and (r) "Vacation" means the vacation to which Executive is entitled, as contemplated in Schedule "B". (2) It is agreed by and between the parties hereto that the Schedules referred to herein, as itemized below and attached hereto, shall form a part of this Agreement and this Agreement shall be construed as incorporating such Schedules: Schedule "A" - Services Schedule "B" - Basic Compensation, Benefits and Vacation Schedule "C" - Alternative Dispute Resolution Schedule "D" - Restricted Stock Plan 2. EMPLOYMENT (1) Hub International agrees to employ the Executive for the purpose of providing the Services, and the Executive accepts such employment. (2) During the term of the Executive's employment with Hub International, the Executive agrees to devote the whole of the Executive's business time and attention to the provision of the Services in a conscientious and competent manner and with the utmost integrity. (3) The Executive shall perform the Services primarily at the Current Location. Subject to reimbursement for related expenses in accordance with Section 3(3) and subject to Section 4, it is understood and agreed that the Executive may be called upon, on occasion, to travel outside of the City of Chicago on behalf of Hub International, but that the Executive shall not be required to move his residence from the Chicago area as a condition of this Agreement. -4- 3. REMUNERATION AND BENEFITS (1) Hub International shall pay the Executive the Basic Compensation and Benefits (as applicable) in such payment periods as are established from time to time by Hub International for its employees, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. (2) The Executive shall be entitled to and Hub International shall provide the Benefits. (3) Hub International shall reimburse the Executive for reasonable travel and other business expenses incurred by the Executive in performing the Services, in accordance with approved budgets. (4) The Executive shall be entitled to the Vacation, to be scheduled at the mutual convenience of the parties. (5) The Executive shall be entitled to the rights set out in Schedule "D" in connection with the Restricted Stock Plan which Hub agrees to implement as soon as reasonably practicable having regard to all the circumstances, including the requirements of applicable law and any shareholder consent that may be required. (6) The Executive shall be paid a Bonus, if any, in accordance with Schedule "B". 4. TERM AND TERMINATION (1) The parties acknowledge that the Executive has been employed by Hub International since the commencement date set out in Schedule "A" and agree that this Agreement codifies the existing arrangements regarding the Executive's employment. (2) This Agreement and the employment of the Executive hereunder shall be for an indefinite term, subject to termination in accordance with the terms of this Agreement. (3) This Agreement and the employment of the Executive may be terminated by Hub International for any reason whatsoever upon prior written notice to the Executive, or by the Executive for Good Reason upon written notice to Hub International, provided that, in the event that the Agreement is terminated in accordance with this Section 4(3), the Executive shall, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts, be paid: (a) the Basic Compensation and entitled to receive the Benefits for the period up to the effective date of termination; and (b) (i) an amount equal to twelve (12) months' Basic Compensation; (ii) a ratable portion, based on the days elapsed in the then current year to the effective date of termination, of an amount equal to the most recent prior Bonus paid to the Executive; and (iii) the value of the group insurance and automobile benefits or -5- allowance components of the Benefits, all on a semi-monthly basis over the ensuing twelve (12) months, provided that in the event that the Executive breaches any of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, effective as at the date of such breach the Executive shall cease to be entitled to any further payment under Section 4(3)(b) or by way of any other damages, compensation or pay in lieu of notice; and provided further that in no event shall the Executive be paid an amount that is less than the prescribed minimum under applicable employment standards legislation. (4) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated immediately by Hub International, for Cause, without further obligation to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the date of termination. (5) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated by Hub International on notice to the Executive due to the Disability of the Executive, upon ninety (90) days' written notice to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (6) Notwithstanding Section 4(2) and 4(3), this Agreement shall be terminated immediately upon the Death of the Executive or, unless otherwise agreed by the parties, upon the Executive's attaining sixty-five (65) years of age, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (7) In the event of termination of this Agreement in accordance with the terms hereof, the provisions of the Confidentiality, Non-Solicitation and Insider Agreement shall continue in full force and effect. 5. DISPUTE RESOLUTION Subject to, and without diminishing, the rights of the corporations of The Hub Group to seek and obtain equitable relief in accordance with the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, the parties agree to submit any disputes to mediation in accordance with the procedures set out in Schedule "C". 6. GENERAL PROVISIONS (1) In the event any payment, distribution or other benefit received by the Executive under this Agreement or any other contract or arrangement (including, but not limited to, any acceleration of the ability to exercise any stock option or the vesting of any stock or other property or any payment made to the Executive in connection with a change of control of Hub International or any severance payment provided herein) (a "Payment") would be subject to the excise tax imposed by section 4999 -6- of the Internal Revenue Code of 1986 (such excise tax, together with any similar tax under any new or replacement provision to such Section 4999, are hereinafter collectively referred to as the "Excise Tax"), including any payment, distribution or other benefit that when aggregated with any other payment, distribution or other benefit (whether or not such is received or made pursuant to this Agreement) results in the imposition of the Excise Tax, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes, including without limitation, any Excise Tax or other tax imposed upon any amounts received under this Section 6(1), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All determinations required to be made under this Section 6(1), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Hub International's independent accounting firm which shall provide detailed supporting calculations both to Hub International and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been or will be a Payment, or such earlier time as is requested by Hub International. (2) The provisions hereof, when the context permits, shall enure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Executive and the successors and assigns of Hub International, respectively. (3) This Agreement shall be construed in accordance with the laws of the State of Illinois. (4) If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. However, if any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in the Confidentiality, Non-Solicitation and Insider Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement in any other jurisdiction. (5) Any notice, demand, request, consent, approval or waiver required or permitted to be given hereunder shall be in writing and may be given to the party for whom it is intended by personally delivering it to such party or by mailing the same by prepaid registered mail: -7- (a) In the case of Hub International, to: Hub International Limited 55 East Jackson Boulevard Chicago, IL 60604 Attention: General Counsel (b) In the case of the Executive, to the Executive's last known address. Any such notice or other documents delivered personally shall be deemed to have been received by and given to the addressee on the day of delivery and any such notice or other documents mailed, as aforesaid, shall be deemed to have been received by and given to the addressee on the third (3rd) business day following the date of mailing. Any party may at any time give notice to the other of any change of address. (6) All amounts referred to herein are in United States currency unless otherwise indicated. IN WITNESS THEREOF the parties hereto have hereunto executed this Agreement as of the day and year first above written. HUB INTERNATIONAL LIMITED By: /s/ Martin P. Hughes - ------------------------------------ Name: Martin P. Hughes Title: Chairman and Chief Executive Officer I have authority to bind the corporation. SIGNED AND DELIVERED in the presence of: ) ) /s/ W. Kirk James ) - ----------------------------------- ) (Signature) ) ) W. Kirk James ) /s/ Dennis J. Pauls - ----------------------------------- ) ---------------------- (Print Name) ) DENNIS J. PAULS ) -8- SCHEDULE "A" COMMENCEMENT DATE The Executive's employment with Hub International commenced on November 30, 1998. The parties agree that the Employment Agreement dated November 30, 1998 between the parties is terminated upon the date of this Agreement and is hereafter superceded by this Agreement. SERVICES The Executive shall report to the Board of Directors and the Chief Executive Officer of Hub International. The Executive shall perform such reasonable duties as shall assigned from time to time in connection with the Executive's position as Vice-President and Chief Financial Officer of Hub International (the "Services"). SCHEDULE "B" BASIC COMPENSATION o Annual salary of $200,000.00 (the "Basic Compensation") BONUS o The Executive shall be paid such annual bonus (the "Bonus"), if any, as may declared by Hub International's Compensation Committee (the "Compensation Committee") in its sole discretion, of an amount not to exceed $100,000.00. The Compensation Committee shall determine the amount of the Bonus, if any, taking into consideration not only the Executive's individual performance, but also Hub International's performance as a company relative to its growth and profitability targets for the applicable year. The Bonus, if any, shall be paid to the Executive on or before March 15 of the year immediately following the year in respect of which it is declared payable, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. The Executive Committee may develop for the Executive such performance-based criteria as may be necessary and are reasonable to take into consideration in order to allow Hub International to deduct as an expense all remuneration, including any Bonus, paid to the Executive under this Agreement in the applicable year. BENEFITS o Group insurance (including medical, extended health, dental, short and long term disability and life insurance) and such other benefits as are made available to employees of Hub International, provided that the Executive qualifies for coverage under such plans. o Automobile allowance of $700.00 per month. o Matching contribution by Hub International on the Executive's behalf to Hub International's employee 401(k) retirement savings plan equal to 3% of the Executive's Basic Compensation, subject to applicable law. VACATION The Executive shall be entitled to a maximum of four (4) weeks' vacation per year to be scheduled at the mutual convenience of the parties (the "Vacation"). -10- SCHEDULE "C" ALTERNATIVE DISPUTE RESOLUTION o Disputes will be submitted to mediation before a mediator in Chicago, Illinois, as a condition precedent to the initiation of litigation by any party to this Agreement; provided, however, that any party may seek injunctive relief in a court of competent jurisdiction to preserve the status quo pending the completion of mediation. The mediator shall be chosen by mutual agreement of the parties; provided, however, that if the parties are unable to agree upon a mediator within ten (10) days, they shall each, within the further period of five (5) days, choose a mediator and the two mediators shall choose, within the ensuing period of ten (10) days a separate and independent mediator who shall then serve as the sole mediator for the purposes of this Schedule "C". If either party fails to name a mediator within the further period of five (5) days aforesaid, the mediator chosen by the other party shall serve as the sole mediator for the purposes of this Schedule "C". o At such time as a dispute shall arise that is submitted to mediation, each of the parties shall execute such mediation agreement in such form as shall then be used by the chosen mediator or mediation firm for such purposes and shall join in a request that the mediator provide an evaluation of the parties' cases and of the likely resolution of the dispute if not settled. The cost of the mediator and mediation shall be borne equally by the parties. o In the event that one party to this Agreement is willing to accept the mediator's proposed resolution of the dispute, if any, but the other party (the "Contesting Party") is not so willing, the Contesting Party may elect to pursue a claim in a court of competent jurisdiction. In the event that the final determination of the rights of the Contesting Party by such court of competent jurisdiction is less advantageous to the Contesting Party than the mediator's proposed resolution of the dispute, the Contesting Party shall be deemed to have agreed to pay the other party's costs and expenses of litigation of such claim(s), including reasonable attorneys' fees. -11- SCHEDULE "D" RESTRICTED STOCK PLAN o The Executive shall receive units (the "Units") allowing the Executive to acquire up to 25,000 common shares under the Restricted Stock Plan (the "Awarded Shares"), subject to the following terms: o The terms of the Units (including number) shall be adjusted or modified, from time to time, to take into account any stock splits, stock dividends or other changes or adjustments occurring with respect to the common shares of Hub International. o No payment of cash consideration will be required to acquire the Awarded Shares. o Fifty percent (50%) of the Units shall be exercisable on the fifth (5th) anniversary of the commencement date set out in Schedule "A" (the "Commencement Date") and the remaining Units shall be exercisable on the tenth (10th) anniversary of the Commencement Date, provided that all unexercised Units shall immediately be exercisable upon normal retirement or upon termination without Cause or for Good Reason. Units will be exercisable pro rata in the event of Death or Disability (that is, at the rate of 10% per year). Subject to the foregoing, the Executive shall forfeit any unexercised Units in the event of Death or Disability or if the Executive's employment is terminated by Hub International for Cause or by the Executive without Good Reason. o The parties acknowledge that the Restricted Stock Plan is currently under design and, when in final form, may be subject to the approval of the shareholders of Hub International. Accordingly, the provisions of the Restricted Stock Plan and the Units may be modified from those set out above to accommodate applicable laws, regulatory requirements and tax considerations. EX-10.9 14 t06723ex10-9.txt EXECUTIVE CONFIDENTIALITY AGREEMENT - D.J PAULS Exhibit 10.9 EXECUTIVE CONFIDENTIALITY, NON-SOLICITATION AND INSIDER AGREEMENT TO: HUB INTERNATIONAL LIMITED AND ITS SUBSIDIARIES (collectively, "Hub International") - -------------------------------------------------------------------------------- WHEREAS: A. the undersigned (the "Executive") and Hub International have entered into an employment agreement dated as at the date hereof whereby Hub International employs the Executive (the "Employment Agreement"); and B. the defined terms "Cause" and "Good Reason" used in this Agreement have the meanings given to them in the Employment Agreement; NOW THEREFORE for good and valuable consideration, including the employment of the Executive by Hub International, the Executive agrees as follows: 1. PROPERTY. The Executive acknowledges and agrees that all books of business, policies of insurance, documents, computer records, vouchers and other books, papers and records connected with the business of Hub International, whether paid for, serviced or produced by the respective corporation of Hub International or not, are the property of the respective corporation and shall be at all times open to the respective corporation for the purposes of examination, and shall be turned over and surrendered to the respective corporation or its representatives upon the order of the respective corporation or on the termination of the Executive's relationship with Hub International for any reason whatsoever. 2. CONFIDENTIALITY. The Executive acknowledges that in the course of carrying out the Executive's duties to Hub International, the Executive will have access to and will be entrusted with confidential information concerning the business and corporate affairs of the corporations of Hub International and their clients ("Confidential Information"), including information pertaining to the respective corporation's relationships with insurance carriers and lenders, compensation structures, client underwriting and policy renewal information, internal accounting procedures, policies and information, unique insurance product features, insurance programs developed by the respective corporation (with or without the assistance of the Executive), marketing strategies, e-commerce strategies, personnel and training procedures. The term "Confidential Information" shall be deemed to include all such information that the Executive currently possesses as a result of the Executive's prior employment, if any, by any of the corporations of Hub International. The Executive agrees that all Confidential Information acquired by the Executive or disclosed to the Executive shall be held in the strictest confidence. The Executive shall not disclose any Confidential Information to any other person during the term of the Executive's relationship with Hub International or at any 2 time thereafter without the prior written consent of the respective corporation, except as may be required for the Executive to fulfil the Executive's duties to Hub International or as may be required by law. Neither during the term of the Executive's relationship with Hub International nor at any time thereafter will the Executive make use of any Confidential Information for the Executive's own benefit or for the benefit of any other person or persons, firm, partnership, association or corporation other than Hub International, or assist others in so doing; provided that nothing herein shall prohibit the Executive from using Confidential Information that: (a) was readily available to the public at the time such information was available to the Executive; (b) became readily available to the public after the time such information was made available to the Executive other than through a breach of this Agreement; (c) is lawfully and in good faith obtained by the Executive from an independent third party without a breach of obligations of confidentiality or of this Agreement; or (d) is information and expertise that was known to the Executive prior to the date of this Agreement or any prior agreement of employment, services or confidentiality between the Executive and any of the corporations of Hub International. The Executive shall have the burden of proof in establishing that any item of Confidential Information falls within one of the foregoing exceptions. The Executive acknowledges and agrees that the disclosure of any Confidential Information to competitors of Hub International or to the general public may be highly detrimental to the business interests of Hub International. The Executive acknowledges and agrees that the right of Hub International to maintain Confidential Information as confidential constitutes a proprietary right that the respective corporation is entitled to protect. Unless otherwise agreed to by the respective corporation, all Confidential Information shall be and shall remain the sole and exclusive property of the respective corporation. The Executive shall return to Hub International, forthwith upon the effective date of termination of the Executive's relationship with Hub International for any reason whatsoever, all records of Confidential Information in the possession of the Executive which were acquired in connection with the Executive's employment by Hub International. The Executive agrees that in the event of any breach of this Section 2, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the other respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of this Section 2. 3. NON-SOLICITATION 3 (a) The Executive agrees that the Executive will not, without the prior written consent of Hub International Limited, either during the term of the Executive's employment with Hub International or at any time within a period of two (2) years following the cessation thereof for any reason whatsoever (the "Restricted Period"), either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as principal, agent, employee, shareholder, or in any other capacity whatsoever, directly or indirectly, approach or solicit any client, employee or producer of Hub International except for the benefit of Hub International or attempt to direct any such client, Executive or producer away from Hub International. Without limiting the generality of the foregoing, the Executive shall not directly or indirectly approach or solicit any of the clients comprising the book of insurance business serviced by Hub International while the Executive is employed by Hub International for the purpose of selling insurance or consulting as to the purchase or sale of insurance during the Restricted Period, other than on behalf of Hub International. (b) The Executive shall pay to Hub International a sum equal to two (2) times the annual commissions and fees generated by clients obtained by the Executive in violation of Section 3(a). For each such client, the annual commissions and fees shall be the greater of the amount generated in the year preceding and the amount generated in the year following the date upon which the client becomes a client of the competing business. (c) The amount payable by the Executive under Section 3(b) shall be paid in cash and as soon as it is determinable and may be set off by Hub International against any amount owing or to become owing by any corporation of Hub International to the Executive. The Executive acknowledges that the said amount is a reasonable calculation of the respective corporation's liquidated damages given the interest of the respective corporation in maintaining its client base and the future profits which would be foregone by the corporation if the Executive violates the provisions of Section 3(a). The Executive further acknowledges that the payment by the Executive pursuant to Section 3(b) shall in no way limit the other remedies to which the respective corporation of Hub International may be entitled as a result of the Executive's breach of Section 3(a). Without limiting the generality of the foregoing, the Executive recognizes that a breach by the Executive of any of the covenants contained in Section 3(a) would result in damages to the respective corporation of Hub International on an ongoing basis and that Hub International may not be adequately compensated for such damages by the payment of the amounts contemplated in Section 3(b). The Executive agrees that in the event of any such breach, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of Section 3(a). 4. NON-COMPETITION. The Executive covenants and agrees that the Executive will not, without the prior written consent of Hub International, during the Restricted Period, either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as 4 principal, agent, employee, shareholder, or in any other capacity whatsoever carry on or be engaged in any aspect of the insurance agency business in the United States or Canada, or advise, lend money to, guarantee the debts or obligations of, or permit the Executive's name or any part thereof to be used or employed by any other person or persons, firm, partnership, association, company, corporation or any other entity engaged in any aspect of the insurance agency business in the United States or Canada. Notwithstanding the foregoing, the provisions of this Section 4 shall not: (a) apply in the event that this Agreement is terminated by Hub International without Cause or by the Executive for Good Reason, including in accordance with Section 5(2) of the Employment Agreement; or (b) prohibit the Executive from directly or indirectly owning up to 10% of the issued capital stock of any public company the price of whose shares is quoted in a published newspaper of general circulation. 5. DISCLOSURE OF MATERIAL INFORMATION. The Executive acknowledges that common shares of Hub International Limited are traded on the Toronto Stock Exchange and that, subject to certain exceptions, as a publicly traded company Hub International Limited has an obligation not to disseminate material information related to the company unless disclosure of such information is made contemporaneously to the public. The Executive therefore agrees not to make any public disclosure of material information related to Hub International without the prior written consent of Hub International Limited. The Executive further acknowledges that unauthorized disclosure by the Executive of internal information relating to Hub International could result in liability under insider trading legislation for Hub International Limited and/or the Executive. Notwithstanding the foregoing, the Executive undertakes and agrees to disclose unpublished material information related to Hub International to the Executive's immediate supervisor, Hub International Limited's General Counsel or such other person of authority employed by Hub International Limited as may be appropriate under the circumstances, if the Executive has reason to believe that such information is not then known to the appropriate person(s) of authority employed by Hub International Limited who would, in the normal course, determine whether Hub International Limited must disclose such information to the public. 6. INSIDER TRADING. The Executive acknowledges that if the Executive is in possession of any material information that relates to Hub International that has not yet been made public, the Executive must refrain from trading in Hub International Limited's shares (buying or selling) until the material information has been made public and the Executive agrees to advise others to whom the Executive divulges unpublished material information that they have the same responsibility. 7. CODE OF ETHICS. The Executive acknowledges that the Executive has received, read and understands Hub International Limited's "Insider Trading Code of Ethics and Disclosure Requirements" and agrees to comply therewith. 8. GROUNDS FOR DISMISSAL. The Executive acknowledges and agrees that due to the significance of the matters addressed herein and the negative consequences that may follow a contravention of any of the terms hereof, a breach by the Executive of any of the Executive's obligations hereunder may result in the Executive's immediate 5 dismissal and that such breach shall be deemed to be included in the definition of "Cause". 9. RESTRICTIONS NECESSARY. The Executive agrees that all restrictions in this Agreement are necessary and fundamental to the protection of the business of the corporations of Hub International and are reasonable. 10. ENFORCEABILITY. If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. If any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in this Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of this Agreement in any other jurisdiction. 11. GOVERNING LAW. This Agreement shall be interpreted in accordance with the laws of the State of Illinois. . DATED this 19th day of March, 2001. /s/ W. Kirk James /s/ Dennis J. Pauls - --------------------------------- ---------------------------------- WITNESS SIGNATURE EXECUTIVE SIGNATURE W. Kirk James Dennis J. Pauls - --------------------------------- ---------------------------------- PRINT WITNESS NAME PRINT EXECUTIVE NAME EX-10.10 15 t06723ex10-10.txt EMPLOYMENT AGREEMENT - HUB & W. KIRK JAMES Exhibit 10.10 EXECUTIVE EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT dated March 19, 2002. BETWEEN: W. KIRK JAMES (the "Executive") -and- HUB INTERNATIONAL LIMITED, a corporation incorporated pursuant to the laws of Ontario ("Hub International") In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows. 1. INTERPRETATION (1) In this Agreement: (a) "Agreement" means this agreement, all schedules attached hereto and any amendments made to any of the foregoing by written agreement between the Executive and Hub International; (b) "Basic Compensation" means the compensation defined in Schedule "B"; (c) "Benefits" means the benefits defined in Schedule "B"; (d) "Bonus" means the bonus defined in Schedule "B"; (e) "Cause" means (i) a material breach by the Executive of the provisions of this Agreement, which breach shall not have been cured by the Executive within thirty (30) days following written notice thereof by Hub International to the Executive, (ii) the commission of gross negligence by the Executive in the course of the Executive's employment, which commission has a material adverse effect on Hub International, (iii) the commission by the Executive of a criminal act of fraud, theft or dishonesty causing material damages to Hub International, (iv) the Executive's conviction of (or plead of nolo contendere to) any felony, or misdemeanor involving moral turpitude if such misdemeanor results in material financial harm to or materially adversely affects the goodwill of Hub International, (v) any breach by the Executive of the Confidentiality, Non-Solicitation and Insider Agreement of even date -2- herewith, or (vi) such other act or omission that a court of competent jurisdiction declares in a written ruling to be a breach of the Executive's responsibilities hereunder of such materiality as to justify a termination of the Executive's employment by Hub International; (f) "Confidentiality, Non-Solicitation and Insider Agreement" means the Executive Confidentiality, Non-Solicitation and Insider Agreement entered into by the parties hereto, of even date herewith; (g) "Current Location" means Hub International's executive offices at 55 East Jackson Boulevard, Chicago, Illinois; (h) "Death" means a natural death and, in addition, is deemed to include a continuous period of at least ninety (90) consecutive business days during which time the Executive has not been in the offices of Hub International during normal working hours and the Executive's whereabouts are unknown to Hub International; (i) "Disability" means the mental or physical state of the Executive is such that the Executive would qualify for disability benefits, in accordance with Hub International's group benefits insurance policy at the relevant time; (j) "Good Reason" means (i) the breach of the terms of this Agreement by Hub International or any successor thereto, excluding any inadvertent breach that is rectified within a reasonable period of time under the circumstances; (ii) the direct or indirect assignment to the Executive of any duties or reporting responsibilities, materially inconsistent with the Services (as contemplated as of the date hereof or in any mutually-agreed written amendment hereto) (excluding any isolated and inadvertent assignment that is remedied by Hub International within thirty (30) days after receipt of notice from the Executive); (iii) a reduction in the Executive's Basic Compensation or a reduction in the Benefits that is not reimbursed; (iv) any failure by Hub International to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Hub International to assume expressly and agree to perform the provisions of this Agreement in the same manner and to the same extent that Hub International would be required to perform if no such succession had taken place; (v) the failure by Hub International to continue to provide the Executive with the Benefits; (vi) the relocation of the Current Location to a location that is outside a thirty-five (35) mile radius of the Current Location, unless such new location is no further than the Current Location is from the Executive's then current residence. (k) "Hub International" means Hub International Limited; -3- (l) "Restricted Stock Plan" means a restricted stock purchase plan that includes substantially the same terms as those set out in Schedule "D" attached hereto that is generally applicable to senior employees or consultants with companies of The Hub Group who are resident in the United States; (m) "Schedule" means a schedule to this Agreement; (n) "Section" means a section or subsection of this Agreement; (o) "Services" means the duties and the responsibilities set out in Schedule "A", as the same may be amended or extended by mutual agreement of the parties from time to time; (p) "Subsidiaries" means the "subsidiary companies," as defined in the Securities Act (Ontario), of Hub International; (q) "The Hub Group" means Hub International and the Subsidiaries; and (r) "Vacation" means the vacation to which Executive is entitled, as contemplated in Schedule "B". (2) It is agreed by and between the parties hereto that the Schedules referred to herein, as itemized below and attached hereto, shall form a part of this Agreement and this Agreement shall be construed as incorporating such Schedules: Schedule "A" - Services Schedule "B" - Basic Compensation, Benefits and Vacation Schedule "C" - Alternative Dispute Resolution Schedule "D" - Restricted Stock Plan 2. EMPLOYMENT (1) Hub International agrees to employ the Executive for the purpose of providing the Services, and the Executive accepts such employment. (2) During the term of the Executive's employment with Hub International, the Executive agrees to devote the whole of the Executive's business time and attention to the provision of the Services in a conscientious and competent manner and with the utmost integrity. (3) The Executive shall perform the Services primarily at the Current Location. Subject to reimbursement for related expenses in accordance with Section 3(3) and subject to Section 4, it is understood and agreed that the Executive may be called upon, on occasion, to travel outside of the City of Chicago on behalf of Hub International, but that the Executive shall not be required to move his residence from the Chicago area as a condition of this Agreement. -4- 3. REMUNERATION AND BENEFITS (1) Hub International shall pay the Executive the Basic Compensation and Benefits (as applicable) in such payment periods as are established from time to time by Hub International for its employees, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. (2) The Executive shall be entitled to and Hub International shall provide the Benefits. (3) Hub International shall reimburse the Executive for reasonable travel and other business expenses incurred by the Executive in performing the Services, in accordance with approved budgets. (4) The Executive shall be entitled to the Vacation, to be scheduled at the mutual convenience of the parties. (5) The Executive shall be entitled to the rights set out in Schedule "D" in connection with the Restricted Stock Plan which Hub agrees to implement as soon as reasonably practicable having regard to all the circumstances, including the requirements of applicable law and any shareholder consent that may be required. (6) The Executive shall be paid a Bonus, if any, in accordance with Schedule "B". 4. TERM AND TERMINATION (1) The parties acknowledge that the Executive has been employed by Hub International since the commencement date set out in Schedule "A" and agree that this Agreement codifies the existing arrangements regarding the Executive's employment. (2) This Agreement and the employment of the Executive hereunder shall be for an indefinite term, subject to termination in accordance with the terms of this Agreement. (3) This Agreement and the employment of the Executive may be terminated by Hub International for any reason whatsoever upon prior written notice to the Executive, or by the Executive for Good Reason upon written notice to Hub International, provided that, in the event that the Agreement is terminated in accordance with this Section 4(3), the Executive shall, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts, be paid: (a) the Basic Compensation and entitled to receive the Benefits for the period up to the effective date of termination; and (b) (i) an amount equal to twelve (12) months' Basic Compensation; (ii) a ratable portion, based on the days elapsed in the then current year to the effective date of termination, of an amount equal to the most recent prior Bonus paid to the Executive; and (iii) the value of the group insurance and automobile benefits or -5- allowance components of the Benefits, all on a semi-monthly basis over the ensuing twelve (12) months, provided that in the event that the Executive breaches any of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, effective as at the date of such breach the Executive shall cease to be entitled to any further payment under Section 4(3)(b) or by way of any other damages, compensation or pay in lieu of notice; and provided further that in no event shall the Executive be paid an amount that is less than the prescribed minimum under applicable employment standards legislation. (4) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated immediately by Hub International, for Cause, without further obligation to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the date of termination. (5) Notwithstanding Sections 4(2) and 4(3)(b), this Agreement may be terminated by Hub International on notice to the Executive due to the Disability of the Executive, upon ninety (90) days' written notice to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (6) Notwithstanding Section 4(2) and 4(3), this Agreement shall be terminated immediately upon the Death of the Executive or, unless otherwise agreed by the parties, upon the Executive's attaining sixty-five (65) years of age, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the effective date of termination. (7) In the event of termination of this Agreement in accordance with the terms hereof, the provisions of the Confidentiality, Non-Solicitation and Insider Agreement shall continue in full force and effect. 5. DISPUTE RESOLUTION Subject to, and without diminishing, the rights of the corporations of The Hub Group to seek and obtain equitable relief in accordance with the provisions of the Confidentiality, Non-Solicitation and Insider Agreement, the parties agree to submit any disputes to mediation in accordance with the procedures set out in Schedule "C". 6. GENERAL PROVISIONS (1) In the event any payment, distribution or other benefit received by the Executive under this Agreement or any other contract or arrangement (including, but not limited to, any acceleration of the ability to exercise any stock option or the vesting of any stock or other property or any payment made to the Executive in connection with a change of control of Hub International or any severance payment provided herein) (a "Payment") would be subject to the excise tax imposed by section 4999 -6- of the Internal Revenue Code of 1986 (such excise tax, together with any similar tax under any new or replacement provision to such Section 4999, are hereinafter collectively referred to as the "Excise Tax"), including any payment, distribution or other benefit that when aggregated with any other payment, distribution or other benefit (whether or not such is received or made pursuant to this Agreement) results in the imposition of the Excise Tax, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes, including without limitation, any Excise Tax or other tax imposed upon any amounts received under this Section 6(1), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All determinations required to be made under this Section 6(1), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Hub International's independent accounting firm which shall provide detailed supporting calculations both to Hub International and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been or will be a Payment, or such earlier time as is requested by Hub International. (2) The provisions hereof, when the context permits, shall enure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Executive and the successors and assigns of Hub International, respectively. (3) This Agreement shall be construed in accordance with the laws of the State of Illinois. (4) If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. However, if any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in the Confidentiality, Non-Solicitation and Insider Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of the Confidentiality, Non-Solicitation and Insider Agreement in any other jurisdiction. (5) Any notice, demand, request, consent, approval or waiver required or permitted to be given hereunder shall be in writing and may be given to the party for whom it is intended by personally delivering it to such party or by mailing the same by prepaid registered mail: -7- (a) In the case of Hub International, to: Hub International Limited 55 East Jackson Boulevard Chicago, IL 60604 Attention: General Counsel (b) In the case of the Executive, to the Executive's last known address. Any such notice or other documents delivered personally shall be deemed to have been received by and given to the addressee on the day of delivery and any such notice or other documents mailed, as aforesaid, shall be deemed to have been received by and given to the addressee on the third (3rd) business day following the date of mailing. Any party may at any time give notice to the other of any change of address. (6) All amounts referred to herein are in United States currency unless otherwise indicated. IN WITNESS THEREOF the parties hereto have hereunto executed this Agreement as of the day and year first above written. HUB INTERNATIONAL LIMITED By: /s/ Martin P. Hughes - ----------------------------------- Name: Martin P. Hughes Title: Chairman and Chief Executive Officer I have authority to bind the corporation. SIGNED AND DELIVERED in the presence of: ) ) /s/ Richard A. Gulliver ) - ----------------------------------- ) (Signature) ) ) Richard A. Gulliver ) - ----------------------------------- ) /s/ W. Kirk James (Print Name) ) ---------------------- ) W. KIRK JAMES ) -8- SCHEDULE "A" COMMENCEMENT DATE The Executive's employment with Hub International commenced on December 1, 1999. SERVICES The Executive shall report to the Board of Directors and the Chief Executive Officer of Hub International. The Executive shall perform such reasonable duties as shall assigned from time to time in connection with the Executive's position as Vice-President, Secretary and General Counsel of Hub International (the "Services"). -9- SCHEDULE "B" BASIC COMPENSATION o Annual salary of $200,000.00 (the "Basic Compensation") BONUS o The Executive shall be paid such annual bonus (the "Bonus"), if any, as may declared by Hub International's Compensation Committee (the "Compensation Committee") in its sole discretion, of an amount not to exceed $100,000.00. The Compensation Committee shall determine the amount of the Bonus, if any, taking into consideration not only the Executive's individual performance, but also Hub International's performance as a company relative to its growth and profitability targets for the applicable year. The Bonus, if any, shall be paid to the Executive on or before March 15 of the year immediately following the year in respect of which it is declared payable, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. The Executive Committee may develop for the Executive such performance-based criteria as may be necessary and are reasonable to take into consideration in order to allow Hub International to deduct as an expense all remuneration, including any Bonus, paid to the Executive under this Agreement in the applicable year. BENEFITS o Group insurance (including medical, extended health, dental, short and long term disability and life insurance) and such other benefits as are made available to employees of Hub International, provided that the Executive qualifies for coverage under such plans. o Automobile allowance of $700.00 per month. o Matching contribution by Hub International on the Executive' behalf to Hub International's employee 401(k) retirement savings plan equal to 3% of the Executive's Basic Compensation, subject to applicable law. VACATION The Executive shall be entitled to a maximum of four (4) weeks' vacation per year to be scheduled at the mutual convenience of the parties (the "Vacation"). -10- SCHEDULE "C" ALTERNATIVE DISPUTE RESOLUTION o Disputes will be submitted to mediation before a mediator in Chicago, Illinois, as a condition precedent to the initiation of litigation by any party to this Agreement; provided, however, that any party may seek injunctive relief in a court of competent jurisdiction to preserve the status quo pending the completion of mediation. The mediator shall be chosen by mutual agreement of the parties; provided, however, that if the parties are unable to agree upon a mediator within ten (10) days, they shall each, within the further period of five (5) days, choose a mediator and the two mediators shall choose, within the ensuing period of ten (10) days a separate and independent mediator who shall then serve as the sole mediator for the purposes of this Schedule "C". If either party fails to name a mediator within the further period of five (5) days aforesaid, the mediator chosen by the other party shall serve as the sole mediator for the purposes of this Schedule "C". o At such time as a dispute shall arise that is submitted to mediation, each of the parties shall execute such mediation agreement in such form as shall then be used by the chosen mediator or mediation firm for such purposes and shall join in a request that the mediator provide an evaluation of the parties' cases and of the likely resolution of the dispute if not settled. The cost of the mediator and mediation shall be borne equally by the parties. o In the event that one party to this Agreement is willing to accept the mediator's proposed resolution of the dispute, if any, but the other party (the "Contesting Party") is not so willing, the Contesting Party may elect to pursue a claim in a court of competent jurisdiction. In the event that the final determination of the rights of the Contesting Party by such court of competent jurisdiction is less advantageous to the Contesting Party than the mediator's proposed resolution of the dispute, the Contesting Party shall be deemed to have agreed to pay the other party's costs and expenses of litigation of such claim(s), including reasonable attorneys' fees. -11- SCHEDULE "D" RESTRICTED STOCK PLAN o The Executive shall receive units (the "Units") allowing the Executive to acquire up to 30,000 common shares under the Restricted Stock Plan (the "Awarded Shares"), subject to the following terms: o The terms of the Units (including number) shall be adjusted or modified, from time to time, to take into account any stock splits, stock dividends or other changes or adjustments occurring with respect to the common shares of Hub International. o No payment of cash consideration will be required to acquire the Awarded Shares. o As a precondition to the award, any shares previously allocated to the Executive under Hub International's Executive Share Purchase Plan will be sold to Hub International at original cost or sold on the open market, as the parties may decide, and the proceeds therefrom used to pay out the corresponding loan from Bank of Montreal. Excess proceeds, if any, arising from a sale on the open market will be paid to Hub International, subject to payment of such amount, if any, as may be required to reimburse the Executive for income tax arising from such sale. o Fifty percent (50%) of the Units shall be exercisable on the fifth (5th) anniversary of the commencement date set out in Schedule "A" (the "Commencement Date") and the remaining Units shall be exercisable on the tenth (10th) anniversary of the Commencement Date, provided that all unexercised Units shall immediately be exercisable upon normal retirement or upon termination without Cause or for Good Reason. Units will be exercisable pro rata in the event of Death or Disability (that is, at the rate of 10% per year). Subject to the foregoing, the Executive shall forfeit any unexercised Units in the event of Death or Disability or if the Executive's employment is terminated by Hub International for Cause or by the Executive without Good Reason. o The parties acknowledge that the Restricted Stock Plan is currently under design and, when in final form, may be subject to the approval of the shareholders of Hub International. Accordingly, the provisions of the Restricted Stock Plan and the Units may be modified from those set out above to accommodate applicable laws, regulatory requirements and tax considerations. EX-10.11 16 t06723ex10-11.txt EXECUTIVE CONFIDENTIALITY AGREEMENT - W.K. JAMES Exhibit 10.11 EXECUTIVE CONFIDENTIALITY, NON-SOLICITATION AND INSIDER AGREEMENT TO: HUB INTERNATIONAL LIMITED AND ITS SUBSIDIARIES (collectively, "Hub International") - -------------------------------------------------------------------------------- WHEREAS: A. the undersigned (the "Executive") and Hub International have entered into an employment agreement dated as at the date hereof whereby Hub International employs the Executive (the "Employment Agreement"); and B. the defined terms "Cause" and "Good Reason" used in this Agreement have the meanings given to them in the Employment Agreement; NOW THEREFORE for good and valuable consideration, including the employment of the Executive by Hub International, the Executive agrees as follows: 1. PROPERTY. The Executive acknowledges and agrees that all books of business, policies of insurance, documents, computer records, vouchers and other books, papers and records connected with the business of Hub International, whether paid for, serviced or produced by the respective corporation of Hub International or not, are the property of the respective corporation and shall be at all times open to the respective corporation for the purposes of examination, and shall be turned over and surrendered to the respective corporation or its representatives upon the order of the respective corporation or on the termination of the Executive's relationship with Hub International for any reason whatsoever. 2. CONFIDENTIALITY. The Executive acknowledges that in the course of carrying out the Executive's duties to Hub International, the Executive will have access to and will be entrusted with confidential information concerning the business and corporate affairs of the corporations of Hub International and their clients ("Confidential Information"), including information pertaining to the respective corporation's relationships with insurance carriers and lenders, compensation structures, client underwriting and policy renewal information, internal accounting procedures, policies and information, unique insurance product features, insurance programs developed by the respective corporation (with or without the assistance of the Executive), marketing strategies, e-commerce strategies, personnel and training procedures. The term "Confidential Information" shall be deemed to include all such information that the Executive currently possesses as a result of the Executive's prior employment, if any, by any of the corporations of Hub International. The Executive agrees that all Confidential Information acquired by the Executive or disclosed to the Executive shall be held in the strictest confidence. The Executive shall not disclose any Confidential Information to any other person during the term of the Executive's relationship with Hub International or at any 2 time thereafter without the prior written consent of the respective corporation, except as may be required for the Executive to fulfil the Executive's duties to Hub International or as may be required by law. Neither during the term of the Executive's relationship with Hub International nor at any time thereafter will the Executive make use of any Confidential Information for the Executive's own benefit or for the benefit of any other person or persons, firm, partnership, association or corporation other than Hub International, or assist others in so doing; provided that nothing herein shall prohibit the Executive from using Confidential Information that: (a) was readily available to the public at the time such information was available to the Executive; (b) became readily available to the public after the time such information was made available to the Executive other than through a breach of this Agreement; (c) is lawfully and in good faith obtained by the Executive from an independent third party without a breach of obligations of confidentiality or of this Agreement; or (d) is information and expertise that was known to the Executive prior to the date of this Agreement or any prior agreement of employment, services or confidentiality between the Executive and any of the corporations of Hub International. The Executive shall have the burden of proof in establishing that any item of Confidential Information falls within one of the foregoing exceptions. The Executive acknowledges and agrees that the disclosure of any Confidential Information to competitors of Hub International or to the general public may be highly detrimental to the business interests of Hub International. The Executive acknowledges and agrees that the right of Hub International to maintain Confidential Information as confidential constitutes a proprietary right that the respective corporation is entitled to protect. Unless otherwise agreed to by the respective corporation, all Confidential Information shall be and shall remain the sole and exclusive property of the respective corporation. The Executive shall return to Hub International, forthwith upon the effective date of termination of the Executive's relationship with Hub International for any reason whatsoever, all records of Confidential Information in the possession of the Executive which were acquired in connection with the Executive's employment by Hub International. The Executive agrees that in the event of any breach of this Section 2, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the other respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of this Section 2. 3. NON-SOLICITATION 3 (a) The Executive agrees that the Executive will not, without the prior written consent of Hub International Limited, either during the term of the Executive's employment with Hub International or at any time within a period of two (2) years following the cessation thereof for any reason whatsoever (the "Restricted Period"), either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as principal, agent, employee, shareholder, or in any other capacity whatsoever, directly or indirectly, approach or solicit any client, employee or producer of Hub International except for the benefit of Hub International or attempt to direct any such client, Executive or producer away from Hub International. Without limiting the generality of the foregoing, the Executive shall not directly or indirectly approach or solicit any of the clients comprising the book of insurance business serviced by Hub International while the Executive is employed by Hub International for the purpose of selling insurance or consulting as to the purchase or sale of insurance during the Restricted Period, other than on behalf of Hub International. (b) The Executive shall pay to Hub International a sum equal to two (2) times the annual commissions and fees generated by clients obtained by the Executive in violation of Section 3(a). For each such client, the annual commissions and fees shall be the greater of the amount generated in the year preceding and the amount generated in the year following the date upon which the client becomes a client of the competing business. (c) The amount payable by the Executive under Section 3(b) shall be paid in cash and as soon as it is determinable and may be set off by Hub International against any amount owing or to become owing by any corporation of Hub International to the Executive. The Executive acknowledges that the said amount is a reasonable calculation of the respective corporation's liquidated damages given the interest of the respective corporation in maintaining its client base and the future profits which would be foregone by the corporation if the Executive violates the provisions of Section 3(a). The Executive further acknowledges that the payment by the Executive pursuant to Section 3(b) shall in no way limit the other remedies to which the respective corporation of Hub International may be entitled as a result of the Executive's breach of Section 3(a). Without limiting the generality of the foregoing, the Executive recognizes that a breach by the Executive of any of the covenants contained in Section 3(a) would result in damages to the respective corporation of Hub International on an ongoing basis and that Hub International may not be adequately compensated for such damages by the payment of the amounts contemplated in Section 3(b). The Executive agrees that in the event of any such breach, and in addition to any other remedies available to Hub International at law or otherwise, Hub International Limited, either on its own behalf or on behalf of the respective corporation(s) of Hub International, shall be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of Section 3(a). 4. NON-COMPETITION. The Executive covenants and agrees that the Executive will not, without the prior written consent of Hub International, during the Restricted Period, either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as 4 principal, agent, employee, shareholder, or in any other capacity whatsoever carry on or be engaged in any aspect of the insurance agency business in the United States or Canada, or advise, lend money to, guarantee the debts or obligations of, or permit the Executive's name or any part thereof to be used or employed by any other person or persons, firm, partnership, association, company, corporation or any other entity engaged in any aspect of the insurance agency business in the United States or Canada. Notwithstanding the foregoing, the provisions of this Section 4 shall not: (a) apply in the event that this Agreement is terminated by Hub International without Cause or by the Executive for Good Reason, including in accordance with Section 5(2) of the Employment Agreement; or (b) prohibit the Executive from directly or indirectly owning up to 10% of the issued capital stock of any public company the price of whose shares is quoted in a published newspaper of general circulation. 5. DISCLOSURE OF MATERIAL INFORMATION. The Executive acknowledges that common shares of Hub International Limited are traded on the Toronto Stock Exchange and that, subject to certain exceptions, as a publicly traded company Hub International Limited has an obligation not to disseminate material information related to the company unless disclosure of such information is made contemporaneously to the public. The Executive therefore agrees not to make any public disclosure of material information related to Hub International without the prior written consent of Hub International Limited. The Executive further acknowledges that unauthorized disclosure by the Executive of internal information relating to Hub International could result in liability under insider trading legislation for Hub International Limited and/or the Executive. Notwithstanding the foregoing, the Executive undertakes and agrees to disclose unpublished material information related to Hub International to the Executive's immediate supervisor, Hub International Limited's General Counsel or such other person of authority employed by Hub International Limited as may be appropriate under the circumstances, if the Executive has reason to believe that such information is not then known to the appropriate person(s) of authority employed by Hub International Limited who would, in the normal course, determine whether Hub International Limited must disclose such information to the public. 6. INSIDER TRADING. The Executive acknowledges that if the Executive is in possession of any material information that relates to Hub International that has not yet been made public, the Executive must refrain from trading in Hub International Limited's shares (buying or selling) until the material information has been made public and the Executive agrees to advise others to whom the Executive divulges unpublished material information that they have the same responsibility. 7. CODE OF ETHICS. The Executive acknowledges that the Executive has received, read and understands Hub International Limited's "Insider Trading Code of Ethics and Disclosure Requirements" and agrees to comply therewith. 8. GROUNDS FOR DISMISSAL. The Executive acknowledges and agrees that due to the significance of the matters addressed herein and the negative consequences that may follow a contravention of any of the terms hereof, a breach by the Executive of any of the Executive's obligations hereunder may result in the Executive's immediate 5 dismissal and that such breach shall be deemed to be included in the definition of "Cause". 9. RESTRICTIONS NECESSARY. The Executive agrees that all restrictions in this Agreement are necessary and fundamental to the protection of the business of the corporations of Hub International and are reasonable. 10. ENFORCEABILITY. If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision of this Agreement. If any of the provisions of or covenants contained in this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any jurisdiction, which shall be given full effect, without regard to the invalid portions or the unenforceability in such other jurisdiction. If any of the provisions of or covenants contained in this Agreement are held to be unenforceable in any jurisdiction because of the duration or scope thereof, the parties agree that the court making such determinations shall have the power to reduce the duration and/or scope of such provision or covenant and, in its reduced form, said provision or covenant shall be enforceable; provided, however, that the determination of such court shall not affect the enforceability of the provisions of this Agreement in any other jurisdiction. 11. GOVERNING LAW. This Agreement shall be interpreted in accordance with the laws of the State of Illinois. DATED this 19th day of March, 2001. /s/ Martin P. Hughes /s/ W. Kirk James - --------------------------------- ---------------------------------- WITNESS SIGNATURE EXECUTIVE SIGNATURE Martin P. Hughes W. Kirk James - --------------------------------- ---------------------------------- PRINT WITNESS NAME PRINT EXECUTIVE NAME EX-10.12 17 t06723ex10-12.txt EMPLOYMENT AGREEMENT - KAYE, HUB & BRUCE GUTHART Exhibit 10.12 EXECUTIVE EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT dated June 28, 2001. BETWEEN: BRUCE D. GUTHART (the "Executive") -and- KAYE GROUP INC., a corporation incorporated pursuant to the laws of Delaware (the "Agency") -and- HUB INTERNATIONAL LIMITED, a corporation incorporated pursuant to the laws of Ontario ("Hub") In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows. 1. INTERPRETATION (1) In this Agreement: (a) "Agreement" means this agreement, all Schedules attached hereto and the amendments made hereto by written agreement between the Executive and the Agency; (b) "Basic Compensation" means the compensation indicated in Schedule "B"; (c) "Benefits" means the benefits to which the Executive is entitled in accordance with Schedule "B"; (d) "Cause" means (i) a material breach by the Executive of the provisions of this Agreement, which breach shall not have been cured by the Executive within thirty (30) days following notice thereof by the Agency to the Executive, (ii) the commission of gross negligence or bad faith by the Executive in the -2- course of the Executive's employment, which commission has a material adverse effect on the Agency or Hub, (iii) the commission by the Executive of a criminal act of fraud, theft or dishonesty causing material damages to the Company or Hub, (iv) the Executive's conviction of (or plead nolo contendere to) any felony, or misdemeanor involving moral turpitude if such misdemeanor results in material financial harm to or materially adversely affects the goodwill of the Agency or Hub, or (v) such other act or omission that a court of competent jurisdiction declares in a written ruling to be a breach of the Executive's responsibilities hereunder of such materiality as to justify a termination of the Executive's employment by the Agency. (e) "Death" means a natural death and, in addition, is deemed to include a continuous period of at least six months during which time the Executive has not been in the offices of the Agency during normal working hours and the Executive's whereabouts are unknown to the Agency; (f) "Disability" means the mental or physical state of the Executive is such that the Executive would be considered to suffer from a "total disability" or a "disability" or to be "totally disabled" or "disabled" in accordance with the Agency's group benefits insurance policy at the relevant time; (g) "Good Reason" means any breach of the terms of this Agreement by the Agency or Hub, including but not limited to any of the following: (i) the assignment to the Executive of any duties substantially inconsistent with the Executive's positions as set forth on Schedule A, or a significant adverse alteration in the nature or status of the Executive's responsibilities or duties or the conditions of the Executive's employment compared to the responsibilities, duties and conditions in effect for the Executive's employment with respect to the business of the Agency immediately prior to the date of this Agreement, excluding any isolated and inadvertent action that is not taken in bad faith and that is remedied by the Agency or Hub, as applicable, within thirty (30) days after receipt of notice thereof given by the Executive; (ii) a reduction in the Executive's Basic Compensation; (iii) any failure by the Agency or Hub to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Agency to assume expressly and agree to perform the provisions of this Agreement in the same manner and to the same extent that the Agency and Hub would be required to perform if no such succession had taken place; (iv) the relocation of the offices at which the Executive is principally employed immediately prior to the date of the Closing hereunder to a location more than 20 miles from such location; and -3- (v) the failure by the Agency or Hub to continue to provide the Executive with the benefits described on Schedule B. (h) "Hub" means Hub International Limited; (i) "Hub Group" means Hub and the Subsidiaries; (j) "Investment Letter" means the investment letter referred to in item 4 of schedule D and attached as Exhibit A hereto which will be executed and delivered on the date hereof between the Executive and Hub. (k) "Management Bonus" means any amount of bonus paid or payable (as the context may require) pursuant to the Management Bonus Agreement; (l) "Management Bonus Agreement" means, subject to item 1 of Schedule D hereto, the Management Bonus Agreement attached as Exhibit B hereto which will be executed and delivered on the date hereof between the Agency and Hub, and a copy of which (as executed) will be provided to the Executive; (m) "Restricted Period" means the two-year period ending on the second anniversary of the termination of the Executive's employment hereunder for whatever reason; (n) "Restricted Stock Arrangement" means the plan or other arrangement referred to in item 3 of Schedule D; (o) "Schedule" means a schedule to this Agreement; (p) "Section" means a section or subsection of this Agreement; (q) "Services" means the positions, duties and the responsibilities set out in Schedule "A" to this Agreement, as the same may be amended or extended by agreement of the parties from time to time; (r) "Subsidiaries" means the "subsidiary companies", as defined in the Securities Act (Ontario), of Hub, including the Agency and Hub U.S. Holdings, Inc.; (s) "Vacation" means the vacation to which Executive is entitled, as contemplated in Schedule "B". (2) It is agreed by and between the parties hereto that the Schedules referred to herein, as itemized below and attached hereto, shall form a part of this Agreement and this Agreement shall be construed as incorporating such Schedules: Schedule A - Services Schedule B - Basic Compensation, Benefits and Vacation Schedule C - Alternative Dispute Resolution Schedule D - Additional Provisions -4- 2. EMPLOYMENT (1) The Agency agrees to employ the Executive during the term of employment hereunder in the positions and with the duties and responsibilities set out in Schedule A and the Executive accepts such employment and represents to the Agency that the Executive has the required skills and expertise to perform the Services. (2) During the term of employment hereunder the Executive agrees to devote the whole of the Executive's business time and attention to the Services, and to the other activities contemplated in item 1 of Schedule D, in a conscientious and competent manner and with the utmost integrity. (3) The Executive shall perform the Services primarily at the office of the Agency located in the City of New York, NY in the United States of America and at such other locations as the Agency's and Hub's reasonable needs may dictate from time to time, provided that the Executive will not be required to move the Executive's residence. (4) During the term of employment hereunder, Hub shall put forth, and management shall recommend, the Executive for election to the Board of Directors of Hub at each annual general meeting of the stockholders of Hub. (5) During the term of employment hereunder the Executive shall be entitled to the benefits of: (a) all indemnification provisions contained in the Agency's and Hub's Certificate of Incorporation or Articles of Incorporation or by-laws, as the case may be (and for this purpose, the Agency and Hub agree that no amendment shall be made thereto which materially changes such indemnification provisions, other than to enhance the protection thereby afforded to the Executive); and (b) all of the Company's insurance policies, including directors and officers liability policies, to the extent that such policies are generally applicable to other officers and directors. 3. REMUNERATION AND BENEFITS (1) During the term of employment hereunder the Agency shall pay the Executive the Basic Compensation in such payment periods as are established from time to time by the Agency for its employees, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. (2) The Executive shall be entitled to and the Agency shall provide the Benefits. (3) The Agency shall reimburse the Executive for reasonable travel and other business expenses incurred by the Executive in performing the Services, in accordance with approved budgets. (4) The Executive shall be entitled to the Vacation, to be scheduled at the mutual convenience of the parties. -5- (5) The Executive shall be entitled to participate in the Management Bonus Agreement as an Eligible Manager (as defined therein) on the basis that notwithstanding any discretion otherwise exercisable by the President of the Agency as to the payment of bonuses under the Management Bonus Agreement, the Executive shall receive 50% of the aggregate of any bonus paid thereunder to the Eligible Managers collectively to a maximum annual amount equal to the Basic Compensation for the period of one year. The Executive shall be "President of the Agency" for purposes of the foregoing sentence and in that capacity shall have the authority to exercise the discretion as to the payment of bonuses under the Management Bonus Agreement. 4. PROPERTY, CONFIDENTIALITY AND NON-SOLICITATION (1) PROPERTY. The Executive acknowledges and agrees that all books of business, policies of insurance, documents, computer records, vouchers and other books, papers and records connected with the business of the Agency or the other Subsidiaries of Hub Group, whether paid for, serviced or produced by the respective corporation of Hub Group or not, are the property of the respective corporation and shall be at all times open to the respective corporation for the purposes of examination, and shall be turned over and surrendered to the respective corporation or its representatives upon the order of the respective corporation or on the termination of the Executive's employment with the Agency for any reason whatsoever. (2) CONFIDENTIALITY. The Executive acknowledges that in the course of carrying out the Executive's duties to the Agency, the Executive will have access to and will be entrusted with confidential information concerning the business and corporate affairs of the Agency, the other corporations of Hub Group and their clients ("Confidential Information"), including information pertaining to the respective corporation's relationships with insurance carriers, employee and producer compensation structures, client underwriting and policy renewal information, internal accounting procedures, policies and information, unique insurance product features, insurance programs developed by the respective corporation (with or without the assistance of the Executive), marketing strategies and employee training procedures. The Executive agrees that all Confidential Information acquired by the Executive or disclosed to the Executive shall be held in the strictest confidence. The Executive shall not disclose any Confidential Information to any other person without the prior written consent of the respective corporation, except as may be required for the Executive to fulfill the Executive's employment duties to the Agency or as may be required by law. The Executive shall not make use of any Confidential Information for the Executive's own benefit or for the benefit of any other person or persons, firm, partnership, association or corporation other than Hub Group, or assist others in so doing; provided that nothing herein shall prohibit the Executive from using Confidential Information that: (a) was readily available to the public at the time such information was available to the Executive; (b) became readily available to the public after the time such information was made available to the Executive other than through a breach of this Agreement; or -6- (c) is lawfully and in good faith obtained by the Executive from an independent third party without a breach of this Agreement. The Executive acknowledges and agrees that the disclosure of any Confidential Information to competitors of the Agency or the other corporations of Hub Group or to the general public in violation of the terms of this Section 4(2) may be highly detrimental to the business interests of Hub Group. The Executive acknowledges and agrees that the right of Hub Group to maintain Confidential Information as confidential in accordance herewith constitutes a proprietary right that the respective corporation is entitled to protect. Unless otherwise agreed to by the respective corporation, all Confidential Information shall be and shall remain the sole and exclusive property of the respective corporation subject to the terms of this Section 4(2). The Executive shall return to the Agency, forthwith upon the effective date of termination of the Executive's employment for any reason whatsoever, all records of Confidential Information in the possession of the Executive which were acquired in connection with the Executive's employment by the Agency. The Executive hereby agrees with the Agency that, in the event of any breach by the Executive of the provisions of this Section 4(2), the respective corporation(s) of Hub Group shall be entitled to equitable relief, including an injunction and specific performance, in any competent court having jurisdiction over the Executive, in addition to all other remedies available to the respective corporation at law or in equity. (3) NON-COMPETITION AND NON-SOLICITATION (a) The Executive covenants and agrees that the Executive will not, without the prior written consent of the Agency, during the Restricted Period, either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as principal, agent, employee, shareholder, or in any other capacity whatsoever carry on or be engaged in any aspect of the insurance agency business in the United States, or advise, lend money to, guarantee the debts or obligations of, or permit the Executive's name or any part thereof to be used or employed by any other person or persons, firm, partnership, association, company, corporation or any other entity engaged in any aspect of the insurance agency business in the United States. Notwithstanding the foregoing, the provisions of this Section 4(3)(a) shall not: (i) apply in the event that this Agreement is terminated by the Agency without Cause or by the Executive for Good Reason, including in accordance with Section 5(2); or (ii) prohibit the Executive from directly or indirectly owning up to 10% of the issued capital stock of any public company the price of whose shares is quoted in a published newspaper of general circulation. (b) The Executive agrees that during the Restricted Period the Executive shall not directly or indirectly approach or solicit any client, employee or producer of Hub -7- Group except for the benefit of Hub Group or attempt to direct any such client, employee or producer away from Hub Group, provided, however, that, if the Executive's employment hereunder is terminated pursuant to any of the circumstances contemplated by Section 5(2) below, then any failure by the Agency to make the payments contemplated by Section 5(2), including but not limited to Section 5(2)(c), shall release the Executive from his obligation under this Section 4(3)(b). (c) If the Executive violates any of the provisions of Section 4(3)(b), the Executive shall pay to Hub a sum equal to one and one-half times the annual renewal commissions generated by clients obtained by the Executive in violation of Section 4(3)(b). (d) The amount payable by the Executive under Section 4(3)(c) shall be paid in cash and as soon as it is determinable and may be set off by the Agency against any amount owing or to become owing by the Agency or Hub to the Executive. The Executive acknowledges that the said amount is a reasonable calculation of the respective corporation's liquidated damages given the interest of the corporation in maintaining its client base and the future profits which would be foregone by the corporation if the Executive violates the provisions of Section 4(3)(b). The Executive further acknowledges that the payment by the Executive pursuant to Section 4(3)(c) shall in no way limit the other remedies to which the respective corporation of Hub Group may be entitled as a result of the Executive's breach of Section 4(3)(a) or (b). Without limiting the generality of the foregoing, the Executive recognizes that a breach by the Executive of any of the covenants contained in Section 4(3)(a) would result in ongoing damages to the respective corporation of Hub Group and that Hub Group may not be adequately compensated for such damages by the payment of the amounts contemplated in Section 4(3)(c). The Executive agrees that in the event of any such breach, and in addition to any other remedies available to Hub Group at law or otherwise, Hub shall, on behalf of the respective corporation of Hub Group, be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of Sections 4(3)(a) and (b). (4) The Executive agrees that all restrictions in this Section 4 are necessary and fundamental to the protection of the business of the Agency and the other corporations of Hub Group and are reasonable. If, at the time of enforcement of this Section 4, a court should hold that the duration, scope or area restrictions stated herein are unreasonable under the circumstances then existing, the parties agree that the maximum duration, scope or area that is reasonable under such circumstances shall be substituted for the stated scope, duration or area, as the case may be, and the court shall be allowed to revise the relevant restrictions contained herein to cover the maximum period, scope and area permitted by law. -8- 5. TERM AND TERMINATION (1) This Agreement and the term of the employment of the Executive hereunder shall be for an indefinite term, subject to termination in accordance with the terms of this Agreement. (2) This Agreement and the term of the employment of the Executive hereunder may be terminated by the Agency for any reason whatsoever by written notice to the Executive, or by the Executive for Good Reason by written notice to the Agency, provided that, in the event that the Agreement is terminated in accordance with this Section 5(2), the Executive shall be: (a) paid the Basic Compensation for the period up to the effective date of termination; (b) paid a portion of the Management Bonus payable for the year during which the Executive's employment is terminated calculated by dividing the Management Bonus for that year by twelve and multiplying it by the number or months or portions of a month of that year up to and including the effective date of the termination of the Executive's employment; and (c) entitled to continue to receive an amount equal to the Basic Compensation and the group insurance and automobile allowance components of the Benefits for the severance period hereinafter defined. For the purposes of this Section 5(2), "severance period" means the period commencing as at the effective date of such termination and ending on the first anniversary of the date thereof. Notwithstanding the foregoing, in the event that the Executive breaches any of the provisions of Section 4, effective as at the date of such breach the Executive shall cease to be entitled to any further payment, provided that in no event shall the Executive be paid an amount that is less than the prescribed minimum under applicable employment standards legislation. (3) Notwithstanding Section 5(2), this Agreement may be terminated immediately by the Agency for Cause, without further obligation to the Executive, provided that the Executive shall be entitled to receive an amount equal to the Basic Compensation and the Benefits to the date of termination. (4) Notwithstanding Section 5(2), this Agreement may be terminated by the Agency on notice to the Executive due to the Disability of the Executive, upon ninety (90) days' notice to the Executive. (5) Notwithstanding Section 5(2), this Agreement shall be terminated immediately upon the Death of the Executive or, unless otherwise agreed by the parties, upon the Executive attaining sixty-five (65) years of age. -9- (6) Upon termination of this Agreement in accordance with Section 5(2) the Executive shall have no other claim against the Agency for damages for failure to give reasonable notice or pay in lieu of notice or severance pay, except as set out in Section 5(2). (7) In the event of termination of this Agreement in accordance with the terms hereof, the provisions of Section 4 shall continue in full force and effect. 6. ALTERNATIVE DISPUTE RESOLUTION The parties agree to submit any disputes to mediation in accordance with the procedures set out in Schedule C. 7. GENERAL PROVISIONS (1) In the event any payment, distribution or other benefit received by the Executive under this Agreement or any other contract or arrangement (including, but not limited to, any acceleration of the exerciseability of any stock option or the vesting of any stock or other property or any payment made to the Executive in connection with a change of control of the Agency or Hub or any severance payment provided herein) (a "Payment") would be subject to the excise tax imposed by section 4999 of the Internal Revenue Code of 1986 (such excise tax, together with any similar tax under any new or replacement provision to such Section 4999, are hereinafter collectively referred to as the "Excise Tax"), including any payment, distribution or other benefit that when aggregated with any other payment, distribution or other benefit (whether or not such received or made pursuant to this agreement) results in the imposition of the Excise Tax, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes, including without limitation, any Excise Tax or other tax imposed upon any amounts received under this Section 7(1), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All determinations required to be made under this Section 7(1), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Agency's independent accounting firm which shall provide detailed supporting calculations both to the Agency and the Executive within 15 business days of the receipt of notice from the Executive that there has been or will be a Payment, or such earlier time as is requested by the Agency. (2) Any and all previous agreements, written or oral, between the parties hereto or on their behalf relating to the employment of the Executive by the Agency, other than the Management Bonus Agreement, are hereby terminated and cancelled and each of the parties hereto hereby releases and forever discharges the other hereto of and from all manner of actions, causes of action, claims and demands whatsoever under or in respect of any such agreement. -10- (3) The provisions hereof, when the context permits, shall inure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Executive and the successors and assigns of the Agency, respectively. (4) This Agreement shall be construed in accordance with the laws of the Sate of New York and the laws of the United States applicable therein. (5) If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision and this Agreement shall be read and construed as if such void or unenforceable provision were excluded from this Agreement. (6) Any notice, demand, request, consent, approval or waiver required or permitted to be given hereunder shall be in writing and may be given to the party for whom it is intended by personally delivering it to such party or by mailing the same by prepaid registered mail: (a) In the case of the Agency, to: Kaye Group Inc. 122 East 42nd St. New York, NY 10168 Attention: Chief Financial Officer (b) In the case of the Executive: 2794 Lindenmere Drive Merrick, New York 11566 (c) In the case of Hub: Hub International Limited 55 East Jackson Boulevard Chicago, IL 60604 Any such notice or other documents delivered personally shall be deemed to have been received by and given to the addressee on the day of delivery and any such notice or other documents mailed, as aforesaid, shall be deemed to have been received by and given to the addressee on the third business day following the date of mailing. Any party may at any time give notice to the other or any change of address. (7) All amounts referred to herein and in the Schedules hereto are in U.S. currency unless otherwise indicated. -11- 8. ADDITIONAL PROVISIONS The provisions in Schedule D form part of this Agreement. IN WITNESS THEREOF the parties hereto have hereunto executed this Agreement as of the day and year first above written. HUB INTERNATIONAL LIMITED KAYE GROUP INC. By: By: /s/ W. Kirk James /s/ Michael P. Sabanos - -------------------------------------- ----------------------------------- Name: W. Kirk James Name: Michael P. Sabanos Title: Vice President and General Counsel Title: Executive Vice President I have authority to bind I have authority to bind the corporation. the corporation. SIGNED AND DELIVERED in the presence of: ) ) /s/ W. Kirk James ) - ------------------------------ (Signature) ) W. Kirk James ) - ----------------------------- /s/ Bruce D. Guthart (Print Name) ) -------------------------------------- 55 East Jackson Blvd. ) BRUCE D. GUTHART Chicago, Illinois - ------------------------------ (Address) SCHEDULE A SERVICES The Executive shall be the President and Chief Executive Officer of the Agency and in that capacity shall perform such duties and shall have such authority as are customary and appropriate to those positions and as are consistent with the duties and authority of the Executive in connection with his employment with respect to the business of the Agency prior to the date of this Agreement, including, without limitation, the full authority and responsibility for the day-to-day management of the Agency (including hiring and firing personnel) in a manner consistent with prior practice; and the Executive shall have such additional duties and responsibilities consistent with his positions as described above as the Agency, acting reasonably, may assign from time to time (all of the foregoing, collectively, the "Services"). SCHEDULE B BASIC COMPENSATION The Agency will pay the Executive an annual salary of $500,000. BENEFITS o Group insurance (including medical, extended health, dental, short and long term disability and life insurance) and such other benefits as are made available to employees of the Agency, provided that the Executive qualifies for coverage under such plans. o The Agency shall provide the Executive with the same additional benefits he received under his employment agreement dated as of January 2, 1997 (a copy of which has been provided to the Agency and Hub), including but not limited to the benefits enumerated in section 2(c)(iii) thereof. VACATION The Executive shall be entitled to a minimum of four (4) weeks vacation per year and such additional vacation as may be agreed upon by the parties and as is reasonable under all of the circumstances, including the amount of vacation taken by other executives of similar standing in Hub Group (the "Vacation"). SCHEDULE C ALTERNATIVE DISPUTE RESOLUTION o Disputes will be submitted to mediation before a mediator in New York, New York as a condition precedent to resort to litigation by any party to this Agreement; provided, however, any party may seek injunctive relief in court to preserve the status quo pending the completion of mediation. The mediator shall be chosen by mutual agreement of the parties; provided, however, if the parties are unable to agree upon a mediator within ten days, the mediation shall be conducted by a mediator to be identified by the parties within 30 days of the execution hereof. o At such time as a dispute shall arise that is submitted to mediation, each of the parties shall execute such mediation agreement in such form as shall then be used by the chosen mediator or mediation firm for such purposes and shall join in a request that the mediator provide an evaluation of the parties' cases and of the likely resolution of the dispute if not settled. The cost of the mediator and mediation shall be borne equally by the parties. o In the event that one party to this Agreement is willing to accept the mediator's proposed resolution of the dispute, if any, but the other party (the "Contesting Party") elects to pursue claims in a court of competent jurisdiction and the determination of the rights of the Contesting Party under the final judgment of the court on the Contesting Party's claim(s) is less advantageous to the Contesting Party than the determination of such rights contained in the mediator's evaluation of such claim(s), the Contesting Party shall be deemed to have agreed to pay the costs and expenses of litigation of such claim(s), including reasonable attorneys' fees of the other party to the litigation. SCHEDULE D ADDITIONAL PROVISIONS 1. The Executive, the Agency and Hub agree that, simultaneously with the execution and delivery of this Agreement, the Management Bonus Agreement will be executed and delivered in substantially the form attached as Exhibit B to this Agreement; provided, however, that prior to such execution and delivery that agreement will require certain modifications to correctly reflect the understanding of the parties that the Eligible Employees referred to therein will be entitled to the same bonus of $1,333,000 in any future year in which the Agency produces "NIBGAIT" (as defined therein) of $17,571,000 and to correctly reflect the calculation of NIBGAIT in accordance with the one-page schedule (entitled "NIBGAIT Analysis") attached to Exhibit B. Further, if NIBGAIT is affected by a change in the corporate organization structure of the Agency, NIBGAIT will be revised. 2. Hub hereby appoints the Executive as the President of the U.S. Operations of Hub International Limited and the Executive hereby accepts such appointment, to continue for the duration of the Executive's employment under this Agreement, provided that, save and except for reimbursement for expenses incurred in the fulfillment of such office, the Executive shall not be entitled to any further compensation beyond that contemplated herein. The Executive shall perform such duties as Hub, acting reasonably, shall assign from time to time in connection such position, provided that such duties shall not interfere with the Executive's ability to provide the Services. 3. The Executive, the Agency and Hub agree that promptly after the execution and delivery of this Agreement, Hub will establish a restricted stock plan or arrangement for the benefit of various employees of the Hub Group (the "Restricted Stock Arrangement") pursuant to which Hub will contribute for the benefit of certain key employees of the Company (including the Executive) a number of shares (the "Kaye Agency Shares") of its common stock having a value of $3,000,000 (U.S.) with each share valued at $17.00 (Canadian). The exchange rate for this purpose shall be 1.5 Canadian Dollars to each U.S. Dollar. The Restricted Stock Arrangement shall include the following provisions: * One-third of the Kaye Agency Shares in the Restricted Stock Arrangement shall be allocated to the Executive. * The Executive shall have the authority to allocate the remaining two-thirds of the Kaye Agency Shares among certain key employees of the Agency. * The awarded stock vests as to 50% after 5 years (unless waived by the executive) and 50% after 10 years. -16- * The award will cease to vest if the executive has for any reason ceased to be an employee before the award vests, except in the following cases: - Normal retirement age (award vests fully); - Dismissal without just cause (award vests fully); - Death (award vests pro rata); and - Long-term disability (award vests pro rata) 4. The Executive and Hub agree that, simultaneously with the execution and delivery of this Agreement, they shall execute and deliver the Investment Letter in the form attached as Exhibit A and shall consummate the transactions contemplated therein as promptly as practicable. EX-10.13 18 t06723ex10-13.txt EMPLOYMENT AGREEMENT - BARTON, HUB & CRAIG BARTON Exhibit 10.13 EXECUTIVE EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of JANUARY 1, 2002. B E T W E E N: R. CRAIG BARTON, BUSINESSMAN, OF 44843 SOUTH SUMAS ROAD, IN THE DISTRICT OF CHILLIWACK, IN THE PROVINCE OF BRITISH COLUMBIA; V2R 4A7; (THE "EXECUTIVE") - AND - BARTON INSURANCE BROKERS LTD., A BODY CORPORATE, DULY INCORPORATED UNDER THE LAWS OF THE PROVINCE OF BRITISH COLUMBIA; (THE "BROKER") - AND - HUB INTERNATIONAL LIMITED, A CORPORATION INCORPORATED PURSUANT TO THE LAWS OF ONTARIO; ("THE HUB") In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. INTERPRETATION (a) "AGREEMENT" means this agreement, all Schedules attached hereto and the amendments made hereto by written agreement between the Executive and the Broker; (b) "BASIC COMPENSATION" means the compensation indicated in SCHEDULE "B"; (c) "BENEFITS" means the benefits to which the Executive is entitled in accordance with SCHEDULE "B"; (d) "DEATH" means a natural death and, in addition, is deemed to include a continuous period of at least SIX (6) MONTHS during which time the Executive has not been in the offices of the Broker during normal working hours and the Executive's whereabouts are unknown to the Broker; (e) "DISABILITY" means the mental or physical state of the Executive is such that the Executive would be considered to suffer from a "total disability" or a "disability" or to be "totally disabled" or "disabled" in accordance with the Broker's group benefits insurance policy at the relevant time; (f) "SCHEDULE" means a schedule to this Agreement; (g) "SECTION" means a section or subsection to this Agreement; (h) "SERVICES" means the duties and the responsibilities set out in SCHEDULE "A" to this Agreement, as the same may be amended or extended by agreement of the parties from time to time; (i) "SUBSIDIARIES" means the "subsidiary companies", as defined in the SECURITIES ACT (Ontario), of The Hub, including the Broker; (j) "THE HUB" means Hub International Limited; (k) "THE HUB GROUP" means The Hub and the Subsidiaries; and -3- (l) "VACATION" means the vacation to which Executive is entitled, as contemplated in SCHEDULE "B". 1.2 It is agreed by and between the parties hereto that the Schedules referred to herein, as itemized below and attached hereto, shall form a part of this Agreement and this Agreement shall be construed as incorporating such Schedules: SCHEDULE "A" - Services SCHEDULE "B" - Basic Compensation, Benefits and Vacation 2. EMPLOYMENT 2.1 The Broker agrees to employ the Executive and the Executive accepts such employment and represents to the Broker that the Executive has the required skills and expertise to perform the Services. 2.2 During the term of the Executive's employment with the Broker the Executive agrees to devote the whole of the Executive's business time and attention to the Services in a conscientious and competent manner and with the utmost integrity. 2.3 The Executive shall perform the Services primarily at the office of the Broker at such locations as the Broker's and The Hub's reasonable needs may dictate from time to time. 3. REMUNERATION AND BENEFITS 3.1 The Executive shall be paid the Basic Compensation in such payment periods as are established from time to time by the Broker for its employees, subject to deduction and remittance to the appropriate governmental authority of all applicable taxes and other amounts. -4- 3.2 The Executive shall be entitled to and the Broker shall provide the Benefits. 3.3 The Broker shall reimburse the Executive for reasonable travel and other business expenses incurred by the Executive in performing the Services, as approved in advance by the Broker. 3.4 The Executive shall be entitled to the Vacation, to be scheduled at the mutual convenience of the parties. 4. PROPRIETARY, CONFIDENTIALITY AND NON-SOLICITATION 4.1 PROPERTY. The Executive acknowledges and agrees that all books of business, policies of insurance, documents, computer records, vouchers and other books, papers and records connected with the business of The Hub Group, whether paid for, serviced or produced by the respective corporation of The Hub Group or not, are the property of the respective corporation and shall be at all times open to the respective corporation for the purposes of examination, and shall be turned over and surrendered to the respective corporation or its representatives upon the order of the respective corporation or on the termination of the Executive's employment with the Broker of any reason whatsoever. 4.2 CONFIDENTIALITY. The Executive acknowledges that in the course of carrying out the Executive's duties to the Broker, the Executive will have access to and will be entrusted with confidential information concerning the business and corporate affairs of the Broker, the other corporations of The Hub Group and their clients ("Confidential Information"), including information pertaining to the respective corporation's relationship with insurance carriers, employee and producer compensation structures, client underwriting and policy renewal information, internal accounting procedures, policies and information, unique insurance product features, insurance programs developed by the respective corporation (with or without the assistance of the Executive), marketing strategies and employee training procedures. The Executive agrees that all Confidential Information -5- acquired by the Executive or disclosed to the Executive shall be held in the strictest confidence. The Executive shall not disclose any Confidential Information to any other person during the term of the Executive's employment or at any time thereafter without the prior written consent of the respective corporation, except as may be required for the Executive to fulfil the Executive's employment duties to the Broker. Neither during the term of the Executive's employment nor at any time thereafter will the Executive make use of any Confidential Information for the Executive's own benefit or for the benefit of any other person or persons, firm, partnership, association or corporation other than The Hub Group, or assist others in so doing; provided that nothing herein shall prohibit the Executive from using Confidential Information that: (i) was readily available to the public at the time such information was available to the Executive; (ii) become readily available to the public after the time such information was made available to the Executive other than through a breach of this Agreement; or (iii) is subsequently, lawfully and in good faith obtained by the Executive from an independent third party without a breach of this Agreement. The Executive acknowledges and agrees that the disclosure of any Confidential Information to competitors of the Broker or the other corporations of The Hub Group or to the general public may be highly detrimental to the business interests of The Hub Group. The Executive acknowledges and agrees that the right of The Hub Group to maintain Confidential Information as confidential constitutes a proprietary right which the respective corporation is entitled to protect. Unless otherwise agreed to by the respective corporation, all Confidential Information shall be and shall remain the sole and exclusive property of the respective corporation. The Executive shall return to the Broker, forthwith upon the effective date of termination of the Executive's employment for any reason whatsoever, all Confidential Information acquired in connection with the Executive's employment by the Broker. The Executive hereby agrees with the Broker that, in the event of any -6- breach by the Executive of the provisions of this SECTION 4.2, the respective corporation(s) of The Hub Group shall be entitled to equitable relief, including an injunction and specific performance, in any competent court having jurisdiction over the Executive, in addition to all other remedies available to the respective corporation at law or in equity. 4.3 NON-COMPETITION AND NON-SOLICITATION (a) The Executive covenants and agrees that the Executive will not, without the prior written consent of the Broker, either during the term of this Agreement or at any time within a period of TWO (2) YEARS following the termination of this Agreement in accordance with its terms, either individually, in partnership, jointly, or in conjunction with any other person or persons, firm, partnership, association, company, corporation or any other entity as principal, agent, employee, shareholder, or in any other capacity whatsoever carry on or be engaged in, or be concerned with or be interested in or advise, lend money to, guarantee the debts or obligations of, or permit the Executive's name or any part thereof to be used or employed by any person or persons, firm partnership, association, company, corporation or any other entity engaged in or concerned with, or interested in any insurance agency or brokerage business in BRITISH COLUMBIA. Notwithstanding the foregoing, the provisions of this SECTION 4.3(A) shall not apply in the event that this Agreement is terminated by the Broker pursuant to SECTION 5.1 or the employment of the Executive is otherwise terminated by the Broker without cause. (b) The Executive agrees that the Executive shall not directly or indirectly approach or solicit any client of The Hub Group except for the benefit of The Hub Group or attempt to direct any such client away from The Hub Group at any time during the term of the Executive's employment and for the period of -7- TWO (2) YEARS after termination of this Agreement in accordance with its terms. (c) If the Executive violates any of the provisions of SECTIONS 4.3(B), the Executive shall pay to The Hub a sum equal to THREE (3) TIMES the annual commissions and fees generated by clients obtained by the Executive in violation of SECTION 4.3(B). For each such client, the annual commissions and fees shall be the greater of the amount generated in the year preceding and the amount generated in the year following the date upon which the client becomes a client of the competing business. (d) The amount payable by the Executive under SECTION 4.3(C) shall be paid in cash and as soon as it is determinable and may be set-off by the Broker against any amount owing or to become owing by the Broker or The Hub to the Executive. The Executive acknowledges that the said amount is a reasonable calculation of the respective corporation's liquidated damages given the interest of the corporation in maintaining its client base and the future profits which would be foregone by the corporation if the Executive violates the provisions of SECTION 4.3(B). The Executive further acknowledges that the payment by the Executive pursuant to SECTION 4.3(C) shall in no way limit the other remedies to which the respective corporation of The Hub Group may be entitled as a result of the Executive's breach of SECTIONS 4.3(A) or (B). Without limiting the generality of the foregoing, the Executive recognizes that a breach by the Executive of any of the covenants contained in SECTION 4.3(A) would result in damages to the respective corporation of The Hub Group and that The Hub Group may not be adequately compensated for such damages by the payment of the amounts contemplated in SECTION 4.3(C). The Executive agrees that in the event of any such breach, and in addition to any other remedies available to The Hub -8- Group at law or otherwise, The Hub shall, on behalf of the respective corporation of The Hub Group, be entitled as a matter of right to apply to a court of competent jurisdiction for relief by way of injunction, restraining order, decree or otherwise as may be appropriate to ensure compliance by the Executive with the provisions of SECTIONS 4.3(A) and (B). 4.4 The Executive agrees that all restrictions in this SECTION 4 are necessary and fundamental to the protection of the business of the Broker and the other corporations of The Hub Group and are reasonable. 5. TERM AND TERMINATION 5.1 This Agreement and the employment of the Executive hereunder shall be for an indefinite term, subject to termination by the Broker for any reason whatsoever without notice, provided that, in the event that the Agreement is terminated by the Broker in accordance with this SECTION 5.1, the Executive shall be entitled to continue to receive an amount equal to the Basic Compensation (save and except the bonus component, if any, related thereto) and the value of the group insurance and automobile allowance components of the Benefits for the severance period hereinafter defined. Notwithstanding the foregoing, in the event that the Executive breaches any of the provisions of SECTION 4, effective as at the date of such breach the Executive shall not be entitled to any further payment, provided however, that in no event shall the Executive receive an amount that is less than the prescribed minimum under applicable employment standards legislation. For the purposes of this SECTION 5.1, "SEVERANCE PERIOD" means the period commencing as at the effective date of such termination and ending on the first anniversary of the date thereof. 5.2 Notwithstanding SECTION 5.1, this Agreement may be terminated immediately by either party, for cause, without further obligation to the other party (THE "DEFAULTING PARTY"), on notice to the defaulting party in the event that the defaulting party: -9- (a) shall make a general assignment for the benefit of creditors or shall be adjudicated a bankrupt or insolvent or file a voluntary petition or answer seeking reorganization or an arrangement with its creditors or take advantage of a bankruptcy, insolvency, dissolution or liquidation law or analogous statute; or (b) is in continuing breach of any of its material covenants or obligations hereunder and has failed to rectify such breach within SIXTY (60) DAYS following receipt of notice of such breach from the other party; provided that, in the event that the Agreement is terminated by the Broker in accordance with this SECTION 5.2, the Executive shall be entitled to receive an amount equal to the Basic Compensation and the value of Benefits to the date of termination. 5.3 Notwithstanding SECTION 5.1, this Agreement may be terminated by the Broker on notice to the Executive due to the Disability of the Executive, upon NINETY (90) DAYS' notice to the Executive. 5.4 Notwithstanding SECTION 5.1, this Agreement shall be terminated immediately upon the Death of the Executive or, unless otherwise agreed by the parties, upon the Executive attaining SIXTY-FIVE (65) YEARS of age. 5.5 Upon termination of this Agreement in accordance with SECTION 5.1 or SECTION 5.2, the Executive shall have no other claim against the Broker for damages for failure to give reasonable notice or pay in lieu of notice, severance pay or otherwise, except as set out in the respective Section. 5.6 In the event of termination of this Agreement in accordance with the terms hereof, the provisions of SECTION 4 shall continue in full force and effect. -10- 6. ARBITRATION Any question, dispute or disagreement (HEREINAFTER REFERRED TO AS THE "DISPUTE") arising under or pertaining to this Agreement including the interpretation, application or construction of this Agreement or any part thereof shall be determined by arbitration in accordance with the following terms and provisions: (a) the Dispute shall be submitted to a single arbitrator as may be agreed upon by the parties hereto, provided that if a single arbitrator has been requested by one of the parties hereto and the other party fails to agree on a single arbitrator, then the Dispute may be referred to a board of THREE (3) arbitrators or TWO (2) to be named, as to ONE (1) each, by the parties and the third to be appointed by the first TWO (2) named arbitrators; (b) if either party shall refuse or neglect to appoint an arbitrator within TEN (10) business days after the other party shall have appointed an arbitrator and shall have served a written notice upon the party so refusing or neglecting to appoint an arbitrator, then the arbitrator first appointed shall, at the request of the party appointing the Executive to proceed to hearing and determine the Dispute as if he or she were a single arbitrator appointed by both parties for that purpose; (c) if TWO (2) arbitrators are so named within the time prescribed and they do not agree within a period of TEN (10) business days upon the appointment of the third arbitrator, then upon the application of either party, the third arbitrator shall be appointed by a Judge of the Supreme Court of British Columbia; (d) the determination of the Dispute which shall be made by the said arbitrators of a majority of them, or by a single arbitrator, as the case may be, shall be -11- final and binding upon the parties hereto and the costs of the arbitration and remuneration of the third arbitrator shall be borne equally between all parties thereto, each party bearing the remuneration of the arbitrator appointed by it; and (e) the provisions of SECTION 6 shall be deemed to be submission to arbitration within the provisions of the COMMERCIAL ARBITRATION ACT of British Columbia, as amended from time to time. 7. GENERAL PROVISIONS 7.1 Any and all previous agreements, written or oral, between the parties hereto or on their behalf relating to the employment of the Executive by the Broker, are hereto terminated and cancelled and each of the parties hereto hereby releases and forever discharges the other hereto of and from all manner of actions, causes of action, claims and demands whatsoever under or in respect of any such agreement. 7.2 The provisions hereof, when the context permits, shall enure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Executive and the successors and assigns of the Broker, respectively. 7.3 This Agreement shall be construed in accordance with the laws of the Province of British Columbia and the laws of Canada applicable therein. 7.4 If any covenant or provision of this Agreement is determined to be void or unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision and this Agreement shall be read and construed as if such void or unenforceable provision were excluded from this Agreement. -12- 7.5 Any notice, demand, request, consent, approval or waiver required or permitted to be given hereunder shall be in writing and may be given to the party for whom it is intended by personally delivering it to such party or by mailing the same by prepaid registered mail: In the case of the Broker, to: BARTON INSURANCE BROKERS LTD. 45710 AIRPORT ROAD CHILLIWACK, B.C. V2P 6Z9 ATTENTION: R. CRAIG BARTON And in the case of the Executive, to the Executive's last known address. Any such notice or other documents delivered personally shall deemed to have been received by and given to the addressee on the day of delivery and any such notice or other documents mailed, as aforesaid, shall be deemed to have been received by and given to the addressee on the third business day following the date of mailing. Any party may at any time give notice to the other or any change of address. 7.6 All amounts referred to herein are in Canadian dollars unless otherwise indicated. IN WITNESS WHEREOF the parties hereto have hereunto executed this Agreement as of the day and year first above written. BARTON INSURANCE BROKERS LTD. Per: /s/ W. Kirk James ------------------------------- Authorized Signatory /s/ R. Craig Barton ----------------------------------- R. CRAIG BARTON HUB INTERNATIONAL LIMITED Per: /s/ W. Kirk James ------------------------------ Authorized Signatory THIS IS SCHEDULE "A" REFERRED TO IN THE ANNEXED EMPLOYMENT AGREEMENT MADE BETWEEN THE BROKER AND THE EXECUTIVE SERVICES The Executive shall perform such duties as the Broker, acting reasonably, shall assign from time to time in connection with the Executive's position as President and Chief Executive Officer of the Broker, including, without limitation, the following: To follow the lawful orders and directions of the Board of Directors of the Broker provided to the Executive from time to time. THIS IS SCHEDULE "B" REFERRED TO IN THE ANNEXED EMPLOYMENT AGREEMENT MADE BETWEEN THE BROKER AND THE EXECUTIVE BASIC COMPENSATION The Executive is entitled to be paid the following salary and/or commission, subject to review from time to time and adjustment as recommended by the President of The Hub and approved by the Chair of The Hub having regard to the performance of the Broker relative to the Broker's Basic Profit and NIBGAIT targets (as defined in the Management Bonus Agreement between the Broker and The Hub): FOUR HUNDRED THOUSAND ($400,000.00) DOLLARS PER ANNUM BENEFITS O Group insurance (including medical, dental, death and disability) and such other benefits as are made available to employees of the Broker, provided that the Executive qualifies for coverage under such plans. O A monthly automobile allowance. VACATION The Executive shall be entitled to such vacation as the Broker may agree upon. EX-10.15 19 t06723ex10-15.txt AMENDED & RESTATED CREDIT AGREEMENT - HUB & BMO EXHIBIT 10.15 HUB INTERNATIONAL LIMITED AS BORROWER - AND - BANK OF MONTREAL AS LENDER - -------------------------------------------------------------------------------- AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF JUNE 21, 2001 - -------------------------------------------------------------------------------- FRASER MILNER CASGRAIN LLP 42nd FLOOR 1 FIRST CANADIAN PLACE TORONTO, ONTARIO M5X 1B2 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Defined Terms................................................1 Section 1.2 Computation of Time Periods.................................16 Section 1.3 Accounting Terms............................................16 Section 1.4 Extended Meanings...........................................16 Section 1.5 Incorporation of Schedules..................................16 Section 1.6 Headings and Table of Contents..............................17 Section 1.7 Singular, Plural, Gender....................................17 Section 1.8 Conflict....................................................17 Section 1.9 Currency....................................................17 Section 1.10 Time........................................................17 Section 1.11 Control.....................................................17 Section 1.12 Wholly Owned Subsidiary.....................................18 Section 1.13 References to Conversion of Advances........................18 ARTICLE 2 THE CREDIT FACILITIES Section 2.1 Credit Facility.............................................18 Section 2.2 Drawdown Availability.......................................18 Section 2.3 Renewal of Drawdown Period..................................19 Section 2.4 Term Obligations............................................20 Section 2.5 Advance Requests............................................20 Section 2.6 Advances under the Credit Facility..........................21 Section 2.7 Currency....................................................21 Section 2.8 Conversion of Advance.......................................21 Section 2.9 LIBOR Maturity..............................................22 Section 2.10 Certain Provisions Relating to Bankers' Acceptances.........22 Section 2.11 Reduction or Termination of Commitment......................24 Section 2.12 Use of Proceeds.............................................25 ARTICLE 3 INTEREST AND FEES Section 3.1 Interest on Prime Rate Loans................................25 Section 3.2 Interest on U.S. Base Rate Loans............................25 Section 3.3 Interest on LIBOR Loans.....................................26 Section 3.4 Acceptance Fee..............................................26 Section 3.5 Standby Fee.................................................26 Section 3.6 Reimbursement Obligations...................................26 Section 3.7 Fixed Rate Option...........................................27 Section 3.8 Yearly Rate Statements......................................27 ii. ARTICLE 4 REPAYMENT OF OBLIGATIONS Section 4.1 Repayment on Maturity.......................................28 Section 4.2 Voluntary Repayment.........................................28 Section 4.3 Mandatory Repayment of Credit Facility......................28 Section 4.4 Scheduled Repayment of Obligations..........................29 ARTICLE 5 PAYMENTS AND ACCOUNTS Section 5.1 Maintenance of Accounts.....................................29 Section 5.2 Payments by Borrower........................................29 Section 5.3 Due Date of Payments........................................30 Section 5.4 Time of Payments............................................30 Section 5.5 Form and Amount of Payments.................................30 Section 5.6 Charging Borrower's Accounts................................30 ARTICLE 6 CURRENCY AND COSTS Section 6.1 Market Disruption and Illegality............................30 Section 6.2 Additional Payments.........................................32 Section 6.3 Prepayment and Conversion...................................33 Section 6.4 Mitigation..................................................34 Section 6.5 Mandatory Prepayment........................................34 ARTICLE 7 CONDITIONS PRECEDENT TO LENDING Section 7.1 Conditions Precedent to Initial Advance.....................34 Section 7.2 Conditions Precedent to Each Advance........................35 ARTICLE 8 REPRESENTATIONS AND WARRANTIES Section 8.1 Representations and Warranties by the Borrower..............36 Section 8.2 Survival of Representations and Warranties..................40 ARTICLE 9 COVENANTS OF THE BORROWER Section 9.1 Affirmative Covenants.......................................40 Section 9.2 Negative Covenants..........................................43 ARTICLE 10 ACCELERATION Section 10.1 Events of Default...........................................46 Section 10.2 Remedies Upon Default.......................................48 Section 10.3 Right of Set-Off............................................49 Section 10.4 Currency Conversion After Maturity..........................49 Section 10.5 Judgment Currency...........................................49 iii. ARTICLE 11 GENERAL Section 11.1 Evidence of Debt............................................49 Section 11.2 Additional Expenses.........................................50 Section 11.3 Invalidity of any Provisions................................50 Section 11.4 Amendments, Waivers, etc....................................50 Section 11.5 Notices, etc................................................50 Section 11.6 Costs and Expenses..........................................51 Section 11.7 Indemnification.............................................52 Section 11.8 Taxes.......................................................52 Section 11.9 Calculations................................................53 Section 11.10 Assignments and Participations..............................53 Section 11.11 Governing Law...............................................54 Section 11.12 Consent to Jurisdiction.....................................54 Section 11.13 Binding Effect..............................................55 Section 11.14 Interest Savings Clause.....................................55 Section 11.15 Entire Agreement............................................55 Section 11.16 Counterparts................................................55 Schedule 1 Form of Advance Request Schedule 2 Form of Compliance Certificate Schedule 8.1(h) Material Subsidiaries Schedule 8.1(i) Outstanding Debt Schedule 8.1(k) Transactions and Events Schedule 9.1(d) Preservation of Corporate Existence THIS AMENDED AND RESTATED CREDIT AGREEMENT is made as of the 21st day of June, 2001, BETWEEN: HUB INTERNATIONAL LIMITED, a corporation incorporated under the laws of Ontario, as the Borrower hereunder, - and - BANK OF MONTREAL, as the Lender hereunder WHEREAS Bank of Montreal agreed, on and subject to the terms and conditions of a credit agreement dated April 26, 2000 (the "Original Credit Agreement") between Bank of Montreal and Hub International Limited (formerly named "The Hub Group Limited"), to make available the credit facilities in favour of Hub International Limited provided for in the Original Credit Agreement in the maximum aggregate principal amount of Cdn. $50,000,000 or the U.S. Dollar Equivalent thereof; AND WHEREAS Bank of Montreal and Hub International Limited have agreed, on and subject to the terms and conditions of this amended and restated credit agreement, to amend and restate the Original Credit Agreement effective as of the date of this amended and restated credit agreement; NOW THEREFORE in consideration of these premises and the agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 DEFINED TERMS. Unless the context otherwise requires, the following capitalized terms shall have the following respective meanings in this Agreement and in each of the other Loan Documents: "ACCEPTANCE FEE" means the fee payable in Canadian dollars to the Lender in respect of the Drafts accepted or purchased by the Lender prior to and as a condition of such acceptance or purchase, computed in accordance with Section 3.4; 2. "ADVANCE" means any extension of credit by the Lender hereunder in the form of a Prime Rate Loan, a U.S. Base Rate Loan, a LIBOR Loan or a BA Advance (each of which is referred to herein as a "Type of Advance"), including the conversion of an Advance into another Advance; "ADVANCE REQUEST" means a request for an Advance or conversion of an Advance to another Advance duly completed and executed on behalf of the Borrower, substantially in the form of Schedule 1 hereto, or a notice of a request for an Advance or conversion of an Advance to another Advance delivered pursuant to Section 2.5(c); "AFFILIATE" in respect of any specified Person, means any other Person that (a) is either directly or indirectly controlled by the specified Person or by a Person or Persons that also control the specified Person; or (b) that either directly or indirectly controls the specified Person; "AGREEMENT" means this credit agreement as supplemented, amended, modified or restated from time to time, and the expressions "Article", "Section" and "Schedule" followed by a number mean and refer to the specified Article, Section or Schedule of this Agreement, respectively; "AMORTIZATION DATE" means the first date, if any, on which the ratio of (a) Consolidated Debt on such date, to (b) the product of (i) 4, multiplied by (ii) the Consolidated EBITDA for the last completed fiscal quarter of the Borrower, exceeds 4:1; "APPLICABLE MARGIN" means: (a) in respect of any Prime Rate Loan, at any time prior to the Term Date, the rate of 1.0% per annum, and at any time on or after the Term Date, the rate of 1.25% per annum; (b) in respect of any U.S. Base Rate Loan, at any time prior to the Term Date, the rate of 1.0% per annum, and at any time on or after the Term Date, the rate of 1.25% per annum; (c) in respect of any LIBOR Loan, at any time prior to the Term Date, the rate of 1.125% per annum, and at any time on or after the Term Date, the rate of 1.375% per annum; and (d) in respect of any BA Advance, at any time prior to the Term Date, 1.125%, and at any time on or after the Term Date, 1.375%; "ARM'S-LENGTH" means arm's-length within the meaning of such term under the Income Tax Act (Canada), as amended from time to time; "ASSETS" means, with respect to any Person, all present or future property, assets and undertaking of such Person, real or personal, moveable or immoveable, tangible or intangible, of whatsoever nature or kind and wherever situate, including without limitation anything properly classified as an asset in accordance with Generally Accepted Accounting Principles; 3. "ASSIGNEE LENDER" has the meaning set out in Section 11.10; "ASSIGNEE LENDER'S COMMITMENT" has the meaning set out in Section 11.10; "ASSIGNEE LENDER'S COMMITMENT PERCENTAGE" has the meaning set out in Section 11.10; "AVAILABLE COMMITMENT" means at any time the amount at such time of the Commitment less the amount of the Outstanding Principal Obligations, all expressed in Canadian Dollars, with any amount thereof denominated in another currency to be expressed in Canadian Dollars at the Canadian Dollar Equivalent at such time of such amount; "BA ADVANCE" means any Advance by way of the acceptance of any Draft drawn by the Borrower on, and the purchase of the resulting Bankers' Acceptance by, the Lender; "BA DISCOUNT PROCEEDS" means in respect of any Bankers' Acceptance being purchased by the Lender on any day an amount (rounded to the nearest whole Canadian cent, and with one-half of one Canadian cent being rounded up) calculated on such day by multiplying (a) Face Amount of such Bankers' Acceptance, by (b) the quotient equal to one divided by the sum of one plus the product of: (i) the BA Reference Rate (expressed as a decimal) applicable to such Bankers' Acceptance; and (ii) a fraction, the numerator of which is the number of days remaining in the term of such Bankers' Acceptance and the denominator of which is 365, with such quotient being rounded up or down to the nearest fifth decimal place and 0.000005 being rounded up, less the amount of the Acceptance Fee payable to the Lender in respect of, and as a condition precedent to the acceptance or purchase by the Lender of, such Bankers' Acceptance; "BA LIABILITIES" means, at any time and in respect of any Bankers' Acceptance, the Face Amount thereof if still outstanding and unpaid, whether or not payment thereof is due or, following the maturity thereof, the aggregate unpaid amount of all Reimbursement Obligations at that time due and payable in respect of such Bankers' Acceptance; "BA REFERENCE RATE" means, as applicable to any Bankers' Acceptance being purchased by the Lender on any day, the per annum percentage discount rate (expressed to two decimal places and rounded upward, if necessary, to the nearest 1/100th of 1%), quoted by the Lender as that at which the Lender would, in accordance with its normal practice, on such day be prepared to purchase its own bankers' acceptances in an amount and having a maturity date comparable to the amount and maturity date of such Bankers' Acceptance; 4. "BANKERS' ACCEPTANCE" means a Draft of the Borrower denominated in Canadian Dollars which has been accepted and purchased by the Lender pursuant to Article 2; "BORROWER" means Hub International Limited (formerly named "The Hub Group Limited"), a corporation incorporated under the laws of Ontario, and any successor(s) and permitted assign(s) thereof; "BORROWER'S ACCOUNTS" means the Canadian Dollar account and U.S. Dollar account to be maintained by the Borrower with the Lender at the Lender's Branch in accordance with Article 5; "BUSINESS DAY" means (i) any day of the year, other than Saturday or Sunday or any other day on which banks are closed for normal business in Toronto, Ontario, (ii) when used in connection with U.S. Base Rate Loans, any day of the year, other than Saturday or Sunday or any other day on which banks are closed for normal business in either Toronto, Ontario or New York, New York, and (iii) when used in connection with LIBOR Loans, any day of the year, other than Saturday or Sunday or any other day on which banks are closed for normal business in any of Toronto, Ontario, New York, New York and London, England, and which is also a day on which dealings in U.S. Dollars may be carried on by and between banks in the London interbank market; "CANADA TREASURY BILL RATE" means on any day and for any discount calculation period the rate for Government of Canada Treasury bills for a period approximately equal to such discount calculation period appearing on the "Reuters Screen ISDD Page" (as defined in the International Swaps and Derivatives Association, Inc. definitions, as modified and amended from time to time) at approximately 10:00 a.m. (Toronto, Ontario time) on such day, or if such day is not a Business Day then on the immediately preceding Business Day; "CANADIAN DOLLARS" and the symbols "Can. $" and "Cdn. $" mean lawful money of Canada; "CANADIAN DOLLAR EQUIVALENT" means, at any time, the amount of Canadian Dollars which could be purchased from the Lender by the payment of a specified amount of another currency using the Lender's relevant spot rate for the sale of Canadian Dollars quoted by the Lender's treasury department at such time; "CAPITAL ADEQUACY GUIDELINE" means the capital adequacy requirements from time to time specified by OSFI or any other applicable Governmental Authority and published by it as one or more guidelines for chartered banks in Canada; "CAPITAL LEASE" shall mean, as to any Person, any lease of (or other agreement conveying the right to use) immovable or real property or movable or personal property, which would be required to be classified and accounted for as a capital lease on a balance sheet of such Person under Generally Accepted Accounting Principles; "CAPITAL LEASE OBLIGATION" shall mean, as to any Person, the obligations of such Person to pay rent or other amounts under a Capital Lease and, for the purposes of this 5. Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with Generally Accepted Accounting Principles; "CASH EQUIVALENTS" means: (a) marketable securities issued or directly, fully and unconditionally guaranteed or insured by Canada or any Province thereof or by the United States of America or any State thereof or the District of Columbia therein, or issued by any agency or instrumentality of any of them, and in any case backed by the full faith and credit thereof, in each case having a maturity date of not more than one year from the date of acquisition; (b) time deposits and certificates of deposit having a maturity date of not more than one year from the date of acquisition issued by any Canadian chartered bank, trust company or a bank which is organized under the laws of the United States of America, any State thereof or the District of Columbia therein and which has (or which is a subsidiary of a bank holding company which has) issued capital and earned and contributed surplus in excess of Cdn. $500,000,000 or U.S. $500,000,000, as the case may be; (c) commercial paper maturing within one year after the date of acquisition thereof issued by an issuer organized under the laws of Canada or any Province thereof or the United States of America, any State thereof or the District of Columbia which is rated at least A-l or the equivalent thereof by Standard & Poor's Corporation, P-l or the equivalent thereof by Moody's Investors Service, Inc. or R-l low by Dominion Bond Rating Service; and (d) any other investment which the Lender shall expressly consent in writing to accept as a Cash Equivalent for the purposes of this Agreement; "CDOR RATE" means, on any day, the annual rate which is the rate determined by the Lender as being the arithmetic average (rounded up or down, if necessary, to the nearest 0.01% and 0.005% being rounded up) of the discount rates applicable to Canadian Dollar bankers' acceptances for a period of one month appearing on the "Reuters Screen CDOR Page" (as defined in the International Swaps and Derivatives Association, Inc. definitions, as modified and amended from time to time) at approximately 10:00 a.m. on such day, or if such day is not a Business Day then on the immediately preceding Business Day; provided, however, if such rates do not appear on the Reuters Screen CDOR Page for such one month period as contemplated, then the CDOR Rate on any day shall be calculated as the rate as determined by the Lender equal to the BA Reference Rate that would be applicable to any Drafts required to be purchased by the Lender on such day and having a term to maturity of 30 days; "CLAIM" means any claim of any nature whatsoever including, without limitation, any demand, liability, obligation, cause of action, suit, proceeding, judgment, award, assessment and reassessment, whether present or future; "CLOSING" means the execution and delivery of the Original Credit Agreement and the other Loan Documents by the respective parties thereto; 6. "CLOSING AUDITED FINANCIAL STATEMENTS" means, collectively, the annual financial statements of the Borrower as at and for its financial year ended on December 31, 1999, together with the unqualified opinion of its auditors thereon and the notes thereto; "CLOSING DATE" means that date on which the Closing shall occur; "COMMITMENT" means the amount of U.S. $50,000,000 or the Canadian Dollar Equivalent thereof, as such amount may be reduced or cancelled from time to time in accordance with the provisions of this Agreement; "COMPENSATING AMOUNT" has the meaning set out in Section 6.2; "COMPLIANCE CERTIFICATE" means, the certificate of the Borrower substantially in the form set out in Schedule 2 delivered pursuant to Section 9.1 and signed on its behalf by its chief financial officer, or any other Senior Officer acceptable to the Lender; "CONSOLIDATED DEBT" means at any time, the aggregate outstanding principal amount of all Debt of the Borrower and its Subsidiaries determined (without duplication) in accordance with Generally Accepted Accounting Principles on a consolidated basis, but excluding the subordinate debentures of the Borrower in the maximum aggregate principal amount of U.S. $35,000,000 that are subject to mandatory conversion into common shares of the Borrower; "CONSOLIDATED EBITDA" for any period means Earnings of the Borrower and its Subsidiaries for such period, before Consolidated Interest Expense, income taxes, capital tax and large corporation tax, depreciation and amortization of the Borrower and its Subsidiaries, all determined on an accrual basis and on a consolidated basis for such period, but excluding, for greater certainty, (a) any gain or loss arising from the disposition or write-up or write-down of any fixed assets, (b) any other items not involving the outlay or receipt of cash in the current or any future period, or (c) any other extraordinary items; "CONSOLIDATED INTEREST EXPENSE" of the Borrower and its Subsidiaries for any period means (a) the aggregate amount (without duplication) of all interest, fees (other than professional fees), standby fees, acceptance fees, commissions, costs and other charges paid in cash or accrued as a liability by the Borrower and its Subsidiaries during such period on or in respect of or in connection with any Debt, including, without limitation, all interest expenses (whether capitalized or not) on short and long term obligations for borrowed money, fees and other charges payable in respect of financial guarantees, letters of credit or letters of guarantee or obligations to financial institutions who issued such letters of credit or letters of guarantee, discounts in respect of the proceeds of bankers' acceptances, asset monetizations and securitizations, any capitalized interest and the interest portion of payments under Capital Leases, interest on subordinated Debt, less (b) interest income of the Borrower and its Subsidiaries for such period, but otherwise determined on a consolidated basis in accordance with Generally Accepted Accounting Principles and the accounting practices permitted under Generally Accepted Accounting Principles applied by the Borrower in respect of the preparation of its Closing Audited Financial Statements; 7. "CONSOLIDATED SHAREHOLDER EQUITY" of the Borrower means at any time, the sum of the following, determined (without duplication) in accordance with Generally Accepted Accounting Principles: (a) the stated capital (but for greater certainty excluding any treasury shares and subscribed but unissued shares) of the Borrower, less any amount thereof attributable to any preferred or special shares of the Borrower which are subject to any sinking fund or mandatory redemption provisions under which any amount must be paid by the Borrower, or are retractable at the option of the holder thereof, prior to the Maturity Date; and (b) the aggregate amount of the consolidated contributed surplus and consolidated retained earnings of the Borrower or, in the case of a consolidated contributed surplus or consolidated retained earnings deficit, minus the amount of such deficit; but excluding any amount attributable to any exchange gains or losses arising from the translation of the financial statements of any Subsidiary and accumulated in the foregoing; "CORPORATE DISTRIBUTION" means, in respect of any Person: (a) any payment, dividend or other distribution on or in respect of securities (whether in the form of debt or equity) issued by such Person; (b) any purchase, redemption, retraction or other acquisition by such Person of any of its issued securities (whether in the form of debt or equity), or any purchase by such Person from any of its Affiliates or any other Person not dealing at Arms'-Length with such Person of any securities (whether in the form of debt or equity) issued by such Affiliate or other Person; (c) any consulting, management, administration, service or license fee, royalty or charge or any similar fee or charge paid or payable by such Person to any of its Affiliates or any other Person not dealing at Arm's-Length with such Person; (d) any payment by such Person or any of its Subsidiaries on account of any loan or advance owed by such Person to any of its Affiliates or any other Person not dealing at Arm's-Length with such Person; or (e) any loan to, or guarantee of the indebtedness of, or other financial assistance provided to, any Person not dealing at Arm's-Length with such Person; "COVER" for any BA Liabilities shall be effected by paying to the Lender immediately available and freely transferable funds in Canadian Dollars, in the full amount of such BA Liabilities, which funds shall be held by the Lender in a collateral account maintained by the Lender at the Lender's Branch to provide for the payment of such BA Liabilities. Such funds shall be retained by the Lender in such collateral account until such time as the applicable Bankers' Acceptances shall have matured and the related BA Liabilities shall have been fully satisfied; provided, however, that at such time if a Default or an Event of Default has occurred 8. and is continuing, the Lender shall not be required to release any of the said funds in such collateral account until such Default or Event of Default shall have been cured or waived; "CREDIT FACILITY" means the revolving credit facility to be made available to the Borrower hereunder during the Drawdown Period by way of Advances pursuant to Section 2.1 and the Term Obligations resulting from the conversion of Outstanding Principal Obligations to non-revolving term Debt pursuant to Section 2.2; "DEBT" means, without duplication, for any Person: (a) obligations for borrowed money, including obligations evidenced by bonds, notes, debentures or other similar instruments; (b) obligations under financial guarantees, letters of credit or letters of guarantee or obligations to financial institutions who issued such letters of credit or letters of guarantee for the account of such Person; (c) obligations under banker's acceptances; (d) obligations representing the deferred purchase price of property or services, for other than purchases in the ordinary course of business; (e) obligations, whether or not assumed, secured by Encumbrances on, or payable out of the proceeds or production from, property owned by such Person; (f) Capital Lease Obligations; (g) Guarantees; and (h) obligations for exposures (calculated using the mark to market formula with respect to the applicable agreement) under interest rate protection agreements, currency hedging agreements, commodity hedging agreements and other eligible financial contracts as defined under the Bankruptcy and Insolvency Act (Canada); "DEFAULT" means any event which with the giving of notice, the passage of time, or both, would constitute an Event of Default; "DRAFT" means at any time a bill of exchange, within the meaning of the Bills of Exchange Act (Canada), drawn by the Borrower on the Lender and bearing such distinguishing letters and numbers as the Lender may determine, but which at such time has not been completed or accepted by the Lender; "DRAWDOWN DATE" means a day which the Borrower has notified the Lender in an Advance Request as the date on which the Borrower requests an Advance in accordance with Article 2; "DRAWDOWN PERIOD" the period from the Closing Date to 11:00 a.m. (Toronto, Ontario time) on the Term Date; 9. "EARNINGS" for any period means earnings of the Borrower and its Subsidiaries for such period determined on a consolidated basis in accordance with Generally Accepted Accounting Principles and the accounting practices permitted under Generally Accepted Accounting Principles applied by the Borrower in respect of the preparation of the Closing Audited Financial Statements; "ENCUMBRANCE" means any mortgage, charge, hypothec, legal hypothec, pledge, security interest, lien or deposit arrangement or any other encumbrance, whether fixed or floating, that in substance secures the payment of any indebtedness or liability or the observance or performance of any obligation, regardless of form and whether consensual or arising by law, statutory or otherwise, on or in, any property, whether immovable or real, movable or personal, or mixed, tangible or intangible or a pledge or hypothecation thereof or any conditional sale agreement or other title retention agreement or equipment trust relating thereto or any lease relating to property which would be required to be accounted for as a Capital Lease on the Borrower's balance sheet; "EVENT OF DEFAULT" means any of the events specified in Section 10.1; "FACE AMOUNT" means in respect of a Bankers' Acceptance, the amount stated therein to be payable to the holder thereof on its maturity; "FED FUNDS RATE" means, on any day, the rate equal to the USD-Federal Funds-H.15 rate (as defined in the International Swaps and Derivatives Association, Inc. definitions, as modified and amended from time to time) as of such day, or if such day is not a Business Day then on the immediately preceding Business Day; "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means, at any time, accounting principles generally accepted in Canada as recommended in the Handbook of the Canadian Institute of Chartered Accountants applied on a basis consistent with prior years; "GOVERNMENTAL AUTHORITY" means any nation or government, and any political subdivision thereof, and any central bank, agency, department, commission, board, bureau, court, tribunal or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government; "GUARANTEE" means, with respect to any Person, any indebtedness or liabilities of another Person which such guaranteeing Person has guaranteed or in respect of which such guaranteeing Person is liable, contingently or otherwise, including, without limitation, liable by way of agreement to purchase property or services, to provide funds for payment, to supply funds to or otherwise invest in such other Person, or otherwise to assure a creditor of such other Person against loss, other than endorsements for collection or deposit in the ordinary course of business; The amount of any Guarantee shall be deemed to be the lesser of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made, and (b) the maximum amount for which such guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee, unless such primary obligation and the maximum amount for which such guaranteeing Person may be liable are not stated or determinable, in which case the amount of such Guarantee shall be such guaranteeing 10. Person's maximum reasonably anticipated liability in respect thereof as determined by the Lender, in good faith; "HOSTILE ACQUISITION" means an offer to acquire, directly or indirectly and whether by purchase, amalgamation, merger or otherwise, Assets, whether held directly or indirectly, or securities of any Person (the "Target") where (i) in the case of such offer to acquire securities of the Target, the securities subject to such offer and the securities of the Target beneficially owned, directly or indirectly, by the offeror or Affiliates of the offeror or Persons acting in concert with the offeror and its Affiliates, exceed 10% of the then outstanding securities of any class of securities of the Target, (ii) the board of directors or other governing body of the Target has not recommended (at or prior to the time that such offer is made to the holders of the securities subject to such offer or is submitted for consideration by the holders of securities of the Target) acceptance or approval of such offer by such holders, and (iii) the Assets or securities that are the subject of such offer to acquire would upon completion of such acquisition constitute Material Assets; "INVESTMENT" means any loan, advance, deposit, extension of credit, capital contribution or investment to or in any Person, or any purchase or other acquisition for a consideration of any evidences of Debt, capital stock or other securities of any Person or the acquisition of assets of another Person in circumstances which would qualify such acquisition as a bulk sale of an enterprise; "LEGAL REQUIREMENT" means any law, statute, ordinance, decree, requirement, order, judgment, treaty, rule, guideline, bulletin, license, permit or regulation, and any applicable determination, interpretation, ruling, order or decree, of any Governmental Authority or arbitrator, which is binding upon or applicable to the Lender, the Borrower or a Subsidiary of the Borrower, whether presently existing or arising in the future, including without limitation all Guidelines and Bulletins issued by OSFI; "LENDER" means Bank of Montreal and any other bank or financial institution to which a Commitment in the Credit Facility is assigned by the Lender or a further permitted assignee thereof in accordance with Section 11.10, and their respective successors and permitted assigns; "LENDER'S BRANCH" means the Lender's main Toronto, Ontario branch, or such other branch of the Lender in Canada as the Lender may from time to time specify to the Borrower; "LIABILITIES" of any Person means any indebtedness or liability, contingent or otherwise, which, in accordance with Generally Accepted Accounting Principles and applicable Legal Requirements, would be classified as a liability on a balance sheet of such Person or the notes thereto, whether or not incurred in the ordinary course of business, but in any event including, without limitation or duplication, any Debt of such Person; "LIBO RATE" means, for any LIBOR Period for each LIBOR Loan, the annual rate of interest determined by the Lender as being the rate at which deposits in U.S. Dollars are offered by the Lender in the London interbank market to leading international banks for an 11. amount similar to the principal amount of such LIBOR Loan and having a term similar to such LIBOR Period, such rate to be determined as of 11:00 a.m. London time on the date two Business Days prior to the first day of the LIBOR Period for such LIBOR Loan; "LIBOR LOAN" means any Advance made by the Lender to the Borrower in, or converted into U.S. Dollars, bearing interest by reference to a LIBO Rate; "LIBOR PERIOD" means, for each LIBOR Loan, a period (subject to Section 6.1) of one (1), two (2), three (3), six (6), nine (9) or twelve (12) months selected by the Borrower and advised to the Lender by written notice given in accordance with the provisions hereof, commencing with the date on which such LIBOR Loan is made and ending on the last day of such selected period and thereafter each successive period of one (1), two (2), three (3), six (6), nine (9) or twelve (12) months (again subject to Section 6.1) selected by the Borrower and advised to the Lender by written notice given in respect of the continuation of such LIBOR Loan in accordance with the provisions hereof, commencing on the last day of the immediately preceding LIBOR Period in respect of such LIBOR Loan, provided that the last day of a LIBOR Period shall occur on or before the Maturity Date and whenever the last day of a LIBOR Period would otherwise occur on a day other than a Business Day, the last day of such LIBOR Period shall be extended to the next succeeding Business Day unless such extension would cause the last day of such LIBOR Period to occur in the next following calendar month, in which case the last day of such LIBOR Period shall occur on the last preceding Business Day; "LOAN" means a direct advance of monies hereunder, by way of a Prime Rate Loan, a U.S. Base Rate Loan or a LIBOR Loan; "LOAN DOCUMENTS" means this Agreement and all other documents, certificates, instruments and agreements to be executed and delivered to the Lender by the Borrower or by any other Person as contemplated hereunder and thereunder; "LOSS" means any loss, cost or expense whatsoever, whether present or future, direct or indirect, including, without limitation, any damages, judgments, penalties, fines, fees, charges, claims, demands, liabilities and any and all legal and other professional fees and disbursements, and, with respect to any Advance by the Lender, any loss, cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by the Lender to fund or maintain such Advance, except any such loss representing loss of profit; "MATERIAL ADVERSE EFFECT" means, a material adverse effect on the business, operations, Assets or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, or on the ability of the Borrower to perform any of its obligations under this Agreement and the other Loan Documents; "MATERIAL ASSETS" means any Asset or group of Assets the loss of which would have a Material Adverse Effect; "MATERIAL CONTRACTS" means those contracts, agreements, instruments, leases, licenses or permits to which any Person is a party or by which it or any of its Assets is bound, the breach, termination or amendment of which could reasonably be expected to have a Material Adverse Effect; 12. "MATERIAL SUBSIDIARY" means any Subsidiary of the Borrower, whether now owned or hereafter acquired, which owns Assets the value of which comprises five percent or more of the book value of all of the Assets of the Borrower and its Subsidiaries on a consolidated basis or which has gross revenues for the immediately preceding financial year which comprises five percent or more of the gross revenues of the Borrower and its Subsidiaries for such financial year on a consolidated basis; "MATURITY DATE" means at any time the third anniversary of the Term Date; "OBLIGATIONS" means, at any time, the sum of (a) the aggregate principal amount of all Loans advanced to the Borrower and all accrued and unpaid interest thereon outstanding and unpaid at such time, (b) the aggregate BA Liabilities of the Borrower at such time in respect of all Bankers' Acceptances accepted or purchased by the Lender at or prior to such time, including all accrued and unpaid interest on any then outstanding Reimbursement Obligations in respect of any such Bankers' Acceptances, and (c) all other then outstanding liabilities, obligations and indebtedness of the Borrower to the Lender under this Agreement or any of the other Loan Documents; "OPERATING DEBT" means Debt of the Borrower or any Subsidiary, arising pursuant to operating credit facilities and incurred in the ordinary course of business for the purpose of carrying on such business, consistent with historical practice; "OSFI" means the Office of the Superintendent of Financial Institutions (Canada); "OUTSTANDING PRINCIPAL OBLIGATIONS" means, at any time, the sum of the aggregate principal amount of all Loans advanced to the Borrower outstanding and unpaid at such time and the aggregate BA Liabilities outstanding and unpaid at such time in respect of Bankers' Acceptances accepted or purchased by the Lender, all expressed in Canadian Dollars (or the U.S. Dollar Equivalent thereof), with any amount thereof denominated in another currency to be expressed in Canadian Dollars at the Canadian Dollar Equivalent or the U.S. Dollar Equivalent at such time of such amount; "PAST DUE RATE" means, on any day, a rate per annum equal to the Prime Rate, in the case of Obligations denominated in Canadian Dollars, and U.S. Base Rate, in the case of Obligations denominated in U.S. Dollars, plus two percent; "PERMITTED ENCUMBRANCES" means, as at any time, any one or more of the following: (a) reservations in any original grants from the Crown of any land or interest therein, statutory exceptions to title and reservations of mineral rights in any grants from the Crown or from any other predecessors in title; (b) servitudes or easements or rights of way or similar rights for purposes of public utility, or for encroachments, rights of view or otherwise, including without in any way limiting the generality of the foregoing the sewers, drains, gas and water mains, steam transport, electric light and power or telephone and telegraph 13. conduits, poles and cables, pipelines or zoning restrictions affecting the use of the Borrower's or any of its Subsidiaries' real or immovable properties which will not materially and adversely impair the use thereof in the operation of the Borrower's or any such Subsidiary's business; (c) any Encumbrance for Taxes, assessments or other governmental charges or levies not yet due or, if due, the time for payment of which without penalty has not yet expired or the validity of which is being contested diligently and in good faith by or on behalf of the Borrower or any of its Subsidiaries, provided no enforcement proceedings or actions have been taken in respect thereof and adequate provision has been made for the payment thereof in accordance with Generally Accepted Accounting Principles; (d) any Encumbrance of any judgment rendered or claim filed against the Borrower or any of its Subsidiaries, which the Borrower or any such Subsidiaries or others on its behalf shall be contesting diligently and in good faith, provided no enforcement proceedings or actions have been taken in respect thereof and adequate provision has been made for the payment thereof in accordance with Generally Accepted Accounting Principles; (e) any Encumbrance of any craftsman, workman, builder, contractor, supplier of materials, architect, engineer or subcontractor or any other similar Encumbrance related to the construction or the renovation of any property, provided that such Encumbrance secures an obligation whose term has not expired or that the Borrower or any of its Subsidiaries is not in default to perform same, or if its term has expired or the Borrower or any of its Subsidiaries is in default to perform same, provided that the Borrower or any such Subsidiary commences action, within a delay of less than fifteen (15) days of notice to the Borrower, from the relevant claimant or otherwise, of its registration or publication, to cause its cancellation or extinguishment provided adequate provision has been made for the payment thereof in accordance with Generally Accepted Accounting Principles; (f) title defects, restrictions or irregularities which are of a minor nature and in the aggregate will not substantially impair the use of the property affected by such title defect, restriction or irregularity for the purposes for which it is held by the owner thereof, nor substantially diminish any Encumbrances thereon; (g) the pledges or deposits made pursuant to Legal Requirements relating to workmen's compensation or similar Legal Requirements, or deposits made in good faith in connection with offers, tenders, leases or contracts (excluding, however, the borrowing of money or the repayment of money borrowed), deposits of cash or securities in order to secure appeal bonds or bonds required in respect of judicial proceedings; (h) undetermined or inchoate Encumbrances, arising or potentially arising under statutory provisions which have not at the time been filed or registered in accordance with applicable Legal Requirements or of which written notice has not 14. been duly given in accordance with applicable Legal Requirements or which, although filed or registered, relate to obligations not due or delinquent; (i) the rights reserved to or vested in Governmental Authorities by statutory provisions or by the terms of leases, licences, franchises, grants or permits, which affect any land, to terminate any such leases, licences, franchises, grants or permits or to require annual or other payments as a condition to the continuance thereof; (j) any Encumbrances given to a public utility or any Governmental Authority when required to obtain the services of such utility or other authority in connection with the operations of the Borrower or a Subsidiary of the Borrower in the ordinary course of its business; and (k) any Encumbrance given (whether or not to the transferor), assumed or arising by operation of law after the date hereof to provide or secure or to provide the obligor with funds to pay the whole or part of the consideration for the acquisition of any Asset and which is secured only by the Asset being acquired by the obligor, and includes the renewal, extension or refinancing of any such Encumbrance and of the Debt secured thereby upon the same Asset provided that such Debt and the security therefor are not increased thereby; "PERMITTED PURPOSE" means the use by the Borrower of the proceeds of any Advance hereunder for general corporate purposes, including Asset acquisitions (other than Hostile Acquisitions or the payment of any costs, expenses or liabilities arising out of or relating to any Hostile Acquisition) pending receipt by the Borrower of permanent financing for such Asset acquisitions from capital markets, and for the conversion of Advances to other Advances hereunder; "PERMITTED TRANSACTION" means any transaction of the Borrower with one or more of its wholly-owned Subsidiaries, or any transaction between two or more wholly-owned Subsidiaries with each other, other than any such transaction that could otherwise result in a Default or Event of Default hereunder; "PERSON" includes an individual, partnership, whether general, limited or undeclared, corporation, limited liability corporation, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature; "PRIME RATE" means, on any day, the greater of (a) the floating rate of interest per annum announced from time to time by the Lender, and in effect on such day, as the reference rate of interest the Lender will use to determine rates of interest for Canadian Dollar commercial loans made by the Lender to borrowers in Canada, and (b) the rate as determined by the Lender equal to (i) the CDOR Rate, plus (ii) 1.0% per annum; "PRIME RATE LOAN" means any Advance made by the Lender to the Borrower in Canadian Dollars bearing interest by reference to the Prime Rate; "REFUNDING BANKERS' ACCEPTANCE" has the meaning set out in Section 2.10(g); 15. "REIMBURSEMENT OBLIGATIONS" means, at any time, the obligations of the Borrower to reimburse the Lender in respect of any Bankers' Acceptance drawn by the Borrower upon the Lender and paid by the Lender on maturity thereof, which remain outstanding and unpaid at such time; "RENEWAL ACCEPTANCE" has the meaning specified in Section 2.3; "RENEWAL REQUEST" has the meaning specified in Section 2.3; "SENIOR OFFICER" means the president, any executive vice-president, the treasurer or the secretary of the Borrower and any other Person designated from time to time as a Senior Officer by the president of the Borrower in writing; "STANDBY FEE" has the meaning specified in Section 3.5; "SUBSIDIARY" of a Person means a company or corporation controlled by that Person; "TAX" or "TAXES" means all taxes, assessments, levies, imposts, stamp taxes, duties, charges to tax, fees, deductions, withholdings and any restrictions or conditions resulting in a charge imposed, levied, collected, withheld or assessed as of the date of this Agreement or at any time in the future, and all penalty, interest and other payments on or in respect thereof but does not include any tax on the overall income or capital of the Lender; "TERM CREDIT PERIOD" means the period of time commencing on the Term Date and ending at 11:00 a.m. (Toronto, Ontario time) on the Termination Date; "TERM DATE" means the earlier of (a) the date that occurs 364 days after the date of this Agreement or, if such date is extended pursuant to Section 2.3(c), the date to which it has been extended, and (b) the Amortization Date; "TERM OBLIGATIONS" means the Outstanding Principal Obligations converted to non-revolving term Debt hereunder pursuant to Section 2.2; "TERMINATION DATE" means the earlier of (a) the Maturity Date, and (b) the date on which the Obligations shall automatically, or by virtue of a declaration by the Lender made in accordance with this Agreement, become due and payable; "U.S. BASE RATE" means, on any day, the greater of (i) the floating rate of interest per annum established or announced from time to time by the Lender, and in effect on such day, as its reference rate for determining rates of interest for U.S. Dollar commercial loans made by the Lender to borrowers in Canada, and (ii) the rate as determined by the Lender equal to (A) the Fed Funds Rate, plus (B) 0.50% per annum; "U.S. BASE RATE LOAN" means any Advance made by the Lender to the Borrower in U.S. Dollars bearing interest by reference to the U.S. Base Rate; 16. "U.S. DOLLAR EQUIVALENT" means, at any time, the amount of U.S. Dollars which could be purchased from the Lender by the payment of a specified amount of another currency using the Lender's relevant spot rate for the sale of U.S. Dollars quoted by the Lender's treasury department at such time; "U.S. DOLLARS" and the symbol "U.S. $" mean lawful money of the United States of America in same day immediately available funds or, if such funds are not available, the form of money of the United States of America which is customarily used in the settlement of international banking transactions on that day; "WRITTEN" or "IN WRITING" shall include printing, typewriting, or any electronic means of communication capable of being visibly reproduced at the point of reception including telegraph and telecopier. SECTION 1.2 COMPUTATION OF TIME PERIODS. In this Agreement, in the computation of periods of time from a specified date to a later specified date, unless otherwise expressly stated the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". SECTION 1.3 ACCOUNTING TERMS. Each accounting term, including all defined terms, used in this Agreement shall be construed in accordance with Generally Accepted Accounting Principles and in accordance with the auditing and accounting recommendations and guidelines issued from time to time by the Canadian Institute of Chartered Accountants, as amended from time to time, unless something in the subject matter or the context otherwise is inconsistent therewith. SECTION 1.4 EXTENDED MEANINGS. Unless otherwise specified, any reference in this Agreement to any statute will include all regulations made thereunder or in connection therewith from time to time, and will include such statute as the same may be amended, supplemented or replaced from time to time. Every use of the word "including" herein shall be construed as meaning "including, without limitation". SECTION 1.5 INCORPORATION OF SCHEDULES. The following Schedules annexed hereto shall, for all purposes hereof, form an integral part of this Agreement: Schedule 1 Form of Advance Request Schedule 2 Forms of Compliance Certificate Schedule 8.1(h) Material Subsidiaries Schedule 8.1(i) Outstanding Debt 17. Schedule 8.1(k) Transactions and Events Schedule 9.1(d) Preservation of Corporate Existence SECTION 1.6 HEADINGS AND TABLE OF CONTENTS. The inclusion of headings and a table of contents in this Agreement is intended for convenience of reference only and shall not affect in any way the construction or interpretation hereof. SECTION 1.7 SINGULAR, PLURAL, GENDER As used herein, gender is used as a reference term only and applies with the same effect whether the parties are masculine, feminine, corporate or other form, and the singular shall include the plural and the plural the singular, as the context shall require. SECTION 1.8 CONFLICT. In the event of a conflict between the provisions of this Agreement and the provisions of any of the other Loan Documents, the provisions of this Agreement shall prevail. SECTION 1.9 CURRENCY. Unless otherwise expressly stated, any reference herein to any sum of money herein shall be construed as a reference to Canadian Dollars. Whenever any limitation herein is expressed in U.S. Dollars the limitation shall apply and include the Canadian Dollar Equivalent thereof and the equivalent thereof in all other currencies. Whenever any limitation herein is expressed in Canadian Dollars the limitation shall apply and include the U.S. Dollar Equivalent thereof and the equivalent thereof in all other currencies. Any amount denominated in another currency required herein to be expressed at any time in Canadian Dollars or U.S. Dollars shall be so expressed as the Canadian Dollar Equivalent or the U.S. Dollar Equivalent, as the case may be, at such time of such amount. SECTION 1.10 TIME. Unless otherwise expressly stated, any reference herein to time shall be construed as a reference to local time in Toronto, Ontario, Canada, and time is and shall be construed to be of the essence. SECTION 1.11 CONTROL. Unless otherwise expressly stated, any reference herein to "control" shall mean control in fact, being direct or indirect influence that, if exercised, is sufficient to direct the management and policies of a Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise and the expressions "controlled by" and "under common control" shall have correlative meanings. 18. SECTION 1.12 WHOLLY OWNED SUBSIDIARY. Unless otherwise expressly stated, any reference herein to a wholly owned Subsidiary of a Person shall mean a Subsidiary of such Person where such Person is the beneficial owner, directly or indirectly, of all of the issued and outstanding shares in the capital of such Subsidiary, other than qualifying shares of such Subsidiary required by any applicable Legal Requirement to be held by any directors or nominee directors, and any reference herein to the ownership of all of the issued and outstanding shares in the capital of a Person shall exclude qualifying shares of such Person required by any applicable Legal Requirement to be held by any directors or nominee directors. SECTION 1.13 REFERENCES TO CONVERSION OF ADVANCES. References to "convert" and "conversion", and other similar terms, in the context of Advances or Types of Advances, shall, unless the context otherwise requires, mean and refer to an election to have the Outstanding Principal Obligations of the referenced Advance or Type of Advance bear interest or fees on a different basis or fixed rate henceforth and so on from time to time, and any reference to the conversion of an Advance or Type of Advance to another Advance or Type of Advance includes, without limitation, issue of Refunding Bankers' Acceptances to provide for the payment of maturing Bankers' Acceptances and the continuation of a LIBOR Loan upon the expiry of the then current LIBOR Period for a successive LIBOR Period. ARTICLE 2 THE CREDIT FACILITIES SECTION 2.1 CREDIT FACILITY. Upon and subject to the terms and conditions of this Agreement, the Lender agrees to extend to the Borrower a revolving credit facility available from time to time during the Drawdown Period by way of Advances in an aggregate principal amount such that the maximum aggregate amount of Outstanding Principal Obligations for all Advances made by the Lender under the Credit Facility (after giving effect to the making of any such Advances, all repayments of Outstanding Principal Obligations made concurrently with making any such Advances and any conversion of outstanding Advances from one Advance to another in accordance with Section 2.8) shall not exceed at any time an amount equal at such time to the Commitment. The Borrower may borrow, prepay in whole or in part and reborrow Advances during the Drawdown Period, all in accordance with the terms and conditions hereof. SECTION 2.2 DRAWDOWN AVAILABILITY. Subject to the terms and conditions of this Agreement: (a) the Drawdown Period shall terminate at 11:00 a.m. (Toronto, Ontario time) on the Term Date; 19. (b) from and after such time on the Term Date, the Borrower shall cease to be entitled to obtain any further Advance under the Credit Facility, subject to conversion of any Term Obligations outstanding by way of Advances under the Credit Facility from one Advance to another in accordance with Section 2.4; (c) provided that no Event of Default has occurred and is continuing, the Outstanding Principal Obligations outstanding as of the Term Date shall be automatically converted as of such time on such Term Date into Term Obligations under the Credit Facility; (d) the Outstanding Principal Obligations so converted shall be subject to the terms and conditions applicable to Term Obligations under the Credit Facility pursuant to this Agreement; and (e) on such Term Date the Commitment in excess of the Outstanding Principal Obligations so converted to Term Obligations under the Credit Facility shall automatically be cancelled on a permanent basis. SECTION 2.3 RENEWAL OF DRAWDOWN PERIOD. (a) The Borrower may request prior to the occurrence of the Amortization Date that the Lender agree to a renewal of the Drawdown Period for an additional period of 364 days upon the terms and conditions of this Section 2.3 by notice in writing (a "Renewal Request") to the Lender given not less than 60 days nor more than 75 days prior to the then current Term Date. (b) Upon receipt of any Renewal Request from the Borrower, the Lender shall undertake a credit assessment of the Borrower consistent with the Lender's then current credit standards and practices and when the Lender decides, in its sole and total discretion, to renew or not to renew the Drawdown Period for an additional 364 day period, the Lender shall give the Borrower notice in writing of its decision not less than 30 days prior to the then current Term Date. (c) If the Lender gives the Borrower a notice in writing (a "Renewal Acceptance") as provided above that the Lender has agreed in its sole and total discretion to renew the Drawdown Period for an additional 364 day period, then on and as of the date such Renewal Acceptance is given to the Borrower, the Term Date will automatically be extended to the date that occurs 364 days after the date such Renewal Acceptance is given to and deemed to have been received by the Borrower pursuant to the terms of this Agreement. (d) If (i) the Lender fails to advise the Borrower of its decision as provided above, or (ii) the Lender shall give the Borrower notice in writing of its decision not to renew the Drawdown Period pursuant to such Renewal Request, the provisions of Section 2.2 shall continue to apply to the Credit Facility up until the then current Term Date and the Borrower may continue to obtain further Advances during the Drawdown Period ending on the then current Term Date upon and subject to the terms and conditions of this Agreement. (e) The Borrower acknowledges that (i) the Lender has not made any representations to the Borrower regarding its intention to renew the Drawdown Period as set forth in this Section 20. 2.3 and that the Lender shall not have any obligation to renew the Drawdown Period, and (ii) no extension of the Term Date or renewal of the Drawdown Period pursuant to this Section 2.3 shall extend the Term Date or renew the Drawdown Period beyond the Amortization Date. SECTION 2.4 TERM OBLIGATIONS. During the Term Credit Period, and subject to the terms and conditions hereof, including without limitation the provisions of Section 2.8, Section 3.7 and Article 7, the Borrower shall be entitled to convert, in whole or in part, any Term Obligation outstanding by way of an Advance under the Credit Facility to any other Advance under the Credit Facility, provided that, in the case of a LIBOR Loan, the last day of the applicable LIBOR Period shall not occur, and, in the case of a BA Advance, the Bankers' Acceptances comprising such BA Advance shall not mature, beyond any date on which a scheduled repayment of Outstanding Principal Obligations in respect of the Credit Facility is required to be made pursuant to Article 4 if after giving effect to such Advance the Outstanding Principal Obligations in respect of LIBOR Loans and BA Advances which would mature after such date and all other Outstanding Principal Obligations under the Credit Facility would exceed the Commitment, after giving effect to such repayment. Subject to any such conversion, any payment made on account of Term Obligations shall constitute a permanent reduction in the Commitment and may not be reborrowed by the Borrower hereunder. SECTION 2.5 ADVANCE REQUESTS. The Borrower if it wishes to obtain an Advance under the Credit Facility, or to convert an existing Advance under the Credit Facility to another Advance under the Credit Facility, shall deliver to the Lender an Advance Request in writing, substantially in the form of Schedule 1 hereto, in respect of such Advance not later than 11:00 a.m. (Toronto, Ontario time): (a) in the case of any Advance by way of LIBOR Loan, three Business Days prior to the proposed date of such Advance; (b) in the case of any aggregate Advance by way of Prime Rate Loan, U.S. Base Rate Loan or BA Advance of Cdn. $10,000,000 or more, three Business Days prior to the proposed date of such Advance; and (c) in the case of any other Advance, one Business Day prior to the proposed date of such Advance, except that in the case of any Prime Rate Loan or U.S. Base Rate Loan of $10,000,000 or less requested by a Borrower by way of overdraft in any of its accounts with the Lender, the Borrower shall use its best efforts to deliver to the Lender in a reasonably timely manner (which may be on the proposed date of such Advance) an Advance Request by telephone or telecopy notice (or such other method of notification as may be agreed upon between the Lender and the Borrower), provided that the Lender shall have no obligation to advance such Advance unless the Lender has received at least one hour prior to the time of the advance of such Advance an Advance Request in writing, substantially in the form of Schedule 1 hereto, in respect of such Advance, 21. specifying the date of the Advance, which date shall be a Business Day in respect of such Advance, the Type of Advance, the aggregate amount thereof and (in the case of a BA Advance) the term or terms to maturity of the requested Bankers' Acceptances or (in the case of a LIBOR Loan) the requested LIBOR Period. Any such Advance Request, once delivered by the Borrower to the Lender, shall be binding, and (subject to the conditions precedent provided for herein conditioning the Borrower's right to obtain the requested, or any, Advance), the Borrower shall be obligated to take the requested Advance on the date specified in such Advance Request. The Lender may rely and act upon, and shall incur no liability under or in respect of this Agreement by in good faith relying or acting upon, any Advance Request under this Section 2.5 given by telephone or telecopier (or other method of notification as may be agreed upon between the Lender and the Borrower) believed by the Lender to be genuine (without any verification inquiries) and to be signed or sent or given on behalf of the Borrower or by acting upon any representation or warranty of the Borrower made or deemed to be made hereunder by reason of or as a result of such Advance Request. SECTION 2.6 ADVANCES UNDER THE CREDIT FACILITY. The aggregate of all Loans to be made by the Lender in connection with any particular Advance under the Credit Facility, shall not be less than the lesser of (i) the aggregate amount of the Commitment in respect of the Credit Facility not utilized by way of outstanding Advances, and (ii) an integral multiple of Cdn. $1,000,000, in the case of a Prime Rate Loan, or an integral multiple of U.S. $1,000,000, in the case of a U.S. Base Rate Loan or a LIBOR Loan. SECTION 2.7 CURRENCY. Subject to Sections 6.1, 10.4 and 10.5, Advances under the Credit Facility shall only be denominated, at the option of the Borrower, in Canadian Dollars or U.S. Dollars, and any Advance denominated in either such currency shall be repayable, and all interest and fees in respect thereof or in connection therewith shall accrue and be payable, by the Borrower in like currency. SECTION 2.8 CONVERSION OF ADVANCE. Subject to the terms and conditions hereof, the Borrower shall be entitled from time to time to convert any outstanding Advance to any other Advance or Type of Advance under the Credit Facility by giving notice thereof to the Lender in accordance with Section 2.5, provided that: (a) such conversion does not result in the Outstanding Principal Obligations exceeding the then current Commitment of the Lender; (b) no such conversion of a BA Advance shall be made or purported to be made prior to the maturity date of any Bankers' Acceptance purchased or issued hereunder in respect of such BA Advance; and (c) no such conversion of a LIBOR Loan shall be made or purported to be made prior to the last day of the LIBOR Period applicable to such LIBOR Loan. 22. Any Advance so converted shall cease to bear interest and fees as the former Advance, and shall begin to bear interest and fees as the new Advance, on and as of the date of such conversion. If the Borrower gives notice to the Lender that all or any portion of the principal amount of, or the BA Discount Proceeds in respect of, any new Advance to be advanced by the Lender to the Borrower is to be applied to repay Outstanding Principal Obligations in respect of any outstanding Advance, the Lender shall directly apply such amount to repay such Outstanding Principal Obligations owing to the Lender in satisfaction and discharge of the Lender's obligations hereunder to deposit such amount into the Borrower's Account. SECTION 2.9 LIBOR MATURITY. Any LIBOR Loan in respect of which the Borrower shall not have given notice of the conversion of such outstanding LIBOR Loan to another Advance in accordance with Section 2.5 shall automatically be converted to a U.S. Base Rate Loan upon the expiry of the then current LIBOR Period. Should the Borrower not be entitled to a U.S. Base Rate Loan at all or in an amount sufficient to fully repay the principal of, and accrued and unpaid interest on, such outstanding LIBOR Loan, such principal and interest shall be due and payable on the expiry of the then current LIBOR Period and shall bear interest in accordance with Section 3.2. SECTION 2.10 CERTAIN PROVISIONS RELATING TO BANKERS' ACCEPTANCES. (a) Bankers' Acceptances shall be issued and shall mature on a Business Day. Each Bankers' Acceptance shall have a term of at least 30 days and not more than 364 days excluding days of grace, shall mature on or before the Maturity Date and shall be in form and substance satisfactory to the Lender. No Bankers' Acceptance may be made or accepted on or after the Termination Date, nor may any Bankers' Acceptance be prepaid, whether pursuant to Section 4.2 or otherwise, or converted to another Type of Advance, prior to the maturity date of such Bankers' Acceptance. (b) To facilitate the acceptance of Bankers' Acceptances under this Agreement, the Borrower shall, upon execution of this Agreement and from time to time as required, provide to the Lender Drafts, in form satisfactory to the Lender, duly executed and endorsed in blank by the Borrower in quantities sufficient for the Lender to fulfill its obligations hereunder. In addition, the Borrower hereby appoints the Lender as its attorney to sign and endorse on its behalf, in handwriting or by facsimile or mechanical signature as and when deemed necessary by the Lender, blank forms of Bankers' Acceptances and the Borrower shall deliver to the Lender powers of attorney, in form satisfactory to the Lender, whereby the Borrower appoints the Lender as its attorney to sign and endorse on its behalf, in handwriting or by facsimile or mechanical signature blank forms of Bankers' Acceptances in accordance with the terms of such powers of attorney. The Borrower recognizes and agrees that all Bankers' Acceptances signed and/or endorsed on its behalf by the Lender shall bind the Borrower as fully and effectually as if signed in the handwriting of and duly issued by the proper signing officer of the Borrower. The Lender is hereby authorized to issue such Bankers' Acceptances endorsed in blank in such Face Amounts as may be determined by the Lender provided that the aggregate amount thereof is equal to the aggregate Face Amount of Bankers' Acceptances required to be accepted by the Lender. The Lender shall not be responsible or liable for its failure to accept a Bankers' 23. Acceptance if the cause of such failure is, in whole or in part, due to the failure of the Borrower to provide duly executed and endorsed Drafts to the Lender on a timely basis nor shall the Lender be liable for any damage, loss or other claim arising by reason of any loss or improper use of any such instrument except loss or improper use arising by reason of the gross negligence or willful misconduct of the Lender, its officers, employees, agents or representatives. The Lender shall maintain a record with respect to Bankers' Acceptances (i) received by it from the Borrower in blank hereunder, (ii) voided by it for any reason, (iii) accepted by it hereunder, (iv) purchased by it hereunder, and (v) cancelled at their respective maturities. (c) Drafts of the Borrower to be accepted as Bankers' Acceptances hereunder shall be duly executed by a duly authorized officer of the Borrower. Notwithstanding that any person whose signature appears on any Bankers' Acceptance as a signatory for the Borrower may no longer be an authorized signatory for the Borrower at the date of issuance of a Bankers' Acceptance, such signature shall nevertheless be valid and sufficient for all purposes as if such authority had remained in force at the time of such issuance and any such Bankers' Acceptance so signed shall be binding on the Borrower. (d) On the requested date of Advance, the Lender agrees to purchase from the Borrower, at the face amount thereof discounted by the BA Reference Rate, any Bankers' Acceptance accepted by it and provide to the Borrower, the amount of the BA Discount Proceeds in respect thereof, which amount (for greater certainty) shall be net of the amount of the Acceptance Fee payable by the Borrower to the Lender under Section 3.4 in respect of such Bankers' Acceptance. (e) The Lender may at any time and from time to time hold, sell, rediscount or otherwise dispose of any or all Bankers' Acceptances accepted and purchased by it. (f) The Borrower waives presentment for payment and any other defense to payment of any amounts due to the Lender in respect of a Bankers' Acceptance accepted by it pursuant to this Agreement which might exist solely by reason of such Bankers' Acceptance being held, at the maturity thereof, by the Lender in its own right and the Borrower agrees not to claim any days of grace if the Lender as holder sues the Borrower on any such Bankers' Acceptance for payment of the amount payable by the Borrower thereunder. (g) With respect to each Bankers' Acceptance, the Borrower, prior to the occurrence and continuation of a Default or an Event of Default, may give irrevocable written notice by means of an Advance Request (or such other method of notification as may be agreed upon between the Lender and the Borrower) to the Lender at or before 11:00 a.m. (Toronto, Ontario time) not less than two Business Days prior to the maturity date of such Bankers' Acceptance of the Borrower's intention to issue one or more Bankers' Acceptances on such maturity date (each a "Refunding Bankers' Acceptance") to provide for the payment of such maturing Bankers' Acceptance (it being understood that payments by the Borrower and fundings by the Lender in respect of each maturing Bankers' Acceptance and each related Refunding Bankers' Acceptance shall be made on a net basis reflecting the difference between the Face Amount of such maturing Bankers' Acceptance and the BA Discount Proceeds (net of the applicable Acceptance Fee) of such Refunding Bankers' Acceptance). Any funding on account of any maturing Bankers' Acceptance must be made at or before 11:00 a.m. (Toronto, Ontario time) on the maturity date of 24. such Bankers Acceptance. If the Borrower fails to give such notice, then subject to satisfaction of the conditions in Section VII hereof, the Borrower shall be irrevocably deemed to have requested and to have been advanced a Prime Rate Loan in the Face Amount of such maturing Bankers' Acceptance on the maturity date of such Bankers' Acceptance from the Lender, which Prime Rate Loan shall thereafter bear interest as such in accordance with the provisions hereof until paid in full. Should the Borrower not be entitled to a Prime Rate Loan at all or in an amount sufficient to fully reimburse the Lender for the Face Amount of a matured Bankers' Acceptance, the Face Amount of such Bankers' Acceptance shall constitute Reimbursement Obligations of the Borrower to the Lender and shall bear interest in accordance with Section 3.6. (h) If the Lender determines in good faith, which determination shall be final, conclusive and binding upon the Borrower, and notifies the Borrower that, by reason of circumstances affecting the money market, there is no competitive market for Bankers' Acceptances, then, (i) the right of the Borrower to request an Advance by way of Bankers' Acceptances shall be suspended until the Lender determines that the circumstances causing such suspension no longer exist and the Lender so notifies the Borrower; and (ii) any Advance Request which is outstanding shall be deemed to constitute a request for an Advance by way of a Prime Rate Loan. (i) The Lender shall promptly notify the Borrower of the suspension of the Borrower's right to request an Advance by way of Bankers' Acceptances and of the termination of any such suspension. (j) If an Event of Default shall have occurred and then be continuing (whether or not any declaration pursuant to Article 10 is made), the Borrower shall forthwith provide Cover to, and thereafter shall maintain Cover with, the Lender in respect of all outstanding Bankers' Acceptances. (k) Bankers' Acceptances accepted or purchased by the Lender under this Agreement may, at the option of the Lender, be issued in the form of a "depository bill" and deposited with a "clearing house", as each such term is defined in the Depository Bills and Notes Act (Canada). SECTION 2.11 REDUCTION OR TERMINATION OF COMMITMENT. (a) The Borrower shall have the right, exercisable by it at any time and from time to time upon not less than three Business Days prior written notice to the Lender and without penalty, but subject to the terms of this Section 2.11, to terminate any portion of the Commitment in respect of the Credit Facility not being used by the Borrower, provided that any such partial termination shall be in an amount not less than the lesser of (i) Cdn. $1,000,000 and integral multiples thereof, and (ii) the entire amount of the unused Commitment. Notwithstanding the foregoing, the Borrower shall not be entitled to thereby (i) reduce the Commitment of the Lender below the then Outstanding Principal Obligations under the Credit Facility, or (ii) to prepay any outstanding BA Advance or LIBOR Loan, unless the Borrower shall pay to the Lender all interest accrued to the date of such prepayment on the Advances so 25. prepaid, provide Cover to and thereafter maintain Cover with, the Lender in respect of all outstanding Bankers' Acceptances related to such BA Advances and on demand pay to the Lender any additional amounts payable pursuant to Section 11.7. No such reduction or termination of the Commitment in respect of the Credit Facility pursuant to this Section may be reinstated without the prior written approval of the Lender. Concurrently with the giving of any such notice, the Borrower shall prepay the Standby Fee that will have accrued due on the amount of the terminated portion of the Commitment to the effective date of such termination. (b) On the Termination Date in respect of the Credit Facility, all Commitments in respect of the Credit Facility shall be terminated in their entirety. SECTION 2.12 USE OF PROCEEDS. The proceeds of the Advances shall be used by the Borrower only for Permitted Purposes, provided that as against the Borrower and any other Person, the Lender shall not have any responsibility as to the use of any such proceeds. ARTICLE 3 INTEREST AND FEES SECTION 3.1 INTEREST ON PRIME RATE LOANS. The Borrower shall pay interest on the outstanding principal amount of each Prime Rate Loan outstanding under the Credit Facility from the date on which such Prime Rate Loan was made until such outstanding principal amount shall have been repaid in full, and both before and after maturity, default and judgment, at a floating rate per annum equal to the Prime Rate in effect from time to time plus the Applicable Margin in respect of Prime Rate Loans in effect from time to time, calculated daily and compounded and payable (a) monthly in arrears on the last Business Day of each month of each year, and (b) on the date on which such Prime Rate Loan becomes due and payable or is converted to another Type of Advance as contemplated by Article 2, in each case based on the actual number of days elapsed and a year of 365 or 366 days, as the case may be. SECTION 3.2 INTEREST ON U.S. BASE RATE LOANS. The Borrower shall pay interest on the outstanding principal amount of each U.S. Base Rate Loan outstanding under the Credit Facility from the date on which such U.S. Base Rate Loan was made until such outstanding principal amount shall have been repaid in full, and both before and after maturity, default and judgment, at a floating rate per annum equal to the sum of the U.S. Base Rate in effect from time to time plus the Applicable Margin in respect of U.S. Base Rate Loans in effect from time to time, calculated daily and compounded and payable (a) monthly in arrears on the last Business Day of each month of each year, and (b) on the date on which such U.S. Base Rate Loan becomes due and payable or is converted to another Type of Advance as contemplated by Article 2, in each case based on the actual number of days elapsed and a year of 365 or 366 days, as the case may be. 26. SECTION 3.3 INTEREST ON LIBOR LOANS. The Borrower shall pay interest on the outstanding principal amount of each LIBOR Loan outstanding under the Credit Facility from the date on which such LIBOR Loan was made until such outstanding principal amount shall have been repaid in full, and both before and after maturity, default and judgement, at a rate per annum equal at all times during each LIBOR Period for such LIBOR Loan to the sum of the LIBO Rate for such LIBOR Period plus the Applicable Margin in respect of LIBOR Loans in effect from time to time, in each case calculated daily and compounded and payable (a) in arrears on the last day of such LIBOR Period unless such LIBOR Period is greater than 90 days, in which case such interest shall be calculated daily and compounded and payable quarterly in arrears as well as on the last day of such LIBOR Period, and (b) on the date on which such LIBOR Loan otherwise becomes due and payable or is converted to another Type of Advance as contemplated by Article 2, in each case based on the actual number of days elapsed and a year of 360 days. SECTION 3.4 ACCEPTANCE FEE. The Borrower shall pay the Lender a fee equal to the Applicable Margin in respect of BA Advances in effect from time to time of the Face Amount of each Bankers' Acceptance accepted or purchased by the Lender multiplied by a fraction the numerator of which is the term to maturity of such Bankers' Acceptance, expressed in days, and the denominator of which is 365 (or 366 during a year of 366 days), which fee shall be paid as a condition precedent to any obligation on the part of the Lender to accept or purchase such Bankers' Acceptance. If at the time of an increase in the Applicable Margin in respect of BA Advances there exists any outstanding BA Advance, then the Borrower shall pay to the Lenders an amount in respect of such BA Advance equal to the product obtained by multiplying (i) the product of (A) the difference between the Applicable Margin in respect of BA Advances in effect prior to such change in the Applicable Margin in respect of BA Advances and the Applicable Margin in respect of BA Advances in effect immediately after such change, and (B) the aggregate Face Amount of the Bankers' Acceptances in respect of such BA Advance, by (ii) the quotient obtained by dividing (A) the number of days to maturity remaining in respect of such BA Advance at such time, by (B) 365 days. Any payment in respect of an outstanding BA Advance as a result of a change in the Applicable Margin in respect of BA Advances shall be paid on the maturity date of the Bankers' Acceptances in respect of such BA Advance. SECTION 3.5 STANDBY FEE. The Borrower shall pay the Lender a standby fee in respect of the Credit Facility at the rate of 0.2% per annum (based on a year of 365 or 366 days, as the case may be) on the Available Commitment, expressed in Canadian Dollars and calculated on a daily basis and compounded and payable quarterly in arrears on the last Business Day of January, April, July and October in each year and on the Termination Date. SECTION 3.6 REIMBURSEMENT OBLIGATIONS. The amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in Article 7 hereof have been satisfied, be paid with the proceeds of Prime 27. Rate Loans or, as provided in Section 2.10(g), by the purchase of Refunding Bankers' Acceptances. Pending any such repayment in full, the Borrower shall pay to the Lender interest on any Reimbursement Obligation at the Past Due Rate, from and including the date on which such Reimbursement Obligations arose to the date of payment in full, calculated daily and compounded monthly in arrears based on the number of days elapsed and a year of 365 or 366 days, as the case may be, and payable on demand, both before and after judgement in respect thereof. SECTION 3.7 FIXED RATE OPTION Subject to the availability of fixed rate funds, the Borrower may, at its option, provided that such option may be exercised only once by notice in writing to the Lender given not more than 30 days prior to the Term Date or during the Term Credit Period, request the Lender to fix the rate at which all, but not less than all, of the Term Obligations shall bear interest during the then remaining Term Credit Period, which fixed rate shall be equal to (i) the annual rate of interest equal to the Canadian Dollar interest swap rate quoted by the Lender for the then remaining Term Credit Period as of the later of (A) the Term Date, and (B) any date within 30 days after the date such notice is given to the Lender specified by the Borrower in such notice, plus (ii) 1.375% per annum. Interest payable at such fixed rate shall be compounded and payable (a) monthly in arrears on the last Business Day of each month of each year, and (b) on the date on which such Term Obligations become due and payable, in each case based on the actual number of days elapsed and a year of 365 or 366 days, as the case may be. Any interest payable at such fixed rate not paid on the date it is due and payable pursuant to this Section 3.7 shall bear interest from such date at the Past Due Rate. Upon the exercise by the Borrower of its option pursuant to this Section 3.7 all rights or entitlements of the Borrower to convert, in whole or in part, any Term Obligation to any other Advance or Type of Advance under the Credit Facility shall be permanently terminated. SECTION 3.8 YEARLY RATE STATEMENTS. For the purpose of complying with the Interest Act (Canada), it is expressly stated that: (a) where interest is calculated pursuant hereto at a rate based on a 365 day period, the yearly rate or percentage of interest to which such rate is equivalent is such rate multiplied by the actual number of days in the year (365 or 366, as the case may be) divided by 365; (b) where interest is calculated pursuant hereto at a rate based on a 360 day period, the yearly rate or percentage of interest to which such rate is equivalent is such rate multiplied by the actual number of days in the year (365 or 366, as the case may be) divided by 360; and (c) the rates of interest specified in this Agreement are nominal rates and not effective rates or yields and the parties hereto acknowledge that there is a material distinction between the nominal and effective rates of interest, that they are capable of making the calculations necessary to compare such rates and that the 28. principle of deemed reinvestment of interest shall not apply to any calculations of interest hereunder. ARTICLE 4 REPAYMENT OF OBLIGATIONS SECTION 4.1 REPAYMENT ON MATURITY. The Obligations shall become due and payable, and shall be paid in full, on the Termination Date. SECTION 4.2 VOLUNTARY REPAYMENT Subject to the terms and conditions hereof, the Borrower may, without bonus or penalty, upon prior written notice to the Lender specifying the proposed date and aggregate principal amount of the prepayment and the Advance or Advances on account of which such prepayment is to be applied, prepay the specified principal amount on account of the then Outstanding Principal Obligations under the Credit Facility, together with all accrued interest to the date of such prepayment on the specified principal amount so prepaid and any other amounts payable to the Lender by the Borrower hereunder in respect thereof including, without limitation, pursuant to Section 11.7. Such notice shall be given at or before 11:00 a.m. (Toronto, Ontario time) not less than three Business Days, in the case of a prepayment of Cdn. $10,000,000 or more, and in any other case, not less than one Business Day, prior to the proposed date of prepayment and, once given, any such notice shall be irrevocable and binding upon the Borrower. Notwithstanding the foregoing, the Borrower shall not be entitled to prepay any outstanding BA Advance or LIBOR Loan, unless the Borrower shall pay to the Lender all interest accrued to the date of such prepayment on the Advances so prepaid, provide Cover to and thereafter maintain Cover with, the Lender in respect of all outstanding Bankers' Acceptances related to such BA Advances and on demand pay to the Lender any additional amounts payable pursuant to Section 11.7, nor shall the Borrower be entitled to give any such notice or to make any such prepayment unless each partial prepayment is in an aggregate principal amount of not less than Cdn. $1,000,000. SECTION 4.3 MANDATORY REPAYMENT OF CREDIT FACILITY. Subject to the terms and conditions hereof, the Outstanding Principal Obligations under the Credit Facility shall be repaid forthwith, upon demand by or on behalf of the Lender, to the extent that the Outstanding Principal Obligations under the Credit Facility exceed the then current Commitment in respect of the Credit Facility, whether as a result of oversight or otherwise, together with all accrued interest to the date of such repayment on the principal amount so repaid and any other amounts payable to the Lender by the Borrower hereunder in respect thereof including, without limitation, pursuant to Section 11.7, provided that any such repayment of the Outstanding Principal Obligations in respect of any BA Advance shall be discounted for the period to the maturity of the Bankers' Acceptances outstanding in respect of such BA Advance at the Canada Treasury Bill Rate for such discount calculation period in effect on the date of such repayment. 29. SECTION 4.4 SCHEDULED REPAYMENT OF OBLIGATIONS. Subject to the Lender's rights of acceleration pursuant to Article 10 and without limiting Section 4.1: (a) if the Amortization Date does not occur, the Outstanding Principal Obligations shall be repaid by the Borrower in full on the Maturity Date; or (b) if the Amortization Date occurs, the Borrower shall repay Outstanding Principal Obligations in: (i) two equal semi-annual payments on the first and second semi-annual anniversaries of the Amortization Date, in an aggregate amount equal to 15% of the aggregate Outstanding Principal Obligations as of the Amortization Date; plus (ii) two equal semi-annual payments on the third and fourth semi-annual anniversaries of the Amortization Date, in an aggregate amount equal to an additional 25% of the aggregate Outstanding Principal Obligations as of the Amortization Date, plus (iii) in two equal semi-annual payments on the fifth and sixth semi-annual anniversaries of the Amortization Date, in an aggregate amount equal to the aggregate Outstanding Principal Obligations remaining unpaid immediately prior to such fifth semi-annual anniversary, provided that, notwithstanding the foregoing, if the Amortization Date occurs after the Term Date and the Maturity Date therefore occurs prior to one or more of the semi-annual payment dates referred to above, the Outstanding Principal Obligations remaining unpaid on the Maturity Date shall be due and payable, and shall be repaid by the Borrower, in full on the Maturity Date. ARTICLE 5 PAYMENTS AND ACCOUNTS SECTION 5.1 MAINTENANCE OF ACCOUNTS. The Borrower shall open in its name and maintain the Borrower's Accounts with the Lender at the Lender's Branch. SECTION 5.2 PAYMENTS BY BORROWER. Any payment by the Borrower on account of any amount due and payable by it hereunder, whether on account of principal, interest, fees, costs and expenses or otherwise, shall be made by the Borrower in the currency in which such payment is due in immediately available funds to the Lender at the Lender's Branch. No payment by the Borrower shall be effective until such time as it is so paid to the Lender at the Lender's Branch. The Borrower shall make all payments hereunder regardless of any counterclaim, compensation or set-off rights of the Borrower. 30. SECTION 5.3 DUE DATE OF PAYMENTS. Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be, payable on such date, provided that if any such extension would cause repayment of the principal of or interest on a LIBOR Loan to be made in the next following calendar month, such payment shall be made on the last preceding Business Day with interest payments adjusted accordingly. SECTION 5.4 TIME OF PAYMENTS. All payments to be made by the Borrower to the Lender shall be paid in immediately available funds no later than 11:00 a.m. (Toronto, Ontario time) on the date of payment in order to obtain same day credit. Any such payment so paid after such time on such date shall be deemed to have been paid on the next following Business Day. SECTION 5.5 FORM AND AMOUNT OF PAYMENTS. All amounts due hereunder, whether for principal, interest, or otherwise, in respect of any Advance denominated in Canadian Dollars shall be paid in full by the Borrower in Canadian Dollars, and all amounts due hereunder, whether for principal, interest fees or otherwise, in respect of any Advance denominated in U.S. Dollars shall be paid in full in U.S. Dollars, and all amounts due hereunder in respect of costs and expenses shall be paid in full by the Borrower in the currency in which such costs or expenses were originally incurred, in any case without set-off, withholding or deduction of any kind or nature whatsoever unless required by law, and then subject to Section 11.8. SECTION 5.6 CHARGING BORROWER'S ACCOUNTS. In respect of all Obligations the Borrower hereby irrevocably authorizes and instructs the Lender to withdraw from or debit, from time to time when such Obligations are due and payable, any account of the Borrower with the Lender for the purpose of satisfying payment thereof. Without limiting the generality of the foregoing, the Borrower hereby authorizes the Lender, if and to the extent that any payment owed to the Lender by the Borrower in respect of such Obligations is not made when due hereunder, to charge from time to time against any or all of the Borrower's accounts with the Lender, including without limitation the Borrower's Accounts, the full amount of the payment so due. ARTICLE 6 CURRENCY AND COSTS SECTION 6.1 MARKET DISRUPTION AND ILLEGALITY. If the Lender determines in good faith and acting reasonably, which determination shall be final, conclusive and binding upon the Borrower, and notifies the Borrower that (a) by reason of circumstances affecting financial markets inside or outside Canada or the United 31. States, as the case may be, deposits of U.S. Dollars are unavailable to Canadian banks generally; (b) adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided in the definition of LIBO Rate or U.S. Base Rate, as the case may be; (c) the making or continuation of any U.S. Base Rate Loans or LIBOR Loans, as the case may be, has been made impracticable by the occurrence of an event (other than a mere increase in rates payable by the Lender to fund the Loans) which materially and adversely affects the funding of the Credit Facility at any interest rate computed on the basis of the LIBO Rate or the U.S. Base Rate, as the case may be; or (d) any change to the present, or the introduction of any future, Legal Requirement or any guideline, directive, policy, request or requirement with which it is customary for the Lender to comply (whether or not having the force of law) of any Governmental Authority, or in the interpretation or application thereof by any Governmental Authority, has made it unlawful for the Lender to make, fund, or maintain or to give effect to its obligations in respect of any Type of Advance as contemplated hereby, then the Lender shall notify the Borrower in writing thereof and: (a) the right of the Borrower to select any affected Type of Advance shall be suspended until the Lender determines in good faith that the circumstances causing such suspension no longer exist and the Lender so notifies the Borrower; (b) if any affected Type of Advance is not yet outstanding, any outstanding request for such Type of Advance shall be cancelled and the Type of Advance requested therein shall not be made; and (c) if any Advance is already outstanding at any time when the right of the Borrower to select that Type of Advance is suspended, in addition to its rights under Section 4.2, the Borrower shall, by written notice to the Lender given within three Business Days of the date of the notification, elect to (i) prepay within (A) seven Business Days of the date of such written notice to the Lender such Advance (in the case of Outstanding Principal Obligations in respect of any BA Advance, discounted for the period to the maturity of the Bankers' Acceptances outstanding in respect of such BA Advance at the Canada Treasury Bill Rate for such discount calculation period in effect on the date of such prepayment), but should it do so the Borrower shall pay to the Lender all interest accrued to the date of such prepayment on the Advances so prepaid and on demand all such amounts as are required to compensate the Lender for (A) any Compensating Amount payable pursuant to Section 6.2, and (B) any additional amounts payable pursuant to Section 11.7, or (ii) convert, immediately, or in the case of a LIBOR Loan, effective the last day of the then current LIBOR Period applicable thereto (or on such earlier date as may be required to comply with any applicable Legal Requirement), or in the case of a BA Advance, on the maturity date of the outstanding Bankers' Acceptances in respect of such BA Advance (or on such earlier date as may be required to comply with any applicable Legal Requirement), such outstanding Advance to another Type of Advance which the Borrower is then entitled to select, failing which such outstanding Advance shall be converted, at the sole discretion of the Lender, to another Type of Advance which the Borrower is then entitled to select as of the date specified above for conversion of such outstanding Advance by the Borrower or, if the Borrower is 32. not then entitled to select any other Type of Advance, the Borrower shall immediately prepay such Advance as above provided. If the provisions of this Section 6.1 apply or prepayment is made of any Advance, the Lender and the Borrower shall negotiate in good faith with a view to providing alternative funding arrangements for the Borrower in a similar amount (or the equivalent thereof in another currency) and on similar terms to the amount affected or prepaid to the extent reasonably practicable, provided that such alternative funding arrangements shall not be, in the reasonable judgment of the Lender, materially disadvantageous to the Lender. SECTION 6.2 ADDITIONAL PAYMENTS. If subsequent to the date hereof (a) any change in applicable Legal Requirements or any change in the interpretation or application thereof by any Governmental Authority; or (b) compliance by the Lender with any guideline, direction, request or requirement with which it is customary for the Lender to comply (whether or not having the force of law) of any Governmental Authority shall have the effect of: (a) increasing the cost to the Lender (which it would not otherwise have incurred) of continuing to provide or maintain the Credit Facility (including, without limitation, the costs of maintaining any reserve or special deposit or similar requirements with respect to this Agreement, or with respect to its obligations hereunder or thereunder), other than an increased cost resulting from a generally applicable higher rate of tax imposed on the overall net income or capital of the Lender; (b) imposing on the Lender or expecting there to be maintained by the Lender any additional reserve, special deposit or similar requirement or any additional capital adequacy or additional capital requirement (including, without limiting the generality of the foregoing, under any Capital Adequacy Guideline or any other requirement which affects the Lender's allocation of capital resources to its obligations) in respect of the Lender's obligations hereunder; (c) reducing any amount paid or payable to the Lender under this Agreement in any amount which is material; (d) causing the Lender to make any payment or to forego any return, on a basis calculated by reference to any amount received or receivable by the Lender under this Agreement; or (e) directly or indirectly reducing the effective return to the Lender under this Agreement or on the Lender's overall capital as a result of entering into this Agreement or as a result of any of the transactions or obligations contemplated by this Agreement (other than a reduction resulting from a generally applicable higher rate of tax imposed on the net income or capital of the Lender) received or receivable by the Lender under this Agreement; 33. the Borrower shall, subject to the terms and conditions hereof, pay such amount (the "Compensating Amount") as may be necessary to compensate the Lender for and will indemnify the Lender against any such additional cost, reduction, payment or foregone return. The payment by the Borrower of such Compensating Amount is not, and shall not be deemed to be or construed as, a repayment on account of any Outstanding Principal Obligations. The Lender shall, forthwith after the Lender becoming aware of the occurrence of an event entitling the Lender to the payment of a Compensating Amount and the Lender determining to claim such Compensating Amount (which determination the Lender shall make without undue delay), give notice to the Borrower of the Compensating Amount claimed with details of the events giving rise thereto and shall at that time or within twenty (20) days thereafter provide to the Borrower a certificate setting out in reasonable detail a compilation of the Compensating Amount claimed (and where appropriate the Lender's reasonable allocation to its Advances hereunder of Compensating Amounts with respect to the aggregate of such similar credits granted by the Lender affected by such event) or, if the Lender is then unable to determine the Compensating Amount or the method of compilation thereof an estimate of such Compensating Amount and/or the method or the basis on which the Lender estimates the calculation will be made which estimate will be confirmed or adjusted by the aforesaid certificate. The certificate of the Lender with respect to the Compensating Amount shall be conclusive evidence of the amount thereof, absent manifest error. The Borrower shall within thirty (30) days of receipt of such notice from the Lender pay to the Lender the Compensating Amount (or the estimated Compensating Amount) claimed but, if the Compensating Amount claimed and paid is greater or lesser than the Compensating Amount as finally determined, the Lender or the Borrower, as the case may be, shall pay to the other the amount required to adjust the payment to the Compensating Amount required to be paid. The obligation to pay such a Compensating Amount for subsequent periods will continue, subject as herein provided, until the earlier of the payment in full of the Obligations owed to the Lender and the lapse or cessation of the event giving rise to the Compensating Amount. SECTION 6.3 PREPAYMENT AND CONVERSION. In addition to the Borrower's rights under Section 4.2, if any notification of a Compensating Amount is given under Section 6.2 in respect of any Advance, then the Borrower may, by written notice to the Lender given within thirty Business Days next following the date of the notification, elect to prepay such Advances (in the case of Outstanding Principal Obligations in respect of any BA Advance, discounted for the period to the maturity of the Bankers' Acceptances outstanding in respect of such BA Advance at the Canada Treasury Bill Rate for such discount calculation period in effect on the date of such prepayment) or to convert all such Advances to any other Type of Advance, but should it do so the Borrower shall pay to the Lender all interest accrued to the date of such prepayment on the Advances so prepaid and on demand all such amounts as are required to compensate the Lender for (a) any Compensating Amount payable pursuant to Section 6.2, and (b) any additional amounts payable pursuant to Section 11.7. 34. SECTION 6.4 MITIGATION. If the provisions of Section 6.1 become applicable or any Compensating Amount becomes payable pursuant to Section 6.2, the Lender shall use its reasonable efforts (subject to any legal and regulatory restrictions) to avoid the necessity of invoking the provisions of Section 6.1 or to avoid the need for paying, or to reduce, such additional Compensating Amount, including changing the jurisdiction of its applicable lending office; provided that the taking of any such action would not, in the reasonable judgment of the Lender, be materially disadvantageous to the Lender. SECTION 6.5 MANDATORY PREPAYMENT. In the event that the provisions of Section 6.1 become applicable or any Compensating Amount becomes payable to the Lender pursuant to Section 6.2, the Borrower may, at its own expense and in its sole discretion terminate the Commitment of the Lender and prepay all Outstanding Principal Obligations to the Lender (in the case of Outstanding Principal Obligations in respect of any BA Advance, discounted for the period to the maturity of the Bankers' Acceptances outstanding in respect of such BA Advance at the Canada Treasury Bill Rate for such discount calculation period in effect on the date of such prepayment); provided that (a) the Borrower shall have paid to the Lender (i) the Outstanding Principal Obligations in respect of (in the case of Outstanding Principal Obligations in respect of any BA Advance, discounted as above provided) and interest accrued to the date of such payment on the Advances made by the Lender hereunder, (ii) any Compensating Amount payable pursuant to Section 6.2, (iii) any additional amounts payable pursuant to Section 11.7, (iv) Standby Fees accrued to the date of suspension of all Types of Advances pursuant to Section 6.1 or the date of such payment, whichever is earlier, and (v) all other amounts (excluding Standby Fees) owed to the Lender hereunder, and (b) such termination of the Commitment of the Lender and prepayment of Advances is not prohibited by any Legal Requirement. ARTICLE 7 CONDITIONS PRECEDENT TO LENDING SECTION 7.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of the Lender to make its initial Advance under the Credit Facility is subject to the Lender having received the following, each dated as of a date satisfactory to the Lender and in form and substance reasonably satisfactory to the Lender, provided that such condition precedent, being for the sole benefit of the Lender, may be unilaterally waived by it in whole or in part at any time on or before the date of the initial Advance: (a) certified copies of the articles and borrowing by-laws of the Borrower, together with a related certificate of non-restriction; (b) certified copies of the resolutions of the board of directors of the Borrower approving and authorizing the execution, delivery and performance of this Agreement; 35. (c) a certificate of status or like certificate with respect to the Borrower issued by the appropriate Governmental Authority of the jurisdiction of its incorporation; (d) a certificate of the Secretary or an Assistant Secretary of the Borrower, certifying as to the names and true signatures of its officers authorized to sign this Agreement and the other Loan Documents; (e) a certificate of a Senior Officer of the Borrower to the effect that all representations and warranties of the Borrower set forth in Article 8 are true in all material respects as of the initial Drawdown Date; (f) such other certificates and documentation relating to the Borrower or this Agreement as separately agreed to by the Borrower and the Lender; (g) a certificate of a Senior Officer of the Borrower that there has been no material adverse change in the financial condition or results of operations of the Borrower and its Subsidiaries, taken as a whole, from the financial condition and results of operations of the Borrower and its Subsidiaries presented in the Closing Audited Financial Statements, a copy of which has been furnished to the Lender; and (h) favourable opinion of counsel for the Borrower to and in favour of the Lender in form and substance reasonably satisfactory to the Lender and its counsel. SECTION 7.2 CONDITIONS PRECEDENT TO EACH ADVANCE. The obligation of the Lender to make any Advance (including the initial Advance) under the Credit Facility is subject to the fulfilment of each of the following conditions precedent to the reasonable satisfaction of the Lender (provided that each such condition precedent, being for the sole benefit of the Lender, may be unilaterally waived by it in whole or in part at any time either generally or with respect to any particular Advance): (a) the Lender shall have received from the Borrower a duly completed Advance Request in accordance with the provisions of this Agreement in that regard; (b) the representations and warranties set forth herein and in any other Loan Document shall be true and correct in all material respects, both on the date of such Advance Request and on the requested date of Advance; (c) the Borrower shall have observed and performed in all material respects all covenants set forth herein and in any other Loan Document; (d) no Default or Event of Default shall have occurred and be continuing or will result from giving effect to such Advance Request; (e) the making of the requested Advance shall not be prohibited by any Legal Requirement. 36. The submission by the Borrower of an Advance Request shall be deemed to constitute a representation and warranty by the Borrower that the conditions precedent to the making of the Advance requested thereby set forth in this Article 7 have been satisfied in full. ARTICLE 8 REPRESENTATIONS AND WARRANTIES SECTION 8.1 REPRESENTATIONS AND WARRANTIES BY THE BORROWER. The Borrower represents and warrants to the Lender, acknowledging that the Lender is relying thereon without independent inquiry in entering into this Agreement and making Advances from time to time hereunder, that: (a) ORGANIZATION AND QUALIFICATION. The Borrower is a corporation duly incorporated and organized and validly existing and in good standing and up-to-date in the filing of all corporate, financial and other returns under the laws of Ontario, the jurisdiction of its incorporation, except where the failure to file any such corporate, financial or other return does not affect the Borrower's good standing and would not otherwise have a Material Adverse Effect; it is duly authorized to do business wherever the nature of its material properties or activities requires authorization, except to the extent that a failure to be so duly authorized would not have a Material Adverse Effect, and it has the corporate right, power and authority and all material governmental licences, authorizations, consents, registrations and approvals required to own and lease its material properties and assets and to conduct the business in which it is presently engaged, except to the extent that the lack thereof would not have a Material Adverse Effect. The Borrower has delivered to the Lender a complete and correct copy of the charter documents and borrowing by-laws of the Borrower, in each case as amended to the date of such delivery, and there have been no amendments to any such charter documents or by-laws other than as have been disclosed to the Lender; (b) CORPORATE POWER. The Borrower has full corporate right, power and authority to enter into and perform its obligations under each of the Loan Documents and the Borrower and each Material Subsidiary has full corporate power and authority to own and operate its Assets and to carry on its business as now conducted and as presently proposed to be conducted; (c) CONFLICT WITH OTHER INSTRUMENTS. The execution and delivery by the Borrower of the Loan Documents, the performance by the Borrower of its obligations thereunder and hereunder (as the case may be) and compliance with the terms, conditions and provisions thereof and hereof do not and will not: (i) conflict with or result in a breach of any of the terms, conditions or provisions of (A) the charter documents or by-laws of the Borrower or any of the Material Subsidiaries, (B) any Legal Requirement applicable to the Borrower or any of its Material Subsidiaries or any Material Assets, or (C) except as disclosed to the Lender in writing, any Material Contract; or 37. (ii) result in, require or permit (A) the imposition of any Encumbrance upon or with respect to any Material Assets now owned or hereafter acquired, (B) the acceleration of the maturity of any Debt of, binding on or affecting the Borrower or any of its Material Subsidiaries or any Material Assets, or (C) any third party to terminate or acquire rights under any Material Contract; (d) AUTHORIZATION, GOVERNMENTAL APPROVALS, ETC. The execution and delivery of each of the Loan Documents by the Borrower and the performance by the Borrower of its obligations hereunder and thereunder (as the case may be) have been duly authorized by all necessary corporate action; no consent, approval, order, authorization, licence, exemption or designation of or by any Governmental Authority or other Person is required in connection with the execution, delivery and performance by the Borrower of this Agreement or any of the other Loan Documents except such as have been obtained and true copies of which have been delivered to the Lender on or prior to the Closing Date; and no registration, qualification, designation, declaration or filing with any Governmental Authority is or was necessary to enable or empower the Borrower to enter into and to perform its obligations under the Loan Documents except such as have been made or obtained and are in full force and effect, unamended; (e) DUE EXECUTION. The Loan Documents have each been duly executed and delivered by the Borrower and each constitutes a legal, valid and binding obligation of the Borrower enforceable in accordance with its terms, subject to bankruptcy, insolvency, arrangement and other laws affecting the enforcement of creditors' rights generally (other than those pertaining to settlements, fraudulent conveyances, assignments and preferences) and the availability, in the discretion of a court of competent jurisdiction, of equitable remedies; (f) RANKING. The Obligations will rank at least pari passu with all Debt of the Borrower except Debt secured by Permitted Encumbrances, provided that such Permitted Encumbrances shall not at any time secure Debt of the Borrower and all of its Subsidiaries exceeding at any time Cdn. $10,000,000, or the U.S. Dollar Equivalent thereof, in the aggregate; (g) OWNERSHIP OF PROPERTY. The Borrower is the absolute beneficial owner of, with good and marketable title to, all of its Material Assets free and clear of all Encumbrances other than Permitted Encumbrances; (h) SUBSIDIARIES. The Material Subsidiaries are set out in the Closing Audited Financial Statements. Other than as set out in Schedule 8.1(h) to this Agreement, neither the Borrower nor any of its Subsidiaries has agreed or offered to acquire any shares in the capital of any other corporation or any ownership interest in any other Person which after acquisition thereof would amount to a Material Asset or to acquire or lease any other Material Asset or business operations and no Person will have any agreement or option, or any right or privilege (whether by law, pre-emptive or contractual) capable of becoming an agreement or option, for the purchase from the Borrower of any Material Asset or for the purchase or issue of any securities of any Material Subsidiary, except as permitted pursuant to Section 9.2. Neither the Borrower nor any of its Subsidiaries has sold, lost or otherwise disposed of any Material Assets forming part of the assets reflected in the Closing Audited Financial Statements, except as has otherwise been disclosed to the Lender in writing by means of (a) the Loan Documents, or (b) an officer's certificate delivered to the Lender on Closing; 38. (i) DEBT. Other than as set out in Schedule 8.1(i) to this Agreement, neither the Borrower or any of its Subsidiaries has any outstanding Debt other than: (i) Obligations owed or otherwise incurred to the Lender under the Loan Documents; (ii) Debt reflected in the Closing Audited Financial Statements; (iii) Debt of the Borrower or any of its Subsidiaries, including Debt referred to in clause (ii) above, not exceeding Cdn. $10,000,000, or the U.S. Dollar Equivalent thereof, in the aggregate, secured by Permitted Encumbrances; and (iv) Operating Debt of the Subsidiaries of the Borrower up to an aggregate maximum, on a consolidated basis, of Cdn. $10,000,000, or the U.S. Dollar Equivalent thereof; (j) NO DEFAULT UNDER MATERIAL CONTRACTS. Neither the Borrower or any of its Subsidiaries is in default or breach in any material respect of any Material Contract to which it is a party or by which it or any of its Material Assets may be bound and there exists no state of facts which after notice or the passage of time, or both, would constitute such a default or breach, and all such Material Contracts are in good standing in all material respects; (k) ABSENCE OF UNUSUAL TRANSACTIONS AND EVENTS. Other than as set out in Schedule 8.1(k) to this Agreement, neither the Borrower or any of its Subsidiaries has, since December 31, 1999 and to and including the date of the Drawdown Advance: (i) paid or satisfied any Debt, other than in accordance with the terms of such Debt; (ii) waived or cancelled any material rights or material Claims or made any material gift, other than in the ordinary course of such corporation's business consistent with past practice; (iii) made or suffered any Material Adverse Effect; (iv) except as would otherwise be permitted hereunder, declared or paid any dividend or made any other Corporate Distribution, whether in cash, stock or in specie; or (v) authorized or agreed or otherwise become committed to do any of the foregoing; (l) TAX MATTERS. All Taxes that are or may become payable by the Borrower or any of its Material Subsidiaries in respect of any prior period have been fully paid or fully disclosed and fully provided for in the books and financial statements of the Borrower and each such Material Subsidiary. There are no actions, audits, assessments, reassessments, suits, proceedings, investigations or claims pending or threatened against the Borrower or any of its Subsidiaries in respect of any Taxes or any matters under discussion with any Governmental Authority relating to any Taxes which, if determined adversely, could have a Material Adverse Effect; 39. (m) LITIGATION AND OTHER PROCEEDINGS. Except as advised to the Lender in writing, there is no court, administrative, regulatory or other proceeding (whether civil, quasi-criminal or criminal), arbitration or other dispute settlement procedure, or any investigation or inquiry, by or before any Governmental Authority against or involving the Borrower or any of its Subsidiaries (whether in progress or threatened) which, if determined adversely, could have a Material Adverse Effect; (n) FINANCIAL STATEMENTS. (i) Except as advised to the Lender in writing, the Closing Audited Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles and present fairly in all material respects the financial position of the Borrower and its Subsidiaries as at December 31, 1999 and the results of their operations for the period then ended; and (ii) except as advised to the Lender in writing, all other financial statements delivered to the Lender relating to each of the Borrower and its Subsidiaries have been prepared in accordance with Generally Accepted Accounting Principles and present fairly in all material respects the financial position of each of the Borrower and its Subsidiaries, as the case may be, and the results of their operations for the period covered thereby; (o) DISCLOSURE. To the best of the knowledge of the Borrower, all information supplied to the Lender by the Borrower, and its Affiliates, shareholders or Subsidiaries (i) with respect to any and all factual matters, is true and correct in all material respects (except as otherwise disclosed to the Lender in writing on or before the Closing Date), (ii) with respect to any projections or forecasts therein and the assumptions on the basis of which such information was prepared, is believed to be reasonable in the circumstances (except as otherwise disclosed to the Lender in writing on or before the Closing Date), and (iii) with respect to any other matters being the subject of opinion, is believed on reasonable grounds to be true and correct in all material respects (except as otherwise disclosed to the Lender in writing on or before the Closing Date). There is no fact known to the Borrower as of the Closing Date which could reasonably be expected to have after the Closing Date a Material Adverse Effect which has not been fully and adequately disclosed to the Lender prior to the Closing Date; (p) PENSION PLANS. Each of the pension plans provided by the Borrower and its Subsidiaries are, as of the Closing Date, registered under, and are in compliance with, the Income Tax Act (Canada) (if applicable) and all other applicable Legal Requirements and all reports, returns and filings required to be made thereunder or in respect thereof have been duly made. Such pension plans have been at all times administered in accordance with their terms and all applicable Legal Requirements. There are no unfunded liabilities under any of such pension plans, and without limiting the generality of the foregoing, there is no going concern unfunded actuarial liability, past service unfunded actuarial liability or solvency deficiency, which would reasonably be expected to have a Material Adverse Effect. Except as advised by the Borrower to the Lender in writing, none of the Borrower or any of its Subsidiaries has received, or applied for, any payment of surplus from any of such pension plans; 40. (q) INSURANCE. The Borrower and each of its Material Subsidiaries has in place all insurance policies required in accordance with the provisions of this Agreement and all policy premiums owing or payable in respect thereof have been paid to date; and (r) COMPLIANCE WITH LAWS. The Borrower and each of its Subsidiaries has complied and is complying in all material respects with all Legal Requirements applicable to its business, property, Assets and operations in each jurisdiction in which such corporations own any Material Assets or carry on any material portion of their respective businesses where the failure to do so could reasonably be expected to have a Material Adverse Effect. SECTION 8.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties herein set forth or contained in any certificates or documents delivered to the Lender pursuant hereto shall survive the execution and delivery hereof and any Advance hereunder and any investigation at any time made by or on behalf of the Lender. The representations and warranties shall be deemed to be continuing and repeated by the Borrower upon each Drawdown Date, and all references to the Closing Date contained in such representations and warranties shall be deemed to refer to such Drawdown Date. ARTICLE 9 COVENANTS OF THE BORROWER SECTION 9.1 AFFIRMATIVE COVENANTS. From and after the Closing Date and so long as any Obligations remain outstanding and unpaid or any Commitment of the Lender shall continue to exist, the Borrower shall: (a) PAYMENT OF OBLIGATIONS TO LENDER. Duly and punctually pay to the Lender all amounts payable by the Borrower hereunder as and when the same become due; (b) PAYMENT OF TAXES, ETC. Pay and discharge, and cause each of its Material Subsidiaries to pay and discharge, before the same shall become delinquent, all Taxes where the failure to do so could have a Material Adverse Effect, except any such Taxes which are being contested in good faith and by proper proceedings and for which adequate provision for payment has been made to the sole satisfaction of the Lender, acting reasonably; (c) MAINTENANCE OF INSURANCE. Maintain, and cause each of its Material Subsidiaries to maintain, insurance with responsible and reputable insurance companies in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary, as the case may be, operates; (d) PRESERVATION OF CORPORATE EXISTENCE, ETC. Other than as set out in Schedule 9.1(d) to this Agreement, preserve and maintain, and cause each of its Material Subsidiaries to preserve and maintain, its and their respective corporate existence and rights (charter and statutory) and maintain, and cause each of its Material Subsidiaries to maintain, up-to-date 41. registrations and licences and filings of all corporate, financial and other returns under the laws of all jurisdictions where the Borrower or such Material Subsidiary owns any Material Assets or carries on a material portion of its business, where the failure to do so could have a Material Adverse Effect; and maintain and cause its Material Subsidiaries to maintain full corporate right, power and authority to perform their respective obligations under each of the Loan Documents to which each is a party and to own and operate their respective Assets and to carry on their respective businesses where the failure to do so could have a Material Adverse Effect; (e) CONFLICT WITH OTHER INSTRUMENTS. Ensure that at all times and from time to time the execution and delivery by it of each of the Loan Documents to which it is a party, the performance by it of its obligations thereunder and the compliance by it with the terms, conditions and provisions thereof will not: (i) conflict with or result in a breach of any of the terms, conditions or provisions of (A) its or any of the Material Subsidiaries' charter documents or by-laws, (B) any Legal Requirement applicable to it or any of the Material Subsidiaries or any Material Assets, or (C) any Material Contract; or (ii) result in, require or permit (A) the imposition of any Encumbrance upon or with respect to any Material Assets now owned or hereafter acquired, (B) the acceleration of the maturity of any Debt, binding on or affecting the Borrower or any of the Material Subsidiaries or any Material Asset, or (C) any third party to terminate or acquire rights under any Material Contract; (f) ENFORCEABILITY. Ensure that at all times and from time to time the execution and delivery of each of the Loan Documents by it and the performance by it of its obligations thereunder will be, upon the execution and delivery thereof, duly authorized by all necessary corporate action; that all consents, approvals, orders, authorizations, licenses, exemptions or designations of or by any Governmental Authority or other Person required in connection with the execution, delivery and performance by it of any such documents have been obtained; and that all registrations, qualifications, designations, declarations or filings with any Governmental Authority necessary to enable or empower it to enter into and to perform its obligations under any such documents have been obtained and continue in full force and effect as required for such purpose; and that any and all Loan Documents to which it is a party have been duly executed and delivered by it and that each will constitute its legal, valid and binding obligation enforceable in accordance with its terms, subject only to bankruptcy, insolvency, arrangement and other laws affecting the enforcement of creditors' rights generally (other than those pertaining to settlements, fraudulent conveyances, assignments and preferences) and the availability, in the discretion of a court of competent jurisdiction, of equitable remedies; (g) COMPLIANCE WITH LAWS, ETC. Comply, and cause each of its Subsidiaries to comply, in all material respects with all applicable Legal Requirements, and duly observe all valid requirements of any Governmental Authority, if the failure to do so could reasonably be expected to have a Material Adverse Effect; (h) KEEPING OF BOOKS. Keep, and cause each of its Material Subsidiaries to keep, financial books and records systems in accordance with Generally Accepted Accounting 42. Principles and all applicable Legal Requirements, and in such books and records make full and correct entries of all financial transactions, Assets, liabilities, shareholders equity, participation accounts and business of the Borrower and each of its Material Subsidiaries in accordance with Generally Accepted Accounting Principles; (i) MAINTENANCE OF ASSETS, ETC. Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its or their Material Assets in all material respects in good repair, working order and condition (reasonable wear and tear excepted) and, from time to time, make all needful and proper repairs, renewals, replacements, additions and improvements thereto, so that the business carried on may be properly and advantageously conducted at all times in accordance with prudent business management; and, without limiting the generality of the foregoing, maintain, preserve and protect, and cause each of its Subsidiaries to maintain, preserve and protect its or their intangibles, including all trademarks, trade names, copyrights, licences and other intellectual property, that constitute Material Assets, without conflict with the rights of others; (j) REPORTING REQUIREMENTS. Furnish to the Lender: (i) annually, as soon as available and in any event within 120 days after the end of each financial year: (A) Audited Financial Statements. The audited annual financial statements of the Borrower and the Material Subsidiaries for such financial year; and (B) Compliance Certificate. A Compliance Certificate dated the date of delivery thereof, with work sheets attached thereto setting forth in reasonable detail the computations necessary to determine whether the covenant of the Borrower pursuant to Section 9.2(j) shall have been complied with and whether the Amortization Date shall have occurred; (ii) quarterly, as soon as available and in any event within 60 days after the end of each financial quarter of each financial year: (A) Quarterly Financial Statements. The quarterly financial statements of the Borrower and the Material Subsidiaries for such financial quarter of each financial year; and (B) Compliance Certificate. A Compliance Certificate dated the date of delivery thereof, with work sheets attached thereto setting forth in reasonable detail the computations necessary to determine whether the covenant of the Borrower pursuant to Section 9.2(j) shall have been complied with and whether the Amortization Date shall have occurred; (iii) promptly on reasonable demand, a Compliance Certificate dated the date of delivery thereof, with work sheets attached thereto setting forth in reasonable detail the computations necessary to determine whether the covenant of the 43. Borrower pursuant to Section 9.2(j) shall have been complied with and whether the Amortization Date shall have occurred; (iv) promptly upon becoming aware thereof, notice of any fact or change which has had, is having or is expected to have a Material Adverse Effect; (v) notice of any Subsidiary of the Borrower becoming a Material Subsidiary thereof, forthwith after becoming aware thereof; and (vi) such other information respecting the business and affairs, financial or otherwise, of the Borrower or any of its Subsidiaries or Affiliates, as the Lender may from time to time reasonably request; (k) CURE DEFECTS. Promptly cure or cause to be cured, or cause its Subsidiaries to cure or cause to be cured, any defects in the execution, delivery, validity or enforceability of any of the Loan Documents or any of the other agreements, instruments or documents contemplated thereby or executed pursuant hereto or thereto and at its expense, execute and deliver or cause to be executed and delivered all such agreements, instruments and other documents and make all necessary filings and recordings as the Lender may consider reasonably necessary or desirable for the foregoing purposes; (l) NOTICE OF DEFAULT, ETC. Notify the Lender forthwith in writing of the occurrence of a Default, an Event of Default, and in such notice and in further notices delivered from time to time thereafter to (and in any event forthwith in response to any request for such a notice by) the Lender, provide the Lender with the particulars of the steps being taken to remedy any such Default, Event of Default; (m) CORPORATE DISTRIBUTIONS. Subject to compliance with applicable Legal Requirements, cause such of its Subsidiaries to declare and pay to the Borrower or to such Subsidiary's holding body corporate such dividends and other Corporate Distributions as may be required to provide sufficient funds to the Borrower to duly and punctually pay to the Lender all amounts payable by the Borrower hereunder as and when the same become due; and (n) FURTHER ASSURANCES. At its cost and expense, upon request of the Lender, duly execute and deliver, or cause to be duly executed and delivered, to the Lender all such further agreements, instruments, documents and other assurances and do and cause to be done all such further acts and things as may be necessary or desirable in the reasonable opinion of the Lender to carry out more effectually the provisions and purposes of this Agreement or any of the other Loan Documents. SECTION 9.2 NEGATIVE COVENANTS. From and after the Closing Date and so long as any Obligations remain outstanding and unpaid or any Commitment of the Lender shall continue to exist, the Borrower shall not, unless required pursuant to a Legal Requirement, or, if not required pursuant to a Legal Requirement then without the prior written consent of the Lender, which consent shall not be unreasonably withheld: 44. (a) DEBT. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist any Debt other than: (i) Obligations of the Borrower to the Lender hereunder; (ii) Debt of the Borrower ranking pari passu with or subordinate to the Obligations to the Lender hereunder; (iii) Debt of the Subsidiaries of the Borrower reflected in the Closing Audited Financial Statements; (iv) Debt of the Borrower or any of its Subsidiaries secured by Permitted Encumbrances, provided that such Permitted Encumbrances shall not at any time secure Debt of the Borrower and all of its Subsidiaries, including Debt referred to in clause (iii) above, exceeding at any time Cdn. $10,000,000, or the U.S. Dollar Equivalent thereof, in the aggregate; and (v) Operating Debt of the Subsidiaries of the Borrower up to an aggregate maximum, on a consolidated basis, at any time of Cdn. $10,000,000, or the U.S. Dollar Equivalent thereof; (b) ENCUMBRANCES, ETC. Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Encumbrance on any of its Assets other than a Permitted Encumbrance; (c) SALE OF MATERIAL ASSETS. Effect, or permit any of its Material Subsidiaries to effect, any sale, lease, exchange, transfer, assignment or other disposition (whether in one transaction or a series of related transactions) of any Material Assets other than for the purpose of effecting a Permitted Transaction or repayment or repayments on account of the then outstanding Obligations; (d) HOSTILE AQUISITION. Engage in, or permit any of its Subsidiaries to engage in, any Hostile Acquisition, whether alone or in concert with any other Person or Persons; (e) CHANGE IN NATURE OF BUSINESS. Make, or permit any of its Material Subsidiaries to make, any material change in the nature of its or their business; (f) MERGERS, ETC. In all cases, except in the case of a Permitted Transaction, (i) amalgamate with any other Person or Persons, or (ii) enter into any transaction (whether by way of reconstruction, reorganization, consolidation, amalgamation, merger, transfer, sale, lease or otherwise) whereby all or a material portion of its Assets would become the property of any other Person or, in the case of any such merger, of the continuing corporation resulting therefrom, or (iii) permit any of its Subsidiaries to amalgamate with any other Person or Persons or to enter into any such transaction; (g) INVESTMENTS. Other than pursuant to a Permitted Transaction, make, or permit any of its Subsidiaries to make, any Investment that on completion of the Investment would 45. constitute a Material Asset, otherwise than in the ordinary course of its business or in accordance with any investment policy adopted by its, or such Subsidiary's, board of directors and in compliance with all applicable Legal Requirements; (h) TRANSACTIONS WITH AFFILIATES. Except as otherwise expressly contemplated or permitted by this Agreement, directly or indirectly: (i) make any Investment, or permit any of its Subsidiaries to make any Investment, in any Affiliate; (ii) transfer, sell, lease, assign or otherwise dispose of, or permit any of its Subsidiaries to transfer, sell, lease, assign or otherwise dispose of, any Asset to any Affiliate; (iii) merge into or consolidate with or purchase or acquire any Assets from, or permit any of its Subsidiaries to merge into, or consolidate with or purchase or acquire any Assets from, any Affiliate; or (iv) enter into, or permit any of its Subsidiaries to enter into, any other transaction directly or indirectly with or for the benefit of any Affiliate (including, without limitation, any guarantee or assumption of any obligation of any Affiliate), provided that (A) any Affiliate who is an individual may serve as a director, officer or employee of the Borrower or any of its Affiliates, or any one or more of them, and receive reasonable compensation in connection with services rendered by such individual in such capacity, and (B) the Borrower and any of its Subsidiaries may enter into any such transaction with any Affiliate if such transaction is a Permitted Transaction or if the terms and conditions thereof are at least as favourable to the Borrower or such Subsidiary as market terms and conditions, and if such transaction would otherwise be permitted under all applicable Legal Requirements; (i) PROHIBITION ON RESTRICTIONS. Create or permit any of its Material Subsidiaries to, create or otherwise cause or suffer to exist any Encumbrance or restriction which prohibits or otherwise restricts in any material respect: (i) the ability of any such Subsidiary to (A) pay dividends or make other distributions or pay any Debt owed to the Borrower or any such Subsidiary, (B) make any other Corporate Distribution to the Borrower or any such Subsidiary or (C) transfer any of its properties or assets to the Borrower or any such Subsidiary; or (ii) the ability of the Borrower or any such Subsidiary to create, incur, assume or suffer to exist any Encumbrance upon its property or assets to secure the Obligations, other than prohibitions or restrictions existing under or by reason of (A) this Agreement and the Loan Documents, (B) Legal Requirements, (C) customary non-assignment provisions entered into in the ordinary course of business and consistent with past practices, and (D) Permitted 46. Encumbrances and any documents or instruments governing the terms of any Debt secured by any such Permitted Encumbrances, provided that such prohibitions or restrictions apply only to the assets subject to such Permitted Encumbrances; (j) CONSOLIDATED DEBT TO SHAREHOLDER EQUITY RATIO. Permit at any time the ratio of Consolidated Debt of the Borrower to Consolidated Shareholder Equity of the Borrower to be greater than 2:1; (k) FINANCIAL YEAR. Change its fiscal year, or permit any of its Material Subsidiaries to change their respective fiscal years to other than December 31 or to have a fiscal year that does not end on December 31 of each calendar year. ARTICLE 10 ACCELERATION SECTION 10.1 EVENTS OF DEFAULT. If any one or more of the following events (each an "Event of Default") shall occur and be continuing then the Lender may, (i) terminate the Lender's obligations to make any further Advance under the Credit Facility, and (ii) (at the same time or at any time after such termination) declare the Obligations to be immediately due and payable, provided that should any Event of Default specified in Sections 10.1(e), 10.1(f), 10.1(g) or 10.1(h) occur then the Obligations shall, to the extent permitted by applicable law, be and become immediately due and payable without any declaration or other act on the part of the Lender: (a) the Borrower makes default in the payment on the due date thereof of any amount payable by it hereunder on account of the Outstanding Principal Obligations under the Credit Facility; (b) the Borrower makes default in the payment when due of any amount payable by it hereunder on account of interest, fees, costs, expenses or other amounts payable by it hereunder, and such default shall continue for three Business Days after notice of such default being given to the Borrower by the Lender; (c) the Borrower fails to perform any covenant, agreement or undertaking under this Agreement other than those referred to in paragraphs (a) and (b) of this Section 10.1 or in any other Loan Document, provided that if such failure is capable of being remedied or cured within a ten day period, the Borrower, subject to the other provisions of this Section 10.1, shall have a period of ten Business Days after the earlier of the Borrower becoming aware of such default and notice of such default being given to the Borrower by the Lender within which to remedy or cure such failure; (d) any representation or warranty made by the Borrower in this Agreement or in any other Loan Document is incorrect in any material respect when made (or when deemed to be made hereunder or thereunder), provided that, notwithstanding any lack of correctness of any such representation or warranty as so stated as at the Closing Date, if the subject matter of such representation and warranty is capable of being remedied or cured within a period of ten 47. Business Days such that it would be true if so stated at such later time, the Borrower, subject to the other provisions of this Section 10.1, shall have a period of ten Business Days after the earlier of receipt of written notice from the Lender specifying the representation or warranty concerned and the Borrower otherwise becoming aware that such representation or warranty is incorrect in any material respect, within which to remedy or cure such lack of correctness; (e) the Borrower or any of its Material Subsidiaries ceases or threatens to cease to carry on business or becomes insolvent or bankrupt or ceases paying its debts generally as they fall due, other than any such debts which are contested in good faith and by appropriate proceedings and for which adequate provision has been made to the Lender' sole satisfaction, or the Borrower or any of its Material Subsidiaries commits any act of bankruptcy or makes an assignment for the benefit of creditors or otherwise acknowledges its insolvency, or a trustee, receiver, receiver and manager, liquidator, agent or similar official is appointed for the Borrower or any of its Material Subsidiaries or for any material part of its Assets with the consent of or without contest by the Borrower or such Material Subsidiaries upon receipt of notice of such appointment or action or proceeding to effect such appointment; (f) without limiting the generality of paragraph (e) of this Section 10.1, any Governmental Authority shall take control of the Borrower or any of its Material Subsidiaries, or shall take control of the Assets of any such Person or any Material Assets; (g) any proceeding is instituted by the Borrower or any of its Material Subsidiaries, any order is made or any resolution is passed for the winding-up of the Borrower or any of its Material Subsidiaries; (h) any petition shall be filed or other action or proceeding shall be commenced, whether judicial, quasi-judicial or administrative in nature or by or in respect of the Borrower or any of its Material Subsidiaries, to adjudge the Borrower or any of its Material Subsidiaries insolvent or a bankrupt, or to give notice of, consider or approve any proposal, reorganization, compromise, moratorium or arrangement with all or any of the creditors of the Borrower or any of its Material Subsidiaries, or to appoint a trustee, receiver, receiver and manager, liquidator, agent or similar official of the Borrower or any of its Material Subsidiaries or any of its Assets or any Material Assets, or to wind-up, dissolve or otherwise liquidate the Borrower or any of its Material Subsidiaries, provided that, if the Borrower or any of its Material Subsidiaries shall be contesting such petition, action or proceeding in good faith and by appropriate proceedings based, in the Lender's sole opinion, on reasonable and substantial grounds, the Borrower and each of its Material Subsidiaries, subject to the other provisions of this Section 10.1, shall have a period of forty-five days after the date of the filing or commencement of such petition, action or proceeding within which to obtain or procure an abandonment, dismissal, withdrawal, quashing or permanent stay of such petition, action or proceeding; (i) any execution, sequestration or any other process of any court, any work order or any distress or analogous process with respect to a sum in excess of Cdn. $ 5,000,000 becomes enforceable against the Borrower or any of its Material Subsidiaries or any Material Assets, if enforcement thereof could have a Material Adverse Effect; 48. (j) the Borrower or any of its Material Subsidiaries shall permit any sum in excess of Cdn. $ 5,000,000 which has been admitted as due by it or is not disputed to be due by it to remain unpaid for five days after proceedings have been taken to enforce the same; (k) the Borrower or any of its Material Subsidiaries makes default under the terms of any agreement or instrument for or in respect of any Liabilities in excess of Cdn. $ 5,000,000 and such default remains unremedied for the applicable grace period, if any, specified in such agreement or instrument and has not been waived by the Person to whom such Liabilities are owed or by its authorized representative or agent; (l) subject to Permitted Encumbrances securing Debt of the Borrower and all of its Subsidiaries not exceeding at any time Cdn. $10,000,000, or the U.S. Dollar Equivalent thereof, in the aggregate, the Lender's rights and entitlement to be paid the Obligations hereunder shall cease to rank in priority to all other Debt of the Borrower, secured or unsecured; (m) a Material Adverse Effect shall occur; (n) there is any adverse qualification to any of the financial statements of the Borrower or any of its Material Subsidiaries by their respective auditors; (o) the ratio of Consolidated Debt of the Borrower to Consolidated Shareholder Equity of the Borrower shall be greater than 2:1; or (p) this Agreement shall cease to be in full force and effect and to constitute a legal, valid and binding obligation of any of the parties signatory thereto enforceable against such parties in accordance with its terms, subject to bankruptcy, insolvency, arrangement and other laws affecting the enforcement of creditors' rights generally (other than those pertaining to settlements, fraudulent conveyances, assignments and preferences) and the availability, in the discretion of a court of competent jurisdiction, of equitable remedies. SECTION 10.2 REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default and acceleration of the maturity of the Obligations owed to the Lender hereunder, the Lender may commence such litigation or proceedings as it may deem expedient, all without any additional notice, presentation, demand, protest, notice of dishonour, including entering into of possession of any of the property or assets of the Borrower, or any other action, notice of all of which the Borrower hereby expressly waives. For greater certainty, and subject to any curative provisions specified herein, the Borrower will be considered to be in default of its obligations hereunder by the mere lapse of time provided herein for performing such obligations, without any requirement of further notice or other act of the Lender unless a notice is specifically required under this Agreement. The rights and remedies of the Lender hereunder are cumulative and are in addition to and not in substitution for any other rights or remedies provided by law. Nothing contained herein or in any Loan Documents now or hereafter held by the Lender with respect to the Obligations of the Borrower to the Lender, or any part thereof, nor any act or omission of the Lender with respect to such Loan Documents, shall in any way prejudice or affect the rights, remedies and powers of the Lender with respect to any other such Loan Documents. 49. SECTION 10.3 RIGHT OF SET-OFF. Upon the occurrence of an Event of Default and the acceleration of the maturity of the Obligations owed to the Lender hereunder, the Lender is hereby authorized by the Borrower at any time and from time to time and shall to the fullest extent permitted by law, set off, appropriate and apply any and all deposits (general or special, time or demand, matured or unmatured, provisional or final) at any time held and other Debt at any time owing to or for the credit or the account of the Borrower against any and all of the Obligations of the Borrower now or hereafter existing hereunder. The Lender shall promptly notify the Borrower in advance of any such set-off and application made by the Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section 10.3 are in addition to all other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have. SECTION 10.4 CURRENCY CONVERSION AFTER MATURITY. At any time following the occurrence of an Event of Default and the acceleration of the maturity of the Obligations owed to the Lender hereunder, the Lender shall be entitled to convert, with two (2) Business Days' prior notice to the Borrower, any and all then unpaid and outstanding LIBOR Loans and U.S. Base Rate Loans or any of them to Prime Rate Loans. Any such conversion shall be calculated so that the resulting Prime Rate Loans shall be the Canadian Dollar Equivalent on the date of conversion of the amount of United States Dollars so converted. Any accrued and unpaid interest denominated in United States Dollars at the time of any such conversion shall be similarly converted to Canadian Dollars, and such Prime Rate Loans and accrued and unpaid interest thereon shall thereafter bear interest in accordance with Section 3.1. SECTION 10.5 JUDGMENT CURRENCY. The obligation of the Borrower to make payments on any Obligations to the Lender hereunder in any currency (the "first currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any other currency (the "second currency") except to the extent to which such tender or recovery shall result in the effective receipt by the Lender of the full amount of the first currency payable, and accordingly the primary obligation of the Borrower shall be enforceable as an alternative or additional cause of action for the purpose of recovery in the second currency of the amount (if any) by which such effective receipt shall fall short of the full amount of the first currency payable and shall not be affected by a judgment being obtained for any other sum due hereunder. ARTICLE 11 GENERAL SECTION 11.1 EVIDENCE OF DEBT. The Obligations of the Borrower hereunder, in respect of or in connection with the Advances under the Credit Facility made from time to time by the Lender or otherwise, shall, absent manifest error, be conclusively evidenced by the records of the Lender. 50. SECTION 11.2 ADDITIONAL EXPENSES. If during the continuation of an Event of Default the Borrower should fail to observe or perform any covenant or agreement to be observed or performed by the Borrower hereunder the Lender may but shall not be obliged to perform or cause to be performed the same for which purpose the Borrower hereby appoints the Lender to be the lawful attorney of the Borrower, and all reasonable expenses incurred or payments made by the Lender in so doing shall be paid by the Borrower to the Lender forthwith upon demand and any such unpaid amount shall bear interest, both before and after judgment, at the Past Due Rate, calculated daily and compounded monthly in arrears and payable on demand, and the Borrower hereby indemnifies the Lender against any loss incurred by the Lender in that regard. SECTION 11.3 INVALIDITY OF ANY PROVISIONS. Any provision of this Agreement or any of the other Loan Documents which is prohibited by the laws of any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition without invalidating the remaining terms and provisions hereof or thereof and no such invalidity shall affect the obligation of the Borrower to pay the Obligations in full. The rate of interest chargeable or collectable on overdue instalments of interest shall not exceed the maximum rate permitted by applicable law. SECTION 11.4 AMENDMENTS, WAIVERS, ETC. No amendment, modification or waiver of any provision of, and no waiver of the strict observance, performance or compliance by the Borrower with any term, covenant, condition or agreement contained in this Agreement and no indulgence granted by the Lender or consent to any departure by the Borrower therefrom, shall in any event be effective unless it shall be in writing and signed by the Lender (and the Borrower in the case of amendments or modifications or waivers by the Borrower), and then such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. Notwithstanding the foregoing, no failure to exercise and no delay in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any other rights or remedies available at or provided by law. SECTION 11.5 NOTICES, ETC. All notices and other communications provided for hereunder shall, except as otherwise permitted hereunder, be in writing personally delivered by messenger or courier or facsimile or telecopy transmission, if (a) to the Borrower, to it at: Hub International Limited 214 King Street West Suite 314 51. Toronto, Ontario M5H 3S6 Telecopy: (416) 593-8717 for the attention of: W. Kirk James Vice President and General Counsel (b) to the Lender, to it at: Bank of Montreal 24th Floor 1 First Canadian Place Toronto, Ontario M5X 1A1 Telecopy: (416)-867-4741 for the attention of: Vice President, Asset Portfolio Management or to such other address or facsimile or telecopy number as any party hereto may from time to time designate to the other parties hereto in such manner. All such notices and communications shall be effective, and deemed to be received by the intended recipient, on the date delivered or transmitted, if delivered or transmitted before 3:00 p.m. (Toronto, Ontario time) on a Business Day, or, in any other case, on the first Business Day following the date delivered or transmitted. SECTION 11.6 COSTS AND EXPENSES. The Borrower shall pay to the Lender, on demand all reasonable out of pocket costs and expenses (including, without limitation, all reasonable legal fees and disbursements) incurred by the Lender in connection with this Agreement, the other Loan Documents and the Credit Facility including, without limitation, (a) the negotiation, preparation, execution, delivery and interpretation, both prior and subsequent to the Closing Date, of this Agreement and the other Loan Documents or any agreement or instrument contemplated hereby or thereby; (b) the performance by the Lender of its obligations and duties under this Agreement and the other Loan Documents; (c) advice of counsel with respect to the interpretation of the Credit Facility, the Loan Documents or any transaction contemplated thereunder; (d) the enforcement of any of the Loan Documents or the enforcement or preservation of rights under and the refinancing, renegotiation or restructuring of the Credit Facility under this Agreement or the other Loan Documents or the bringing of any action, suit or proceeding with respect to the enforcement of any of the Loan Documents or any such right or seeking any remedy which may be available to the Lender at law or in equity; and (e) any amendments, waivers or consents requested by the Borrower pursuant to the provisions hereof or any other Loan Document. The Borrower shall supply all statements, reports, certificates, opinions, appraisals and other documents or information required to be furnished to the Lender pursuant to this Agreement without cost to the Lender. 52. SECTION 11.7 INDEMNIFICATION. (a) The Borrower agrees to indemnify the Lender and its directors, officers and employees from and against any and all Claims and Losses of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Lender or the directors, officers or employees of the Lender, arising by reason of any action (including any action referred to herein) or inaction or omission to do any act legally required of the Borrower pursuant to the Loan Documents. (b) The Borrower shall pay to the Lender on demand any amounts required to compensate the Lender for any Loss suffered or incurred by the Lender as a result of (i) any payment being made (due to acceleration of the maturity of any Advance pursuant to Article 10, a mandatory or optional prepayment of principal or otherwise) in respect of any Bankers' Acceptance other than on the maturity date of such Bankers' Acceptance or in respect of a LIBOR Loan other than on the last day of the related LIBOR Period; (ii) the failure of the Borrower to give any notice in the manner and at the times required by this Agreement; (iii) the failure of the Borrower to effect an Advance in the manner and at the time specified in any Advance Request; or (iv) the failure of the Borrower to make a payment or a mandatory repayment in the manner at the time specified in this Agreement or any notice given by the Borrower to the Lender in accordance with this Agreement. A certificate as to the amount of any such Loss, providing reasonable detail of the calculation of such Loss and submitted in good faith by the Lender to the Borrower shall be conclusive and binding for all purposes, absent manifest error. (c) The provisions of this Section 11.7 shall survive the termination of this Agreement and the repayment of all Obligations. The Borrower acknowledges that neither its obligation to indemnify, nor any actual indemnification by it, of the Lender or any other indemnified party hereunder in respect of such Person's Losses for the legal fees and expenses of such Person's counsel shall in any way affect the confidentiality or privilege relating to any information communicated by such Person to its counsel. SECTION 11.8 TAXES. (a) Any and all payments to the Lender by the Borrower hereunder (or under any of the other Loan Documents) shall be made free and clear of and without deduction or withholding for any and all present and future Taxes, imposed by any Governmental Authority including, without limitation, any Taxes which arise from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any of the other Loan Documents, unless such Taxes are required by law or the administration thereof to be deducted or withheld. If the Borrower shall be required by law or the administration thereof to deduct or withhold any such Taxes from or in respect of any amount payable hereunder, (i) the amount payable shall be increased as may be necessary so that after making all required deductions or withholdings (including deductions or withholdings applicable to additional amounts paid under this paragraph), the Lender receives an amount equal to the amount it would have received if no such deduction or withholding had been made; (ii) the Borrower shall make such deductions or withholdings; and (iii) the Borrower shall pay forthwith the full amount deducted or withheld to the relevant taxation or other authority in accordance with applicable law. 53. (b) The Borrower agrees to indemnify the Lender for the full amount of Taxes not deducted or withheld and paid by the Borrower in accordance with Section 11.8 (a) to the relevant taxation or other authority and any Taxes imposed by any jurisdiction on amounts payable by the Borrower under this Section 11.8, paid by the Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not any such Taxes were correctly or legally asserted. Payment under this indemnification shall be made within fifteen days from the date the Lender makes written demand therefor. A certificate as to the amount of such Taxes, providing reasonable details of the calculation thereof, and evidence of payment thereof submitted to the Borrower by the Lender shall be conclusive evidence of the amount due from the Borrower to the Lender absent manifest error. (c) The Borrower shall furnish to the Lender the original or a certified copy of a receipt evidencing any payment of Taxes made by the Borrower, as soon as such receipt becomes available. (d) If the provisions of Section 11.8(a) or 11.8(b) require the Borrower to deduct or withhold and pay Taxes to any relevant taxation or other authority or to pay any additional amounts thereunder, the Lender shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to avoid the necessity of invoking such provisions of this Section 11.8, or to reduce the amounts payable thereunder, including changing the jurisdiction of its applicable lending office; provided that the taking of any such action would not, in the reasonable judgment of the Lender, be disadvantageous to the Lender. (e) The provisions of this Section 11.8 shall survive the termination of this Agreement and the repayment of all Obligations. SECTION 11.9 CALCULATIONS. Except as otherwise provided herein, the financial statements and returns to be furnished to the Lender pursuant to this Agreement shall be made and prepared in accordance with Generally Accepted Accounting Principles consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Lender). SECTION 11.10 ASSIGNMENTS AND PARTICIPATIONS. (a) The Borrower shall not be entitled to assign its rights and obligations hereunder or any interest herein without the prior consent of the Lender. (b) Subject to the provisions of this Agreement, the Lender may grant participations to one or more Persons in or respect of all or any part of the Lender's Commitment and the Obligations owed to the Lender, but in any such event the participant shall not have any rights under this Agreement or the other Loan Documents in respect of its participation and shall only have, as against the Lender, those rights and remedies in respect of such participation as are set forth in the agreement or agreements made between the Lender and such participant relating thereto. 54. (c) The Lender may at any time, subject, prior to the occurrence of an Event of Default and other than in respect to an assignment by a Lender to one of its Affiliates, to the consent of the Borrower (such consent not to be unreasonably withheld or delayed), assign all or part of the Lender's Commitment and the Obligations then owed to the Lender to one or more Persons (each of which is hereinafter in this Section called the "Assignee Lender") in consideration of the agreement of each such Assignee Lender to advance or hold that percentage of the Lender's Commitment or Obligations owed to the Lender as corresponds with the percentage thereof so assigned to such Assignee (hereinafter called the "Assignee Lender's Commitment" and the "Assignee Lender's Commitment Percentage", respectively). (d) If the Lender proposes to make any such assignment to a potential Assignee Lender, the Lender shall provide to the Borrower or procure the provision to the Borrower of any material information about such potential Assignee Lender which is generally available in order to assist the Borrower in complying with any applicable laws, treaties and regulations relating to the lending by such potential Assignee Lender and to determine whether to give any required consent by the Borrower under clause (c) above. (e) If the Lender assigns all or any part of its Commitment hereunder to an Assignee Lender as provided above, all references in this Agreement to the Lender shall thereafter be construed as references to the Lender and such Assignee Lender to the extent of their respective Commitments and, if such Assignee Lender is not an Affiliate of the Lender the Borrower shall thereafter look only to such Assignee Lender (and not to the Lender) in respect of that proportion of such Lender's Commitment as corresponds to such Assignee Lenders' Commitment therein and accordingly the Lender's obligation to provide Advances in accordance with its Commitment hereunder shall be reduced correspondingly and such Assignee Lender shall assume a Commitment equivalent to such reduction in the Lender's Commitment. (f) The Lender may disclose to a potential participant or potential Assignee Lender (provided that such potential participant or Assignee Lender has been approved by the Borrower, such approval not to be unreasonably withheld) such information concerning or pertaining to the Obligations of the Borrower and its Subsidiaries as is known to the Lender, and may in addition express to any such Person any opinion it may have with respect to any matter, provided such potential participant or potential Assignee Lender covenants in favour of the Borrower and the Lender to only use such information in connection with its evaluation as to whether to take any such participation or assignment and, should it do so, in connection therewith, and to maintain the confidential nature of all such information. SECTION 11.11 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the Province of Ontario and the laws of Canada applicable therein. SECTION 11.12 CONSENT TO JURISDICTION. The Borrower hereby irrevocably submits to the non-exclusive jurisdiction of the Courts of the Province of Ontario in respect of any action, suit or proceeding arising out of or relating to this Agreement and the other Loan Documents and the Credit Facility hereby 55. extended and hereby irrevocably agrees that all Claims in respect of any such action, suit or proceeding may be heard and determined in any such Ontario Court. The Borrower hereby irrevocably waives, to the fullest extent it and they may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. The Borrower agrees that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in another jurisdiction by suit on the judgment or in any other manner provided by law. Nothing in this Section 11.12 shall affect the right of the Lender to bring any suit, action or proceeding against the Borrower or its assets in the courts of any other jurisdiction. SECTION 11.13 BINDING EFFECT. This Agreement shall be binding upon and enure to the benefit of the parties hereto and their respective successors and permitted assigns. SECTION 11.14 INTEREST SAVINGS CLAUSE. Nothing contained in this Agreement or in any promissory notes made by the Borrower to the Lender or in any of the other Loan Documents shall be construed to permit the Lender to receive at any time interest, fees or other charges in excess of the amounts which the Lender is legally entitled to charge and receive under any law to which such interest, fees or charges are subject. In no contingency or event whatsoever shall the compensation payable to the Lender by the Borrower, howsoever characterized or computed, hereunder or under any other agreement or instrument evidencing or relating to the Obligations of the Borrower to the Lender hereunder, exceed the highest rate permissible under any law to which such compensation is subject. There is no intention that the Lender shall contract for, charge or receive compensation in excess of the highest lawful rate, and, in the event it should be determined that any excess has been charged or received, then, ipso facto, such rate shall be reduced to the highest lawful rate so that no amounts shall be charged which are in excess thereof; and the Lender shall apply such excess against the Obligations of the Borrower to the Lender then outstanding and, to the extent of any amounts remaining thereafter, refund such excess to the Borrower. SECTION 11.15 ENTIRE AGREEMENT. This Agreement, including the Schedules hereto, constitutes the entire agreement between the Borrower and the Lender and supersedes all prior agreements, whether oral or written, between the Borrower and the Lender in respect of the Credit Facility extended hereby. SECTION 11.16 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument. 56. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. HUB INTERNATIONAL LIMITED Per: /s/ W. Kirk James c/s ------------------------------- Authorized Signing Officer Per: /s/ Dennis J. Pauls ------------------------------- Authorized Signing Officer BANK OF MONTREAL Per: /s/ Ben Ciallella ------------------------------- Authorized Signing Officer EX-10.16 20 t06723ex10-16.txt DEBENTURE DATED JUNE 28/01 - HUB & ROYAL TRUST EXHIBIT 10.16 HUB INTERNATIONAL LIMITED, as Issuer and Zurich Insurance Company, as Holder ------------------------- DEBENTURE Dated as of June 28, 2001 ------------------------- Cdn$42,500,000 8.5% Convertible Subordinated Debenture due June 28, 2006 Exhibit 10.16 DEBENTURE DEBENTURE dated as of June 28, 2001 between Hub International Limited, a corporation duly organized and existing under the laws of the Province of Ontario (herein called the "Company"), having its registered office at 214 King Street West, Suite 314, Toronto, Ontario, and Royal Trust Corporation of Canada as Trustee for Zurich Insurance Company, a company duly organized and existing under the laws of Switzerland (herein called the "Holder"). FOR GOOD AND VALUABLE CONSIDERATION the parties agree as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF OTHER APPLICATION SECTION 101. Definitions. For all purposes of this Debenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with Generally Accepted Accounting Principles, and, except as otherwise herein expressly provided, the term "Generally Accepted Accounting Principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (c) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Debenture as a whole and not to any particular Article, Section or other subdivision. "Additional Amounts" has the meaning specified in Section 1007. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Base Currency" has the meaning specified in Section 114. "Board of Directors" or "Board" means the board of directors of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of Toronto, Ontario are obligated by law to close. "Canadian Taxes" means any past, present or future tax, duty, levy, impost, deduction, charge, withholding, assessment, tariff or other government charge (including penalties, interest and other liabilities related thereto) imposed or levied by or on behalf of any Tax Authority in Canada. "Cash Equivalents" means: (a) marketable securities issued or directly, fully and unconditionally guaranteed or insured by Canada or any Province thereof or by the United States of America or any State thereof or the District of Columbia therein, or issued by any agency or instrumentality of any of them, and in any case backed by the full faith and credit thereof, in each case having a maturity date of not more than one year from the date of acquisition; (b) time deposits and certificates of deposit having a maturity date of not more than one year from the date of acquisition issued by any Canadian chartered bank, trust company or a bank which is organized under the laws of the United States of America, any State thereof or the District of Columbia therein and which has (or which is a subsidiary of a bank holding company which has) issued capital and earned and contributed surplus in excess of Cdn$500,000,000 or US$500,000,000, as the case may be; (c) commercial paper maturing within one year after the date of acquisition thereof issued by an issuer organized under the laws of Canada or any Province thereof or the United States of America, any State thereof or the District of Columbia which is rated at least A-1 or the equivalent thereof by Standard and Poor's Corporation, P-1 or the equivalent thereof by Moody's Investors Service, Inc. or R-1 low by Dominion Bond Rating Service; and (d) any other investment which the lender of the Company's Senior Indebtedness shall expressly consent in writing to accept as a Cash Equivalent. "Closing Sale Price" means on any day the reported last sale price, regular way, on such day or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on The Toronto Stock Exchange (or such successor exchange), or, if not listed or admitted to trading or quoted on The Toronto Stock Exchange (or such successor exchange), on the principal securities exchange or quotation system in Canada on which such security is quoted or listed or admitted to trading, or, determined in good faith by the Board of Directors. 2 "Commission" means the Ontario Securities Commission, as from time to time constituted, created under the Securities Act (Ontario), or, if at any time after the execution of this Debenture such Commission is not existing and performing the duties now assigned to it then the body performing such duties at such time. "Common Shares" means the common shares, with no par value, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 1218, shares issuable upon conversion of the Debenture shall include only Common Shares or shares of any class or classes of Common Stock resulting from any reclassification thereof; provided, however, that if at any time as a result of such reclassification there shall be more than one such resulting class, the shares so issuable upon conversion of the Debenture shall include shares of all such classes, and the number of shares of each such class then so issuable shall be in the same proportion which the total number of shares of such class resulting from such reclassification bears to the total number of shares of such classes resulting from such reclassification; and provided further, however, that such shares issuable upon conversion of the Debenture shall be "prescribed securities" as defined in Regulation 6208 to the Tax Act, or such other shares as may, at the date of their issuance, be issued without subjecting the Debenture to Canadian Taxes or US Taxes. "Common Stock" means the Common Shares, together with any other class of capital stock of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. "Company" means Hub International Limited, until a successor Person shall have become such pursuant to the applicable provisions of this Debenture, and thereafter "Company" shall mean such successor Person. "Company Conversion Option" has the meaning specified in Section 1203. "Company Conversion Threshold" has the meaning specified in Section 1203. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its President, its Chief Financial Officer or Secretary. "Consolidated EBITDA" for any period means Earnings of the Company and its Subsidiaries for such period, before Consolidated Interest Expense, income taxes, capital tax and large corporation tax, depreciation and amortization of the Company and its Subsidiaries, all determined on an accrual basis and on a consolidated basis for such period, all in accordance with Generally Accepted Accounting Principles, but excluding, for greater certainty, (a) any gain or loss arising from the disposition or write-up or write-down of any fixed assets, (b) any other items not involving the outlay or receipt of cash in the current or any future period, or (c) any other extraordinary items. "Consolidated Indebtedness" means, as of the date of determination (a) the aggregate outstanding principal amount of all Indebtedness of the Company and its Subsidiaries determined (without duplication) in accordance with Generally Accepted Accounting Principles 3 on a consolidated basis, less (b) the excess of (i) then current market value of cash and Cash Equivalents beneficially owned, and held directly, by the Company at such time, over (ii) the reserves and capital required by applicable insurance law to fund reasonably anticipated claims. "Consolidated Interest Expense" of the Company and its Subsidiaries for any period means the aggregate amount (without duplication) of all interest, fees (other than professional fees), standby fees, acceptance fees, commissions, costs and other charges paid in cash or accrued as a liability by the Company and its Subsidiaries during such period on or in respect of or in connection with any Indebtedness, including, without limitation, all interest expenses (whether capitalized or not) on short and long term obligations for borrowed money, fees and other charges payable in respect of financial guarantees, letters of credit or letters of guarantee or obligations to financial institutions who issued such letters of credit or letters of guarantee, discounts in respect of the proceeds of bankers' acceptances, asset monetizations and securitizations, any capitalized interest and the interest portion of payments under Capital Leases, and interest on subordinated Indebtedness, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles; "Constituent Person" has the meaning specified in Section 1218. "Conversion Agent" means any Person authorized by the Company to convert Debentures in accordance with Article 12. The Company has initially appointed the Secretary of the Company as its Conversion Agent. "Conversion Date" of a Debenture means the day such Debenture is surrendered for conversion in accordance with Section 1202 or Section 1204, if such day is not a Business Day, then the next succeeding Business Day. "Conversion Amount" has the meaning specified in Section 1210. "Conversion Price" has the meaning specified in Section 1201. "corporation" includes corporations, partnerships, associations, companies, joint ventures and business trusts. "current market price" has the meaning specified in Section 1210(h). "Debenture", "Debentures", "this Debenture", "the Debenture" and "the Debentures" means this instrument as originally executed and as it may from time to time be supplemented, apportioned (in integral multiples of denominations of US$1,000) or amended by one or more instruments supplemental hereto entered into pursuant to the applicable provisions hereof, as applicable. "Debenture Register" and "Debenture Registrar" have the respective meanings specified in Section 305. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 4 "Defaulted Interest" has the meaning specified in Section 307. "Dollar", "Cdn$" or "Canadian dollar" means a dollar or other equivalent unit in such coin or currency of Canada as at the time shall be legal tender for the payment of public and private debts. "Earnings" for any period means earnings of the Company and its Subsidiaries for such period determined on a consolidated basis in accordance with Generally Accepted Accounting Principles and the accounting practices permitted under Generally Accepted Accounting Principles applied by the Company. "EBITDA Ratio" means the ratio of the Company's Consolidated Indebtedness to its Consolidated EBITDA for the period indicated. "Encumbrance" means any mortgage, charge, hypothec, legal hypothec, pledge, security interest, lien or deposit arrangement or any other encumbrance, whether fixed or floating, that in substance secures the payment of any indebtedness or liability or the observance or performance of any obligation, regardless of form and whether consensual or arising by law, statutory or otherwise, on or in, any asset or property, whether immovable or real, movable or personal, or mixed, tangible or intangible, or any pledge or hypothecation thereof or any conditional sale agreement or other title retention agreement or equipment trust relating thereto or any lease relating to property which would be required to be accounted for as a capital lease on such Person's balance sheet. "Event of Default" has the meaning specified in Section 501. "Exchange Rate" means the average for the 20 Business Days immediately prior the Conversion Date of the noon buying rate in New York City for cable transfers of Canadian dollars as certified for customs purposes (or, if not so certified, as otherwise determined) by the Federal Reserve Bank of New York. "Excluded Holder" has the meaning specified in Section 1007. "Expiration Time" has the meaning specified in Section 1210(f). "Financial Institution" means any bank, or other institutional lender or commercial lender or any strategic lender. "Generally Accepted Accounting Principles" means, at any time, accounting principles generally accepted in Canada as recommended in the Handbook of the Canadian Institute of Chartered Accountants applied on a basis consistent with prior years. "guarantee" means any guarantee or other credit support for all or any part of any Indebtedness or other obligation of any other person, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, excluding, however, any endorsement of negotiable instruments for collection in the ordinary course of business. 5 "Hedging Obligations" means, with respect to any Person, the obligations of such Person under: (1) interest rate swap agreements and interest rate cap agreements; and (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Holder" means the "Holder" identified in the first paragraph of this Debenture and any permitted assignee or successor Person in whose name a Debenture is registered in the Debenture Register. "Holder Conversion Option" has the meaning specified in Section 1201. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that the accrual of interest shall be considered an Incurrence of Indebtedness. "Indebtedness" means (a) any liability of any Person (1) for borrowed money, or under any reimbursement obligation relating to a letter of credit, banker's acceptance, surety or other bond or instrument (2) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation given in connection with the acquisition of any businesses, properties or assets of any kind other than a trade payable or a current liability arising in the ordinary course of business), or (3) under any loan agreement, letter of credit application, acceptance agreement, factoring agreement, Debenture, capital lease, mortgage or similar agreement or document; (b) any liability of others described in the preceding clause (a) that such Person has guaranteed or that is otherwise its legal liability; and (c) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (a) and (b) above. "Interest Payment Date" has the meaning specified in Section 301. "Judgment Currency" has the meaning specified in Section 114. "junior securities" has the meaning specified in Section 1312. "Maturity", when used with respect to the Debenture, means the date on which the principal of the Debenture or an installment of principal becomes due and payable as herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or otherwise. "Non-electing Share" has the meaning specified in Section 1218. "Non-payment Event of Default" means any event (other than a Payment Event of Default) the occurrence of which entitles one or more Persons to accelerate the maturity of any Indebtedness. "Notice of Conversion" means the notice given by the Holder to the Conversion Agent directing the Conversion Agent to convert such Debentures into Common Shares on behalf of such Holder, the form of which is set out in Section 1202. 6 "Notice of Default" has the meaning specified in Section 501. "Officers' Certificate" means a certificate signed by the Chairman, the President, the Chief Financial Officer or Secretary of the Company and delivered to the Holder. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be acceptable to the Holder. "Outstanding", when used with respect to the Debenture, means, as of the date of determination, all Debentures theretofore authenticated and delivered to the Holder, except: (i) Debentures theretofore cancelled or delivered to the Company for cancellation; (ii) Debentures, or portions thereof, for whose payment or redemption money in the necessary amount has been paid to the Holder; (iii) Debentures which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Debentures have been delivered pursuant to this Debenture, other than any such Debentures in respect of which there shall have been presented to the Company proof satisfactory to it that such Debentures are held by a bona fide purchaser in whose hands the Debentures are valid obligations of the Company; and (iv) the principal portion of Debentures converted into Common Shares pursuant to Article 12. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any) or interest on any Debentures on behalf of the Company. "Payment Blockage Period" has the meaning specified in Section 1302(b). "Payment Event of Default" means any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto. "Permitted Senior Indebtedness" means indebtedness that is permitted in accordance with Section 1008. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Debenture" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 306 in exchange for a mutilated Debenture or in lieu of a lost, destroyed or stolen 7 Debenture shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Debenture. "prescribed securities" has the meaning specified in Section 1218. "Principal Lender" means Zurich Insurance Company. "Purchased Shares" has the meaning specified in Section 1210(f). "rate(s) of exchange" has the meaning specified in Section 114(d). "Redemption Date" means the date fixed for redemption by or pursuant to this Debenture. "Redemption Price" has the meaning specified in Section 1101. "Redemption Tax Event" means that the Company shall have received an Opinion of Counsel to the effect that, as a result of (a) any amendment to or change (including any announced prospective change) in the laws (or any regulations thereunder) of any Tax Authority, (b) any amendment to or change in an interpretation or application of such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), in either case, which amendment or change is enacted, promulgated, issued or announced, or which interpretation is issued or announced, or which action is taken, on or after the date hereof, or (c) any change in the domicile or residence of the Company or the Holder thereby subjecting the parties to the tax laws of another jurisdiction, there is more than an insubstantial risk that the Company has or would become obligated to pay Additional Amounts to the Holder, and the Board concludes that (i) the Additional Amounts are or would be more than a de minimis amount and (ii) such obligation cannot be avoided by the Company taking reasonable measures available to it. "Reference Date" has the meaning specified in Section 1210(d). "Reference Period" has the meaning specified in Section 1203. "Registered Office" means the registered office of the Company, currently located at Suite 314, 214 King Street West, Toronto, Ontario. "Regular Record Date" for the interest payable on any Interest Payment Date means the date (whether or not a Business Day) next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Company, means the Chairman, the President, the Chief Financial Officer or the Secretary. "Securities Act" means the Securities Act, (Ontario), as amended from time to time. 8 "Senior Indebtedness" means: (a) the principal of (and premium, if any, on) and interest on (including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law) and other amounts due on or in connection with any Indebtedness of the Company owed to any Financial Institution pursuant to a negotiated agreement between the Company and such Financial Institution, whether outstanding on the date of this Debenture or hereafter created, incurred or assumed, and all Hedging Obligations with respect thereto; (b) any other Indebtedness unless the instrument under which such Indebtedness is incurred expressly provides that such Indebtedness shall not be senior in right of payment to any other Indebtedness of the Company; and (c) all obligations with respect to items listed in the preceding clauses (a) and (b). Notwithstanding anything to the contrary in the preceding, Senior Indebtedness will not include: (d) any liability for federal, state, local or other taxes owed or owing by the Company; (e) Indebtedness of the Company that is expressly subordinated in right of payment or pari passu to the Debentures; (f) Indebtedness of the Company that is expressly subordinated in right of payment to any Senior Indebtedness; (g) Indebtedness of the Company that by operation of law is subordinate to any general unsecured obligations of the Company; (h) any Indebtedness of the Company to any of its Subsidiaries; (i) any trade payables; or (j) any Indebtedness incurred in violation of this Debenture. "Stated Maturity" means, in the case of principal on the Debenture, June 28, 2007, and, in the case of interest thereon, the fixed date on which any installment of interest is due and payable. "Subsidiary" means any corporation of which at the time of determination the Company, directly and/or indirectly through one or more Subsidiaries, owns more than 50% of the Voting Stock. "Tax Act" means the Income Tax Act (Canada) or a Canadian provincial or territorial income tax statute. "Tax Authority" means the Dominion of Canada, any province, territory or other political subdivision thereof or the United States or any state or other political subdivision thereof, as applicable, or any other authority, agency or other person having the power to tax. "Trading Day" means a Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange in the applicable securities market. "Trading Volume" means the total number of shares of Common Stock traded on a particular Trading Day. "US$" or "United States" dollar means a dollar or other equivalent unit in currency of the United States of America as at the time shall be legal tender for payment of public and private debts. "US Taxes" means any past, present or future tax, duty, levy, impost, deductions, charges, withholdings, assessment, tariff or other government charge (including penalties, interest and other liabilities related thereto) imposed or levied by or on behalf of any Tax Authority in the United States of America. 9 "Voting Stock" means stock of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Holder to take any action under any provision of this Debenture, the Company shall furnish to the Holder an Officers' Certificate stating that all conditions precedent, if any, provided for in this Debenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Debenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Debenture (other than pursuant to Section 1005) shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Holder. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or 10 officers of the Company as to such factual matters, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Debenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holder. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Debenture to be given or taken by the Holder may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by the Holder in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Company and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holder. Proof of execution of any such instrument or of writing appointing any such agent shall be sufficient for any purpose of this Debenture and conclusive in favor of the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. (c) The principal amount and serial numbers of Debentures held by any Person, and the date of holding the same, shall be proved by the Debenture Register. (d) If the Company shall solicit from the Holder any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of the Holder entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of the Holder generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holder of record at the close of business on such record date shall be deemed to be the Holder; provided that no such authorization, agreement or consent by the Holder on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of such request, demand, authorization, direction, notice, consent, waiver or other Act. 11 (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder shall bind every future Holder of the same Debenture and the Holder of every Debenture issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Company in reliance thereon, whether or not notation of such action is made upon such Debenture. SECTION 105. Notices, etc., to the Holder, Company. (a) Any request, demand, authorization, direction, notice, consent, waiver or act of the Company or other documents provided or permitted by this Debenture to be made upon, given or furnished to, or filed with, the Holder by the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Holder addressed to it as follows: Fairfax Financial Holdings Limited, 95 Wellington Street West, Suite 800, Toronto, Ontario M5J 2N7, Attention: Bradley Martin or to such other address in Canada or the United States as the Holder may, upon advance written notice, give to the Company. (b) Any request, demand, authorization, direction, notice, consent, waiver or Act of the Holder or other documents provided or permitted by this Debenture to be made upon, given or furnished to, or filed with, the Company by the Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its Registered Office. SECTION 106. Deemed Receipt and Waiver. Any notice mailed to the Holder in the manner prescribed in Section 105 shall be conclusively deemed to have been received by the Holder or the Company, as the case may be, five (5) Business Days after such mailing, whether or not the intended recipient actually receives such notice. Where this Debenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. SECTION 107. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. All covenants and agreements in this Debenture by the Company shall bind its successors and assigns, whether so expressed or not. Notwithstanding anything else herein contained, the Holder may not assign or transfer this Debenture or any of its rights hereunder other than to an Affiliate or Affiliates of the Holder (in such proportions of principal as the Holder may see fit). 12 SECTION 109. Severability Clause. In case any provision in this Debenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Debenture. Nothing in this Debenture, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Conversion Agent, any Securities Registrar and their successors hereunder, the Holder and, with respect to any provisions hereof relating to the subordination of the Debentures or the rights of holders of Senior Indebtedness, the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Debenture. SECTION 111. Governing Law. This Debenture shall be governed by and construed in accordance with the law of the Province of Ontario, and the laws of Canada applicable therein, without regard to the principles of conflict of laws that would defer to the substantive laws of any other jurisdiction. SECTION 112. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Conversion Date, Stated Maturity or Maturity of any Debenture shall not be a Business Day, then (notwithstanding any other provision of this Debenture) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Conversion Date or at the Stated Maturity or Maturity; provided that, subject to section 3.01, no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Conversion Date, Stated Maturity or Maturity, as the case may be. SECTION 113. Intentionally Deleted SECTION 114. Conversion of Currency. (a) The Company covenants and agrees that the following provisions shall apply to conversion of currency in the case of this Debenture: (i) If for the purpose of obtaining judgment in, or enforcing the judgment of, any court in any country, it becomes necessary to convert into a currency (the "Judgment Currency") an amount due in any other currency (the "Base Currency"), then the conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which the judgment is given or the order of enforcement is made, as the case may be (unless a court shall otherwise determine). (ii) If there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment is given or an order of enforcement 13 is made, as the case may be (or such other date as a court shall determine), and the date of receipt of the amount due, the Company will pay such additional (or, as the case may be, such lesser) amount, if any, as may be necessary so that the amount paid in the Judgment Currency when converted at the rate of exchange prevailing on the date of receipt will produce the amount in Base Currency originally due. (b) In the event of the winding-up of the Company at any time while any amount or damages owing under this Debenture, or any judgment or order rendered in respect thereof, shall remain outstanding, the Company shall indemnify and hold the Holders harmless against any deficiency arising or resulting from any variation in rates of exchange between (i) the date as of which the equivalent of the amount in Base Currency due or contingently due under this Debenture (other than under this Subsection (b)) is calculated for the purposes of such winding-up and (ii) the final date for the filing of proofs of claim in such winding-up. For the purpose of this Subsection (b) the final date for the filing of proofs of claim in the winding-up of the Company shall be the date fixed by the liquidator or otherwise in accordance with the relevant provisions of applicable law as being the latest practicable date as at which liabilities of the Company may be ascertained for such winding-up prior to payment by the liquidator or otherwise in respect thereto. (c) The obligations contained in Subsections (a)(ii) and (b) of this Section 114 shall constitute separate and independent obligations of the Company from its other obligations under this Debenture, shall give rise to separate and independent causes of action against the Company, shall apply irrespective of any waiver or extension granted by the Holder from time to time and shall continue in full force and effect notwithstanding any judgment or order or the filing of any proof of claim in the winding-up of the Company for a liquidated sum in respect of amounts due hereunder (other than under Subsection (b) above) or under any such judgment or order. Any such deficiency as aforesaid shall be deemed to constitute a loss suffered by the Holders and no proof or evidence of any actual loss shall be required by the Company or its liquidator. In the case of Subsection (b) above, the amount of such deficiency shall not be deemed to be increased or reduced by any variation in rates of exchange occurring between the said final date and the date of any liquidating distribution. (d) The term "rate(s) of exchange" shall mean the rate of exchange quoted by the Bank of Montreal, or such other Canadian chartered bank as may be designated in writing by the Company from time to time, at its central foreign exchange desk in its main office in Toronto at 12:00 noon (Toronto time) on the relevant date for purchases of the Base Currency with the Judgment Currency and includes any premiums and costs of exchange payable. SECTION 115. Submission to Jurisdiction; Waiver of Immunities. The Company agrees that any legal suit, action or proceeding brought by any party to enforce any rights under or with respect to this Debenture may be instituted in any court in The City of Toronto, in the Province of Ontario, and waives to the fullest extent permitted by law any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, including (without limitation) any objection or defense to any such jurisdiction as an inconvenient forum and irrevocably submits itself to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding. 14 To the extent the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations under this Debenture, to the extent permitted by law. SECTION 116. Intentionally Deleted. ARTICLE TWO INTENTIONALLY DELETED ARTICLE THREE THE DEBENTURE SECTION 301. Terms. FOR VALUE RECEIVED, the Company hereby acknowledges itself indebted and promises to pay to the Holder, or its registered assigns, the principal sum of Forty-two Million Five Hundred Thousand Canadian Dollars (Cdn$42,500,000) on June 28, 2006, and to pay interest on the said principal sum from time to time outstanding from the date that the subscription for the Debenture was funded by the Holder, namely June 21, 2001, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid, semi-annually on June 28 and December 28 of each year, commencing December 28, 2001, at the rate of 8.5% per annum until the said principal amount has been paid in full and, to the extent lawful, to pay on demand interest on any overdue interest or principal payment at the rate borne by this Debenture plus 3% per annum. Interest at the applicable rates set out above shall be payable both before and after maturity and before and after judgment. The principal of and the interest on this Debenture shall be payable at the Registered Office or agency of the Company in The City of Toronto in such coin or currency of The United States of America at the time and payment is the legal tender for payment of public and private debts in United States Dollars; provided, however, that payment of principal and interest may be made at the option of the Company by mailing a cheque payable to the Holder at such address as appears on the Debenture Register; provided, further, that in the case of payments of principal the Debenture is first surrendered to the Paying Agent. Notwithstanding the foregoing, the Holder will be entitled to receive interest payments, if any, on any Interest Payment Date and principal on Maturity by wire transfer of immediately available funds to an account maintained by the payee located in The United States of America if appropriate wire transfer instructions have been received in writing by the Company not less than 15 days prior to such Interest Payment Date or Maturity, provided that in the case of payments of principal the related Debenture is first surrendered to the Paying Agent. Any such wire transfer instructions received by the Company shall remain in effect until revoked by the Holder. The Debenture shall be redeemable as provided in Article Eleven. In the event of a partial redemption, the parties may, upon mutual agreement, indicate on an addendum attached 15 to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, as contemplated in Section 1105(d). The Debenture shall be convertible as provided in Article Twelve. The Debenture shall be subordinated in right of payment to Senior Indebtedness as provided in Article Thirteen. There shall be no sinking fund for the retirement of the Debenture. The Company will pay Additional Amounts with respect to the Debenture under certain circumstances as provided in Section 1007. SECTION 302. Denominations. The Debenture shall be issuable without coupons and only in denominations of US$1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Debenture shall be executed on behalf of the Company by its Chairman, its President, its Chief Financial Officer or Secretary under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Debenture must be manual. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid (either, a "Successor"), shall have executed a Debenture supplemental hereto with the Holder pursuant to Article Nine, the Debenture delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the Successor, be exchanged for another Debenture executed in the name of the Successor with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Debenture surrendered for such exchange and of like principal amount; however, such exchanged Debenture shall conform to any requirements necessary to ensure that such Debenture will be and will remain exempt from Canadian Taxes and US Taxes including, without limitation, in respect of Canadian Taxes, the requirement in effect on the date of the Debenture that the Holder shall not be entitled to receive shares, other securities or property, other than shares that are "prescribed securities" as defined in Regulation 6208 of the Tax Act; and the Company shall deliver a Debenture as specified in such request for the purpose of such exchange. In the event of a partial redemption, the parties may, upon mutual agreement, indicate on an addendum attached to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, as contemplated in Section 1105(d). If any Debenture shall at any time be delivered in any new name of a successor Person pursuant to this Section in 16 exchange or substitution for or upon registration of transfer of the Debenture, such successor Person, at the option of the Holder but without expense to the Holder, shall provide for the exchange of all Debentures at the time Outstanding for a Debenture delivered in such new name. SECTION 304. Intentionally Deleted. SECTION 305. Registration, Registration of Transfer and Exchange. (a) The Company shall cause to be kept at the Registered Office a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Debenture Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of the Debenture(s) and of transfers of the Debenture(s). The Debenture Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Debenture Register shall be open to inspection by the Holder. The Secretary of the Company is hereby initially appointed as security registrar (the "Debenture Registrar") for the purpose of registering Debentures and transfers of Debentures as herein provided. Upon surrender for registration of transfer of the Debenture, the Company shall execute, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Debentures of any authorized denomination or denominations of a like aggregate principal amount. At the option of the Holder, the Debenture may be exchanged for other Debentures of any authorized denomination and of a like aggregate principal amount, upon surrender of the Debentures to be exchanged at such office or agency. Whenever the Debentures are so surrendered for exchange, the Company shall execute and deliver the Debenture which the Holder making the exchange is entitled to receive. All Debentures issued upon any registration of transfer or exchange of the Debenture shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits as this Debenture. Every Debenture presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Debenture Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Debenture Registrar, duly executed by the Holder or the Holder's attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Debentures, other than exchanges pursuant to Section 304, 306, 906, 1104, 1202 or 1204 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Debenture during a period beginning at the opening of business 15 days before the 17 redemption of the Debenture under Section 1104 and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange that portion of the Debenture so selected for redemption. SECTION 306. Mutilated, Destroyed, Lost and Stolen Debenture Certificate. If (i) any mutilated Debenture is surrendered to the Company, or (ii) the Company receives evidence to its satisfaction of the destruction, loss or theft of the Debenture, and there is delivered to the Company such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company that the Debenture has been acquired by a bona fide purchaser, the Company shall execute, authenticate and deliver, in exchange for any such mutilated Debenture or in lieu of any such destroyed, lost or stolen Debenture, a new Debenture of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Debenture has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Debenture, pay such Debenture. Upon the issuance of any new Debenture under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of a trustee, any Authenticating Agent and the Debenture Registrar) connected therewith. Every new Debenture issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Debenture shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Debenture shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Debenture equally and proportionately with any and all other Debentures duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures. SECTION 307. Payment of Interest; Interest Rights Preserved. Interest on the Debenture which is payable, and is punctually paid, on any Interest Payment Date shall be paid to the Person in whose name such Debenture (or one or more Predecessor Debentures) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002. Subject to the foregoing provisions of this Section and Section 305, upon registration of transfer of or in exchange for or in lieu of the Debenture, any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by the Debenture. SECTION 308. Persons Deemed Owners. 18 Prior to the due presentment of the Debenture for registration of transfer, the Company, and any agent of the Company, may treat the Person in whose name the Debenture is registered as the owner of the Debenture for the purpose of receiving payment of principal of and (subject to Sections 305 and 307) interest on the Debenture and for all other purposes whatsoever, whether or not the Debenture is overdue, and none of the Company, or any agent of the Company, shall be affected by notice to the contrary. SECTION 309. Cancellation. The Debenture, if surrendered for payment, redemption, registration of transfer or exchange shall be cancelled promptly by the Company. The Company may at any time cancel any Debentures previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may cancel any Debentures previously authenticated hereunder which the Company has not issued and sold. No Debentures shall be authenticated in lieu of or in exchange for any Debentures cancelled as provided in this Section, except as expressly permitted by this Debenture. SECTION 310. Computation of Interest. Interest on the Debenture shall be computed on the basis of a 360-day year of twelve 30-day months. For purposes of the Interest Act (Canada), where, in this Debenture, a rate of interest is to be calculated on the basis of a year of 360 days, the yearly rate of interest to which the 360 day rate is equivalent is such rate multiplied by the actual number of days in the year for which such calculation is made and divided by 360. SECTION 311. Company to Determine Certain Matters. In accordance with the provisions of this Debenture, the Company shall determine solely certain matters relating to the administration of the Debenture, including but not limited to Sections 305, 306, 308 and 1002. It shall be at the Company's sole option to exercise the redemption provisions set forth in Article 11. In addition, it shall be the sole obligation of the Company to satisfy the provisions of Article 12. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Debenture. This Debenture shall cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Debenture expressly provided for herein or pursuant hereto) and the Holder, shall execute proper instruments acknowledging satisfaction and discharge of this Debenture when the Company has paid or caused to be paid all other sums payable hereunder by the Company; and the Company has delivered to the Holders an Officers' Certificate stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Debenture have been complied with. 19 ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest on any Debenture when it becomes due and payable, and continuance of such default for a period of five (5) Business Days; or (b) default in the payment of the principal of the Debenture at its Maturity or a Redemption Date; or (c) default in the performance, or breach, of any covenant or agreement of the Company in this Debenture (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with elsewhere in this Section), and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the Holder a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) Indebtedness of the Company shall have been accelerated or otherwise declared or become due and payable or required to be prepaid or repurchased (in each case other than by regularly scheduled required installment), prior to the stated maturity thereof; or (e) failure by the Company to pay a final judgment or final judgments or a final order or final orders entered by a court or courts of competent jurisdiction, which judgments or orders in the aggregate exceed US$5 million, and (i) the commencement by any creditor of any enforcement proceeding upon any such judgment or order or (ii) such order remaining unstayed for 45 days; or (f) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the Bankruptcy and Insolvency Act (Canada), the Companies Creditors Arrangement Act (Canada) or any other applicable federal or provincial insolvency law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 30 consecutive days; or (g) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or 20 relief under the Bankruptcy and Insolvency Act (Canada), the Companies Creditors Arrangement Act (Canada) or any other applicable federal or provincial insolvency law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(f) or 501(g)) occurs and is continuing, then and in every such case the Holder may declare the principal amount of all the Debenture to be due and payable immediately, by a notice in writing to the Company and upon any such declaration such principal amount shall become due and payable. If an Event of Default specified in Section 501(f) or 501(g) occurs and is continuing, then the principal amount of the Debenture shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Holder as hereinafter provided in this Article, the Holder by written notice to the Company may rescind and annul such declaration and its consequences if: (a) the Company has paid a sum sufficient to pay in [ Canadian/US ] Dollars: (i) all overdue interest on all Outstanding Debentures at the rate set out in Section 301, (ii) all unpaid principal of (and premium, if any, on) any Outstanding Debenture which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate set out in Section 301, (iii) to the extent that payment of such interest is lawful, interest on overdue interest at the rate set out in Section 301, and (b) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Debenture which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Holder. The Company covenants that if: 21 (a) default is made in the payment of any installment of interest on any Debenture when such interest becomes due and payable and such default continues for a period of five (5) Business Days: or (b) default is made in the payment of the principal of (or premium, if any, on) the Debenture at the Maturity thereof, the Company will, upon demand of the Holder pay to the Holder the whole amount then due and payable on such Debenture for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate set out in Section 301, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection. If the Company fails to pay such amounts forthwith upon such demand, the Holder may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Debenture and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Debenture, wherever situated. If an Event of Default occurs and is continuing, the Holder may in its discretion proceed to protect and enforce its rights by such appropriate judicial proceedings as the Holder shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Debenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Holder May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Debenture or the property of the Company or of such other obligor or their creditors, the Holder (irrespective of whether the principal of the Debenture shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Holder shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Debenture and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Holder allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; 22 and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by the Holder to make such payments to the Holder. SECTION 505. Intentionally Deleted. SECTION 506. Application of Money Collected. Any money collected by the Holder pursuant to this Article shall be applied forthwith in the following order and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Debenture and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: Subject to Article Thirteen, to the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Debenture; and SECOND: The balance, if any, to the Person or Persons entitled thereto. SECTION 507. Limitation on Suits. The Holder shall not have any right to institute any proceeding, judicial or otherwise, with respect to this Debenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such Holder has previously given written notice to the Company of a continuing Event of Default or has made a demand under Section 503 or 504. SECTION 508. Unconditional Right of Holder to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Debenture, the Holder shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Thirteen) and the Debenture of the principal of (and premium, if any) and (subject to Section 301) interest on the Debenture on the Maturity expressed in such Debenture (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Holder has instituted any proceeding to enforce any right or remedy under this Debenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Holder, then and in every such case, subject to any determination in such proceeding, the Company and the Holder shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Holder shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debenture Certificates in the last paragraph of Section 306, 23 no right or remedy herein conferred upon or reserved to the Holder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Holder may be exercised from time to time, and as often as may be deemed expedient, by the Holder, as the case may be. The acceptance of payments under this Debenture by the Holder during an Event of Default will not be considered a waiver of such Event of Default. SECTION 512. Intentionally Deleted. SECTION 513. Waiver of Past Defaults. The Holder may waive any past default hereunder and its consequences. Upon any such waiver, such default shall cease to exist, and any Event of Default arising there from shall be deemed to have been cured, for every purpose of this Debenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 514. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Debenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 515. Undertaking for Costs. In any suit for the enforcement of any rights or remedy under this Debenture a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant. ARTICLE SIX INTENTIONALLY DELETED 24 ARTICLE SEVEN REPORTS BY COMPANY SECTION 701. Reports by Company. The Company shall: (a) transmit to the Holder, within 15 days after it files its annual and quarterly reports, information, documents and other reports with the Commission, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Company is required to file with the Commission, (b) transmit to the Holder in the manner provided in Section 106 all information that is provided to the holders of Common Stock within 10 days after such information is provided to such holders of Common Stock, (c) provide to the Holder such information about the operations and financial condition of the Company as the Holder may from time to time reasonably request and allow the Holder, on reasonable advance notice from the Holder to the Company, to examine the books of account and records of the Company and discuss the affairs, finances and accounts of the Company with, and to be advised as to the same by, the Company's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and/or General Counsel (or as they may otherwise delegate). ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms. The Company shall not, and shall not cause, suffer or permit any of its Subsidiaries to, consolidate or amalgamate with or merge with or into any other Person or sell, convey, transfer or lease or otherwise dispose of all or substantially all of its assets to any Person, unless: (a) the entity formed shall be a corporation, partnership or trust organized under the laws of Canada or any province or territory thereof or the United States, any state thereof or the District of Columbia (other than Old Lyme Insurance Co. Ltd., a company domiciled in Bermuda that is a Subsidiary of Kaye Group Inc., a company that the Company has agreed to acquire), and, unless the Company is the continuing corporation, shall expressly assume the Company's obligation to pay principal and interest on the Debenture and to observe the covenants of the Debenture; (b) immediately after giving effect to such transaction, (i) on a pro forma basis the Company or such continuing corporation which becomes the successor obligor of the Debentures could incur at least Cdn$1.00 of additional Indebtedness under the first paragraph of Section 1008 (without reliance on paragraph (b) thereof); and (ii) no Default or Event of Default shall have occurred and be continuing; 25 (c) the Corporation shall have delivered to the Holder an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, amalgamation, merger, conveyance, transfer or lease and the supplemental Debenture comply with this Debenture. The requirements of paragraph (b) of this Section 801 shall not apply to any sale, conveyance, transfer, lease or other disposition of the Company's assets to a direct or indirect Subsidiary of the Company. SECTION 802. No Consent or Approval Required. To the greatest extent permitted by law, no approval or consent of the Holder is required in connection with any consolidation, amalgamation or merger involving the Company, or any sale or conveyance to another Person of all or substantially all the assets of the Company, whether as a result of any of the events referred to in Section 801 or otherwise under the terms of this Debenture. SECTION 803. Successor Substituted. Upon any consolidation or amalgamation of the Company with or merger of the Company with or into any other corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 801, the successor Person formed by such consolidation or amalgamation into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Debenture with the same effect as if such successor Person had been named as the Company herein. SECTION 804. Assignment of Rights. The Company will have the right at all times to assign any of its respective rights or obligations under this Debenture to a direct or indirect Subsidiary of the Company; provided, however, that in the event of any such assignment, the Company will remain liable for all of its respective obligations. Subject to the foregoing, this Debenture will be binding upon and inure to the benefit of the parties hereto, the Holder and its respective successors and assigns. This Debenture may not otherwise be assigned by the Company. ARTICLE NINE SUPPLEMENTAL DEBENTURE SECTION 901. Intentionally Deleted. SECTION 902. Supplemental Debentures. The Company when authorized by a Board Resolution and with the prior consent of The Toronto Stock Exchange, and the Holder may enter into a Debenture supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Debenture or any supplemental Debenture. 26 SECTION 903. Intentionally Deleted. SECTION 904. Effect of Supplemental Debenture. Upon the execution of any supplemental Debenture by the Company and the Holder under this Article, this Debenture shall be modified in accordance therewith, and such supplemental Debenture shall form a part of this Debenture for all purposes; and the Company and the Holder shall be bound thereby. SECTION 905. Intentionally Deleted. SECTION 906. Reference in Debenture to Supplemental Debentures. Any Debenture delivered after the execution of any supplemental Debenture pursuant to this Article may, bear a notation in form approved by the parties as to any matter provided for in such supplemental Debenture. If the Company shall so determine, a new Debenture so modified as to conform, in the opinion of the Company, to any such supplemental Debenture may be prepared and executed by the Company and delivered by the Company in exchange for the Debenture. SECTION 907. Intentionally Deleted. SECTION 908. Effect on Senior Indebtedness. No supplemental Debenture shall adversely affect the rights of the holders of Senior Indebtedness under Article Thirteen without the consent of the Holder. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if any, and Interest. The Company covenants and agrees for the benefit of the Holder that it will duly and punctually pay the principal of (and premium, if any) and interest on the Debenture in accordance with the terms of this Debenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain its Registered Office, where the Debenture may be presented or surrendered for payment, where the Debenture may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of this Debenture may be served. The Company will give prompt written notice to the Holder of any change in the location of the Registered Office. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of Toronto) where the Debenture may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner 27 relieve the Company of its obligation to maintain an office or agency in The City of Toronto for such purposes. The Company will give prompt written notice to the Holder of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Debenture Payments to Be Held in Trust. The Company, on or before each due date of the principal of (or premium, if any) or interest on the Debenture, shall segregate and hold in trust for the benefit of the Holder a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall be paid to the Holder or otherwise disposed of as herein provided and will promptly notify the Holder of its action or failure so to act. Any money then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest on the Debenture and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be discharged from such trust; and the Holder may thereafter, only as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Company, as trustee thereof, shall thereupon cease. SECTION 1004. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holder. SECTION 1005. Statement by Officers As to Default. The Company will deliver to the Holder, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer, as to his or her knowledge, after reviewing the Debenture, of the Company's compliance with all conditions and covenants under this Debenture. In addition, the Company shall notify the Holder in the case of any Event of Default as soon as is reasonably practicable after knowledge of such Event of Default comes to the attention of any of any Responsible Officer. For purposes of this Section 1005, such compliance shall be determined without regard to any period of grace or requirement of notice under this Debenture. SECTION 1006. Intentionally Deleted. SECTION 1007. Payment of Additional Amounts. All adjustments, payments or transfers made by the Company under or with respect to the Debenture (including, but not limited to, the redemption or conversion thereof or as a result of any adjustment to the Conversion Price), or delivery of Common Shares (including cash in lieu of fractional shares) made by or on behalf of the Company will be made free and 28 clear of and without withholding or deduction for or on account of Canadian Taxes and US Taxes, unless the Company is required to withhold or deduct Canadian Taxes or US Taxes by law or by the interpretation or administration thereof by the relevant government authority or agency. If the Company is so required to withhold or deduct any amount for or on account of Canadian Taxes or US Taxes from any payment or transfer made under or with respect to the Debentures (including, but not limited to, the redemption or conversion thereof or as a result of any adjustment to the Conversion Price), the Company will pay as additional interest such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by the Holder after such withholding or deduction (including with respect to Additional Amounts) will not be less than the amount the Holder would have received if such Canadian Taxes or US Taxes, as the case may be, had not been withheld or deducted (a similar payment will also be made to the Holder if the Holder is exempt from withholding but is required to pay tax directly on amounts otherwise subject to withholding); provided, however, that no Additional Amounts related to Canadian Taxes will be payable with respect to a payment made to the Holder (an "Excluded Holder") in respect of the beneficial owner thereof (i) if the Company does not deal at arm's length (for purposes of the Tax Act) with the Holder at the time of the making of such payment, (ii) if the Holder is subject to such Canadian Taxes by reason of its failure to comply with any certification, identification, information, documentation or other reporting requirement if compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or a reduction in the rate of deduction or withholding of, such Canadian Taxes or (iii) which payment is subject to such Canadian Taxes by reason of the Holder carrying on business in or being connected with Canada or any province or territory thereof otherwise than by the mere holding of Debentures or the receipt of payment thereunder. The Company will make such withholding or deduction and remit the full amount deducted or withheld to the relevant authority as and when required in accordance with applicable law. The Company will pay all taxes, interest penalties, liabilities or other amounts due of the Company or the Holder which arise by virtue of any failure of the Company to withhold, deduct and remit to the relevant authority on a timely basis the full amounts required in accordance with applicable law. The Company will furnish to the Holder, within 30 days after the date the payment of any Canadian Taxes or US Taxes is due pursuant to applicable law, certified copies of tax receipts evidencing such payment by the Company. SECTION 1008. Limitation on Additional Indebtedness. (a) The Company shall not, directly or indirectly, Incur any Senior Indebtedness, provided, however, that the Company may incur Senior Indebtedness (i) if the date of such Incurrence shall be on or prior to the last day of the fourth full fiscal quarter following the date of this Debenture, in an amount not to exceed, together with all other Incurrences under this Section and all other outstanding Senior Indebtedness, U.S.$148 million, or (ii) if the date of such Incurrence is after the last day of the fourth full fiscal quarter following the date of this Debenture then, the Company's EBITDA Ratio for the most recently ended four full fiscal quarters immediately preceding the date on which such additional Indebtedness is Incurred (taken as one accounting period) would not have been greater than 4:1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom) as if the additional Indebtedness had been Incurred at the beginning of such four-quarter period. (b) The foregoing provisions will not apply to: 29 (i) Indebtedness outstanding on the date of this Debenture; (ii) the Incurrence of any Indebtedness in exchange for, or the proceeds of which are used to refund, refinance or replace Indebtedness that was outstanding on the date of this Debenture or otherwise permitted by the terms of this Debenture to be then outstanding; (iii) the Incurrence of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Debenture to be outstanding; (iv) the Incurrence of intercompany Indebtedness between the Company and its Subsidiaries; and (v) the Incurrence of Indebtedness represented by capital lease obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company and its Subsidiaries, including any Encumbrances on (and limited to) such assets to secure such Indebtedness. SECTION 1009. Limitations on Issuances of Guarantees of Senior Indebtedness. The Company will not permit any of its Subsidiaries, directly or indirectly, to guarantee or pledge or grant any Encumbrance upon any assets to secure the payment of any Senior Indebtedness of the Company, unless such Subsidiary simultaneously executes and delivers a supplemental Debenture providing for the guarantee of, or pledge of assets to secure, the payment of the Debenture by such Subsidiary, which guarantee or pledge shall be on terms substantially similar to the guarantee of or pledge of assets regarding such Senior Indebtedness and shall be subordinated to such guarantee or pledge of assets of such Senior Indebtedness to the same extent as the Debenture is subordinated to such Senior Indebtedness. It is the intention of all such parties hereto that any guarantee of the Debentures by any Subsidiary of the Company shall not constitute a fraudulent transfer or conveyance for purposes of Canadian federal or provincial law relating to fraudulent transfer or conveyance. To effectuate the foregoing intention, the Holder hereby irrevocably agrees that the obligations of such Subsidiary under any guaranty of the Debenture shall be limited to the maximum amount that will not result in the obligations of the Subsidiary constituting such fraudulent transfer or conveyance (taking into account the subrogation and contribution rights such Subsidiary may have against the borrower or any other guarantor or person). Notwithstanding the preceding paragraph, any guarantee of, or pledge of assets with respect to the Debenture by a Subsidiary of the Company will provide by its terms that it will be automatically and unconditionally released and discharged in connection with any permitted sale or disposition of all or substantially all of the assets of such Subsidiary (including by way of permitted merger or consolidation), or in connection with any permitted sale of all the capital stock of such Subsidiary. SECTION 1010. Limitation on Senior Subordinated Indebtedness. 30 The Company will not Incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is pari passu in right of payment to this Debenture, other than 8.5% convertible subordinated debentures due 2006 (subject to a call to redeem after three years) to be issued by the Company and sold to the Principal Lender, in aggregate principal amount not to exceed Cdn$42.5 million. SECTION 1011. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 1007 through 1009, if before or after the time for such compliance, the Holder waives such compliance (with or without conditions) in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN REDEMPTION OF DEBENTURES SECTION 1101. Right of Redemption. Other than as hereinafter set out, the Debentures may not be redeemed at the election of the Company. Upon the occurrence of a Redemption Tax Event, the Company may, at its option, redeem all of the Debentures upon notice as set forth in Section 1105, at 100% of the principal amount (the "Redemption Price") plus any accrued and unpaid interest to the Redemption Date and any Additional Amounts owed on such interest; provided that (i) no such notice of redemption may be given earlier than 60 Business Days prior to the earliest date on which the Company would be obligated to pay any such Additional Amounts were a payment in respect of the Debentures then due, and (ii) at the time such notice is given, the circumstances creating the obligation to pay such Additional Amounts remain in effect. Prior to the giving of any such notice of redemption, the Company must deliver to the Holder (i) an Officers' Certificate stating that the Company is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right to the Company so to redeem have occurred, (ii) a Board Resolution to the effect that the Board has concluded that the Additional Amounts are or would be more than a de minimis amount and such obligations cannot be avoided by the Company taking reasonable measures available to it, and (iii) an Opinion of Counsel acceptable to the Holder, acting reasonably, to the effect that the Company has or would become obligated to pay any Additional Amounts as a result of the Redemption Tax Event. The Company's right to redeem the Debentures shall continue as long as the Company is obligated to pay such Additional Amounts, notwithstanding that the Company shall have made payments of Additional Amounts. SECTION 1102. Applicability of Article. 31 Redemption of the Debenture at the election of the Company, as permitted or required by any provision of this Debenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Holder. The election of the Company to redeem the Debenture pursuant to Section 1101 shall be evidenced by a Board Resolution. The Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Holder), notify the Holder of such Redemption Date and of the principal amount of the Debenture to be redeemed. SECTION 1104. Debentures to be Redeemed. No partial redemption of the Debenture shall reduce the portion of the principal amount of the Debenture not redeemed to less than US$1,000. Upon any redemption of any portion of the Debenture the Company and the Holder shall treat as Outstanding any portion of the Debenture not thereafter surrendered for conversion in accordance with Article 12 and any portion of the Debenture thereafter delivered to the Holder in exchange for the unconverted portion of the Debenture converted in part. For all purposes of this Debenture, unless the context otherwise requires, all provisions relating to redemption of the Debenture shall relate to the portion of the principal amount of the Debenture which has been or is to be redeemed. SECTION 1105. Notice of Redemption. Notice of redemption shall be given by the Company to the Holder in the manner provided for in Section 105 not less than 30 nor more than 60 days prior to the Redemption Date. All notices of redemption shall state: (a) the Redemption Date, (b) the Redemption Price and the amount of accrued and unpaid interest, if any, to the Redemption Date payable as provided in Section 1107, (c) in the case of a partial redemption, the principal amount of the Debenture to be redeemed, (d) in the case of a partial redemption, the notice shall state that on and after the Redemption Date, upon surrender of the Debenture, the Holder will receive, without charge, a new Debenture or Debentures of authorized denominations for the principal amount thereof remaining unredeemed or, in the alternative, the parties may, upon mutual agreement, indicate on an addendum attached to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, 32 (e) (i) the Conversion Price then in effect, and (ii) the places where the Debenture may be surrendered for conversion, (f) that on the Redemption Date, the Redemption Price (and accrued interest and unpaid interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and payable upon the applicable portion of the Debenture, and that interest thereon will cease to accrue on and after said date, and (g) the place or places where the Debenture is to be surrendered for payment of the Redemption Price and accrued interest, if any. SECTION 1106. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit, segregate and hold in trust as provided in Section 1003 an amount of money sufficient to pay the Redemption Price of, and accrued interest on, that the portion of the Debenture which is to be redeemed on that date. SECTION 1107. Debentures Payable on Redemption Date. Notice of redemption having been given as aforesaid, and unless the Holder shall have exercised a conversion right under Article Twelve, the portion of the Outstanding Debenture to be so redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest, if any) such portion of the Debenture shall cease to be Outstanding and to bear interest. Upon surrender of the Debenture for redemption in accordance with said notice, such Debenture shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holder, or one or more Predecessor Debentures, registered as such at the close of business on the relevant Regular Record Dates according to their terms and the provisions of Section 301. ARTICLE TWELVE CONVERSION OF DEBENTURES SECTION 1201. Holder Conversion Option. Subject to and upon compliance with the provisions of this Article, the Holder at its option, at any time prior to 5:00 p.m. (Toronto time) on the Business Day immediately preceding the Maturity, or, in the case of a redemption, any time prior to 5:00 p.m. ((Toronto time) on the Business Day immediately preceding the Redemption Date, may convert the Debenture (or any portion of the principal amount thereof that is an integral multiple of US$1,000), into that number of fully paid and nonassessable Common Shares as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price, as defined below (the "Holder Conversion Option"). 33 The price at which Common Shares shall be delivered upon a conversion by a Holder (herein called the "Conversion Price") shall be Seventeen Canadian Dollars (Cdn $17) per Common Share, as adjusted in certain instances as provided in this Article Twelve. SECTION 1202. Exercise of Holder Conversion Option. In order to exercise the Holder Conversion Option, the Holder shall (A) surrender the Debenture, duly endorsed or assigned to the Company or in blank at any office or agency of the Company maintained for that purpose pursuant to Section 1002, and (B) deliver to such office or agency a duly signed and irrevocable completed Notice of Conversion (a "Notice of Conversion") in the form set out below stating that the Holder elects to convert such Debenture or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. CONVERSION NOTICE The undersigned holder of this Debenture hereby irrevocably converts the Debenture, or any portion of the principal amount at Maturity hereof (which is an integral multiple of US $1,000) below designated, into Common Shares of the Company in accordance with the terms of this Debenture, and directs that such shares, together with a Cheque in payment for any fractional shares and any Debentures representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If Common Shares or Debentures are to be registered in the name of a Person other than the undersigned (which other Person the undersigned acknowledges may only be an affiliate of the undersigned), the undersigned will pay all transfer taxes, if any, payable with respect thereto. Dated: ---------------------- ----------------------------------------- ----------------------------------------- Signature(s) If Common Shares or Debentures are to be registered in If only a portion of the Debenture is to be converted, the name of a Person other than the Holder, please indicate: print such Person's name and address: - ------------------------------------- Principal amount to be converted: Name US$ -------------------------------- (US$1,000 denomination or - ------------------------------------- integral multiple thereof) Address 34 - ------------------------------------- Taxpayer Identification Number, if any The Debenture, if surrendered for conversion (in whole or in part) other than on an Interest Payment Date, shall be entitled to, and the Company shall make, a payment of interest, calculated in the normal course, on the outstanding principal for that portion of the period during which such principal was not converted on the next succeeding Interest Payment Date. For greater certainty, the principal amount of the Debenture that is converted shall be entitled to interest up to the Conversion Date, such interest to be paid on the next succeeding Interest Payment Date, together with interest on that portion of the principal that was not converted. The Company's delivery to the Holder of the number of Common Shares (and cash in lieu of fractions thereof) into which the Debenture is convertible will be deemed to satisfy the Company's obligation to pay the principal amount of the Debenture. The Holder shall promptly deliver to the Company and the Company, in turn, to the transfer agent of the Common Shares, notification of such Notice of Conversion at the address described in Section 105 The Debenture shall be deemed to have been converted immediately prior to the close of business on the Business Day of surrender of the Debenture for conversion (the "Conversion Date") in accordance with the foregoing provisions, and at such time the rights of the Holder, as holder of the principal amount of the Debenture so converted, shall cease, and the Person or Persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and deliver to the Holder, a certificate or certificates for the number of full shares of Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1208. If the Debenture is converted in part only, upon such conversion the Company shall execute and deliver to the Holder, at the expense of the Company, a new Debenture or Debentures of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such Debenture. The Debenture may be converted in part, but only if the principal amount to be converted is any integral multiple of US$1,000. SECTION 1203. Company Conversion Option. Subject to and upon the compliance with the provisions of this Article, the Company is entitled, at any time after the fifth (5th) anniversary of the date of this Debenture that the weighted average Closing Sale Price of the Common Shares for 20 consecutive Trading Days (the "Reference Period") ending on the Trading Day immediately prior to the day which the Company sends out a notice of conversion pursuant to Section 1206, exceeds NINETEEN Canadian Dollars (Cdn$19) per Common Share, as adjusted in certain instances as provided in this Article Twelve (the "Company Conversion Threshold"), at its option (the "Company 35 Conversion Option"), in whole or in part, to require the Holder to convert the Debentures held by such Holder into that number of fully paid and non-assessable Common Shares as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price multiplied by the Exchange Rate. As used in this Debenture, "weighted average" of the Closing Sale Price of the Common Shares shall be calculated as the sum of the product of the Closing Sale Price multiplied by the Trading Volume of the Common Shares on The Toronto Stock Exchange (or such successor exchange) of each Trading Day within the Reference Period divided by the total Trading Volume of the Common Shares on The Toronto Stock Exchange (or such successor exchange) during the Reference Period. SECTION 1204. Exercise of Company Conversion Option. In order to exercise the Company Conversion Option, the Company shall provide a conversion notice pursuant to Section 1206. On the Conversion Date specified by the Company in such notice, the Holder must (a) surrender the Debentures subject to the Company Conversion Option, (b) furnish appropriate endorsements or transfer documents if required by the Conversion Agent, (c) pay any transfer or similar tax, if required, and (d) pay any interest payments as described in the next succeeding sentence. In case the Conversion Date specified by the Company in a notice pursuant to a Company Conversion Option shall be made subsequent to an Interest Payment Date but prior to the next Interest payment Date (except Debentures called for redemption on a Redemption Date during such period), the Holder will be entitled to an amount equal to the ratable interest payable from such prior Interest Payment Date to the Conversion Date on the principal amount of the Debenture then being converted by the Company. The Company's delivery to the Holder of the number of Common Shares (and cash in lieu of fractions thereof, as provided in the Debenture) into which the Debenture is convertible will be deemed to satisfy the Company's obligation to pay the principal amount of the Debenture. Debentures shall be deemed to have been converted immediately prior to the close of business on the Conversion Date in accordance with the foregoing provisions, however, in no event shall the Conversion Date upon a Company Conversion Option be later than 30 days from the date the Company provides a conversion notice to the Holder, and at such time the rights of the Holder of the Debenture, as holder, shall cease, and the Person or Persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and deliver to the Conversion Agent, for delivery to the Holder, a certificate or certificates for the number of full shares of Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1208. In the case of any Debenture which is converted at the option of the Company in part only, upon such conversion the Company shall execute and deliver to the Holder, at the expense of the Company, a new Debenture or Debentures of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such 36 Debenture. A Debenture may be converted in part, but only if the principal amount of such Debenture to be converted is any integral multiple of US$1,000. SECTION 1205. Election to Convert; Notice to Holder. The election of the Company to convert the Debenture pursuant to Section 1203 shall be evidenced by Board Resolution. In case of any Company Conversion Option, the Company shall at least 30 days prior to the Conversion Date fixed by the Company (unless a shorter notice shall be satisfactory to the Holder), notify the Holder of such Conversion Date. SECTION 1206. Notice of Company Conversion. The conversion notice given by the Company to the Holder shall be given in the manner provided for in Sections 105 and 106 and pursuant to Section 1203. A conversion notice issued by the Company pursuant to a Company Conversion Option shall state: (a) the Conversion Date, (b) the Conversion Price, and the amount of accrued and unpaid interest, if any, on the Debentures to be converted from the Conversion Date to the next subsequent Interest Payment Date payable as provided in Section 1203, and (c) the place or places where the Debenture is to be surrendered for conversion. A conversion notice shall be given by the Company at the expense of the Company. SECTION 1207. Debenture to be Converted Upon a Company Conversion Notice. A conversion notices having been given as aforesaid, that principal portion of the Debenture to be so converted shall, on the Conversion Date, be converted into that number of fully paid and nonassessable Common Shares (calculated as to each conversion to the nearest 1/100th of a share) as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price multiplied by the Exchange Rate (together with accrued and unpaid interest, if any, to the Conversion Date), and from and after such date (unless the Company shall default in providing Holders with such Common Shares), the converted portion of the principal of the Debenture shall cease to bear interest. SECTION 1208. Fractions of Shares. No fractional Common Shares shall be issued upon conversion of any Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be completed on the basis of the aggregate principal amount of the Debenture (or specified portions thereof) so 37 surrendered. Instead of any fractional share of Common Shares which would otherwise be issuable upon conversion of the Debenture (or specified portions thereof), the Company shall calculate and pay a cash adjustment in respect of such fraction (calculated to the nearest 1/100th of a share) in an amount equal to the same fraction of the Conversion Price per Common Share (calculated in accordance with Section 1210(h) below) at the close of business on the Conversion Date. In effecting the conversion transactions described in this Section, the Conversion Agent is acting as agent of the Holder. The Conversion Agent is hereby authorized to convert all or a portion of the Debentures into Common Shares and thereupon to deliver such Common Shares in accordance with the provisions of this Article and to deliver to the Holder a new Debenture or Debentures for any resulting unconverted principal amount. SECTION 1209. Expiration of the Holder Conversion Option. The conversion rights of the Holder shall expire (a) at 5:00 p.m. Toronto, Ontario time on the Business Day prior to the Maturity Date of the Debentures, or (b) if the Debenture is called for redemption, at 5:00 p.m. Toronto, Ontario time on the Business Day prior to the Redemption Date, unless in either case the Company defaults in making the payment due upon redemption or such Maturity Date (both referred to as the "Conversion Expiration Date"), in which event conversion rights shall continue until payment is made. SECTION 1210. Adjustment of Conversion Price. No adjustment will be made to the Conversion Price or the Company Conversion Threshhold (each, a "Conversion Amount") other than as described in this Article. The Conversion Amount shall be subject to adjustments from time to time as follows: (a) In case the Company shall pay or make a dividend or other distribution on any of its Common Shares payable in Common Stock to all holders of its Common Stock, the Conversion Amount in effect at the opening of business on the Business Day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Amount by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the Business Day following the date fixed for such determination. For purposes of this paragraph (a), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not pay any dividend or make any distribution on Common Shares that have not been issued. (b) In case the Company shall issue rights, options or warrants to all holders of Common Shares entitling them to subscribe for or purchase shares of any class of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (h) of this Section) of such class of Common Stock on the date fixed for the 38 determination of shareholders entitled to receive such rights, options or warrants, the Conversion Amount in effect at the opening of business on the Business Day following the date fixed for such determination shall be reduced by multiplying such Conversion Amount by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not issue any rights, options or warrants in respect of Common Shares held in the treasury of the Company. In the event that such rights, warrants or options are not so issued, the Conversion Amount shall again be adjusted to be the Conversion Amount which would then be in effect if such date fixed for the determination of shareholders entitled to receive such rights, warrants or options had not been fixed. In determining whether any rights, warrants or options entitle the holders to subscribe for or purchase Common Shares at less than such current market price, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received by the Company for such rights, warrants or options, the value of such consideration, if other than cash, to be determined by the Board of Directors whose determination shall be conclusive and binding. (c) In case outstanding shares of Common Shares shall be subdivided into a greater number of Common Shares, and, conversely, in case outstanding shares of Common Shares shall each be combined into a smaller number of Common Shares, the Conversion Amount in effect at the opening of business on the Business Day following the day upon which such subdivision or combination becomes effective shall be adjusted by the Company so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Amount adjustment contemplated by this paragraph (c) by a fraction of which the numerator shall be the number of Common Shares outstanding immediately prior to such subdivision or combination and the denominator shall be the number of Common Shares outstanding immediately after giving effect to such subdivision or combination, such adjustment to become effective immediately after the opening of business on the Business Day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares or shares of any class of its capital stock, or other property (including securities, but excluding (i) any rights, options or warrants referred to in paragraph (b) of this Section, (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (a) of this Section, and (iv) any merger, consolidation or other transaction to which Section 1218 applies), the Conversion Amount shall be reduced so that the same shall equal the price determined by multiplying the Conversion Amount in effect immediately prior to the close of business on the date fixed for the determination of shareholders 39 entitled to receive such distribution by a fraction of which (i) the numerator shall be the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on the third Trading Day prior to the date fixed for such determination (such third Trading Day being the "Reference Date") less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on the Reference Date of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one Common Share and the denominator shall be the current market price per Common Share on the Reference Date, such adjustment to become effective immediately prior to the opening of business on the day following the Reference Date. (e) In case the Company shall, by dividend or otherwise, distribute to all holders of Common Shares cash (excluding any cash that is distributed upon a merger or consolidation to which Section 1218 applies or as part of a distribution referred to in paragraph (d) of this Section) in an aggregate amount that, combined together with (i) the aggregate amount of any other cash distributions to all holders of Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this paragraph (e) has been made and (ii) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer by the Company or any of its Subsidiaries for all or any portion of Common Shares concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to paragraph (f) of this Section has been made, exceeds 12.5% of the product of the current market price per Common Share on the date for the determination of holders of Common Shares entitled to receive such distribution times the number of Common Shares outstanding on such date, then, and in each such case, immediately after the close of business on such date for determination, the Conversion Amount in effect immediately prior to the close of business on the date fixed for determination of the shareholders entitled to receive such distribution shall be reduced by a fraction (1) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined amount in (i) and (ii) above over such 12.5% and (y) the number of Common Shares outstanding on such date for determination and (2) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on such date of determination. (f) In case a tender or exchange offer (other than an odd-lot offer) made by the Company or any Subsidiary for all or any portion of the Common Shares shall expire and such tender or exchange offer shall involve the payment by the Company or such Subsidiary of consideration per Common Share having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds 110% of the current market price per Common Share (determined as provided in paragraph (h) of this Section) as of the Trading Day next succeeding the Expiration Time, the Conversion Amount shall be reduced so that the same shall equal the price determined by multiplying the Conversion Amount in effect immediately prior to the effectiveness of the Conversion Amount reduction contemplated by this paragraph (f) by a fraction of which the numerator shall be the product of the number of Common Shares 40 outstanding (including any tendered or exchanged shares) at the Expiration Time multiplied by the respective current market price per Common Share (determined as provided in paragraph (h) of this Section) on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (i) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (ii) the product of the number of shares of each class of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the respective current market price per share (determined as provided in paragraph (h) of this Section) of each such Common Shares on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the Trading day following the Expiration Time. (g) The reclassification of any Common Shares into securities (other than any reclassification upon a consolidation or merger to which Section 1218 applies) shall be deemed to involve (i) a distribution of such securities to all holders of Common Shares (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraph (d) of this Section), and (ii) a subdivision or combination, as the case may be, of the number of Common Shares outstanding immediately prior to such reclassification into the number of Common Shares outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (c) of this Section). (h) For the purpose of any computation under paragraphs (b), (d), (e) or (f) of this Section 1210, the current market price per share of a class of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Sale Prices per share of such class for the five consecutive Trading Days selected by the Company commencing not more than 10 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "`ex' date", when used with respect to any issuance or distribution, means the first date on which such class of Common Stock trades in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. (i) No adjustment in the Conversion Amount shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (i)) would require an increase or decrease of at least one percent in such price; provided, however, that any adjustments which by reason of this paragraph (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (j) With the prior consent of The Toronto Stock Exchange, the Company at its option may make such reductions in the Conversion Amount, for the remaining term of the 41 Debentures or any shorter term, in addition to those required by paragraphs (a) through (f) of this Section 1210, as it considers to be advisable in order to avoid or diminish any income tax to any holders of Common Shares resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. (k) No adjustment to the Conversion Amount shall be made for any event referred to in paragraphs (a) through (f) of Section 1210, if the Board of Directors, acting reasonably and in good faith, determines that the Holder will participate in the event on a basis that is fair and appropriate in light of the basis on which holders of Common Shares participate in the event;, such participation subject to the prior consent of The Toronto Stock Exchange. SECTION 1211. Notice of Adjustments of Conversion Amount. Whenever the Conversion Amount is adjusted as herein provided: (a) the Company shall compute the adjusted Conversion Amount in accordance with Section 1210 and shall prepare a certificate signed by the Chief Financial Officer of the Company setting forth the adjusted Conversion Amount and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall promptly be filed with the Conversion Agent; and (b) a notice stating that the Conversion Amount has been adjusted and setting forth the adjusted Conversion Amount shall forthwith be required, and as soon as practicable after it is required, such notice, together with the Certificate referred to in Section 1211(a), shall be provided by the Company to the Holder in accordance with Section 106. SECTION 1212. Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Shares payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 1210; or (b) the Company shall authorize the granting to all holders of Common Shares of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) of any reclassification of Common Shares (other than a subdivision or combination of its outstanding shares of Common Shares), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or 42 (e) the Company or any Subsidiary shall commence a tender offer for all or a portion of any class of the Company's outstanding shares of Common Shares that would require an adjustment of the Conversion Amount pursuant to paragraph (f) of Section 1210 (or shall amend any such tender offer); then the Company shall cause to be filed at the Registered Office, and shall cause to be provided to the Holder in accordance with Section 106, on or before the date that is the earlier of (i) 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record, expiration or effective date hereinafter specified, and (ii) five (5) Business Days after the date upon which the Board of Directors determines to take the relevant action or send to the shareholders the applicable notice, a notice stating (iii) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants are to be determined, (iv) the date on which the right to make tenders under such tender offer expires or (iv) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as to which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. SECTION 1213. Dividend Reinvestment and Other Plans. Notwithstanding anything to the contrary in this Article, no adjustment of the Conversion Amount will be made upon the issuance of any Common Shares of the Company pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Company and the investment of additional optional amount in Common Shares of the Company under any such plan, or the issuance of any Common Shares or options or rights to purchase such shares pursuant to any present or future employee benefit plan or program of the Company or pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security which does not constitute an issuance to all holders of Common Shares or a class thereof, of rights or warrants entitling holders of such rights or warrants to subscribe for or purchase Common Shares at less than the current market price (as determined in paragraph (h) of Section 1210) SECTION 1214. Company to Maintain Authorized Capital. The Company shall at all times have authorized capital that includes an unlimited number of Common Shares. SECTION 1215. Taxes on Conversions. The Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Shares on conversion of the Debenture pursuant hereto. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Shares in a name other than that of the Holder, and no such issue or delivery shall be made unless and 43 until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. SECTION 1216. Covenant as to Common Shares. The Company agrees that all Common Shares which may be delivered upon conversion of the Debenture, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable and free of any items, charges or adverse claims. SECTION 1217. Cancellation of Converted Debenture. The Debenture, if delivered for conversion, shall be cancelled by the Company. SECTION 1218. Provision in Case of Amalgamation, Consolidation, Merger or Sale of Assets. (a) In case of any amalgamation or consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Shares of the Company) or any sale or transfer of all or substantially all of the assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be (a "Successor"), shall execute and deliver to the Holder a supplemental Debenture providing that the Holder shall have the right thereafter, during the period the Debenture shall be convertible as specified in Section 1201, to convert the Debenture only into the kind and amount of securities, cash and other property receivable upon such amalgamation, consolidation, merger, sale or transfer by a holder of the number of Common Shares of the Company into which the Debenture might have been converted immediately prior to such amalgamation, consolidation, merger, sale or transfer, subject to any requirements necessary to ensure that the Debenture will not be subject to Canadian or United States withholding tax as a result of such event, and assuming such holder of Common Shares of the Company (i) is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be ("Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each Common Share of the Company held immediately prior to such consolidation, merger, sale or transfer by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 1218 the kind and amount of securities, cash and other property receivable upon such amalgamation, consolidation, merger, sale or transfer by the holders of each Non-electing Shares shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares), subject, however, to any requirements necessary to ensure that the Debenture will be and will remain exempt from Canadian Taxes and US Taxes, including, without limitation, the requirement in respect of Canadian Taxes in effect on the date hereof that the Holder shall not be entitled to receive shares, other securities or property, other than shares that are "prescribed securities" as defined in 44 Regulation 6208 to the Tax Act. Notwithstanding the foregoing, if such Successor, due to its continuation or domicile in another jurisdiction, is unable to issue such supplemental Debenture in conformity to any requirements necessary to ensure that such Debenture will be and will remain exempt from Canadian Taxes and US Taxes, such inability will not constitute an Event of Default or any other breach of the terms of this Debenture, provided that the Company otherwise complies with Section 1007. Such supplemental Debenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental Debenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section 1218 shall similarly apply to successive consolidations, mergers, sales or transfers. Notice of execution of such a supplemental Debenture shall be given by the Company to the Holder as provided in Section 106 promptly upon such execution. (b) In case of any distribution of assets or properties of the Company or any of its Subsidiaries to all holders of the Common Shares of the Company (including securities, but excluding (i) any rights, options or warrants referred to in Section 1210(b), (ii) any dividend or distribution paid exclusively in cash or shares of Indebtedness or capital stock issued by the Company, (iii) any dividend or distribution referred to in Section 1210(a), and (iv) any merger, consolidation or other transaction to which Section 1218(a) applies), the Company shall provide the Holder with notice of such distribution at least 30 days prior to the Regular Record Date pertaining to the distribution (it being the intent that the Holder be given the opportunity to convert the Debenture to Common Shares of the Company during such period). SECTION 1219. Intentionally Deleted. ARTICLE THIRTEEN SUBORDINATION OF DEBENTURES SECTION 1301. Debentures Subordinate to Permitted Senior Indebtedness. The Company covenants and agrees, and the Holder, by its acceptance thereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Permitted Senior Indebtedness that, to the extent and in the manner hereinafter set forth in this Article and in Section 1008, the indebtedness represented by the Debenture and the payment of the principal of and interest on the Debenture are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of all Permitted Senior Indebtedness. SECTION 1302. Suspension of Payment When Permitted Senior Indebtedness in Default. (a) Unless Section 1303 shall be applicable, upon (1) the occurrence of a Payment Event of Default and (2) receipt by the Holder of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of principal of (or premium, if any) or interest on the Debenture or on account of the purchase or redemption or other acquisition of the Debenture unless and until such Payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Permitted Senior Indebtedness shall have been discharged, after which the 45 Company shall resume making any and all required payments in respect of the Debenture, including any missed payments, together with interest on all missed payments. (b) Unless Section 1303 shall be applicable, upon (1) the occurrence of a Non-payment Event of Default and (2) receipt by the Holder from the representative of holders of Permitted Senior Indebtedness of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of any principal of (or premium, if any) or interest on the Debenture or on account of the purchase or redemption or other acquisition of the Debenture for a period ("Payment Blockage Period") commencing on the earlier of the date of receipt by the Company or the date of receipt by the Holder of such notice from the Agent or such other representative unless and until (subject to any blockage of payments that may then be in effect under paragraph (a) of this Section) (x) more than 180 days shall have elapsed since receipt of such written notice by the Company or the Holder, whichever was earlier, (y) such Non-payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Permitted Senior Indebtedness shall have been discharged or (z) such Payment Blockage Period shall have been terminated by written notice to the Company or the Holder from the Agent or such other representative initiating such Payment Blockage Period, after which, in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Debenture, including any missed payments, together with interest on all missed payments. Notwithstanding any other provision of this Agreement, only one Payment Blockage Period may be commenced within any consecutive 365-day period, and no event of default with respect to Permitted Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period initiated by or behalf of such Permitted Senior Indebtedness shall be, or be made, the basis for the commencement of a second Payment Blockage Period whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days subsequent to the commencement of such initial Payment Blockage Period. In no event will a Payment Blockage Period extend beyond 180 days. (c) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Holder of the Debenture prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to the Company. SECTION 1303. Liquidation; Dissolution; Bankruptcy. (a) Upon any distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all principal, premium, if any and interest due on all Permitted Senior Indebtedness of the Company permitted by Section 1008 shall first be paid in full before the Holder is entitled to receive or retain any payment (excluding any class of shares of Common Stock); and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character whether in cash, property or securities (excluding any class of shares of Common Stock), which the Holder would be entitled to receive from the Company, except for the provisions of this Article Thirteen, shall be paid by the Company or by any receiver, trustee 46 in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, or by the Holder under this Debenture if received by them or it, directly to the holders of Permitted Senior Indebtedness of the Company or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Permitted Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, to the extent necessary to pay such Permitted Senior Indebtedness in full, in cash, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Permitted Senior Indebtedness, before any payment or distribution is made to the Holder. (b) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (excluding any class of shares of Common Stock), prohibited by the foregoing, shall be received by the Holder before all Permitted Senior Indebtedness of the Company permitted by Section 1008 is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Permitted Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Permitted Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, to the extent necessary to pay such Permitted Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Permitted Senior Indebtedness, before any payment or distribution is made to the Holders. (c) For purposes of this Article Thirteen, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article Thirteen with respect to the Debentures to the payment of all Permitted Senior Indebtedness of the Company, as the case may be, that may at the time be outstanding; provided, however, that (i) such Permitted Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Permitted Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The amalgamation or consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer its properties or assets substantially as an entirety, to another corporation upon the terms and conditions provided for in Article Eight of this Debenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 1303 if such other corporation shall, as a part of such amalgamation, consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Eight of this Debenture. SECTION 1304. Subrogation. (a) Subject to the payment in full of all Permitted Senior Indebtedness of the Company permitted by Section 1008 then outstanding, the rights of the Holder shall be subrogated to the rights of the holders of such Permitted Senior Indebtedness to receive 47 payments or distributions of such cash, property or securities of the Company, as the case may be, applicable to such Permitted Senior Indebtedness until the principal of and interest on the Debenture shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Permitted Senior Indebtedness of any cash, property or securities to which the Holder would be entitled except for the provisions of this Article Thirteen, and no payment over pursuant to the provisions of this Article Thirteen to or for the benefit of the holders of such Permitted Senior Indebtedness by the Holder, shall, as between the Company, its creditors other than holders of Permitted Senior Indebtedness of the Company, and the Holder, be deemed to be a payment by the Company to or on account of such Permitted Senior Indebtedness. It is understood that the provisions of this Article Thirteen are and are intended solely for the purposes of defining the relative rights of the Holder, on the one hand, and the holders of such Permitted Senior Indebtedness on the other hand. (b) Nothing contained in this Article Thirteen or elsewhere in this Debenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Permitted Senior Indebtedness of the Company, and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder the principal of and interest on the Debenture as and when the same shall become due and payable in accordance with its terms, or is intended to or shall affect the relative rights of the Holder and creditors of the Company, as the case may be, other than the holders of Permitted Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Holder from exercising all remedies otherwise permitted by applicable law upon default under this Debenture, subject to the rights, if any, under this Article Thirteen of the holders of such Permitted Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. (c) Upon any payment or distribution of assets of the Company referred to in this Article Thirteen, the Holder shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Holder, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Permitted Senior Indebtedness and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Thirteen. SECTION 1305. Holder to Effectuate Subordination. The Holder shall take such action as may be necessary or appropriate to effectuate the subordination provided in this Article. SECTION 1306. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Permitted Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, 48 provisions and covenants of this Debenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this Section, the holders of Permitted Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holder, without incurring responsibility to the Holder and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holder to the holders of Permitted Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or, subject to Section 1008, alter, Permitted Senior Indebtedness or any instrument evidencing the same or any agreement under which Permitted Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Permitted Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Permitted Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 1307. Notice to Holder. (a) The Company shall give prompt written notice in the form of an Officers' Certificate to the Holder of any fact known to the Company which would prohibit the making of any payment to or by the Holder in respect of the Debenture. Notwithstanding the provisions of this Article or any other provision of this Debenture, the Holder shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Holder in respect of the Debentures, unless and until the Holder shall have received written notice thereof from the Company or a holder of Permitted Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Holder shall be entitled in all respects to assume that no such facts exist; provided, however, that, if the Holder shall not have received the notice provided for in this Section at least three (3) Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Holder shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. (b) The Holder shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Permitted Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a holder of Permitted Senior Indebtedness (or a trustee, fiduciary or agent therefor). In the event that the Holder determines in good faith that further evidence is required with respect to the right of any Person as a holder of Permitted Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Holder may request such Person to furnish evidence to the reasonable satisfaction of the Holder as to the amount of Permitted Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article and, if 49 such evidence is not furnished, the Holder may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 1308. Intentionally Deleted. SECTION 1309. Intentionally Deleted. SECTION 1310. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Holder to take any action to accelerate the maturity of the Debentures pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law, except as provided in Article Five. SECTION 1311. Permitted Senior Indebtedness Entitled to Rely. The holders of Permitted Senior Indebtedness shall have the right to rely upon this Article 13, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. SECTION 1312. Certain Conversions Deemed Payment. For the purposes of this Article 13 only, (1) the issuance and delivery of junior securities upon conversion of the Debenture in accordance with Article 12 or on account of the redemption or other acquisition of the Debenture shall not be deemed to constitute a payment or distribution in respect of the Debenture, and (2) the payment, issuance or delivery of cash (except in satisfaction of fractional shares pursuant to Section 1208), property or securities (other than junior securities) upon conversion of the Debenture shall be deemed to constitute payment on account of the principal of such Debenture. For the purposes of this Section 1312, the term "junior securities" means any shares of any class of Common Stock of the Company (including, without limitation, the Common Shares). Nothing contained in this Article 13 or elsewhere in this Debenture is intended to or shall impair, as among the Company, its creditors other than holders of Permitted Senior Indebtedness and the Holders, the right, which is absolute and unconditional, of the Holder to convert the Debenture in accordance with Article 12. This Debenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Debenture. ARTICLE FOURTEEN FURTHER DISTRIBUTION (a) This Debenture (for the purpose of this Article Fourteen, "these securities") has not been registered under the United States Securities Act of 1933, as amended, or qualified for distribution to the public in Canada or qualified under state securities laws and may not be sold, pledged, or otherwise transferred unless (i) covered by an effective registration statement under the United States Securities Act of 1933, as amended (the "Securities Act"), and qualified under applicable state securities laws; (ii) sold outside the United States in accordance with Rule 904 of Regulation S under the Securities Act; (iii) sold inside the United States pursuant to an 50 exemption from registration under the Securities Act provided by Rule 144 thereunder, if available; or (iv) transferred in compliance with certain other procedures satisfactory to the Company upon the furnishing to the Company of an opinion from counsel in form and substance reasonably satisfactory to the Company to the effect that no registration or qualification is legally required for such transfer; and (b) The Holder, by acquiring these securities, agrees for the benefit of the Company that for a period (the "Minimum Holding Period") ending 120 days after the date of the issuance of these securities by the Company (but in any event the Minimum Holding Period shall end not later than December 31, 2001), the Holder will not resell these securities to any Canadian resident or in Canada. These securities are not listed on any stock exchange and are not freely transferable. 51 IN WITNESS WHEREOF, the parties hereto have caused this Debenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. HUB INTERNATIONAL LIMITED [SEAL] By: /s/ W. KIRK JAMES ------------------------------------ Name: W. Kirk James Title: V.P. & GENERAL COUNSEL Royal Trust Corporation of Canada As Trustee for Zurich Insurance Company [SEAL] By: /s/ Vera Lewinson ------------------------------------- By: /s/ Bibi Madho ------------------------------------- 52 [Zurich Letterhead] Mr. Rick Gulliver President and COO Hub International Limited 55 East Jackson Boulevard Chicago, IL 60604 USA Your reference Our reference Date March 6, 2002 Dear Rick: In reply to your letter of January 8, 2002, this will confirm that you have Zurich's agreement to extend our current offer to retire the debenture or facilitate the secondary placement of the shares derived at CAD $17, at your option, without penalty until June 30th, 2002. As we discussed, Rick, our preference would be to accomplish this in the first quarter if at all possible. We confirm that, in the meantime, Zurich will not exercise its right to convert the debenture to Hub common shares. Zurich North America Canada 400 University Avenue Yours truly, Toronto, Ontario M5G 1S7 CANADA Phone (416) 586-3000 http://www.zurich.com By: /s/ Barry J. Gilway Direct Phone (416) 586-2590 Barry J. Gilway Direct Fax (416) 408-6169 President and Chief Executive Officer barry.gilway@zurich.com EX-10.17 21 t06723ex10-17.txt DEBENTURE DATED JUN 28/01 - HUB & ODYSSEY RE EXHIBIT 10.17 HUB INTERNATIONAL LIMITED, as Issuer and ODYSSEY REINSURANCE CORPORATION, as Holder ------------------------- DEBENTURE Dated as of June 28, 2001 ------------------------- US$17,500,000 8.5% Convertible Subordinated Debenture due June 28, 2007 DEBENTURE DEBENTURE dated as of June 28, 2001 between Hub International Limited, a corporation duly organized and existing under the laws of the Province of Ontario (herein called the "Company"), having its registered office at 214 King Street West, Suite 314, Toronto, Ontario, and Odyssey Reinsurance Corporation, a company duly organized and existing under the laws of Delaware (herein called the "Holder"). FOR GOOD AND VALUABLE CONSIDERATION the parties agree as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF OTHER APPLICATION SECTION 101. Definitions. For all purposes of this Debenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with Generally Accepted Accounting Principles, and, except as otherwise herein expressly provided, the term "Generally Accepted Accounting Principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (c) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Debenture as a whole and not to any particular Article, Section or other subdivision. "Additional Amounts" has the meaning specified in Section 1007. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Base Currency" has the meaning specified in Section 114. "Board of Directors" or "Board" means the board of directors of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of Toronto, Ontario are obligated by law to close. "Canadian Taxes" means any past, present or future tax, duty, levy, impost, deduction, charge, withholding, assessment, tariff or other government charge (including penalties, interest and other liabilities related thereto) imposed or levied by or on behalf of any Tax Authority in Canada. "Cash Equivalents" means: (a) marketable securities issued or directly, fully and unconditionally guaranteed or insured by Canada or any Province thereof or by the United States of America or any State thereof or the District of Columbia therein, or issued by any agency or instrumentality of any of them, and in any case backed by the full faith and credit thereof, in each case having a maturity date of not more than one year from the date of acquisition; (b) time deposits and certificates of deposit having a maturity date of not more than one year from the date of acquisition issued by any Canadian chartered bank, trust company or a bank which is organized under the laws of the United States of America, any State thereof or the District of Columbia therein and which has (or which is a subsidiary of a bank holding company which has) issued capital and earned and contributed surplus in excess of Cdn$500,000,000 or US$500,000,000, as the case may be; (c) commercial paper maturing within one year after the date of acquisition thereof issued by an issuer organized under the laws of Canada or any Province thereof or the United States of America, any State thereof or the District of Columbia which is rated at least A-1 or the equivalent thereof by Standard and Poor's Corporation, P-1 or the equivalent thereof by Moody's Investors Service, Inc. or R-1 low by Dominion Bond Rating Service; and (d) any other investment which the lender of the Company's Senior Indebtedness shall expressly consent in writing to accept as a Cash Equivalent. "Closing Sale Price" means on any day the reported last sale price, regular way, on such day or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on The Toronto Stock Exchange (or such successor exchange), or, if not listed or admitted to trading or quoted on The Toronto Stock Exchange (or such successor exchange), on the principal securities exchange or quotation system in Canada on which such security is quoted or listed or admitted to trading, or, determined in good faith by the Board of Directors. 2 "Commission" means the Ontario Securities Commission, as from time to time constituted, created under the Securities Act (Ontario), or, if at any time after the execution of this Debenture such Commission is not existing and performing the duties now assigned to it then the body performing such duties at such time. "Common Shares" means the common shares, with no par value, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 1218, shares issuable upon conversion of the Debenture shall include only Common Shares or shares of any class or classes of Common Stock resulting from any reclassification thereof; provided, however, that if at any time as a result of such reclassification there shall be more than one such resulting class, the shares so issuable upon conversion of the Debenture shall include shares of all such classes, and the number of shares of each such class then so issuable shall be in the same proportion which the total number of shares of such class resulting from such reclassification bears to the total number of shares of such classes resulting from such reclassification; and provided further, however, that such shares issuable upon conversion of the Debenture shall be "prescribed securities" as defined in Regulation 6208 to the Tax Act, or such other shares as may, at the date of their issuance, be issued without subjecting the Debenture to Canadian Taxes or US Taxes. "Common Stock" means the Common Shares, together with any other class of capital stock of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. "Company" means Hub International Limited, until a successor Person shall have become such pursuant to the applicable provisions of this Debenture, and thereafter "Company" shall mean such successor Person. "Company Conversion Option" has the meaning specified in Section 1203. "Company Conversion Threshold" has the meaning specified in Section 1203. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its President, its Chief Financial Officer or Secretary. "Consolidated EBITDA" for any period means Earnings of the Company and its Subsidiaries for such period, before Consolidated Interest Expense, income taxes, capital tax and large corporation tax, depreciation and amortization of the Company and its Subsidiaries, all determined on an accrual basis and on a consolidated basis for such period, all in accordance with Generally Accepted Accounting Principles, but excluding, for greater certainty, (a) any gain or loss arising from the disposition or write-up or write-down of any fixed assets, (b) any other items not involving the outlay or receipt of cash in the current or any future period, or (c) any other extraordinary items. "Consolidated Indebtedness" means, as of the date of determination (a) the aggregate outstanding principal amount of all Indebtedness of the Company and its Subsidiaries determined (without duplication) in accordance with Generally Accepted Accounting Principles 3 on a consolidated basis, less (b) the excess of (i) then current market value of cash and Cash Equivalents beneficially owned, and held directly, by the Company at such time, over (ii) the reserves and capital required by applicable insurance law to fund reasonably anticipated claims. "Consolidated Interest Expense" of the Company and its Subsidiaries for any period means the aggregate amount (without duplication) of all interest, fees (other than professional fees), standby fees, acceptance fees, commissions, costs and other charges paid in cash or accrued as a liability by the Company and its Subsidiaries during such period on or in respect of or in connection with any Indebtedness, including, without limitation, all interest expenses (whether capitalized or not) on short and long term obligations for borrowed money, fees and other charges payable in respect of financial guarantees, letters of credit or letters of guarantee or obligations to financial institutions who issued such letters of credit or letters of guarantee, discounts in respect of the proceeds of bankers' acceptances, asset monetizations and securitizations, any capitalized interest and the interest portion of payments under Capital Leases, and interest on subordinated Indebtedness, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles; "Constituent Person" has the meaning specified in Section 1218. "Conversion Agent" means any Person authorized by the Company to convert Debentures in accordance with Article 12. The Company has initially appointed the Secretary of the Company as its Conversion Agent. "Conversion Date" of a Debenture means the day such Debenture is surrendered for conversion in accordance with Section 1202 or Section 1204, if such day is not a Business Day, then the next succeeding Business Day. "Conversion Amount" has the meaning specified in Section 1210. "Conversion Price" has the meaning specified in Section 1201. "corporation" includes corporations, partnerships, associations, companies, joint ventures and business trusts. "current market price" has the meaning specified in Section 1210(h). "Debenture", "Debentures", "this Debenture", "the Debenture" and "the Debentures" means this instrument as originally executed and as it may from time to time be supplemented, apportioned (in integral multiples of denominations of US$1,000) or amended by one or more instruments supplemental hereto entered into pursuant to the applicable provisions hereof, as applicable. "Debenture Register" and "Debenture Registrar" have the respective meanings specified in Section 305. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 4 "Defaulted Interest" has the meaning specified in Section 307. "Dollar", "Cdn$" or "Canadian dollar" means a dollar or other equivalent unit in such coin or currency of Canada as at the time shall be legal tender for the payment of public and private debts. "Earnings" for any period means earnings of the Company and its Subsidiaries for such period determined on a consolidated basis in accordance with Generally Accepted Accounting Principles and the accounting practices permitted under Generally Accepted Accounting Principles applied by the Company. "EBITDA Ratio" means the ratio of the Company's Consolidated Indebtedness to its Consolidated EBITDA for the period indicated. "Encumbrance" means any mortgage, charge, hypothec, legal hypothec, pledge, security interest, lien or deposit arrangement or any other encumbrance, whether fixed or floating, that in substance secures the payment of any indebtedness or liability or the observance or performance of any obligation, regardless of form and whether consensual or arising by law, statutory or otherwise, on or in, any asset or property, whether immovable or real, movable or personal, or mixed, tangible or intangible, or any pledge or hypothecation thereof or any conditional sale agreement or other title retention agreement or equipment trust relating thereto or any lease relating to property which would be required to be accounted for as a capital lease on such Person's balance sheet. "Event of Default" has the meaning specified in Section 501. "Exchange Rate" means the average for the 20 Business Days immediately prior the Conversion Date of the noon buying rate in New York City for cable transfers of Canadian dollars as certified for customs purposes (or, if not so certified, as otherwise determined) by the Federal Reserve Bank of New York. "Excluded Holder" has the meaning specified in Section 1007. "Expiration Time" has the meaning specified in Section 1210(f). "Financial Institution" means any bank, or other institutional lender or commercial lender or any strategic lender. "Generally Accepted Accounting Principles" means, at any time, accounting principles generally accepted in Canada as recommended in the Handbook of the Canadian Institute of Chartered Accountants applied on a basis consistent with prior years. "guarantee" means any guarantee or other credit support for all or any part of any Indebtedness or other obligation of any other person, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, excluding, however, any endorsement of negotiable instruments for collection in the ordinary course of business. 5 "Hedging Obligations" means, with respect to any Person, the obligations of such Person under: (1) interest rate swap agreements and interest rate cap agreements; and (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Holder" means the "Holder" identified in the first paragraph of this Debenture and any permitted assignee or successor Person in whose name a Debenture is registered in the Debenture Register. "Holder Conversion Option" has the meaning specified in Section 1201. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that the accrual of interest shall be considered an Incurrence of Indebtedness. "Indebtedness" means (a) any liability of any Person (1) for borrowed money, or under any reimbursement obligation relating to a letter of credit, banker's acceptance, surety or other bond or instrument (2) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation given in connection with the acquisition of any businesses, properties or assets of any kind other than a trade payable or a current liability arising in the ordinary course of business), or (3) under any loan agreement, letter of credit application, acceptance agreement, factoring agreement, Debenture, capital lease, mortgage or similar agreement or document; (b) any liability of others described in the preceding clause (a) that such Person has guaranteed or that is otherwise its legal liability; and (c) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (a) and (b) above. "Interest Payment Date" has the meaning specified in Section 301. "Judgment Currency" has the meaning specified in Section 114. "junior securities" has the meaning specified in Section 1312. "Maturity", when used with respect to the Debenture, means the date on which the principal of the Debenture or an installment of principal becomes due and payable as herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or otherwise. "Non-electing Share" has the meaning specified in Section 1218. "Non-payment Event of Default" means any event (other than a Payment Event of Default) the occurrence of which entitles one or more Persons to accelerate the maturity of any Indebtedness. "Notice of Conversion" means the notice given by the Holder to the Conversion Agent directing the Conversion Agent to convert such Debentures into Common Shares on behalf of such Holder, the form of which is set out in Section 1202. 6 "Notice of Default" has the meaning specified in Section 501. "Officers' Certificate" means a certificate signed by the Chairman, the President, the Chief Financial Officer or Secretary of the Company and delivered to the Holder. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be acceptable to the Holder. "Outstanding", when used with respect to the Debenture, means, as of the date of determination, all Debentures theretofore authenticated and delivered to the Holder, except: (i) Debentures theretofore cancelled or delivered to the Company for cancellation; (ii) Debentures, or portions thereof, for whose payment or redemption money in the necessary amount has been paid to the Holder; (iii) Debentures which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Debentures have been delivered pursuant to this Debenture, other than any such Debentures in respect of which there shall have been presented to the Company proof satisfactory to it that such Debentures are held by a bona fide purchaser in whose hands the Debentures are valid obligations of the Company; and (iv) the principal portion of Debentures converted into Common Shares pursuant to Article 12. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any) or interest on any Debentures on behalf of the Company. "Payment Blockage Period" has the meaning specified in Section 1302(b). "Payment Event of Default" means any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto. "Permitted Senior Indebtedness" means indebtedness that is permitted in accordance with Section 1008. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Debenture" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 306 in exchange for a mutilated Debenture or in lieu of a lost, destroyed or stolen 7 Debenture shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Debenture. "prescribed securities" has the meaning specified in Section 1218. "Principal Lender" means Zurich Insurance Company. "Purchased Shares" has the meaning specified in Section 1210(f). "rate(s) of exchange" has the meaning specified in Section 114(d). "Redemption Date" means the date fixed for redemption by or pursuant to this Debenture. "Redemption Price" has the meaning specified in Section 1101. "Redemption Tax Event" means that the Company shall have received an Opinion of Counsel to the effect that, as a result of (a) any amendment to or change (including any announced prospective change) in the laws (or any regulations thereunder) of any Tax Authority, (b) any amendment to or change in an interpretation or application of such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), in either case, which amendment or change is enacted, promulgated, issued or announced, or which interpretation is issued or announced, or which action is taken, on or after the date hereof, or (c) any change in the domicile or residence of the Company or the Holder thereby subjecting the parties to the tax laws of another jurisdiction, there is more than an insubstantial risk that the Company has or would become obligated to pay Additional Amounts to the Holder, and the Board concludes that (i) the Additional Amounts are or would be more than a de minimis amount and (ii) such obligation cannot be avoided by the Company taking reasonable measures available to it. "Reference Date" has the meaning specified in Section 1210(d). "Reference Period" has the meaning specified in Section 1203. "Registered Office" means the registered office of the Company, currently located at Suite 314, 214 King Street West, Toronto, Ontario. "Regular Record Date" for the interest payable on any Interest Payment Date means the date (whether or not a Business Day) next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Company, means the Chairman, the President, the Chief Financial Officer or the Secretary. "Securities Act" means the Securities Act, (Ontario), as amended from time to time. 8 "Senior Indebtedness" means: (a) the principal of (and premium, if any, on) and interest on (including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law) and other amounts due on or in connection with any Indebtedness of the Company owed to any Financial Institution pursuant to a negotiated agreement between the Company and such Financial Institution, whether outstanding on the date of this Debenture or hereafter created, incurred or assumed, and all Hedging Obligations with respect thereto; (b) any other Indebtedness unless the instrument under which such Indebtedness is incurred expressly provides that such Indebtedness shall not be senior in right of payment to any other Indebtedness of the Company; and (c) all obligations with respect to items listed in the preceding clauses (a) and (b). Notwithstanding anything to the contrary in the preceding, Senior Indebtedness will not include: (d) any liability for federal, state, local or other taxes owed or owing by the Company; (e) Indebtedness of the Company that is expressly subordinated in right of payment or pari passu to the Debentures; (f) Indebtedness of the Company that is expressly subordinated in right of payment to any Senior Indebtedness; (g) Indebtedness of the Company that by operation of law is subordinate to any general unsecured obligations of the Company; (h) any Indebtedness of the Company to any of its Subsidiaries; (i) any trade payables; or (j) any Indebtedness incurred in violation of this Debenture. "Stated Maturity" means, in the case of principal on the Debenture, June 28, 2007, and, in the case of interest thereon, the fixed date on which any installment of interest is due and payable. "Subsidiary" means any corporation of which at the time of determination the Company, directly and/or indirectly through one or more Subsidiaries, owns more than 50% of the Voting Stock. "Tax Act" means the Income Tax Act (Canada) or a Canadian provincial or territorial income tax statute. "Tax Authority" means the Dominion of Canada, any province, territory or other political subdivision thereof or the United States or any state or other political subdivision thereof, as applicable, or any other authority, agency or other person having the power to tax. "Trading Day" means a Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange in the applicable securities market. "Trading Volume" means the total number of shares of Common Stock traded on a particular Trading Day. "US$" or "United States" dollar means a dollar or other equivalent unit in currency of the United States of America as at the time shall be legal tender for payment of public and private debts. "US Taxes" means any past, present or future tax, duty, levy, impost, deductions, charges, withholdings, assessment, tariff or other government charge (including penalties, interest and other liabilities related thereto) imposed or levied by or on behalf of any Tax Authority in the United States of America. 9 "Voting Stock" means stock of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Holder to take any action under any provision of this Debenture, the Company shall furnish to the Holder an Officers' Certificate stating that all conditions precedent, if any, provided for in this Debenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Debenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Debenture (other than pursuant to Section 1005) shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Holder. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or 10 officers of the Company as to such factual matters, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Debenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holder. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Debenture to be given or taken by the Holder may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by the Holder in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Company and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holder. Proof of execution of any such instrument or of writing appointing any such agent shall be sufficient for any purpose of this Debenture and conclusive in favor of the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. (c) The principal amount and serial numbers of Debentures held by any Person, and the date of holding the same, shall be proved by the Debenture Register. (d) If the Company shall solicit from the Holder any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of the Holder entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of the Holder generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holder of record at the close of business on such record date shall be deemed to be the Holder; provided that no such authorization, agreement or consent by the Holder on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of such request, demand, authorization, direction, notice, consent, waiver or other Act. 11 (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder shall bind every future Holder of the same Debenture and the Holder of every Debenture issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Company in reliance thereon, whether or not notation of such action is made upon such Debenture. SECTION 105. Notices, etc., to the Holder, Company. (a) Any request, demand, authorization, direction, notice, consent, waiver or act of the Company or other documents provided or permitted by this Debenture to be made upon, given or furnished to, or filed with, the Holder by the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Holder addressed to it as follows: Fairfax Financial Holdings Limited, 95 Wellington Street West, Suite 800, Toronto, Ontario M5J 2N7, Attention: Bradley Martin or to such other address in Canada or the United States as the Holder may, upon advance written notice, give to the Company. (b) Any request, demand, authorization, direction, notice, consent, waiver or Act of the Holder or other documents provided or permitted by this Debenture to be made upon, given or furnished to, or filed with, the Company by the Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its Registered Office. SECTION 106. Deemed Receipt and Waiver. Any notice mailed to the Holder in the manner prescribed in Section 105 shall be conclusively deemed to have been received by the Holder or the Company, as the case may be, five (5) Business Days after such mailing, whether or not the intended recipient actually receives such notice. Where this Debenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. SECTION 107. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. All covenants and agreements in this Debenture by the Company shall bind its successors and assigns, whether so expressed or not. Notwithstanding anything else herein contained, the Holder may not assign or transfer this Debenture or any of its rights hereunder other than to an Affiliate or Affiliates of the Holder (in such proportions of principal as the Holder may see fit). 12 SECTION 109. Severability Clause. In case any provision in this Debenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Debenture. Nothing in this Debenture, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Conversion Agent, any Securities Registrar and their successors hereunder, the Holder and, with respect to any provisions hereof relating to the subordination of the Debentures or the rights of holders of Senior Indebtedness, the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Debenture. SECTION 111. Governing Law. This Debenture shall be governed by and construed in accordance with the law of the Province of Ontario, and the laws of Canada applicable therein, without regard to the principles of conflict of laws that would defer to the substantive laws of any other jurisdiction. SECTION 112. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Conversion Date, Stated Maturity or Maturity of any Debenture shall not be a Business Day, then (notwithstanding any other provision of this Debenture) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Conversion Date or at the Stated Maturity or Maturity; provided that, subject to section 3.01, no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Conversion Date, Stated Maturity or Maturity, as the case may be. SECTION 113. Intentionally Deleted SECTION 114. Conversion of Currency. (a) The Company covenants and agrees that the following provisions shall apply to conversion of currency in the case of this Debenture: (i) If for the purpose of obtaining judgment in, or enforcing the judgment of, any court in any country, it becomes necessary to convert into a currency (the "Judgment Currency") an amount due in any other currency (the "Base Currency"), then the conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which the judgment is given or the order of enforcement is made, as the case may be (unless a court shall otherwise determine). (ii) If there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment is given or an order of enforcement 13 is made, as the case may be (or such other date as a court shall determine), and the date of receipt of the amount due, the Company will pay such additional (or, as the case may be, such lesser) amount, if any, as may be necessary so that the amount paid in the Judgment Currency when converted at the rate of exchange prevailing on the date of receipt will produce the amount in Base Currency originally due. (b) In the event of the winding-up of the Company at any time while any amount or damages owing under this Debenture, or any judgment or order rendered in respect thereof, shall remain outstanding, the Company shall indemnify and hold the Holders harmless against any deficiency arising or resulting from any variation in rates of exchange between (i) the date as of which the equivalent of the amount in Base Currency due or contingently due under this Debenture (other than under this Subsection (b)) is calculated for the purposes of such winding-up and (ii) the final date for the filing of proofs of claim in such winding-up. For the purpose of this Subsection (b) the final date for the filing of proofs of claim in the winding-up of the Company shall be the date fixed by the liquidator or otherwise in accordance with the relevant provisions of applicable law as being the latest practicable date as at which liabilities of the Company may be ascertained for such winding-up prior to payment by the liquidator or otherwise in respect thereto. (c) The obligations contained in Subsections (a)(ii) and (b) of this Section 114 shall constitute separate and independent obligations of the Company from its other obligations under this Debenture, shall give rise to separate and independent causes of action against the Company, shall apply irrespective of any waiver or extension granted by the Holder from time to time and shall continue in full force and effect notwithstanding any judgment or order or the filing of any proof of claim in the winding-up of the Company for a liquidated sum in respect of amounts due hereunder (other than under Subsection (b) above) or under any such judgment or order. Any such deficiency as aforesaid shall be deemed to constitute a loss suffered by the Holders and no proof or evidence of any actual loss shall be required by the Company or its liquidator. In the case of Subsection (b) above, the amount of such deficiency shall not be deemed to be increased or reduced by any variation in rates of exchange occurring between the said final date and the date of any liquidating distribution. (d) The term "rate(s) of exchange" shall mean the rate of exchange quoted by the Bank of Montreal, or such other Canadian chartered bank as may be designated in writing by the Company from time to time, at its central foreign exchange desk in its main office in Toronto at 12:00 noon (Toronto time) on the relevant date for purchases of the Base Currency with the Judgment Currency and includes any premiums and costs of exchange payable. SECTION 115. Submission to Jurisdiction; Waiver of Immunities. The Company agrees that any legal suit, action or proceeding brought by any party to enforce any rights under or with respect to this Debenture may be instituted in any court in The City of Toronto, in the Province of Ontario, and waives to the fullest extent permitted by law any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, including (without limitation) any objection or defense to any such jurisdiction as an inconvenient forum and irrevocably submits itself to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding. 14 To the extent the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations under this Debenture, to the extent permitted by law. SECTION 116. Intentionally Deleted. ARTICLE TWO INTENTIONALLY DELETED ARTICLE THREE THE DEBENTURE SECTION 301. Terms. FOR VALUE RECEIVED, the Company hereby acknowledges itself indebted and promises to pay to the Holder, or its registered assigns, the principal sum of Seventeen Million Five Hundred Thousand United States Dollars (US$17,500,000.00) on June 28, 2007, and to pay interest on the said principal sum from time to time outstanding from the date that the subscription for the Debenture was funded by the Holder, namely June 21, 2001, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid, semi-annually on June 28 and December 28 of each year, commencing December 28, 2001, at the rate of 8.5% per annum until the said principal amount has been paid in full and, to the extent lawful, to pay on demand interest on any overdue interest or principal payment at the rate borne by this Debenture plus 3% per annum. Interest at the applicable rates set out above shall be payable both before and after maturity and before and after judgment. The principal of and the interest on this Debenture shall be payable at the Registered Office or agency of the Company in The City of Toronto in such coin or currency of The United States of America at the time and payment is the legal tender for payment of public and private debts in United States Dollars; provided, however, that payment of principal and interest may be made at the option of the Company by mailing a cheque payable to the Holder at such address as appears on the Debenture Register; provided, further, that in the case of payments of principal the Debenture is first surrendered to the Paying Agent. Notwithstanding the foregoing, the Holder will be entitled to receive interest payments, if any, on any Interest Payment Date and principal on Maturity by wire transfer of immediately available funds to an account maintained by the payee located in The United States of America if appropriate wire transfer instructions have been received in writing by the Company not less than 15 days prior to such Interest Payment Date or Maturity, provided that in the case of payments of principal the related Debenture is first surrendered to the Paying Agent. Any such wire transfer instructions received by the Company shall remain in effect until revoked by the Holder. The Debenture shall be redeemable as provided in Article Eleven. In the event of a partial redemption, the parties may, upon mutual agreement, indicate on an addendum attached 15 to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, as contemplated in Section 1105(d). The Debenture shall be convertible as provided in Article Twelve. The Debenture shall be subordinated in right of payment to Senior Indebtedness as provided in Article Thirteen. There shall be no sinking fund for the retirement of the Debenture. The Company will pay Additional Amounts with respect to the Debenture under certain circumstances as provided in Section 1007. SECTION 302. Denominations. The Debenture shall be issuable without coupons and only in denominations of US$1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Debenture shall be executed on behalf of the Company by its Chairman, its President, its Chief Financial Officer or Secretary under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Debenture must be manual. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid (either, a "Successor"), shall have executed a Debenture supplemental hereto with the Holder pursuant to Article Nine, the Debenture delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the Successor, be exchanged for another Debenture executed in the name of the Successor with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Debenture surrendered for such exchange and of like principal amount; however, such exchanged Debenture shall conform to any requirements necessary to ensure that such Debenture will be and will remain exempt from Canadian Taxes and US Taxes including, without limitation, in respect of Canadian Taxes, the requirement in effect on the date of the Debenture that the Holder shall not be entitled to receive shares, other securities or property, other than shares that are "prescribed securities" as defined in Regulation 6208 of the Tax Act; and the Company shall deliver a Debenture as specified in such request for the purpose of such exchange. In the event of a partial redemption, the parties may, upon mutual agreement, indicate on an addendum attached to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, as contemplated in Section 1105(d). If any Debenture shall at any time be delivered in any new name of a successor Person pursuant to this Section in 16 exchange or substitution for or upon registration of transfer of the Debenture, such successor Person, at the option of the Holder but without expense to the Holder, shall provide for the exchange of all Debentures at the time Outstanding for a Debenture delivered in such new name. SECTION 304. Intentionally Deleted. SECTION 305. Registration, Registration of Transfer and Exchange. (a) The Company shall cause to be kept at the Registered Office a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Debenture Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of the Debenture(s) and of transfers of the Debenture(s). The Debenture Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Debenture Register shall be open to inspection by the Holder. The Secretary of the Company is hereby initially appointed as security registrar (the "Debenture Registrar") for the purpose of registering Debentures and transfers of Debentures as herein provided. Upon surrender for registration of transfer of the Debenture, the Company shall execute, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Debentures of any authorized denomination or denominations of a like aggregate principal amount. At the option of the Holder, the Debenture may be exchanged for other Debentures of any authorized denomination and of a like aggregate principal amount, upon surrender of the Debentures to be exchanged at such office or agency. Whenever the Debentures are so surrendered for exchange, the Company shall execute and deliver the Debenture which the Holder making the exchange is entitled to receive. All Debentures issued upon any registration of transfer or exchange of the Debenture shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits as this Debenture. Every Debenture presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Debenture Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Debenture Registrar, duly executed by the Holder or the Holder's attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Debentures, other than exchanges pursuant to Section 304, 306, 906, 1104, 1202 or 1204 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Debenture during a period beginning at the opening of business 15 days before the 17 redemption of the Debenture under Section 1104 and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange that portion of the Debenture so selected for redemption. SECTION 306. Mutilated, Destroyed, Lost and Stolen Debenture Certificate. If (i) any mutilated Debenture is surrendered to the Company, or (ii) the Company receives evidence to its satisfaction of the destruction, loss or theft of the Debenture, and there is delivered to the Company such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company that the Debenture has been acquired by a bona fide purchaser, the Company shall execute, authenticate and deliver, in exchange for any such mutilated Debenture or in lieu of any such destroyed, lost or stolen Debenture, a new Debenture of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Debenture has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Debenture, pay such Debenture. Upon the issuance of any new Debenture under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of a trustee, any Authenticating Agent and the Debenture Registrar) connected therewith. Every new Debenture issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Debenture shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Debenture shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Debenture equally and proportionately with any and all other Debentures duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures. SECTION 307. Payment of Interest; Interest Rights Preserved. Interest on the Debenture which is payable, and is punctually paid, on any Interest Payment Date shall be paid to the Person in whose name such Debenture (or one or more Predecessor Debentures) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002. Subject to the foregoing provisions of this Section and Section 305, upon registration of transfer of or in exchange for or in lieu of the Debenture, any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by the Debenture. SECTION 308. Persons Deemed Owners. 18 Prior to the due presentment of the Debenture for registration of transfer, the Company, and any agent of the Company, may treat the Person in whose name the Debenture is registered as the owner of the Debenture for the purpose of receiving payment of principal of and (subject to Sections 305 and 307) interest on the Debenture and for all other purposes whatsoever, whether or not the Debenture is overdue, and none of the Company, or any agent of the Company, shall be affected by notice to the contrary. SECTION 309. Cancellation. The Debenture, if surrendered for payment, redemption, registration of transfer or exchange shall be cancelled promptly by the Company. The Company may at any time cancel any Debentures previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may cancel any Debentures previously authenticated hereunder which the Company has not issued and sold. No Debentures shall be authenticated in lieu of or in exchange for any Debentures cancelled as provided in this Section, except as expressly permitted by this Debenture. SECTION 310. Computation of Interest. Interest on the Debenture shall be computed on the basis of a 360-day year of twelve 30-day months. For purposes of the Interest Act (Canada), where, in this Debenture, a rate of interest is to be calculated on the basis of a year of 360 days, the yearly rate of interest to which the 360 day rate is equivalent is such rate multiplied by the actual number of days in the year for which such calculation is made and divided by 360. SECTION 311. Company to Determine Certain Matters. In accordance with the provisions of this Debenture, the Company shall determine solely certain matters relating to the administration of the Debenture, including but not limited to Sections 305, 306, 308 and 1002. It shall be at the Company's sole option to exercise the redemption provisions set forth in Article 11. In addition, it shall be the sole obligation of the Company to satisfy the provisions of Article 12. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Debenture. This Debenture shall cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Debenture expressly provided for herein or pursuant hereto) and the Holder, shall execute proper instruments acknowledging satisfaction and discharge of this Debenture when the Company has paid or caused to be paid all other sums payable hereunder by the Company; and the Company has delivered to the Holders an Officers' Certificate stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Debenture have been complied with. 19 ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest on any Debenture when it becomes due and payable, and continuance of such default for a period of five (5) Business Days; or (b) default in the payment of the principal of the Debenture at its Maturity or a Redemption Date; or (c) default in the performance, or breach, of any covenant or agreement of the Company in this Debenture (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with elsewhere in this Section), and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the Holder a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) Indebtedness of the Company shall have been accelerated or otherwise declared or become due and payable or required to be prepaid or repurchased (in each case other than by regularly scheduled required installment), prior to the stated maturity thereof; or (e) failure by the Company to pay a final judgment or final judgments or a final order or final orders entered by a court or courts of competent jurisdiction, which judgments or orders in the aggregate exceed US$5 million, and (i) the commencement by any creditor of any enforcement proceeding upon any such judgment or order or (ii) such order remaining unstayed for 45 days; or (f) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the Bankruptcy and Insolvency Act (Canada), the Companies Creditors Arrangement Act (Canada) or any other applicable federal or provincial insolvency law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 30 consecutive days; or (g) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or 20 relief under the Bankruptcy and Insolvency Act (Canada), the Companies Creditors Arrangement Act (Canada) or any other applicable federal or provincial insolvency law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(f) or 501(g)) occurs and is continuing, then and in every such case the Holder may declare the principal amount of all the Debenture to be due and payable immediately, by a notice in writing to the Company and upon any such declaration such principal amount shall become due and payable. If an Event of Default specified in Section 501(f) or 501(g) occurs and is continuing, then the principal amount of the Debenture shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Holder as hereinafter provided in this Article, the Holder by written notice to the Company may rescind and annul such declaration and its consequences if: (a) the Company has paid a sum sufficient to pay in [ Canadian/US ] Dollars: (i) all overdue interest on all Outstanding Debentures at the rate set out in Section 301, (ii) all unpaid principal of (and premium, if any, on) any Outstanding Debenture which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate set out in Section 301, (iii) to the extent that payment of such interest is lawful, interest on overdue interest at the rate set out in Section 301, and (b) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Debenture which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Holder. The Company covenants that if: 21 (a) default is made in the payment of any installment of interest on any Debenture when such interest becomes due and payable and such default continues for a period of five (5) Business Days: or (b) default is made in the payment of the principal of (or premium, if any, on) the Debenture at the Maturity thereof, the Company will, upon demand of the Holder pay to the Holder the whole amount then due and payable on such Debenture for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate set out in Section 301, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection. If the Company fails to pay such amounts forthwith upon such demand, the Holder may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Debenture and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Debenture, wherever situated. If an Event of Default occurs and is continuing, the Holder may in its discretion proceed to protect and enforce its rights by such appropriate judicial proceedings as the Holder shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Debenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Holder May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Debenture or the property of the Company or of such other obligor or their creditors, the Holder (irrespective of whether the principal of the Debenture shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Holder shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Debenture and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Holder allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; 22 and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by the Holder to make such payments to the Holder. SECTION 505. Intentionally Deleted. SECTION 506. Application of Money Collected. Any money collected by the Holder pursuant to this Article shall be applied forthwith in the following order and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Debenture and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: Subject to Article Thirteen, to the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Debenture; and SECOND: The balance, if any, to the Person or Persons entitled thereto. SECTION 507. Limitation on Suits. The Holder shall not have any right to institute any proceeding, judicial or otherwise, with respect to this Debenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such Holder has previously given written notice to the Company of a continuing Event of Default or has made a demand under Section 503 or 504. SECTION 508. Unconditional Right of Holder to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Debenture, the Holder shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Thirteen) and the Debenture of the principal of (and premium, if any) and (subject to Section 301) interest on the Debenture on the Maturity expressed in such Debenture (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Holder has instituted any proceeding to enforce any right or remedy under this Debenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Holder, then and in every such case, subject to any determination in such proceeding, the Company and the Holder shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Holder shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debenture Certificates in the last paragraph of Section 306, 23 no right or remedy herein conferred upon or reserved to the Holder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Holder may be exercised from time to time, and as often as may be deemed expedient, by the Holder, as the case may be. The acceptance of payments under this Debenture by the Holder during an Event of Default will not be considered a waiver of such Event of Default. SECTION 512. Intentionally Deleted. SECTION 513. Waiver of Past Defaults. The Holder may waive any past default hereunder and its consequences. Upon any such waiver, such default shall cease to exist, and any Event of Default arising there from shall be deemed to have been cured, for every purpose of this Debenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 514. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Debenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 515. Undertaking for Costs. In any suit for the enforcement of any rights or remedy under this Debenture a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant. ARTICLE SIX INTENTIONALLY DELETED 24 ARTICLE SEVEN REPORTS BY COMPANY SECTION 701. Reports by Company. The Company shall: (a) transmit to the Holder, within 15 days after it files its annual and quarterly reports, information, documents and other reports with the Commission, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Company is required to file with the Commission, (b) transmit to the Holder in the manner provided in Section 106 all information that is provided to the holders of Common Stock within 10 days after such information is provided to such holders of Common Stock, (c) provide to the Holder such information about the operations and financial condition of the Company as the Holder may from time to time reasonably request and allow the Holder, on reasonable advance notice from the Holder to the Company, to examine the books of account and records of the Company and discuss the affairs, finances and accounts of the Company with, and to be advised as to the same by, the Company's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and/or General Counsel (or as they may otherwise delegate). ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms. The Company shall not, and shall not cause, suffer or permit any of its Subsidiaries to, consolidate or amalgamate with or merge with or into any other Person or sell, convey, transfer or lease or otherwise dispose of all or substantially all of its assets to any Person, unless: (a) the entity formed shall be a corporation, partnership or trust organized under the laws of Canada or any province or territory thereof or the United States, any state thereof or the District of Columbia (other than Old Lyme Insurance Co. Ltd., a company domiciled in Bermuda that is a Subsidiary of Kaye Group Inc., a company that the Company has agreed to acquire), and, unless the Company is the continuing corporation, shall expressly assume the Company's obligation to pay principal and interest on the Debenture and to observe the covenants of the Debenture; (b) immediately after giving effect to such transaction, (i) on a pro forma basis the Company or such continuing corporation which becomes the successor obligor of the Debentures could incur at least Cdn$1.00 of additional Indebtedness under the first paragraph of Section 1008 (without reliance on paragraph (b) thereof); and (ii) no Default or Event of Default shall have occurred and be continuing; 25 (c) the Corporation shall have delivered to the Holder an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, amalgamation, merger, conveyance, transfer or lease and the supplemental Debenture comply with this Debenture. The requirements of paragraph (b) of this Section 801 shall not apply to any sale, conveyance, transfer, lease or other disposition of the Company's assets to a direct or indirect Subsidiary of the Company. SECTION 802. No Consent or Approval Required. To the greatest extent permitted by law, no approval or consent of the Holder is required in connection with any consolidation, amalgamation or merger involving the Company, or any sale or conveyance to another Person of all or substantially all the assets of the Company, whether as a result of any of the events referred to in Section 801 or otherwise under the terms of this Debenture. SECTION 803. Successor Substituted. Upon any consolidation or amalgamation of the Company with or merger of the Company with or into any other corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 801, the successor Person formed by such consolidation or amalgamation into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Debenture with the same effect as if such successor Person had been named as the Company herein. SECTION 804. Assignment of Rights. The Company will have the right at all times to assign any of its respective rights or obligations under this Debenture to a direct or indirect Subsidiary of the Company; provided, however, that in the event of any such assignment, the Company will remain liable for all of its respective obligations. Subject to the foregoing, this Debenture will be binding upon and inure to the benefit of the parties hereto, the Holder and its respective successors and assigns. This Debenture may not otherwise be assigned by the Company. ARTICLE NINE SUPPLEMENTAL DEBENTURE SECTION 901. Intentionally Deleted. SECTION 902. Supplemental Debentures. The Company when authorized by a Board Resolution and with the prior consent of The Toronto Stock Exchange, and the Holder may enter into a Debenture supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Debenture or any supplemental Debenture. 26 SECTION 903. Intentionally Deleted. SECTION 904. Effect of Supplemental Debenture. Upon the execution of any supplemental Debenture by the Company and the Holder under this Article, this Debenture shall be modified in accordance therewith, and such supplemental Debenture shall form a part of this Debenture for all purposes; and the Company and the Holder shall be bound thereby. SECTION 905. Intentionally Deleted. SECTION 906. Reference in Debenture to Supplemental Debentures. Any Debenture delivered after the execution of any supplemental Debenture pursuant to this Article may, bear a notation in form approved by the parties as to any matter provided for in such supplemental Debenture. If the Company shall so determine, a new Debenture so modified as to conform, in the opinion of the Company, to any such supplemental Debenture may be prepared and executed by the Company and delivered by the Company in exchange for the Debenture. SECTION 907. Intentionally Deleted. SECTION 908. Effect on Senior Indebtedness. No supplemental Debenture shall adversely affect the rights of the holders of Senior Indebtedness under Article Thirteen without the consent of the Holder. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if any, and Interest. The Company covenants and agrees for the benefit of the Holder that it will duly and punctually pay the principal of (and premium, if any) and interest on the Debenture in accordance with the terms of this Debenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain its Registered Office, where the Debenture may be presented or surrendered for payment, where the Debenture may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of this Debenture may be served. The Company will give prompt written notice to the Holder of any change in the location of the Registered Office. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of Toronto) where the Debenture may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner 27 relieve the Company of its obligation to maintain an office or agency in The City of Toronto for such purposes. The Company will give prompt written notice to the Holder of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Debenture Payments to Be Held in Trust. The Company, on or before each due date of the principal of (or premium, if any) or interest on the Debenture, shall segregate and hold in trust for the benefit of the Holder a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall be paid to the Holder or otherwise disposed of as herein provided and will promptly notify the Holder of its action or failure so to act. Any money then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest on the Debenture and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be discharged from such trust; and the Holder may thereafter, only as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Company, as trustee thereof, shall thereupon cease. SECTION 1004. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holder. SECTION 1005. Statement by Officers As to Default. The Company will deliver to the Holder, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer, as to his or her knowledge, after reviewing the Debenture, of the Company's compliance with all conditions and covenants under this Debenture. In addition, the Company shall notify the Holder in the case of any Event of Default as soon as is reasonably practicable after knowledge of such Event of Default comes to the attention of any of any Responsible Officer. For purposes of this Section 1005, such compliance shall be determined without regard to any period of grace or requirement of notice under this Debenture. SECTION 1006. Intentionally Deleted. SECTION 1007. Payment of Additional Amounts. All adjustments, payments or transfers made by the Company under or with respect to the Debenture (including, but not limited to, the redemption or conversion thereof or as a result of any adjustment to the Conversion Price), or delivery of Common Shares (including cash in lieu of fractional shares) made by or on behalf of the Company will be made free and 28 clear of and without withholding or deduction for or on account of Canadian Taxes and US Taxes, unless the Company is required to withhold or deduct Canadian Taxes or US Taxes by law or by the interpretation or administration thereof by the relevant government authority or agency. If the Company is so required to withhold or deduct any amount for or on account of Canadian Taxes or US Taxes from any payment or transfer made under or with respect to the Debentures (including, but not limited to, the redemption or conversion thereof or as a result of any adjustment to the Conversion Price), the Company will pay as additional interest such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by the Holder after such withholding or deduction (including with respect to Additional Amounts) will not be less than the amount the Holder would have received if such Canadian Taxes or US Taxes, as the case may be, had not been withheld or deducted (a similar payment will also be made to the Holder if the Holder is exempt from withholding but is required to pay tax directly on amounts otherwise subject to withholding); provided, however, that no Additional Amounts related to Canadian Taxes will be payable with respect to a payment made to the Holder (an "Excluded Holder") in respect of the beneficial owner thereof (i) if the Company does not deal at arm's length (for purposes of the Tax Act) with the Holder at the time of the making of such payment, (ii) if the Holder is subject to such Canadian Taxes by reason of its failure to comply with any certification, identification, information, documentation or other reporting requirement if compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or a reduction in the rate of deduction or withholding of, such Canadian Taxes or (iii) which payment is subject to such Canadian Taxes by reason of the Holder carrying on business in or being connected with Canada or any province or territory thereof otherwise than by the mere holding of Debentures or the receipt of payment thereunder. The Company will make such withholding or deduction and remit the full amount deducted or withheld to the relevant authority as and when required in accordance with applicable law. The Company will pay all taxes, interest penalties, liabilities or other amounts due of the Company or the Holder which arise by virtue of any failure of the Company to withhold, deduct and remit to the relevant authority on a timely basis the full amounts required in accordance with applicable law. The Company will furnish to the Holder, within 30 days after the date the payment of any Canadian Taxes or US Taxes is due pursuant to applicable law, certified copies of tax receipts evidencing such payment by the Company. SECTION 1008. Limitation on Additional Indebtedness. (a) The Company shall not, directly or indirectly, Incur any Senior Indebtedness, provided, however, that the Company may incur Senior Indebtedness (i) if the date of such Incurrence shall be on or prior to the last day of the fourth full fiscal quarter following the date of this Debenture, in an amount not to exceed, together with all other Incurrences under this Section and all other outstanding Senior Indebtedness, U.S.$148 million, or (ii) if the date of such Incurrence is after the last day of the fourth full fiscal quarter following the date of this Debenture then, the Company's EBITDA Ratio for the most recently ended four full fiscal quarters immediately preceding the date on which such additional Indebtedness is Incurred (taken as one accounting period) would not have been greater than 4:1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom) as if the additional Indebtedness had been Incurred at the beginning of such four-quarter period. (b) The foregoing provisions will not apply to: 29 (i) Indebtedness outstanding on the date of this Debenture; (ii) the Incurrence of any Indebtedness in exchange for, or the proceeds of which are used to refund, refinance or replace Indebtedness that was outstanding on the date of this Debenture or otherwise permitted by the terms of this Debenture to be then outstanding; (iii) the Incurrence of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Debenture to be outstanding; (iv) the Incurrence of intercompany Indebtedness between the Company and its Subsidiaries; and (v) the Incurrence of Indebtedness represented by capital lease obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company and its Subsidiaries, including any Encumbrances on (and limited to) such assets to secure such Indebtedness. SECTION 1009. Limitations on Issuances of Guarantees of Senior Indebtedness. The Company will not permit any of its Subsidiaries, directly or indirectly, to guarantee or pledge or grant any Encumbrance upon any assets to secure the payment of any Senior Indebtedness of the Company, unless such Subsidiary simultaneously executes and delivers a supplemental Debenture providing for the guarantee of, or pledge of assets to secure, the payment of the Debenture by such Subsidiary, which guarantee or pledge shall be on terms substantially similar to the guarantee of or pledge of assets regarding such Senior Indebtedness and shall be subordinated to such guarantee or pledge of assets of such Senior Indebtedness to the same extent as the Debenture is subordinated to such Senior Indebtedness. It is the intention of all such parties hereto that any guarantee of the Debentures by any Subsidiary of the Company shall not constitute a fraudulent transfer or conveyance for purposes of Canadian federal or provincial law relating to fraudulent transfer or conveyance. To effectuate the foregoing intention, the Holder hereby irrevocably agrees that the obligations of such Subsidiary under any guaranty of the Debenture shall be limited to the maximum amount that will not result in the obligations of the Subsidiary constituting such fraudulent transfer or conveyance (taking into account the subrogation and contribution rights such Subsidiary may have against the borrower or any other guarantor or person). Notwithstanding the preceding paragraph, any guarantee of, or pledge of assets with respect to the Debenture by a Subsidiary of the Company will provide by its terms that it will be automatically and unconditionally released and discharged in connection with any permitted sale or disposition of all or substantially all of the assets of such Subsidiary (including by way of permitted merger or consolidation), or in connection with any permitted sale of all the capital stock of such Subsidiary. SECTION 1010. Limitation on Senior Subordinated Indebtedness. 30 The Company will not Incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is pari passu in right of payment to this Debenture, other than 8.5% convertible subordinated debentures due 2006 (subject to a call to redeem after three years) to be issued by the Company and sold to the Principal Lender, in aggregate principal amount not to exceed Cdn$42.5 million. SECTION 1011. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 1007 through 1009, if before or after the time for such compliance, the Holder waives such compliance (with or without conditions) in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN REDEMPTION OF DEBENTURES SECTION 1101. Right of Redemption. Other than as hereinafter set out, the Debentures may not be redeemed at the election of the Company. Upon the occurrence of a Redemption Tax Event, the Company may, at its option, redeem all of the Debentures upon notice as set forth in Section 1105, at 100% of the principal amount (the "Redemption Price") plus any accrued and unpaid interest to the Redemption Date and any Additional Amounts owed on such interest; provided that (i) no such notice of redemption may be given earlier than 60 Business Days prior to the earliest date on which the Company would be obligated to pay any such Additional Amounts were a payment in respect of the Debentures then due, and (ii) at the time such notice is given, the circumstances creating the obligation to pay such Additional Amounts remain in effect. Prior to the giving of any such notice of redemption, the Company must deliver to the Holder (i) an Officers' Certificate stating that the Company is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right to the Company so to redeem have occurred, (ii) a Board Resolution to the effect that the Board has concluded that the Additional Amounts are or would be more than a de minimis amount and such obligations cannot be avoided by the Company taking reasonable measures available to it, and (iii) an Opinion of Counsel acceptable to the Holder, acting reasonably, to the effect that the Company has or would become obligated to pay any Additional Amounts as a result of the Redemption Tax Event. The Company's right to redeem the Debentures shall continue as long as the Company is obligated to pay such Additional Amounts, notwithstanding that the Company shall have made payments of Additional Amounts. SECTION 1102. Applicability of Article. 31 Redemption of the Debenture at the election of the Company, as permitted or required by any provision of this Debenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Holder. The election of the Company to redeem the Debenture pursuant to Section 1101 shall be evidenced by a Board Resolution. The Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Holder), notify the Holder of such Redemption Date and of the principal amount of the Debenture to be redeemed. SECTION 1104. Debentures to be Redeemed. No partial redemption of the Debenture shall reduce the portion of the principal amount of the Debenture not redeemed to less than US$1,000. Upon any redemption of any portion of the Debenture the Company and the Holder shall treat as Outstanding any portion of the Debenture not thereafter surrendered for conversion in accordance with Article 12 and any portion of the Debenture thereafter delivered to the Holder in exchange for the unconverted portion of the Debenture converted in part. For all purposes of this Debenture, unless the context otherwise requires, all provisions relating to redemption of the Debenture shall relate to the portion of the principal amount of the Debenture which has been or is to be redeemed. SECTION 1105. Notice of Redemption. Notice of redemption shall be given by the Company to the Holder in the manner provided for in Section 105 not less than 30 nor more than 60 days prior to the Redemption Date. All notices of redemption shall state: (a) the Redemption Date, (b) the Redemption Price and the amount of accrued and unpaid interest, if any, to the Redemption Date payable as provided in Section 1107, (c) in the case of a partial redemption, the principal amount of the Debenture to be redeemed, (d) in the case of a partial redemption, the notice shall state that on and after the Redemption Date, upon surrender of the Debenture, the Holder will receive, without charge, a new Debenture or Debentures of authorized denominations for the principal amount thereof remaining unredeemed or, in the alternative, the parties may, upon mutual agreement, indicate on an addendum attached to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, 32 (e) (i) the Conversion Price then in effect, and (ii) the places where the Debenture may be surrendered for conversion, (f) that on the Redemption Date, the Redemption Price (and accrued interest and unpaid interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and payable upon the applicable portion of the Debenture, and that interest thereon will cease to accrue on and after said date, and (g) the place or places where the Debenture is to be surrendered for payment of the Redemption Price and accrued interest, if any. SECTION 1106. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit, segregate and hold in trust as provided in Section 1003 an amount of money sufficient to pay the Redemption Price of, and accrued interest on, that the portion of the Debenture which is to be redeemed on that date. SECTION 1107. Debentures Payable on Redemption Date. Notice of redemption having been given as aforesaid, and unless the Holder shall have exercised a conversion right under Article Twelve, the portion of the Outstanding Debenture to be so redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest, if any) such portion of the Debenture shall cease to be Outstanding and to bear interest. Upon surrender of the Debenture for redemption in accordance with said notice, such Debenture shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holder, or one or more Predecessor Debentures, registered as such at the close of business on the relevant Regular Record Dates according to their terms and the provisions of Section 301. ARTICLE TWELVE CONVERSION OF DEBENTURES SECTION 1201. Holder Conversion Option. Subject to and upon compliance with the provisions of this Article, the Holder at its option, at any time prior to 5:00 p.m. (Toronto time) on the Business Day immediately preceding the Maturity, or, in the case of a redemption, any time prior to 5:00 p.m. ((Toronto time) on the Business Day immediately preceding the Redemption Date, may convert the Debenture (or any portion of the principal amount thereof that is an integral multiple of US$1,000), into that number of fully paid and nonassessable Common Shares as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price, as defined below (the "Holder Conversion Option"). 33 The price at which Common Shares shall be delivered upon a conversion by a Holder (herein called the "Conversion Price") shall be Seventeen Canadian Dollars (Cdn $17) per Common Share, as adjusted in certain instances as provided in this Article Twelve. SECTION 1202. Exercise of Holder Conversion Option. In order to exercise the Holder Conversion Option, the Holder shall (A) surrender the Debenture, duly endorsed or assigned to the Company or in blank at any office or agency of the Company maintained for that purpose pursuant to Section 1002, and (B) deliver to such office or agency a duly signed and irrevocable completed Notice of Conversion (a "Notice of Conversion") in the form set out below stating that the Holder elects to convert such Debenture or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. CONVERSION NOTICE The undersigned holder of this Debenture hereby irrevocably converts the Debenture, or any portion of the principal amount at Maturity hereof (which is an integral multiple of US $1,000) below designated, into Common Shares of the Company in accordance with the terms of this Debenture, and directs that such shares, together with a Cheque in payment for any fractional shares and any Debentures representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If Common Shares or Debentures are to be registered in the name of a Person other than the undersigned (which other Person the undersigned acknowledges may only be an affiliate of the undersigned), the undersigned will pay all transfer taxes, if any, payable with respect thereto. Dated: ---------------------- ----------------------------------------- ----------------------------------------- Signature(s) If Common Shares or Debentures are to be registered in If only a portion of the Debenture is to be converted, the name of a Person other than the Holder, please indicate: print such Person's name and address: - ------------------------------------- Principal amount to be converted: Name US$ -------------------------------- (US$1,000 denomination or - ------------------------------------- integral multiple thereof) Address 34 - ------------------------------------- Taxpayer Identification Number, if any The Debenture, if surrendered for conversion (in whole or in part) other than on an Interest Payment Date, shall be entitled to, and the Company shall make, a payment of interest, calculated in the normal course, on the outstanding principal for that portion of the period during which such principal was not converted on the next succeeding Interest Payment Date. For greater certainty, the principal amount of the Debenture that is converted shall be entitled to interest up to the Conversion Date, such interest to be paid on the next succeeding Interest Payment Date, together with interest on that portion of the principal that was not converted. The Company's delivery to the Holder of the number of Common Shares (and cash in lieu of fractions thereof) into which the Debenture is convertible will be deemed to satisfy the Company's obligation to pay the principal amount of the Debenture. The Holder shall promptly deliver to the Company and the Company, in turn, to the transfer agent of the Common Shares, notification of such Notice of Conversion at the address described in Section 105 The Debenture shall be deemed to have been converted immediately prior to the close of business on the Business Day of surrender of the Debenture for conversion (the "Conversion Date") in accordance with the foregoing provisions, and at such time the rights of the Holder, as holder of the principal amount of the Debenture so converted, shall cease, and the Person or Persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and deliver to the Holder, a certificate or certificates for the number of full shares of Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1208. If the Debenture is converted in part only, upon such conversion the Company shall execute and deliver to the Holder, at the expense of the Company, a new Debenture or Debentures of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such Debenture. The Debenture may be converted in part, but only if the principal amount to be converted is any integral multiple of US$1,000. SECTION 1203. Company Conversion Option. Subject to and upon the compliance with the provisions of this Article, the Company is entitled, at any time after the fifth (5th) anniversary of the date of this Debenture that the weighted average Closing Sale Price of the Common Shares for 20 consecutive Trading Days (the "Reference Period") ending on the Trading Day immediately prior to the day which the Company sends out a notice of conversion pursuant to Section 1206, exceeds NINETEEN Canadian Dollars (Cdn$19) per Common Share, as adjusted in certain instances as provided in this Article Twelve (the "Company Conversion Threshold"), at its option (the "Company 35 Conversion Option"), in whole or in part, to require the Holder to convert the Debentures held by such Holder into that number of fully paid and non-assessable Common Shares as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price multiplied by the Exchange Rate. As used in this Debenture, "weighted average" of the Closing Sale Price of the Common Shares shall be calculated as the sum of the product of the Closing Sale Price multiplied by the Trading Volume of the Common Shares on The Toronto Stock Exchange (or such successor exchange) of each Trading Day within the Reference Period divided by the total Trading Volume of the Common Shares on The Toronto Stock Exchange (or such successor exchange) during the Reference Period. SECTION 1204. Exercise of Company Conversion Option. In order to exercise the Company Conversion Option, the Company shall provide a conversion notice pursuant to Section 1206. On the Conversion Date specified by the Company in such notice, the Holder must (a) surrender the Debentures subject to the Company Conversion Option, (b) furnish appropriate endorsements or transfer documents if required by the Conversion Agent, (c) pay any transfer or similar tax, if required, and (d) pay any interest payments as described in the next succeeding sentence. In case the Conversion Date specified by the Company in a notice pursuant to a Company Conversion Option shall be made subsequent to an Interest Payment Date but prior to the next Interest payment Date (except Debentures called for redemption on a Redemption Date during such period), the Holder will be entitled to an amount equal to the ratable interest payable from such prior Interest Payment Date to the Conversion Date on the principal amount of the Debenture then being converted by the Company. The Company's delivery to the Holder of the number of Common Shares (and cash in lieu of fractions thereof, as provided in the Debenture) into which the Debenture is convertible will be deemed to satisfy the Company's obligation to pay the principal amount of the Debenture. Debentures shall be deemed to have been converted immediately prior to the close of business on the Conversion Date in accordance with the foregoing provisions, however, in no event shall the Conversion Date upon a Company Conversion Option be later than 30 days from the date the Company provides a conversion notice to the Holder, and at such time the rights of the Holder of the Debenture, as holder, shall cease, and the Person or Persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and deliver to the Conversion Agent, for delivery to the Holder, a certificate or certificates for the number of full shares of Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1208. In the case of any Debenture which is converted at the option of the Company in part only, upon such conversion the Company shall execute and deliver to the Holder, at the expense of the Company, a new Debenture or Debentures of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such 36 Debenture. A Debenture may be converted in part, but only if the principal amount of such Debenture to be converted is any integral multiple of US$1,000. SECTION 1205. Election to Convert; Notice to Holder. The election of the Company to convert the Debenture pursuant to Section 1203 shall be evidenced by Board Resolution. In case of any Company Conversion Option, the Company shall at least 30 days prior to the Conversion Date fixed by the Company (unless a shorter notice shall be satisfactory to the Holder), notify the Holder of such Conversion Date. SECTION 1206. Notice of Company Conversion. The conversion notice given by the Company to the Holder shall be given in the manner provided for in Sections 105 and 106 and pursuant to Section 1203. A conversion notice issued by the Company pursuant to a Company Conversion Option shall state: (a) the Conversion Date, (b) the Conversion Price, and the amount of accrued and unpaid interest, if any, on the Debentures to be converted from the Conversion Date to the next subsequent Interest Payment Date payable as provided in Section 1203, and (c) the place or places where the Debenture is to be surrendered for conversion. A conversion notice shall be given by the Company at the expense of the Company. SECTION 1207. Debenture to be Converted Upon a Company Conversion Notice. A conversion notices having been given as aforesaid, that principal portion of the Debenture to be so converted shall, on the Conversion Date, be converted into that number of fully paid and nonassessable Common Shares (calculated as to each conversion to the nearest 1/100th of a share) as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price multiplied by the Exchange Rate (together with accrued and unpaid interest, if any, to the Conversion Date), and from and after such date (unless the Company shall default in providing Holders with such Common Shares), the converted portion of the principal of the Debenture shall cease to bear interest. SECTION 1208. Fractions of Shares. No fractional Common Shares shall be issued upon conversion of any Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be completed on the basis of the aggregate principal amount of the Debenture (or specified portions thereof) so 37 surrendered. Instead of any fractional share of Common Shares which would otherwise be issuable upon conversion of the Debenture (or specified portions thereof), the Company shall calculate and pay a cash adjustment in respect of such fraction (calculated to the nearest 1/100th of a share) in an amount equal to the same fraction of the Conversion Price per Common Share (calculated in accordance with Section 1210(h) below) at the close of business on the Conversion Date. In effecting the conversion transactions described in this Section, the Conversion Agent is acting as agent of the Holder. The Conversion Agent is hereby authorized to convert all or a portion of the Debentures into Common Shares and thereupon to deliver such Common Shares in accordance with the provisions of this Article and to deliver to the Holder a new Debenture or Debentures for any resulting unconverted principal amount. SECTION 1209. Expiration of the Holder Conversion Option. The conversion rights of the Holder shall expire (a) at 5:00 p.m. Toronto, Ontario time on the Business Day prior to the Maturity Date of the Debentures, or (b) if the Debenture is called for redemption, at 5:00 p.m. Toronto, Ontario time on the Business Day prior to the Redemption Date, unless in either case the Company defaults in making the payment due upon redemption or such Maturity Date (both referred to as the "Conversion Expiration Date"), in which event conversion rights shall continue until payment is made. SECTION 1210. Adjustment of Conversion Price. No adjustment will be made to the Conversion Price or the Company Conversion Threshhold (each, a "Conversion Amount") other than as described in this Article. The Conversion Amount shall be subject to adjustments from time to time as follows: (a) In case the Company shall pay or make a dividend or other distribution on any of its Common Shares payable in Common Stock to all holders of its Common Stock, the Conversion Amount in effect at the opening of business on the Business Day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Amount by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the Business Day following the date fixed for such determination. For purposes of this paragraph (a), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not pay any dividend or make any distribution on Common Shares that have not been issued. (b) In case the Company shall issue rights, options or warrants to all holders of Common Shares entitling them to subscribe for or purchase shares of any class of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (h) of this Section) of such class of Common Stock on the date fixed for the 38 determination of shareholders entitled to receive such rights, options or warrants, the Conversion Amount in effect at the opening of business on the Business Day following the date fixed for such determination shall be reduced by multiplying such Conversion Amount by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not issue any rights, options or warrants in respect of Common Shares held in the treasury of the Company. In the event that such rights, warrants or options are not so issued, the Conversion Amount shall again be adjusted to be the Conversion Amount which would then be in effect if such date fixed for the determination of shareholders entitled to receive such rights, warrants or options had not been fixed. In determining whether any rights, warrants or options entitle the holders to subscribe for or purchase Common Shares at less than such current market price, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received by the Company for such rights, warrants or options, the value of such consideration, if other than cash, to be determined by the Board of Directors whose determination shall be conclusive and binding. (c) In case outstanding shares of Common Shares shall be subdivided into a greater number of Common Shares, and, conversely, in case outstanding shares of Common Shares shall each be combined into a smaller number of Common Shares, the Conversion Amount in effect at the opening of business on the Business Day following the day upon which such subdivision or combination becomes effective shall be adjusted by the Company so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Amount adjustment contemplated by this paragraph (c) by a fraction of which the numerator shall be the number of Common Shares outstanding immediately prior to such subdivision or combination and the denominator shall be the number of Common Shares outstanding immediately after giving effect to such subdivision or combination, such adjustment to become effective immediately after the opening of business on the Business Day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares or shares of any class of its capital stock, or other property (including securities, but excluding (i) any rights, options or warrants referred to in paragraph (b) of this Section, (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (a) of this Section, and (iv) any merger, consolidation or other transaction to which Section 1218 applies), the Conversion Amount shall be reduced so that the same shall equal the price determined by multiplying the Conversion Amount in effect immediately prior to the close of business on the date fixed for the determination of shareholders 39 entitled to receive such distribution by a fraction of which (i) the numerator shall be the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on the third Trading Day prior to the date fixed for such determination (such third Trading Day being the "Reference Date") less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on the Reference Date of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one Common Share and the denominator shall be the current market price per Common Share on the Reference Date, such adjustment to become effective immediately prior to the opening of business on the day following the Reference Date. (e) In case the Company shall, by dividend or otherwise, distribute to all holders of Common Shares cash (excluding any cash that is distributed upon a merger or consolidation to which Section 1218 applies or as part of a distribution referred to in paragraph (d) of this Section) in an aggregate amount that, combined together with (i) the aggregate amount of any other cash distributions to all holders of Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this paragraph (e) has been made and (ii) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer by the Company or any of its Subsidiaries for all or any portion of Common Shares concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to paragraph (f) of this Section has been made, exceeds 12.5% of the product of the current market price per Common Share on the date for the determination of holders of Common Shares entitled to receive such distribution times the number of Common Shares outstanding on such date, then, and in each such case, immediately after the close of business on such date for determination, the Conversion Amount in effect immediately prior to the close of business on the date fixed for determination of the shareholders entitled to receive such distribution shall be reduced by a fraction (1) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined amount in (i) and (ii) above over such 12.5% and (y) the number of Common Shares outstanding on such date for determination and (2) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on such date of determination. (f) In case a tender or exchange offer (other than an odd-lot offer) made by the Company or any Subsidiary for all or any portion of the Common Shares shall expire and such tender or exchange offer shall involve the payment by the Company or such Subsidiary of consideration per Common Share having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds 110% of the current market price per Common Share (determined as provided in paragraph (h) of this Section) as of the Trading Day next succeeding the Expiration Time, the Conversion Amount shall be reduced so that the same shall equal the price determined by multiplying the Conversion Amount in effect immediately prior to the effectiveness of the Conversion Amount reduction contemplated by this paragraph (f) by a fraction of which the numerator shall be the product of the number of Common Shares 40 outstanding (including any tendered or exchanged shares) at the Expiration Time multiplied by the respective current market price per Common Share (determined as provided in paragraph (h) of this Section) on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (i) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (ii) the product of the number of shares of each class of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the respective current market price per share (determined as provided in paragraph (h) of this Section) of each such Common Shares on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the Trading day following the Expiration Time. (g) The reclassification of any Common Shares into securities (other than any reclassification upon a consolidation or merger to which Section 1218 applies) shall be deemed to involve (i) a distribution of such securities to all holders of Common Shares (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraph (d) of this Section), and (ii) a subdivision or combination, as the case may be, of the number of Common Shares outstanding immediately prior to such reclassification into the number of Common Shares outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (c) of this Section). (h) For the purpose of any computation under paragraphs (b), (d), (e) or (f) of this Section 1210, the current market price per share of a class of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Sale Prices per share of such class for the five consecutive Trading Days selected by the Company commencing not more than 10 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "`ex' date", when used with respect to any issuance or distribution, means the first date on which such class of Common Stock trades in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. (i) No adjustment in the Conversion Amount shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (i)) would require an increase or decrease of at least one percent in such price; provided, however, that any adjustments which by reason of this paragraph (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (j) With the prior consent of The Toronto Stock Exchange, the Company at its option may make such reductions in the Conversion Amount, for the remaining term of the 41 Debentures or any shorter term, in addition to those required by paragraphs (a) through (f) of this Section 1210, as it considers to be advisable in order to avoid or diminish any income tax to any holders of Common Shares resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. (k) No adjustment to the Conversion Amount shall be made for any event referred to in paragraphs (a) through (f) of Section 1210, if the Board of Directors, acting reasonably and in good faith, determines that the Holder will participate in the event on a basis that is fair and appropriate in light of the basis on which holders of Common Shares participate in the event;, such participation subject to the prior consent of The Toronto Stock Exchange. SECTION 1211. Notice of Adjustments of Conversion Amount. Whenever the Conversion Amount is adjusted as herein provided: (a) the Company shall compute the adjusted Conversion Amount in accordance with Section 1210 and shall prepare a certificate signed by the Chief Financial Officer of the Company setting forth the adjusted Conversion Amount and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall promptly be filed with the Conversion Agent; and (b) a notice stating that the Conversion Amount has been adjusted and setting forth the adjusted Conversion Amount shall forthwith be required, and as soon as practicable after it is required, such notice, together with the Certificate referred to in Section 1211(a), shall be provided by the Company to the Holder in accordance with Section 106. SECTION 1212. Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Shares payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 1210; or (b) the Company shall authorize the granting to all holders of Common Shares of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) of any reclassification of Common Shares (other than a subdivision or combination of its outstanding shares of Common Shares), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or 42 (e) the Company or any Subsidiary shall commence a tender offer for all or a portion of any class of the Company's outstanding shares of Common Shares that would require an adjustment of the Conversion Amount pursuant to paragraph (f) of Section 1210 (or shall amend any such tender offer); then the Company shall cause to be filed at the Registered Office, and shall cause to be provided to the Holder in accordance with Section 106, on or before the date that is the earlier of (i) 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record, expiration or effective date hereinafter specified, and (ii) five (5) Business Days after the date upon which the Board of Directors determines to take the relevant action or send to the shareholders the applicable notice, a notice stating (iii) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants are to be determined, (iv) the date on which the right to make tenders under such tender offer expires or (iv) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as to which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. SECTION 1213. Dividend Reinvestment and Other Plans. Notwithstanding anything to the contrary in this Article, no adjustment of the Conversion Amount will be made upon the issuance of any Common Shares of the Company pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Company and the investment of additional optional amount in Common Shares of the Company under any such plan, or the issuance of any Common Shares or options or rights to purchase such shares pursuant to any present or future employee benefit plan or program of the Company or pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security which does not constitute an issuance to all holders of Common Shares or a class thereof, of rights or warrants entitling holders of such rights or warrants to subscribe for or purchase Common Shares at less than the current market price (as determined in paragraph (h) of Section 1210) SECTION 1214. Company to Maintain Authorized Capital. The Company shall at all times have authorized capital that includes an unlimited number of Common Shares. SECTION 1215. Taxes on Conversions. The Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Shares on conversion of the Debenture pursuant hereto. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Shares in a name other than that of the Holder, and no such issue or delivery shall be made unless and 43 until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. SECTION 1216. Covenant as to Common Shares. The Company agrees that all Common Shares which may be delivered upon conversion of the Debenture, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable and free of any items, charges or adverse claims. SECTION 1217. Cancellation of Converted Debenture. The Debenture, if delivered for conversion, shall be cancelled by the Company. SECTION 1218. Provision in Case of Amalgamation, Consolidation, Merger or Sale of Assets. (a) In case of any amalgamation or consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Shares of the Company) or any sale or transfer of all or substantially all of the assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be (a "Successor"), shall execute and deliver to the Holder a supplemental Debenture providing that the Holder shall have the right thereafter, during the period the Debenture shall be convertible as specified in Section 1201, to convert the Debenture only into the kind and amount of securities, cash and other property receivable upon such amalgamation, consolidation, merger, sale or transfer by a holder of the number of Common Shares of the Company into which the Debenture might have been converted immediately prior to such amalgamation, consolidation, merger, sale or transfer, subject to any requirements necessary to ensure that the Debenture will not be subject to Canadian or United States withholding tax as a result of such event, and assuming such holder of Common Shares of the Company (i) is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be ("Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each Common Share of the Company held immediately prior to such consolidation, merger, sale or transfer by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 1218 the kind and amount of securities, cash and other property receivable upon such amalgamation, consolidation, merger, sale or transfer by the holders of each Non-electing Shares shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares), subject, however, to any requirements necessary to ensure that the Debenture will be and will remain exempt from Canadian Taxes and US Taxes, including, without limitation, the requirement in respect of Canadian Taxes in effect on the date hereof that the Holder shall not be entitled to receive shares, other securities or property, other than shares that are "prescribed securities" as defined in 44 Regulation 6208 to the Tax Act. Notwithstanding the foregoing, if such Successor, due to its continuation or domicile in another jurisdiction, is unable to issue such supplemental Debenture in conformity to any requirements necessary to ensure that such Debenture will be and will remain exempt from Canadian Taxes and US Taxes, such inability will not constitute an Event of Default or any other breach of the terms of this Debenture, provided that the Company otherwise complies with Section 1007. Such supplemental Debenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental Debenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section 1218 shall similarly apply to successive consolidations, mergers, sales or transfers. Notice of execution of such a supplemental Debenture shall be given by the Company to the Holder as provided in Section 106 promptly upon such execution. (b) In case of any distribution of assets or properties of the Company or any of its Subsidiaries to all holders of the Common Shares of the Company (including securities, but excluding (i) any rights, options or warrants referred to in Section 1210(b), (ii) any dividend or distribution paid exclusively in cash or shares of Indebtedness or capital stock issued by the Company, (iii) any dividend or distribution referred to in Section 1210(a), and (iv) any merger, consolidation or other transaction to which Section 1218(a) applies), the Company shall provide the Holder with notice of such distribution at least 30 days prior to the Regular Record Date pertaining to the distribution (it being the intent that the Holder be given the opportunity to convert the Debenture to Common Shares of the Company during such period). SECTION 1219. Intentionally Deleted. ARTICLE THIRTEEN SUBORDINATION OF DEBENTURES SECTION 1301. Debentures Subordinate to Permitted Senior Indebtedness. The Company covenants and agrees, and the Holder, by its acceptance thereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Permitted Senior Indebtedness that, to the extent and in the manner hereinafter set forth in this Article and in Section 1008, the indebtedness represented by the Debenture and the payment of the principal of and interest on the Debenture are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of all Permitted Senior Indebtedness. SECTION 1302. Suspension of Payment When Permitted Senior Indebtedness in Default. (a) Unless Section 1303 shall be applicable, upon (1) the occurrence of a Payment Event of Default and (2) receipt by the Holder of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of principal of (or premium, if any) or interest on the Debenture or on account of the purchase or redemption or other acquisition of the Debenture unless and until such Payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Permitted Senior Indebtedness shall have been discharged, after which the 45 Company shall resume making any and all required payments in respect of the Debenture, including any missed payments, together with interest on all missed payments. (b) Unless Section 1303 shall be applicable, upon (1) the occurrence of a Non-payment Event of Default and (2) receipt by the Holder from the representative of holders of Permitted Senior Indebtedness of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of any principal of (or premium, if any) or interest on the Debenture or on account of the purchase or redemption or other acquisition of the Debenture for a period ("Payment Blockage Period") commencing on the earlier of the date of receipt by the Company or the date of receipt by the Holder of such notice from the Agent or such other representative unless and until (subject to any blockage of payments that may then be in effect under paragraph (a) of this Section) (x) more than 180 days shall have elapsed since receipt of such written notice by the Company or the Holder, whichever was earlier, (y) such Non-payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Permitted Senior Indebtedness shall have been discharged or (z) such Payment Blockage Period shall have been terminated by written notice to the Company or the Holder from the Agent or such other representative initiating such Payment Blockage Period, after which, in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Debenture, including any missed payments, together with interest on all missed payments. Notwithstanding any other provision of this Agreement, only one Payment Blockage Period may be commenced within any consecutive 365-day period, and no event of default with respect to Permitted Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period initiated by or behalf of such Permitted Senior Indebtedness shall be, or be made, the basis for the commencement of a second Payment Blockage Period whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days subsequent to the commencement of such initial Payment Blockage Period. In no event will a Payment Blockage Period extend beyond 180 days. (c) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Holder of the Debenture prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to the Company. SECTION 1303. Liquidation; Dissolution; Bankruptcy. (a) Upon any distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all principal, premium, if any and interest due on all Permitted Senior Indebtedness of the Company permitted by Section 1008 shall first be paid in full before the Holder is entitled to receive or retain any payment (excluding any class of shares of Common Stock); and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character whether in cash, property or securities (excluding any class of shares of Common Stock), which the Holder would be entitled to receive from the Company, except for the provisions of this Article Thirteen, shall be paid by the Company or by any receiver, trustee 46 in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, or by the Holder under this Debenture if received by them or it, directly to the holders of Permitted Senior Indebtedness of the Company or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Permitted Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, to the extent necessary to pay such Permitted Senior Indebtedness in full, in cash, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Permitted Senior Indebtedness, before any payment or distribution is made to the Holder. (b) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (excluding any class of shares of Common Stock), prohibited by the foregoing, shall be received by the Holder before all Permitted Senior Indebtedness of the Company permitted by Section 1008 is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Permitted Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Permitted Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, to the extent necessary to pay such Permitted Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Permitted Senior Indebtedness, before any payment or distribution is made to the Holders. (c) For purposes of this Article Thirteen, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article Thirteen with respect to the Debentures to the payment of all Permitted Senior Indebtedness of the Company, as the case may be, that may at the time be outstanding; provided, however, that (i) such Permitted Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Permitted Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The amalgamation or consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer its properties or assets substantially as an entirety, to another corporation upon the terms and conditions provided for in Article Eight of this Debenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 1303 if such other corporation shall, as a part of such amalgamation, consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Eight of this Debenture. SECTION 1304. Subrogation. (a) Subject to the payment in full of all Permitted Senior Indebtedness of the Company permitted by Section 1008 then outstanding, the rights of the Holder shall be subrogated to the rights of the holders of such Permitted Senior Indebtedness to receive 47 payments or distributions of such cash, property or securities of the Company, as the case may be, applicable to such Permitted Senior Indebtedness until the principal of and interest on the Debenture shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Permitted Senior Indebtedness of any cash, property or securities to which the Holder would be entitled except for the provisions of this Article Thirteen, and no payment over pursuant to the provisions of this Article Thirteen to or for the benefit of the holders of such Permitted Senior Indebtedness by the Holder, shall, as between the Company, its creditors other than holders of Permitted Senior Indebtedness of the Company, and the Holder, be deemed to be a payment by the Company to or on account of such Permitted Senior Indebtedness. It is understood that the provisions of this Article Thirteen are and are intended solely for the purposes of defining the relative rights of the Holder, on the one hand, and the holders of such Permitted Senior Indebtedness on the other hand. (b) Nothing contained in this Article Thirteen or elsewhere in this Debenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Permitted Senior Indebtedness of the Company, and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder the principal of and interest on the Debenture as and when the same shall become due and payable in accordance with its terms, or is intended to or shall affect the relative rights of the Holder and creditors of the Company, as the case may be, other than the holders of Permitted Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Holder from exercising all remedies otherwise permitted by applicable law upon default under this Debenture, subject to the rights, if any, under this Article Thirteen of the holders of such Permitted Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. (c) Upon any payment or distribution of assets of the Company referred to in this Article Thirteen, the Holder shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Holder, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Permitted Senior Indebtedness and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Thirteen. SECTION 1305. Holder to Effectuate Subordination. The Holder shall take such action as may be necessary or appropriate to effectuate the subordination provided in this Article. SECTION 1306. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Permitted Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, 48 provisions and covenants of this Debenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this Section, the holders of Permitted Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holder, without incurring responsibility to the Holder and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holder to the holders of Permitted Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or, subject to Section 1008, alter, Permitted Senior Indebtedness or any instrument evidencing the same or any agreement under which Permitted Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Permitted Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Permitted Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 1307. Notice to Holder. (a) The Company shall give prompt written notice in the form of an Officers' Certificate to the Holder of any fact known to the Company which would prohibit the making of any payment to or by the Holder in respect of the Debenture. Notwithstanding the provisions of this Article or any other provision of this Debenture, the Holder shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Holder in respect of the Debentures, unless and until the Holder shall have received written notice thereof from the Company or a holder of Permitted Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Holder shall be entitled in all respects to assume that no such facts exist; provided, however, that, if the Holder shall not have received the notice provided for in this Section at least three (3) Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Holder shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. (b) The Holder shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Permitted Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a holder of Permitted Senior Indebtedness (or a trustee, fiduciary or agent therefor). In the event that the Holder determines in good faith that further evidence is required with respect to the right of any Person as a holder of Permitted Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Holder may request such Person to furnish evidence to the reasonable satisfaction of the Holder as to the amount of Permitted Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article and, if 49 such evidence is not furnished, the Holder may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 1308. Intentionally Deleted. SECTION 1309. Intentionally Deleted. SECTION 1310. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Holder to take any action to accelerate the maturity of the Debentures pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law, except as provided in Article Five. SECTION 1311. Permitted Senior Indebtedness Entitled to Rely. The holders of Permitted Senior Indebtedness shall have the right to rely upon this Article 13, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. SECTION 1312. Certain Conversions Deemed Payment. For the purposes of this Article 13 only, (1) the issuance and delivery of junior securities upon conversion of the Debenture in accordance with Article 12 or on account of the redemption or other acquisition of the Debenture shall not be deemed to constitute a payment or distribution in respect of the Debenture, and (2) the payment, issuance or delivery of cash (except in satisfaction of fractional shares pursuant to Section 1208), property or securities (other than junior securities) upon conversion of the Debenture shall be deemed to constitute payment on account of the principal of such Debenture. For the purposes of this Section 1312, the term "junior securities" means any shares of any class of Common Stock of the Company (including, without limitation, the Common Shares). Nothing contained in this Article 13 or elsewhere in this Debenture is intended to or shall impair, as among the Company, its creditors other than holders of Permitted Senior Indebtedness and the Holders, the right, which is absolute and unconditional, of the Holder to convert the Debenture in accordance with Article 12. This Debenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Debenture. ARTICLE FOURTEEN FURTHER DISTRIBUTION (a) This Debenture (for the purpose of this Article Fourteen, "these securities") has not been registered under the United States Securities Act of 1933, as amended, or qualified for distribution to the public in Canada or qualified under state securities laws and may not be sold, pledged, or otherwise transferred unless (i) covered by an effective registration statement under the United States Securities Act of 1933, as amended (the "Securities Act"), and qualified under applicable state securities laws; (ii) sold outside the United States in accordance with Rule 904 of Regulation S under the Securities Act; (iii) sold inside the United States pursuant to an 50 exemption from registration under the Securities Act provided by Rule 144 thereunder, if available; or (iv) transferred in compliance with certain other procedures satisfactory to the Company upon the furnishing to the Company of an opinion from counsel in form and substance reasonably satisfactory to the Company to the effect that no registration or qualification is legally required for such transfer; and (b) The Holder, by acquiring these securities, agrees for the benefit of the Company that for a period (the "Minimum Holding Period") ending 120 days after the date of the issuance of these securities by the Company (but in any event the Minimum Holding Period shall end not later than December 31, 2001), the Holder will not resell these securities to any Canadian resident or in Canada. These securities are not listed on any stock exchange and are not freely transferable. 51 IN WITNESS WHEREOF, the parties hereto have caused this Debenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. HUB INTERNATIONAL LIMITED [SEAL] By: /s/ W. KIRK JAMES ------------------------------------ Name: W. Kirk James Title: V.P. & GENERAL COUNSEL ODYSSEY REINSURANCE CORPORATION [SEAL] By: /s/ DONALD L. SMITH ------------------------------------ Name: Donald L. Smith Title: Senior Vice President 52 EX-10.18 22 t06723ex10-18.txt DEBENTURE DATED JUNE 28/01 - HUB & U.S. FIRE EXHIBIT 10.18 HUB INTERNATIONAL LIMITED, as Issuer and United States Fire Insurance Company, as Holder ------------------------- DEBENTURE Dated as of June 28, 2001 ------------------------- US$17,500,000 8.5% Convertible Subordinated Debenture due June 28, 2007 DEBENTURE DEBENTURE dated as of June 28, 2001 between Hub International Limited, a corporation duly organized and existing under the laws of the Province of Ontario (herein called the "Company"), having its registered office at 214 King Street West, Suite 314, Toronto, Ontario, and United States Fire Insurance Company, a company duly organized and existing under the laws of New York (herein called the "Holder"). FOR GOOD AND VALUABLE CONSIDERATION the parties agree as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF OTHER APPLICATION SECTION 101. Definitions. For all purposes of this Debenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with Generally Accepted Accounting Principles, and, except as otherwise herein expressly provided, the term "Generally Accepted Accounting Principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (c) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Debenture as a whole and not to any particular Article, Section or other subdivision. "Additional Amounts" has the meaning specified in Section 1007. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Base Currency" has the meaning specified in Section 114. "Board of Directors" or "Board" means the board of directors of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of Toronto, Ontario are obligated by law to close. "Canadian Taxes" means any past, present or future tax, duty, levy, impost, deduction, charge, withholding, assessment, tariff or other government charge (including penalties, interest and other liabilities related thereto) imposed or levied by or on behalf of any Tax Authority in Canada. "Cash Equivalents" means: (a) marketable securities issued or directly, fully and unconditionally guaranteed or insured by Canada or any Province thereof or by the United States of America or any State thereof or the District of Columbia therein, or issued by any agency or instrumentality of any of them, and in any case backed by the full faith and credit thereof, in each case having a maturity date of not more than one year from the date of acquisition; (b) time deposits and certificates of deposit having a maturity date of not more than one year from the date of acquisition issued by any Canadian chartered bank, trust company or a bank which is organized under the laws of the United States of America, any State thereof or the District of Columbia therein and which has (or which is a subsidiary of a bank holding company which has) issued capital and earned and contributed surplus in excess of Cdn$500,000,000 or US$500,000,000, as the case may be; (c) commercial paper maturing within one year after the date of acquisition thereof issued by an issuer organized under the laws of Canada or any Province thereof or the United States of America, any State thereof or the District of Columbia which is rated at least A-1 or the equivalent thereof by Standard and Poor's Corporation, P-1 or the equivalent thereof by Moody's Investors Service, Inc. or R-1 low by Dominion Bond Rating Service; and (d) any other investment which the lender of the Company's Senior Indebtedness shall expressly consent in writing to accept as a Cash Equivalent. "Closing Sale Price" means on any day the reported last sale price, regular way, on such day or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on The Toronto Stock Exchange (or such successor exchange), or, if not listed or admitted to trading or quoted on The Toronto Stock Exchange (or such successor exchange), on the principal securities exchange or quotation system in Canada on which such security is quoted or listed or admitted to trading, or, determined in good faith by the Board of Directors. 2 "Commission" means the Ontario Securities Commission, as from time to time constituted, created under the Securities Act (Ontario), or, if at any time after the execution of this Debenture such Commission is not existing and performing the duties now assigned to it then the body performing such duties at such time. "Common Shares" means the common shares, with no par value, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 1218, shares issuable upon conversion of the Debenture shall include only Common Shares or shares of any class or classes of Common Stock resulting from any reclassification thereof; provided, however, that if at any time as a result of such reclassification there shall be more than one such resulting class, the shares so issuable upon conversion of the Debenture shall include shares of all such classes, and the number of shares of each such class then so issuable shall be in the same proportion which the total number of shares of such class resulting from such reclassification bears to the total number of shares of such classes resulting from such reclassification; and provided further, however, that such shares issuable upon conversion of the Debenture shall be "prescribed securities" as defined in Regulation 6208 to the Tax Act, or such other shares as may, at the date of their issuance, be issued without subjecting the Debenture to Canadian Taxes or US Taxes. "Common Stock" means the Common Shares, together with any other class of capital stock of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. "Company" means Hub International Limited, until a successor Person shall have become such pursuant to the applicable provisions of this Debenture, and thereafter "Company" shall mean such successor Person. "Company Conversion Option" has the meaning specified in Section 1203. "Company Conversion Threshold" has the meaning specified in Section 1203. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its President, its Chief Financial Officer or Secretary. "Consolidated EBITDA" for any period means Earnings of the Company and its Subsidiaries for such period, before Consolidated Interest Expense, income taxes, capital tax and large corporation tax, depreciation and amortization of the Company and its Subsidiaries, all determined on an accrual basis and on a consolidated basis for such period, all in accordance with Generally Accepted Accounting Principles, but excluding, for greater certainty, (a) any gain or loss arising from the disposition or write-up or write-down of any fixed assets, (b) any other items not involving the outlay or receipt of cash in the current or any future period, or (c) any other extraordinary items. "Consolidated Indebtedness" means, as of the date of determination (a) the aggregate outstanding principal amount of all Indebtedness of the Company and its Subsidiaries determined (without duplication) in accordance with Generally Accepted Accounting Principles 3 on a consolidated basis, less (b) the excess of (i) then current market value of cash and Cash Equivalents beneficially owned, and held directly, by the Company at such time, over (ii) the reserves and capital required by applicable insurance law to fund reasonably anticipated claims. "Consolidated Interest Expense" of the Company and its Subsidiaries for any period means the aggregate amount (without duplication) of all interest, fees (other than professional fees), standby fees, acceptance fees, commissions, costs and other charges paid in cash or accrued as a liability by the Company and its Subsidiaries during such period on or in respect of or in connection with any Indebtedness, including, without limitation, all interest expenses (whether capitalized or not) on short and long term obligations for borrowed money, fees and other charges payable in respect of financial guarantees, letters of credit or letters of guarantee or obligations to financial institutions who issued such letters of credit or letters of guarantee, discounts in respect of the proceeds of bankers' acceptances, asset monetizations and securitizations, any capitalized interest and the interest portion of payments under Capital Leases, and interest on subordinated Indebtedness, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles; "Constituent Person" has the meaning specified in Section 1218. "Conversion Agent" means any Person authorized by the Company to convert Debentures in accordance with Article 12. The Company has initially appointed the Secretary of the Company as its Conversion Agent. "Conversion Date" of a Debenture means the day such Debenture is surrendered for conversion in accordance with Section 1202 or Section 1204, if such day is not a Business Day, then the next succeeding Business Day. "Conversion Amount" has the meaning specified in Section 1210. "Conversion Price" has the meaning specified in Section 1201. "corporation" includes corporations, partnerships, associations, companies, joint ventures and business trusts. "current market price" has the meaning specified in Section 1210(h). "Debenture", "Debentures", "this Debenture", "the Debenture" and "the Debentures" means this instrument as originally executed and as it may from time to time be supplemented, apportioned (in integral multiples of denominations of US$1,000) or amended by one or more instruments supplemental hereto entered into pursuant to the applicable provisions hereof, as applicable. "Debenture Register" and "Debenture Registrar" have the respective meanings specified in Section 305. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 4 "Defaulted Interest" has the meaning specified in Section 307. "Dollar", "Cdn$" or "Canadian dollar" means a dollar or other equivalent unit in such coin or currency of Canada as at the time shall be legal tender for the payment of public and private debts. "Earnings" for any period means earnings of the Company and its Subsidiaries for such period determined on a consolidated basis in accordance with Generally Accepted Accounting Principles and the accounting practices permitted under Generally Accepted Accounting Principles applied by the Company. "EBITDA Ratio" means the ratio of the Company's Consolidated Indebtedness to its Consolidated EBITDA for the period indicated. "Encumbrance" means any mortgage, charge, hypothec, legal hypothec, pledge, security interest, lien or deposit arrangement or any other encumbrance, whether fixed or floating, that in substance secures the payment of any indebtedness or liability or the observance or performance of any obligation, regardless of form and whether consensual or arising by law, statutory or otherwise, on or in, any asset or property, whether immovable or real, movable or personal, or mixed, tangible or intangible, or any pledge or hypothecation thereof or any conditional sale agreement or other title retention agreement or equipment trust relating thereto or any lease relating to property which would be required to be accounted for as a capital lease on such Person's balance sheet. "Event of Default" has the meaning specified in Section 501. "Exchange Rate" means the average for the 20 Business Days immediately prior the Conversion Date of the noon buying rate in New York City for cable transfers of Canadian dollars as certified for customs purposes (or, if not so certified, as otherwise determined) by the Federal Reserve Bank of New York. "Excluded Holder" has the meaning specified in Section 1007. "Expiration Time" has the meaning specified in Section 1210(f). "Financial Institution" means any bank, or other institutional lender or commercial lender or any strategic lender. "Generally Accepted Accounting Principles" means, at any time, accounting principles generally accepted in Canada as recommended in the Handbook of the Canadian Institute of Chartered Accountants applied on a basis consistent with prior years. "guarantee" means any guarantee or other credit support for all or any part of any Indebtedness or other obligation of any other person, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, excluding, however, any endorsement of negotiable instruments for collection in the ordinary course of business. 5 "Hedging Obligations" means, with respect to any Person, the obligations of such Person under: (1) interest rate swap agreements and interest rate cap agreements; and (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Holder" means the "Holder" identified in the first paragraph of this Debenture and any permitted assignee or successor Person in whose name a Debenture is registered in the Debenture Register. "Holder Conversion Option" has the meaning specified in Section 1201. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that the accrual of interest shall be considered an Incurrence of Indebtedness. "Indebtedness" means (a) any liability of any Person (1) for borrowed money, or under any reimbursement obligation relating to a letter of credit, banker's acceptance, surety or other bond or instrument (2) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation given in connection with the acquisition of any businesses, properties or assets of any kind other than a trade payable or a current liability arising in the ordinary course of business), or (3) under any loan agreement, letter of credit application, acceptance agreement, factoring agreement, Debenture, capital lease, mortgage or similar agreement or document; (b) any liability of others described in the preceding clause (a) that such Person has guaranteed or that is otherwise its legal liability; and (c) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (a) and (b) above. "Interest Payment Date" has the meaning specified in Section 301. "Judgment Currency" has the meaning specified in Section 114. "junior securities" has the meaning specified in Section 1312. "Maturity", when used with respect to the Debenture, means the date on which the principal of the Debenture or an installment of principal becomes due and payable as herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or otherwise. "Non-electing Share" has the meaning specified in Section 1218. "Non-payment Event of Default" means any event (other than a Payment Event of Default) the occurrence of which entitles one or more Persons to accelerate the maturity of any Indebtedness. "Notice of Conversion" means the notice given by the Holder to the Conversion Agent directing the Conversion Agent to convert such Debentures into Common Shares on behalf of such Holder, the form of which is set out in Section 1202. 6 "Notice of Default" has the meaning specified in Section 501. "Officers' Certificate" means a certificate signed by the Chairman, the President, the Chief Financial Officer or Secretary of the Company and delivered to the Holder. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be acceptable to the Holder. "Outstanding", when used with respect to the Debenture, means, as of the date of determination, all Debentures theretofore authenticated and delivered to the Holder, except: (i) Debentures theretofore cancelled or delivered to the Company for cancellation; (ii) Debentures, or portions thereof, for whose payment or redemption money in the necessary amount has been paid to the Holder; (iii) Debentures which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Debentures have been delivered pursuant to this Debenture, other than any such Debentures in respect of which there shall have been presented to the Company proof satisfactory to it that such Debentures are held by a bona fide purchaser in whose hands the Debentures are valid obligations of the Company; and (iv) the principal portion of Debentures converted into Common Shares pursuant to Article 12. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any) or interest on any Debentures on behalf of the Company. "Payment Blockage Period" has the meaning specified in Section 1302(b). "Payment Event of Default" means any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto. "Permitted Senior Indebtedness" means indebtedness that is permitted in accordance with Section 1008. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Debenture" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 306 in exchange for a mutilated Debenture or in lieu of a lost, destroyed or stolen 7 Debenture shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Debenture. "prescribed securities" has the meaning specified in Section 1218. "Principal Lender" means Zurich Insurance Company. "Purchased Shares" has the meaning specified in Section 1210(f). "rate(s) of exchange" has the meaning specified in Section 114(d). "Redemption Date" means the date fixed for redemption by or pursuant to this Debenture. "Redemption Price" has the meaning specified in Section 1101. "Redemption Tax Event" means that the Company shall have received an Opinion of Counsel to the effect that, as a result of (a) any amendment to or change (including any announced prospective change) in the laws (or any regulations thereunder) of any Tax Authority, (b) any amendment to or change in an interpretation or application of such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), in either case, which amendment or change is enacted, promulgated, issued or announced, or which interpretation is issued or announced, or which action is taken, on or after the date hereof, or (c) any change in the domicile or residence of the Company or the Holder thereby subjecting the parties to the tax laws of another jurisdiction, there is more than an insubstantial risk that the Company has or would become obligated to pay Additional Amounts to the Holder, and the Board concludes that (i) the Additional Amounts are or would be more than a de minimis amount and (ii) such obligation cannot be avoided by the Company taking reasonable measures available to it. "Reference Date" has the meaning specified in Section 1210(d). "Reference Period" has the meaning specified in Section 1203. "Registered Office" means the registered office of the Company, currently located at Suite 314, 214 King Street West, Toronto, Ontario. "Regular Record Date" for the interest payable on any Interest Payment Date means the date (whether or not a Business Day) next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Company, means the Chairman, the President, the Chief Financial Officer or the Secretary. "Securities Act" means the Securities Act, (Ontario), as amended from time to time. 8 "Senior Indebtedness" means: (a) the principal of (and premium, if any, on) and interest on (including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law) and other amounts due on or in connection with any Indebtedness of the Company owed to any Financial Institution pursuant to a negotiated agreement between the Company and such Financial Institution, whether outstanding on the date of this Debenture or hereafter created, incurred or assumed, and all Hedging Obligations with respect thereto; (b) any other Indebtedness unless the instrument under which such Indebtedness is incurred expressly provides that such Indebtedness shall not be senior in right of payment to any other Indebtedness of the Company; and (c) all obligations with respect to items listed in the preceding clauses (a) and (b). Notwithstanding anything to the contrary in the preceding, Senior Indebtedness will not include: (d) any liability for federal, state, local or other taxes owed or owing by the Company; (e) Indebtedness of the Company that is expressly subordinated in right of payment or pari passu to the Debentures; (f) Indebtedness of the Company that is expressly subordinated in right of payment to any Senior Indebtedness; (g) Indebtedness of the Company that by operation of law is subordinate to any general unsecured obligations of the Company; (h) any Indebtedness of the Company to any of its Subsidiaries; (i) any trade payables; or (j) any Indebtedness incurred in violation of this Debenture. "Stated Maturity" means, in the case of principal on the Debenture, June 28, 2007, and, in the case of interest thereon, the fixed date on which any installment of interest is due and payable. "Subsidiary" means any corporation of which at the time of determination the Company, directly and/or indirectly through one or more Subsidiaries, owns more than 50% of the Voting Stock. "Tax Act" means the Income Tax Act (Canada) or a Canadian provincial or territorial income tax statute. "Tax Authority" means the Dominion of Canada, any province, territory or other political subdivision thereof or the United States or any state or other political subdivision thereof, as applicable, or any other authority, agency or other person having the power to tax. "Trading Day" means a Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange in the applicable securities market. "Trading Volume" means the total number of shares of Common Stock traded on a particular Trading Day. "US$" or "United States" dollar means a dollar or other equivalent unit in currency of the United States of America as at the time shall be legal tender for payment of public and private debts. "US Taxes" means any past, present or future tax, duty, levy, impost, deductions, charges, withholdings, assessment, tariff or other government charge (including penalties, interest and other liabilities related thereto) imposed or levied by or on behalf of any Tax Authority in the United States of America. 9 "Voting Stock" means stock of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Holder to take any action under any provision of this Debenture, the Company shall furnish to the Holder an Officers' Certificate stating that all conditions precedent, if any, provided for in this Debenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Debenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Debenture (other than pursuant to Section 1005) shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Holder. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or 10 officers of the Company as to such factual matters, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Debenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holder. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Debenture to be given or taken by the Holder may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by the Holder in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Company and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holder. Proof of execution of any such instrument or of writing appointing any such agent shall be sufficient for any purpose of this Debenture and conclusive in favor of the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. (c) The principal amount and serial numbers of Debentures held by any Person, and the date of holding the same, shall be proved by the Debenture Register. (d) If the Company shall solicit from the Holder any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of the Holder entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of the Holder generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holder of record at the close of business on such record date shall be deemed to be the Holder; provided that no such authorization, agreement or consent by the Holder on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of such request, demand, authorization, direction, notice, consent, waiver or other Act. 11 (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder shall bind every future Holder of the same Debenture and the Holder of every Debenture issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Company in reliance thereon, whether or not notation of such action is made upon such Debenture. SECTION 105. Notices, etc., to the Holder, Company. (a) Any request, demand, authorization, direction, notice, consent, waiver or act of the Company or other documents provided or permitted by this Debenture to be made upon, given or furnished to, or filed with, the Holder by the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Holder addressed to it as follows: Fairfax Financial Holdings Limited, 95 Wellington Street West, Suite 800, Toronto, Ontario M5J 2N7, Attention: Bradley Martin or to such other address in Canada or the United States as the Holder may, upon advance written notice, give to the Company. (b) Any request, demand, authorization, direction, notice, consent, waiver or Act of the Holder or other documents provided or permitted by this Debenture to be made upon, given or furnished to, or filed with, the Company by the Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its Registered Office. SECTION 106. Deemed Receipt and Waiver. Any notice mailed to the Holder in the manner prescribed in Section 105 shall be conclusively deemed to have been received by the Holder or the Company, as the case may be, five (5) Business Days after such mailing, whether or not the intended recipient actually receives such notice. Where this Debenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. SECTION 107. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. All covenants and agreements in this Debenture by the Company shall bind its successors and assigns, whether so expressed or not. Notwithstanding anything else herein contained, the Holder may not assign or transfer this Debenture or any of its rights hereunder other than to an Affiliate or Affiliates of the Holder (in such proportions of principal as the Holder may see fit). 12 SECTION 109. Severability Clause. In case any provision in this Debenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Debenture. Nothing in this Debenture, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Conversion Agent, any Securities Registrar and their successors hereunder, the Holder and, with respect to any provisions hereof relating to the subordination of the Debentures or the rights of holders of Senior Indebtedness, the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Debenture. SECTION 111. Governing Law. This Debenture shall be governed by and construed in accordance with the law of the Province of Ontario, and the laws of Canada applicable therein, without regard to the principles of conflict of laws that would defer to the substantive laws of any other jurisdiction. SECTION 112. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Conversion Date, Stated Maturity or Maturity of any Debenture shall not be a Business Day, then (notwithstanding any other provision of this Debenture) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Conversion Date or at the Stated Maturity or Maturity; provided that, subject to section 3.01, no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Conversion Date, Stated Maturity or Maturity, as the case may be. SECTION 113. Intentionally Deleted SECTION 114. Conversion of Currency. (a) The Company covenants and agrees that the following provisions shall apply to conversion of currency in the case of this Debenture: (i) If for the purpose of obtaining judgment in, or enforcing the judgment of, any court in any country, it becomes necessary to convert into a currency (the "Judgment Currency") an amount due in any other currency (the "Base Currency"), then the conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which the judgment is given or the order of enforcement is made, as the case may be (unless a court shall otherwise determine). (ii) If there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment is given or an order of enforcement 13 is made, as the case may be (or such other date as a court shall determine), and the date of receipt of the amount due, the Company will pay such additional (or, as the case may be, such lesser) amount, if any, as may be necessary so that the amount paid in the Judgment Currency when converted at the rate of exchange prevailing on the date of receipt will produce the amount in Base Currency originally due. (b) In the event of the winding-up of the Company at any time while any amount or damages owing under this Debenture, or any judgment or order rendered in respect thereof, shall remain outstanding, the Company shall indemnify and hold the Holders harmless against any deficiency arising or resulting from any variation in rates of exchange between (i) the date as of which the equivalent of the amount in Base Currency due or contingently due under this Debenture (other than under this Subsection (b)) is calculated for the purposes of such winding-up and (ii) the final date for the filing of proofs of claim in such winding-up. For the purpose of this Subsection (b) the final date for the filing of proofs of claim in the winding-up of the Company shall be the date fixed by the liquidator or otherwise in accordance with the relevant provisions of applicable law as being the latest practicable date as at which liabilities of the Company may be ascertained for such winding-up prior to payment by the liquidator or otherwise in respect thereto. (c) The obligations contained in Subsections (a)(ii) and (b) of this Section 114 shall constitute separate and independent obligations of the Company from its other obligations under this Debenture, shall give rise to separate and independent causes of action against the Company, shall apply irrespective of any waiver or extension granted by the Holder from time to time and shall continue in full force and effect notwithstanding any judgment or order or the filing of any proof of claim in the winding-up of the Company for a liquidated sum in respect of amounts due hereunder (other than under Subsection (b) above) or under any such judgment or order. Any such deficiency as aforesaid shall be deemed to constitute a loss suffered by the Holders and no proof or evidence of any actual loss shall be required by the Company or its liquidator. In the case of Subsection (b) above, the amount of such deficiency shall not be deemed to be increased or reduced by any variation in rates of exchange occurring between the said final date and the date of any liquidating distribution. (d) The term "rate(s) of exchange" shall mean the rate of exchange quoted by the Bank of Montreal, or such other Canadian chartered bank as may be designated in writing by the Company from time to time, at its central foreign exchange desk in its main office in Toronto at 12:00 noon (Toronto time) on the relevant date for purchases of the Base Currency with the Judgment Currency and includes any premiums and costs of exchange payable. SECTION 115. Submission to Jurisdiction; Waiver of Immunities. The Company agrees that any legal suit, action or proceeding brought by any party to enforce any rights under or with respect to this Debenture may be instituted in any court in The City of Toronto, in the Province of Ontario, and waives to the fullest extent permitted by law any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, including (without limitation) any objection or defense to any such jurisdiction as an inconvenient forum and irrevocably submits itself to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding. 14 To the extent the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations under this Debenture, to the extent permitted by law. SECTION 116. Intentionally Deleted. ARTICLE TWO INTENTIONALLY DELETED ARTICLE THREE THE DEBENTURE SECTION 301. Terms. FOR VALUE RECEIVED, the Company hereby acknowledges itself indebted and promises to pay to the Holder, or its registered assigns, the principal sum of Seventeen Million Five Hundred Thousand United States Dollars (US$17,500,000.00) on June 28, 2007, and to pay interest on the said principal sum from time to time outstanding from the date that the subscription for the Debenture was funded by the Holder, namely June 21, 2001, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid, semi-annually on June 28 and December 28 of each year, commencing December 28, 2001, at the rate of 8.5% per annum until the said principal amount has been paid in full and, to the extent lawful, to pay on demand interest on any overdue interest or principal payment at the rate borne by this Debenture plus 3% per annum. Interest at the applicable rates set out above shall be payable both before and after maturity and before and after judgment. The principal of and the interest on this Debenture shall be payable at the Registered Office or agency of the Company in The City of Toronto in such coin or currency of The United States of America at the time and payment is the legal tender for payment of public and private debts in United States Dollars; provided, however, that payment of principal and interest may be made at the option of the Company by mailing a cheque payable to the Holder at such address as appears on the Debenture Register; provided, further, that in the case of payments of principal the Debenture is first surrendered to the Paying Agent. Notwithstanding the foregoing, the Holder will be entitled to receive interest payments, if any, on any Interest Payment Date and principal on Maturity by wire transfer of immediately available funds to an account maintained by the payee located in The United States of America if appropriate wire transfer instructions have been received in writing by the Company not less than 15 days prior to such Interest Payment Date or Maturity, provided that in the case of payments of principal the related Debenture is first surrendered to the Paying Agent. Any such wire transfer instructions received by the Company shall remain in effect until revoked by the Holder. The Debenture shall be redeemable as provided in Article Eleven. In the event of a partial redemption, the parties may, upon mutual agreement, indicate on an addendum attached 15 to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, as contemplated in Section 1105(d). The Debenture shall be convertible as provided in Article Twelve. The Debenture shall be subordinated in right of payment to Senior Indebtedness as provided in Article Thirteen. There shall be no sinking fund for the retirement of the Debenture. The Company will pay Additional Amounts with respect to the Debenture under certain circumstances as provided in Section 1007. SECTION 302. Denominations. The Debenture shall be issuable without coupons and only in denominations of US$1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Debenture shall be executed on behalf of the Company by its Chairman, its President, its Chief Financial Officer or Secretary under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Debenture must be manual. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid (either, a "Successor"), shall have executed a Debenture supplemental hereto with the Holder pursuant to Article Nine, the Debenture delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the Successor, be exchanged for another Debenture executed in the name of the Successor with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Debenture surrendered for such exchange and of like principal amount; however, such exchanged Debenture shall conform to any requirements necessary to ensure that such Debenture will be and will remain exempt from Canadian Taxes and US Taxes including, without limitation, in respect of Canadian Taxes, the requirement in effect on the date of the Debenture that the Holder shall not be entitled to receive shares, other securities or property, other than shares that are "prescribed securities" as defined in Regulation 6208 of the Tax Act; and the Company shall deliver a Debenture as specified in such request for the purpose of such exchange. In the event of a partial redemption, the parties may, upon mutual agreement, indicate on an addendum attached to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, as contemplated in Section 1105(d). If any Debenture shall at any time be delivered in any new name of a successor Person pursuant to this Section in 16 exchange or substitution for or upon registration of transfer of the Debenture, such successor Person, at the option of the Holder but without expense to the Holder, shall provide for the exchange of all Debentures at the time Outstanding for a Debenture delivered in such new name. SECTION 304. Intentionally Deleted. SECTION 305. Registration, Registration of Transfer and Exchange. (a) The Company shall cause to be kept at the Registered Office a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Debenture Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of the Debenture(s) and of transfers of the Debenture(s). The Debenture Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Debenture Register shall be open to inspection by the Holder. The Secretary of the Company is hereby initially appointed as security registrar (the "Debenture Registrar") for the purpose of registering Debentures and transfers of Debentures as herein provided. Upon surrender for registration of transfer of the Debenture, the Company shall execute, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Debentures of any authorized denomination or denominations of a like aggregate principal amount. At the option of the Holder, the Debenture may be exchanged for other Debentures of any authorized denomination and of a like aggregate principal amount, upon surrender of the Debentures to be exchanged at such office or agency. Whenever the Debentures are so surrendered for exchange, the Company shall execute and deliver the Debenture which the Holder making the exchange is entitled to receive. All Debentures issued upon any registration of transfer or exchange of the Debenture shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits as this Debenture. Every Debenture presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Debenture Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Debenture Registrar, duly executed by the Holder or the Holder's attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Debentures, other than exchanges pursuant to Section 304, 306, 906, 1104, 1202 or 1204 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Debenture during a period beginning at the opening of business 15 days before the 17 redemption of the Debenture under Section 1104 and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange that portion of the Debenture so selected for redemption. SECTION 306. Mutilated, Destroyed, Lost and Stolen Debenture Certificate. If (i) any mutilated Debenture is surrendered to the Company, or (ii) the Company receives evidence to its satisfaction of the destruction, loss or theft of the Debenture, and there is delivered to the Company such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company that the Debenture has been acquired by a bona fide purchaser, the Company shall execute, authenticate and deliver, in exchange for any such mutilated Debenture or in lieu of any such destroyed, lost or stolen Debenture, a new Debenture of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Debenture has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Debenture, pay such Debenture. Upon the issuance of any new Debenture under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of a trustee, any Authenticating Agent and the Debenture Registrar) connected therewith. Every new Debenture issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Debenture shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Debenture shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Debenture equally and proportionately with any and all other Debentures duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures. SECTION 307. Payment of Interest; Interest Rights Preserved. Interest on the Debenture which is payable, and is punctually paid, on any Interest Payment Date shall be paid to the Person in whose name such Debenture (or one or more Predecessor Debentures) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002. Subject to the foregoing provisions of this Section and Section 305, upon registration of transfer of or in exchange for or in lieu of the Debenture, any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by the Debenture. SECTION 308. Persons Deemed Owners. 18 Prior to the due presentment of the Debenture for registration of transfer, the Company, and any agent of the Company, may treat the Person in whose name the Debenture is registered as the owner of the Debenture for the purpose of receiving payment of principal of and (subject to Sections 305 and 307) interest on the Debenture and for all other purposes whatsoever, whether or not the Debenture is overdue, and none of the Company, or any agent of the Company, shall be affected by notice to the contrary. SECTION 309. Cancellation. The Debenture, if surrendered for payment, redemption, registration of transfer or exchange shall be cancelled promptly by the Company. The Company may at any time cancel any Debentures previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may cancel any Debentures previously authenticated hereunder which the Company has not issued and sold. No Debentures shall be authenticated in lieu of or in exchange for any Debentures cancelled as provided in this Section, except as expressly permitted by this Debenture. SECTION 310. Computation of Interest. Interest on the Debenture shall be computed on the basis of a 360-day year of twelve 30-day months. For purposes of the Interest Act (Canada), where, in this Debenture, a rate of interest is to be calculated on the basis of a year of 360 days, the yearly rate of interest to which the 360 day rate is equivalent is such rate multiplied by the actual number of days in the year for which such calculation is made and divided by 360. SECTION 311. Company to Determine Certain Matters. In accordance with the provisions of this Debenture, the Company shall determine solely certain matters relating to the administration of the Debenture, including but not limited to Sections 305, 306, 308 and 1002. It shall be at the Company's sole option to exercise the redemption provisions set forth in Article 11. In addition, it shall be the sole obligation of the Company to satisfy the provisions of Article 12. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Debenture. This Debenture shall cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Debenture expressly provided for herein or pursuant hereto) and the Holder, shall execute proper instruments acknowledging satisfaction and discharge of this Debenture when the Company has paid or caused to be paid all other sums payable hereunder by the Company; and the Company has delivered to the Holders an Officers' Certificate stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Debenture have been complied with. 19 ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest on any Debenture when it becomes due and payable, and continuance of such default for a period of five (5) Business Days; or (b) default in the payment of the principal of the Debenture at its Maturity or a Redemption Date; or (c) default in the performance, or breach, of any covenant or agreement of the Company in this Debenture (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with elsewhere in this Section), and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the Holder a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) Indebtedness of the Company shall have been accelerated or otherwise declared or become due and payable or required to be prepaid or repurchased (in each case other than by regularly scheduled required installment), prior to the stated maturity thereof; or (e) failure by the Company to pay a final judgment or final judgments or a final order or final orders entered by a court or courts of competent jurisdiction, which judgments or orders in the aggregate exceed US$5 million, and (i) the commencement by any creditor of any enforcement proceeding upon any such judgment or order or (ii) such order remaining unstayed for 45 days; or (f) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the Bankruptcy and Insolvency Act (Canada), the Companies Creditors Arrangement Act (Canada) or any other applicable federal or provincial insolvency law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 30 consecutive days; or (g) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or 20 relief under the Bankruptcy and Insolvency Act (Canada), the Companies Creditors Arrangement Act (Canada) or any other applicable federal or provincial insolvency law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(f) or 501(g)) occurs and is continuing, then and in every such case the Holder may declare the principal amount of all the Debenture to be due and payable immediately, by a notice in writing to the Company and upon any such declaration such principal amount shall become due and payable. If an Event of Default specified in Section 501(f) or 501(g) occurs and is continuing, then the principal amount of the Debenture shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Holder as hereinafter provided in this Article, the Holder by written notice to the Company may rescind and annul such declaration and its consequences if: (a) the Company has paid a sum sufficient to pay in [ Canadian/US ] Dollars: (i) all overdue interest on all Outstanding Debentures at the rate set out in Section 301, (ii) all unpaid principal of (and premium, if any, on) any Outstanding Debenture which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate set out in Section 301, (iii) to the extent that payment of such interest is lawful, interest on overdue interest at the rate set out in Section 301, and (b) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Debenture which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Holder. The Company covenants that if: 21 (a) default is made in the payment of any installment of interest on any Debenture when such interest becomes due and payable and such default continues for a period of five (5) Business Days: or (b) default is made in the payment of the principal of (or premium, if any, on) the Debenture at the Maturity thereof, the Company will, upon demand of the Holder pay to the Holder the whole amount then due and payable on such Debenture for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate set out in Section 301, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection. If the Company fails to pay such amounts forthwith upon such demand, the Holder may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Debenture and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Debenture, wherever situated. If an Event of Default occurs and is continuing, the Holder may in its discretion proceed to protect and enforce its rights by such appropriate judicial proceedings as the Holder shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Debenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Holder May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Debenture or the property of the Company or of such other obligor or their creditors, the Holder (irrespective of whether the principal of the Debenture shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Holder shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Debenture and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Holder allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; 22 and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by the Holder to make such payments to the Holder. SECTION 505. Intentionally Deleted. SECTION 506. Application of Money Collected. Any money collected by the Holder pursuant to this Article shall be applied forthwith in the following order and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Debenture and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: Subject to Article Thirteen, to the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Debenture; and SECOND: The balance, if any, to the Person or Persons entitled thereto. SECTION 507. Limitation on Suits. The Holder shall not have any right to institute any proceeding, judicial or otherwise, with respect to this Debenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such Holder has previously given written notice to the Company of a continuing Event of Default or has made a demand under Section 503 or 504. SECTION 508. Unconditional Right of Holder to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Debenture, the Holder shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Thirteen) and the Debenture of the principal of (and premium, if any) and (subject to Section 301) interest on the Debenture on the Maturity expressed in such Debenture (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Holder has instituted any proceeding to enforce any right or remedy under this Debenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Holder, then and in every such case, subject to any determination in such proceeding, the Company and the Holder shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Holder shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debenture Certificates in the last paragraph of Section 306, 23 no right or remedy herein conferred upon or reserved to the Holder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Holder may be exercised from time to time, and as often as may be deemed expedient, by the Holder, as the case may be. The acceptance of payments under this Debenture by the Holder during an Event of Default will not be considered a waiver of such Event of Default. SECTION 512. Intentionally Deleted. SECTION 513. Waiver of Past Defaults. The Holder may waive any past default hereunder and its consequences. Upon any such waiver, such default shall cease to exist, and any Event of Default arising there from shall be deemed to have been cured, for every purpose of this Debenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 514. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Debenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 515. Undertaking for Costs. In any suit for the enforcement of any rights or remedy under this Debenture a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant. ARTICLE SIX INTENTIONALLY DELETED 24 ARTICLE SEVEN REPORTS BY COMPANY SECTION 701. Reports by Company. The Company shall: (a) transmit to the Holder, within 15 days after it files its annual and quarterly reports, information, documents and other reports with the Commission, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Company is required to file with the Commission, (b) transmit to the Holder in the manner provided in Section 106 all information that is provided to the holders of Common Stock within 10 days after such information is provided to such holders of Common Stock, (c) provide to the Holder such information about the operations and financial condition of the Company as the Holder may from time to time reasonably request and allow the Holder, on reasonable advance notice from the Holder to the Company, to examine the books of account and records of the Company and discuss the affairs, finances and accounts of the Company with, and to be advised as to the same by, the Company's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and/or General Counsel (or as they may otherwise delegate). ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms. The Company shall not, and shall not cause, suffer or permit any of its Subsidiaries to, consolidate or amalgamate with or merge with or into any other Person or sell, convey, transfer or lease or otherwise dispose of all or substantially all of its assets to any Person, unless: (a) the entity formed shall be a corporation, partnership or trust organized under the laws of Canada or any province or territory thereof or the United States, any state thereof or the District of Columbia (other than Old Lyme Insurance Co. Ltd., a company domiciled in Bermuda that is a Subsidiary of Kaye Group Inc., a company that the Company has agreed to acquire), and, unless the Company is the continuing corporation, shall expressly assume the Company's obligation to pay principal and interest on the Debenture and to observe the covenants of the Debenture; (b) immediately after giving effect to such transaction, (i) on a pro forma basis the Company or such continuing corporation which becomes the successor obligor of the Debentures could incur at least Cdn$1.00 of additional Indebtedness under the first paragraph of Section 1008 (without reliance on paragraph (b) thereof); and (ii) no Default or Event of Default shall have occurred and be continuing; 25 (c) the Corporation shall have delivered to the Holder an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, amalgamation, merger, conveyance, transfer or lease and the supplemental Debenture comply with this Debenture. The requirements of paragraph (b) of this Section 801 shall not apply to any sale, conveyance, transfer, lease or other disposition of the Company's assets to a direct or indirect Subsidiary of the Company. SECTION 802. No Consent or Approval Required. To the greatest extent permitted by law, no approval or consent of the Holder is required in connection with any consolidation, amalgamation or merger involving the Company, or any sale or conveyance to another Person of all or substantially all the assets of the Company, whether as a result of any of the events referred to in Section 801 or otherwise under the terms of this Debenture. SECTION 803. Successor Substituted. Upon any consolidation or amalgamation of the Company with or merger of the Company with or into any other corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 801, the successor Person formed by such consolidation or amalgamation into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Debenture with the same effect as if such successor Person had been named as the Company herein. SECTION 804. Assignment of Rights. The Company will have the right at all times to assign any of its respective rights or obligations under this Debenture to a direct or indirect Subsidiary of the Company; provided, however, that in the event of any such assignment, the Company will remain liable for all of its respective obligations. Subject to the foregoing, this Debenture will be binding upon and inure to the benefit of the parties hereto, the Holder and its respective successors and assigns. This Debenture may not otherwise be assigned by the Company. ARTICLE NINE SUPPLEMENTAL DEBENTURE SECTION 901. Intentionally Deleted. SECTION 902. Supplemental Debentures. The Company when authorized by a Board Resolution and with the prior consent of The Toronto Stock Exchange, and the Holder may enter into a Debenture supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Debenture or any supplemental Debenture. 26 SECTION 903. Intentionally Deleted. SECTION 904. Effect of Supplemental Debenture. Upon the execution of any supplemental Debenture by the Company and the Holder under this Article, this Debenture shall be modified in accordance therewith, and such supplemental Debenture shall form a part of this Debenture for all purposes; and the Company and the Holder shall be bound thereby. SECTION 905. Intentionally Deleted. SECTION 906. Reference in Debenture to Supplemental Debentures. Any Debenture delivered after the execution of any supplemental Debenture pursuant to this Article may, bear a notation in form approved by the parties as to any matter provided for in such supplemental Debenture. If the Company shall so determine, a new Debenture so modified as to conform, in the opinion of the Company, to any such supplemental Debenture may be prepared and executed by the Company and delivered by the Company in exchange for the Debenture. SECTION 907. Intentionally Deleted. SECTION 908. Effect on Senior Indebtedness. No supplemental Debenture shall adversely affect the rights of the holders of Senior Indebtedness under Article Thirteen without the consent of the Holder. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if any, and Interest. The Company covenants and agrees for the benefit of the Holder that it will duly and punctually pay the principal of (and premium, if any) and interest on the Debenture in accordance with the terms of this Debenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain its Registered Office, where the Debenture may be presented or surrendered for payment, where the Debenture may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of this Debenture may be served. The Company will give prompt written notice to the Holder of any change in the location of the Registered Office. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of Toronto) where the Debenture may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner 27 relieve the Company of its obligation to maintain an office or agency in The City of Toronto for such purposes. The Company will give prompt written notice to the Holder of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Debenture Payments to Be Held in Trust. The Company, on or before each due date of the principal of (or premium, if any) or interest on the Debenture, shall segregate and hold in trust for the benefit of the Holder a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall be paid to the Holder or otherwise disposed of as herein provided and will promptly notify the Holder of its action or failure so to act. Any money then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest on the Debenture and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be discharged from such trust; and the Holder may thereafter, only as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Company, as trustee thereof, shall thereupon cease. SECTION 1004. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holder. SECTION 1005. Statement by Officers As to Default. The Company will deliver to the Holder, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer, as to his or her knowledge, after reviewing the Debenture, of the Company's compliance with all conditions and covenants under this Debenture. In addition, the Company shall notify the Holder in the case of any Event of Default as soon as is reasonably practicable after knowledge of such Event of Default comes to the attention of any of any Responsible Officer. For purposes of this Section 1005, such compliance shall be determined without regard to any period of grace or requirement of notice under this Debenture. SECTION 1006. Intentionally Deleted. SECTION 1007. Payment of Additional Amounts. All adjustments, payments or transfers made by the Company under or with respect to the Debenture (including, but not limited to, the redemption or conversion thereof or as a result of any adjustment to the Conversion Price), or delivery of Common Shares (including cash in lieu of fractional shares) made by or on behalf of the Company will be made free and 28 clear of and without withholding or deduction for or on account of Canadian Taxes and US Taxes, unless the Company is required to withhold or deduct Canadian Taxes or US Taxes by law or by the interpretation or administration thereof by the relevant government authority or agency. If the Company is so required to withhold or deduct any amount for or on account of Canadian Taxes or US Taxes from any payment or transfer made under or with respect to the Debentures (including, but not limited to, the redemption or conversion thereof or as a result of any adjustment to the Conversion Price), the Company will pay as additional interest such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by the Holder after such withholding or deduction (including with respect to Additional Amounts) will not be less than the amount the Holder would have received if such Canadian Taxes or US Taxes, as the case may be, had not been withheld or deducted (a similar payment will also be made to the Holder if the Holder is exempt from withholding but is required to pay tax directly on amounts otherwise subject to withholding); provided, however, that no Additional Amounts related to Canadian Taxes will be payable with respect to a payment made to the Holder (an "Excluded Holder") in respect of the beneficial owner thereof (i) if the Company does not deal at arm's length (for purposes of the Tax Act) with the Holder at the time of the making of such payment, (ii) if the Holder is subject to such Canadian Taxes by reason of its failure to comply with any certification, identification, information, documentation or other reporting requirement if compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or a reduction in the rate of deduction or withholding of, such Canadian Taxes or (iii) which payment is subject to such Canadian Taxes by reason of the Holder carrying on business in or being connected with Canada or any province or territory thereof otherwise than by the mere holding of Debentures or the receipt of payment thereunder. The Company will make such withholding or deduction and remit the full amount deducted or withheld to the relevant authority as and when required in accordance with applicable law. The Company will pay all taxes, interest penalties, liabilities or other amounts due of the Company or the Holder which arise by virtue of any failure of the Company to withhold, deduct and remit to the relevant authority on a timely basis the full amounts required in accordance with applicable law. The Company will furnish to the Holder, within 30 days after the date the payment of any Canadian Taxes or US Taxes is due pursuant to applicable law, certified copies of tax receipts evidencing such payment by the Company. SECTION 1008. Limitation on Additional Indebtedness. (a) The Company shall not, directly or indirectly, Incur any Senior Indebtedness, provided, however, that the Company may incur Senior Indebtedness (i) if the date of such Incurrence shall be on or prior to the last day of the fourth full fiscal quarter following the date of this Debenture, in an amount not to exceed, together with all other Incurrences under this Section and all other outstanding Senior Indebtedness, U.S.$148 million, or (ii) if the date of such Incurrence is after the last day of the fourth full fiscal quarter following the date of this Debenture then, the Company's EBITDA Ratio for the most recently ended four full fiscal quarters immediately preceding the date on which such additional Indebtedness is Incurred (taken as one accounting period) would not have been greater than 4:1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom) as if the additional Indebtedness had been Incurred at the beginning of such four-quarter period. (b) The foregoing provisions will not apply to: 29 (i) Indebtedness outstanding on the date of this Debenture; (ii) the Incurrence of any Indebtedness in exchange for, or the proceeds of which are used to refund, refinance or replace Indebtedness that was outstanding on the date of this Debenture or otherwise permitted by the terms of this Debenture to be then outstanding; (iii) the Incurrence of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Debenture to be outstanding; (iv) the Incurrence of intercompany Indebtedness between the Company and its Subsidiaries; and (v) the Incurrence of Indebtedness represented by capital lease obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company and its Subsidiaries, including any Encumbrances on (and limited to) such assets to secure such Indebtedness. SECTION 1009. Limitations on Issuances of Guarantees of Senior Indebtedness. The Company will not permit any of its Subsidiaries, directly or indirectly, to guarantee or pledge or grant any Encumbrance upon any assets to secure the payment of any Senior Indebtedness of the Company, unless such Subsidiary simultaneously executes and delivers a supplemental Debenture providing for the guarantee of, or pledge of assets to secure, the payment of the Debenture by such Subsidiary, which guarantee or pledge shall be on terms substantially similar to the guarantee of or pledge of assets regarding such Senior Indebtedness and shall be subordinated to such guarantee or pledge of assets of such Senior Indebtedness to the same extent as the Debenture is subordinated to such Senior Indebtedness. It is the intention of all such parties hereto that any guarantee of the Debentures by any Subsidiary of the Company shall not constitute a fraudulent transfer or conveyance for purposes of Canadian federal or provincial law relating to fraudulent transfer or conveyance. To effectuate the foregoing intention, the Holder hereby irrevocably agrees that the obligations of such Subsidiary under any guaranty of the Debenture shall be limited to the maximum amount that will not result in the obligations of the Subsidiary constituting such fraudulent transfer or conveyance (taking into account the subrogation and contribution rights such Subsidiary may have against the borrower or any other guarantor or person). Notwithstanding the preceding paragraph, any guarantee of, or pledge of assets with respect to the Debenture by a Subsidiary of the Company will provide by its terms that it will be automatically and unconditionally released and discharged in connection with any permitted sale or disposition of all or substantially all of the assets of such Subsidiary (including by way of permitted merger or consolidation), or in connection with any permitted sale of all the capital stock of such Subsidiary. SECTION 1010. Limitation on Senior Subordinated Indebtedness. 30 The Company will not Incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is pari passu in right of payment to this Debenture, other than 8.5% convertible subordinated debentures due 2006 (subject to a call to redeem after three years) to be issued by the Company and sold to the Principal Lender, in aggregate principal amount not to exceed Cdn$42.5 million. SECTION 1011. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 1007 through 1009, if before or after the time for such compliance, the Holder waives such compliance (with or without conditions) in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN REDEMPTION OF DEBENTURES SECTION 1101. Right of Redemption. Other than as hereinafter set out, the Debentures may not be redeemed at the election of the Company. Upon the occurrence of a Redemption Tax Event, the Company may, at its option, redeem all of the Debentures upon notice as set forth in Section 1105, at 100% of the principal amount (the "Redemption Price") plus any accrued and unpaid interest to the Redemption Date and any Additional Amounts owed on such interest; provided that (i) no such notice of redemption may be given earlier than 60 Business Days prior to the earliest date on which the Company would be obligated to pay any such Additional Amounts were a payment in respect of the Debentures then due, and (ii) at the time such notice is given, the circumstances creating the obligation to pay such Additional Amounts remain in effect. Prior to the giving of any such notice of redemption, the Company must deliver to the Holder (i) an Officers' Certificate stating that the Company is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right to the Company so to redeem have occurred, (ii) a Board Resolution to the effect that the Board has concluded that the Additional Amounts are or would be more than a de minimis amount and such obligations cannot be avoided by the Company taking reasonable measures available to it, and (iii) an Opinion of Counsel acceptable to the Holder, acting reasonably, to the effect that the Company has or would become obligated to pay any Additional Amounts as a result of the Redemption Tax Event. The Company's right to redeem the Debentures shall continue as long as the Company is obligated to pay such Additional Amounts, notwithstanding that the Company shall have made payments of Additional Amounts. SECTION 1102. Applicability of Article. 31 Redemption of the Debenture at the election of the Company, as permitted or required by any provision of this Debenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Holder. The election of the Company to redeem the Debenture pursuant to Section 1101 shall be evidenced by a Board Resolution. The Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Holder), notify the Holder of such Redemption Date and of the principal amount of the Debenture to be redeemed. SECTION 1104. Debentures to be Redeemed. No partial redemption of the Debenture shall reduce the portion of the principal amount of the Debenture not redeemed to less than US$1,000. Upon any redemption of any portion of the Debenture the Company and the Holder shall treat as Outstanding any portion of the Debenture not thereafter surrendered for conversion in accordance with Article 12 and any portion of the Debenture thereafter delivered to the Holder in exchange for the unconverted portion of the Debenture converted in part. For all purposes of this Debenture, unless the context otherwise requires, all provisions relating to redemption of the Debenture shall relate to the portion of the principal amount of the Debenture which has been or is to be redeemed. SECTION 1105. Notice of Redemption. Notice of redemption shall be given by the Company to the Holder in the manner provided for in Section 105 not less than 30 nor more than 60 days prior to the Redemption Date. All notices of redemption shall state: (a) the Redemption Date, (b) the Redemption Price and the amount of accrued and unpaid interest, if any, to the Redemption Date payable as provided in Section 1107, (c) in the case of a partial redemption, the principal amount of the Debenture to be redeemed, (d) in the case of a partial redemption, the notice shall state that on and after the Redemption Date, upon surrender of the Debenture, the Holder will receive, without charge, a new Debenture or Debentures of authorized denominations for the principal amount thereof remaining unredeemed or, in the alternative, the parties may, upon mutual agreement, indicate on an addendum attached to this Debenture and signed by the parties the amount of principal redeemed, the actual date of redemption and the principal amount remaining on this Debenture after such redemption, 32 (e) (i) the Conversion Price then in effect, and (ii) the places where the Debenture may be surrendered for conversion, (f) that on the Redemption Date, the Redemption Price (and accrued interest and unpaid interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and payable upon the applicable portion of the Debenture, and that interest thereon will cease to accrue on and after said date, and (g) the place or places where the Debenture is to be surrendered for payment of the Redemption Price and accrued interest, if any. SECTION 1106. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit, segregate and hold in trust as provided in Section 1003 an amount of money sufficient to pay the Redemption Price of, and accrued interest on, that the portion of the Debenture which is to be redeemed on that date. SECTION 1107. Debentures Payable on Redemption Date. Notice of redemption having been given as aforesaid, and unless the Holder shall have exercised a conversion right under Article Twelve, the portion of the Outstanding Debenture to be so redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest, if any) such portion of the Debenture shall cease to be Outstanding and to bear interest. Upon surrender of the Debenture for redemption in accordance with said notice, such Debenture shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holder, or one or more Predecessor Debentures, registered as such at the close of business on the relevant Regular Record Dates according to their terms and the provisions of Section 301. ARTICLE TWELVE CONVERSION OF DEBENTURES SECTION 1201. Holder Conversion Option. Subject to and upon compliance with the provisions of this Article, the Holder at its option, at any time prior to 5:00 p.m. (Toronto time) on the Business Day immediately preceding the Maturity, or, in the case of a redemption, any time prior to 5:00 p.m. ((Toronto time) on the Business Day immediately preceding the Redemption Date, may convert the Debenture (or any portion of the principal amount thereof that is an integral multiple of US$1,000), into that number of fully paid and nonassessable Common Shares as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price, as defined below (the "Holder Conversion Option"). 33 The price at which Common Shares shall be delivered upon a conversion by a Holder (herein called the "Conversion Price") shall be Seventeen Canadian Dollars (Cdn $17) per Common Share, as adjusted in certain instances as provided in this Article Twelve. SECTION 1202. Exercise of Holder Conversion Option. In order to exercise the Holder Conversion Option, the Holder shall (A) surrender the Debenture, duly endorsed or assigned to the Company or in blank at any office or agency of the Company maintained for that purpose pursuant to Section 1002, and (B) deliver to such office or agency a duly signed and irrevocable completed Notice of Conversion (a "Notice of Conversion") in the form set out below stating that the Holder elects to convert such Debenture or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. CONVERSION NOTICE The undersigned holder of this Debenture hereby irrevocably converts the Debenture, or any portion of the principal amount at Maturity hereof (which is an integral multiple of US $1,000) below designated, into Common Shares of the Company in accordance with the terms of this Debenture, and directs that such shares, together with a Cheque in payment for any fractional shares and any Debentures representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If Common Shares or Debentures are to be registered in the name of a Person other than the undersigned (which other Person the undersigned acknowledges may only be an affiliate of the undersigned), the undersigned will pay all transfer taxes, if any, payable with respect thereto. Dated: ---------------------- ----------------------------------------- ----------------------------------------- Signature(s) If Common Shares or Debentures are to be registered in If only a portion of the Debenture is to be converted, the name of a Person other than the Holder, please indicate: print such Person's name and address: - ------------------------------------- Principal amount to be converted: Name US$ -------------------------------- (US$1,000 denomination or - ------------------------------------- integral multiple thereof) Address 34 - ------------------------------------- Taxpayer Identification Number, if any The Debenture, if surrendered for conversion (in whole or in part) other than on an Interest Payment Date, shall be entitled to, and the Company shall make, a payment of interest, calculated in the normal course, on the outstanding principal for that portion of the period during which such principal was not converted on the next succeeding Interest Payment Date. For greater certainty, the principal amount of the Debenture that is converted shall be entitled to interest up to the Conversion Date, such interest to be paid on the next succeeding Interest Payment Date, together with interest on that portion of the principal that was not converted. The Company's delivery to the Holder of the number of Common Shares (and cash in lieu of fractions thereof) into which the Debenture is convertible will be deemed to satisfy the Company's obligation to pay the principal amount of the Debenture. The Holder shall promptly deliver to the Company and the Company, in turn, to the transfer agent of the Common Shares, notification of such Notice of Conversion at the address described in Section 105 The Debenture shall be deemed to have been converted immediately prior to the close of business on the Business Day of surrender of the Debenture for conversion (the "Conversion Date") in accordance with the foregoing provisions, and at such time the rights of the Holder, as holder of the principal amount of the Debenture so converted, shall cease, and the Person or Persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and deliver to the Holder, a certificate or certificates for the number of full shares of Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1208. If the Debenture is converted in part only, upon such conversion the Company shall execute and deliver to the Holder, at the expense of the Company, a new Debenture or Debentures of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such Debenture. The Debenture may be converted in part, but only if the principal amount to be converted is any integral multiple of US$1,000. SECTION 1203. Company Conversion Option. Subject to and upon the compliance with the provisions of this Article, the Company is entitled, at any time after the fifth (5th) anniversary of the date of this Debenture that the weighted average Closing Sale Price of the Common Shares for 20 consecutive Trading Days (the "Reference Period") ending on the Trading Day immediately prior to the day which the Company sends out a notice of conversion pursuant to Section 1206, exceeds NINETEEN Canadian Dollars (Cdn$19) per Common Share, as adjusted in certain instances as provided in this Article Twelve (the "Company Conversion Threshold"), at its option (the "Company 35 Conversion Option"), in whole or in part, to require the Holder to convert the Debentures held by such Holder into that number of fully paid and non-assessable Common Shares as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price multiplied by the Exchange Rate. As used in this Debenture, "weighted average" of the Closing Sale Price of the Common Shares shall be calculated as the sum of the product of the Closing Sale Price multiplied by the Trading Volume of the Common Shares on The Toronto Stock Exchange (or such successor exchange) of each Trading Day within the Reference Period divided by the total Trading Volume of the Common Shares on The Toronto Stock Exchange (or such successor exchange) during the Reference Period. SECTION 1204. Exercise of Company Conversion Option. In order to exercise the Company Conversion Option, the Company shall provide a conversion notice pursuant to Section 1206. On the Conversion Date specified by the Company in such notice, the Holder must (a) surrender the Debentures subject to the Company Conversion Option, (b) furnish appropriate endorsements or transfer documents if required by the Conversion Agent, (c) pay any transfer or similar tax, if required, and (d) pay any interest payments as described in the next succeeding sentence. In case the Conversion Date specified by the Company in a notice pursuant to a Company Conversion Option shall be made subsequent to an Interest Payment Date but prior to the next Interest payment Date (except Debentures called for redemption on a Redemption Date during such period), the Holder will be entitled to an amount equal to the ratable interest payable from such prior Interest Payment Date to the Conversion Date on the principal amount of the Debenture then being converted by the Company. The Company's delivery to the Holder of the number of Common Shares (and cash in lieu of fractions thereof, as provided in the Debenture) into which the Debenture is convertible will be deemed to satisfy the Company's obligation to pay the principal amount of the Debenture. Debentures shall be deemed to have been converted immediately prior to the close of business on the Conversion Date in accordance with the foregoing provisions, however, in no event shall the Conversion Date upon a Company Conversion Option be later than 30 days from the date the Company provides a conversion notice to the Holder, and at such time the rights of the Holder of the Debenture, as holder, shall cease, and the Person or Persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and deliver to the Conversion Agent, for delivery to the Holder, a certificate or certificates for the number of full shares of Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1208. In the case of any Debenture which is converted at the option of the Company in part only, upon such conversion the Company shall execute and deliver to the Holder, at the expense of the Company, a new Debenture or Debentures of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such 36 Debenture. A Debenture may be converted in part, but only if the principal amount of such Debenture to be converted is any integral multiple of US$1,000. SECTION 1205. Election to Convert; Notice to Holder. The election of the Company to convert the Debenture pursuant to Section 1203 shall be evidenced by Board Resolution. In case of any Company Conversion Option, the Company shall at least 30 days prior to the Conversion Date fixed by the Company (unless a shorter notice shall be satisfactory to the Holder), notify the Holder of such Conversion Date. SECTION 1206. Notice of Company Conversion. The conversion notice given by the Company to the Holder shall be given in the manner provided for in Sections 105 and 106 and pursuant to Section 1203. A conversion notice issued by the Company pursuant to a Company Conversion Option shall state: (a) the Conversion Date, (b) the Conversion Price, and the amount of accrued and unpaid interest, if any, on the Debentures to be converted from the Conversion Date to the next subsequent Interest Payment Date payable as provided in Section 1203, and (c) the place or places where the Debenture is to be surrendered for conversion. A conversion notice shall be given by the Company at the expense of the Company. SECTION 1207. Debenture to be Converted Upon a Company Conversion Notice. A conversion notices having been given as aforesaid, that principal portion of the Debenture to be so converted shall, on the Conversion Date, be converted into that number of fully paid and nonassessable Common Shares (calculated as to each conversion to the nearest 1/100th of a share) as calculated by such quotient where the numerator is the principal amount of the Debenture to be converted and the denominator is the Conversion Price multiplied by the Exchange Rate (together with accrued and unpaid interest, if any, to the Conversion Date), and from and after such date (unless the Company shall default in providing Holders with such Common Shares), the converted portion of the principal of the Debenture shall cease to bear interest. SECTION 1208. Fractions of Shares. No fractional Common Shares shall be issued upon conversion of any Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be completed on the basis of the aggregate principal amount of the Debenture (or specified portions thereof) so 37 surrendered. Instead of any fractional share of Common Shares which would otherwise be issuable upon conversion of the Debenture (or specified portions thereof), the Company shall calculate and pay a cash adjustment in respect of such fraction (calculated to the nearest 1/100th of a share) in an amount equal to the same fraction of the Conversion Price per Common Share (calculated in accordance with Section 1210(h) below) at the close of business on the Conversion Date. In effecting the conversion transactions described in this Section, the Conversion Agent is acting as agent of the Holder. The Conversion Agent is hereby authorized to convert all or a portion of the Debentures into Common Shares and thereupon to deliver such Common Shares in accordance with the provisions of this Article and to deliver to the Holder a new Debenture or Debentures for any resulting unconverted principal amount. SECTION 1209. Expiration of the Holder Conversion Option. The conversion rights of the Holder shall expire (a) at 5:00 p.m. Toronto, Ontario time on the Business Day prior to the Maturity Date of the Debentures, or (b) if the Debenture is called for redemption, at 5:00 p.m. Toronto, Ontario time on the Business Day prior to the Redemption Date, unless in either case the Company defaults in making the payment due upon redemption or such Maturity Date (both referred to as the "Conversion Expiration Date"), in which event conversion rights shall continue until payment is made. SECTION 1210. Adjustment of Conversion Price. No adjustment will be made to the Conversion Price or the Company Conversion Threshhold (each, a "Conversion Amount") other than as described in this Article. The Conversion Amount shall be subject to adjustments from time to time as follows: (a) In case the Company shall pay or make a dividend or other distribution on any of its Common Shares payable in Common Stock to all holders of its Common Stock, the Conversion Amount in effect at the opening of business on the Business Day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Amount by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the Business Day following the date fixed for such determination. For purposes of this paragraph (a), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not pay any dividend or make any distribution on Common Shares that have not been issued. (b) In case the Company shall issue rights, options or warrants to all holders of Common Shares entitling them to subscribe for or purchase shares of any class of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (h) of this Section) of such class of Common Stock on the date fixed for the 38 determination of shareholders entitled to receive such rights, options or warrants, the Conversion Amount in effect at the opening of business on the Business Day following the date fixed for such determination shall be reduced by multiplying such Conversion Amount by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not issue any rights, options or warrants in respect of Common Shares held in the treasury of the Company. In the event that such rights, warrants or options are not so issued, the Conversion Amount shall again be adjusted to be the Conversion Amount which would then be in effect if such date fixed for the determination of shareholders entitled to receive such rights, warrants or options had not been fixed. In determining whether any rights, warrants or options entitle the holders to subscribe for or purchase Common Shares at less than such current market price, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received by the Company for such rights, warrants or options, the value of such consideration, if other than cash, to be determined by the Board of Directors whose determination shall be conclusive and binding. (c) In case outstanding shares of Common Shares shall be subdivided into a greater number of Common Shares, and, conversely, in case outstanding shares of Common Shares shall each be combined into a smaller number of Common Shares, the Conversion Amount in effect at the opening of business on the Business Day following the day upon which such subdivision or combination becomes effective shall be adjusted by the Company so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Amount adjustment contemplated by this paragraph (c) by a fraction of which the numerator shall be the number of Common Shares outstanding immediately prior to such subdivision or combination and the denominator shall be the number of Common Shares outstanding immediately after giving effect to such subdivision or combination, such adjustment to become effective immediately after the opening of business on the Business Day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares or shares of any class of its capital stock, or other property (including securities, but excluding (i) any rights, options or warrants referred to in paragraph (b) of this Section, (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (a) of this Section, and (iv) any merger, consolidation or other transaction to which Section 1218 applies), the Conversion Amount shall be reduced so that the same shall equal the price determined by multiplying the Conversion Amount in effect immediately prior to the close of business on the date fixed for the determination of shareholders 39 entitled to receive such distribution by a fraction of which (i) the numerator shall be the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on the third Trading Day prior to the date fixed for such determination (such third Trading Day being the "Reference Date") less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on the Reference Date of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one Common Share and the denominator shall be the current market price per Common Share on the Reference Date, such adjustment to become effective immediately prior to the opening of business on the day following the Reference Date. (e) In case the Company shall, by dividend or otherwise, distribute to all holders of Common Shares cash (excluding any cash that is distributed upon a merger or consolidation to which Section 1218 applies or as part of a distribution referred to in paragraph (d) of this Section) in an aggregate amount that, combined together with (i) the aggregate amount of any other cash distributions to all holders of Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this paragraph (e) has been made and (ii) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer by the Company or any of its Subsidiaries for all or any portion of Common Shares concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to paragraph (f) of this Section has been made, exceeds 12.5% of the product of the current market price per Common Share on the date for the determination of holders of Common Shares entitled to receive such distribution times the number of Common Shares outstanding on such date, then, and in each such case, immediately after the close of business on such date for determination, the Conversion Amount in effect immediately prior to the close of business on the date fixed for determination of the shareholders entitled to receive such distribution shall be reduced by a fraction (1) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined amount in (i) and (ii) above over such 12.5% and (y) the number of Common Shares outstanding on such date for determination and (2) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Shares on such date of determination. (f) In case a tender or exchange offer (other than an odd-lot offer) made by the Company or any Subsidiary for all or any portion of the Common Shares shall expire and such tender or exchange offer shall involve the payment by the Company or such Subsidiary of consideration per Common Share having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds 110% of the current market price per Common Share (determined as provided in paragraph (h) of this Section) as of the Trading Day next succeeding the Expiration Time, the Conversion Amount shall be reduced so that the same shall equal the price determined by multiplying the Conversion Amount in effect immediately prior to the effectiveness of the Conversion Amount reduction contemplated by this paragraph (f) by a fraction of which the numerator shall be the product of the number of Common Shares 40 outstanding (including any tendered or exchanged shares) at the Expiration Time multiplied by the respective current market price per Common Share (determined as provided in paragraph (h) of this Section) on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (i) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (ii) the product of the number of shares of each class of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the respective current market price per share (determined as provided in paragraph (h) of this Section) of each such Common Shares on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the Trading day following the Expiration Time. (g) The reclassification of any Common Shares into securities (other than any reclassification upon a consolidation or merger to which Section 1218 applies) shall be deemed to involve (i) a distribution of such securities to all holders of Common Shares (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraph (d) of this Section), and (ii) a subdivision or combination, as the case may be, of the number of Common Shares outstanding immediately prior to such reclassification into the number of Common Shares outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (c) of this Section). (h) For the purpose of any computation under paragraphs (b), (d), (e) or (f) of this Section 1210, the current market price per share of a class of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Sale Prices per share of such class for the five consecutive Trading Days selected by the Company commencing not more than 10 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "`ex' date", when used with respect to any issuance or distribution, means the first date on which such class of Common Stock trades in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. (i) No adjustment in the Conversion Amount shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (i)) would require an increase or decrease of at least one percent in such price; provided, however, that any adjustments which by reason of this paragraph (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (j) With the prior consent of The Toronto Stock Exchange, the Company at its option may make such reductions in the Conversion Amount, for the remaining term of the 41 Debentures or any shorter term, in addition to those required by paragraphs (a) through (f) of this Section 1210, as it considers to be advisable in order to avoid or diminish any income tax to any holders of Common Shares resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. (k) No adjustment to the Conversion Amount shall be made for any event referred to in paragraphs (a) through (f) of Section 1210, if the Board of Directors, acting reasonably and in good faith, determines that the Holder will participate in the event on a basis that is fair and appropriate in light of the basis on which holders of Common Shares participate in the event;, such participation subject to the prior consent of The Toronto Stock Exchange. SECTION 1211. Notice of Adjustments of Conversion Amount. Whenever the Conversion Amount is adjusted as herein provided: (a) the Company shall compute the adjusted Conversion Amount in accordance with Section 1210 and shall prepare a certificate signed by the Chief Financial Officer of the Company setting forth the adjusted Conversion Amount and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall promptly be filed with the Conversion Agent; and (b) a notice stating that the Conversion Amount has been adjusted and setting forth the adjusted Conversion Amount shall forthwith be required, and as soon as practicable after it is required, such notice, together with the Certificate referred to in Section 1211(a), shall be provided by the Company to the Holder in accordance with Section 106. SECTION 1212. Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Shares payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 1210; or (b) the Company shall authorize the granting to all holders of Common Shares of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) of any reclassification of Common Shares (other than a subdivision or combination of its outstanding shares of Common Shares), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or 42 (e) the Company or any Subsidiary shall commence a tender offer for all or a portion of any class of the Company's outstanding shares of Common Shares that would require an adjustment of the Conversion Amount pursuant to paragraph (f) of Section 1210 (or shall amend any such tender offer); then the Company shall cause to be filed at the Registered Office, and shall cause to be provided to the Holder in accordance with Section 106, on or before the date that is the earlier of (i) 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record, expiration or effective date hereinafter specified, and (ii) five (5) Business Days after the date upon which the Board of Directors determines to take the relevant action or send to the shareholders the applicable notice, a notice stating (iii) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants are to be determined, (iv) the date on which the right to make tenders under such tender offer expires or (iv) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as to which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. SECTION 1213. Dividend Reinvestment and Other Plans. Notwithstanding anything to the contrary in this Article, no adjustment of the Conversion Amount will be made upon the issuance of any Common Shares of the Company pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Company and the investment of additional optional amount in Common Shares of the Company under any such plan, or the issuance of any Common Shares or options or rights to purchase such shares pursuant to any present or future employee benefit plan or program of the Company or pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security which does not constitute an issuance to all holders of Common Shares or a class thereof, of rights or warrants entitling holders of such rights or warrants to subscribe for or purchase Common Shares at less than the current market price (as determined in paragraph (h) of Section 1210) SECTION 1214. Company to Maintain Authorized Capital. The Company shall at all times have authorized capital that includes an unlimited number of Common Shares. SECTION 1215. Taxes on Conversions. The Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Shares on conversion of the Debenture pursuant hereto. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Shares in a name other than that of the Holder, and no such issue or delivery shall be made unless and 43 until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. SECTION 1216. Covenant as to Common Shares. The Company agrees that all Common Shares which may be delivered upon conversion of the Debenture, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable and free of any items, charges or adverse claims. SECTION 1217. Cancellation of Converted Debenture. The Debenture, if delivered for conversion, shall be cancelled by the Company. SECTION 1218. Provision in Case of Amalgamation, Consolidation, Merger or Sale of Assets. (a) In case of any amalgamation or consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Shares of the Company) or any sale or transfer of all or substantially all of the assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be (a "Successor"), shall execute and deliver to the Holder a supplemental Debenture providing that the Holder shall have the right thereafter, during the period the Debenture shall be convertible as specified in Section 1201, to convert the Debenture only into the kind and amount of securities, cash and other property receivable upon such amalgamation, consolidation, merger, sale or transfer by a holder of the number of Common Shares of the Company into which the Debenture might have been converted immediately prior to such amalgamation, consolidation, merger, sale or transfer, subject to any requirements necessary to ensure that the Debenture will not be subject to Canadian or United States withholding tax as a result of such event, and assuming such holder of Common Shares of the Company (i) is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be ("Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each Common Share of the Company held immediately prior to such consolidation, merger, sale or transfer by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 1218 the kind and amount of securities, cash and other property receivable upon such amalgamation, consolidation, merger, sale or transfer by the holders of each Non-electing Shares shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares), subject, however, to any requirements necessary to ensure that the Debenture will be and will remain exempt from Canadian Taxes and US Taxes, including, without limitation, the requirement in respect of Canadian Taxes in effect on the date hereof that the Holder shall not be entitled to receive shares, other securities or property, other than shares that are "prescribed securities" as defined in 44 Regulation 6208 to the Tax Act. Notwithstanding the foregoing, if such Successor, due to its continuation or domicile in another jurisdiction, is unable to issue such supplemental Debenture in conformity to any requirements necessary to ensure that such Debenture will be and will remain exempt from Canadian Taxes and US Taxes, such inability will not constitute an Event of Default or any other breach of the terms of this Debenture, provided that the Company otherwise complies with Section 1007. Such supplemental Debenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental Debenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section 1218 shall similarly apply to successive consolidations, mergers, sales or transfers. Notice of execution of such a supplemental Debenture shall be given by the Company to the Holder as provided in Section 106 promptly upon such execution. (b) In case of any distribution of assets or properties of the Company or any of its Subsidiaries to all holders of the Common Shares of the Company (including securities, but excluding (i) any rights, options or warrants referred to in Section 1210(b), (ii) any dividend or distribution paid exclusively in cash or shares of Indebtedness or capital stock issued by the Company, (iii) any dividend or distribution referred to in Section 1210(a), and (iv) any merger, consolidation or other transaction to which Section 1218(a) applies), the Company shall provide the Holder with notice of such distribution at least 30 days prior to the Regular Record Date pertaining to the distribution (it being the intent that the Holder be given the opportunity to convert the Debenture to Common Shares of the Company during such period). SECTION 1219. Intentionally Deleted. ARTICLE THIRTEEN SUBORDINATION OF DEBENTURES SECTION 1301. Debentures Subordinate to Permitted Senior Indebtedness. The Company covenants and agrees, and the Holder, by its acceptance thereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Permitted Senior Indebtedness that, to the extent and in the manner hereinafter set forth in this Article and in Section 1008, the indebtedness represented by the Debenture and the payment of the principal of and interest on the Debenture are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of all Permitted Senior Indebtedness. SECTION 1302. Suspension of Payment When Permitted Senior Indebtedness in Default. (a) Unless Section 1303 shall be applicable, upon (1) the occurrence of a Payment Event of Default and (2) receipt by the Holder of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of principal of (or premium, if any) or interest on the Debenture or on account of the purchase or redemption or other acquisition of the Debenture unless and until such Payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Permitted Senior Indebtedness shall have been discharged, after which the 45 Company shall resume making any and all required payments in respect of the Debenture, including any missed payments, together with interest on all missed payments. (b) Unless Section 1303 shall be applicable, upon (1) the occurrence of a Non-payment Event of Default and (2) receipt by the Holder from the representative of holders of Permitted Senior Indebtedness of written notice of such occurrence, then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of any principal of (or premium, if any) or interest on the Debenture or on account of the purchase or redemption or other acquisition of the Debenture for a period ("Payment Blockage Period") commencing on the earlier of the date of receipt by the Company or the date of receipt by the Holder of such notice from the Agent or such other representative unless and until (subject to any blockage of payments that may then be in effect under paragraph (a) of this Section) (x) more than 180 days shall have elapsed since receipt of such written notice by the Company or the Holder, whichever was earlier, (y) such Non-payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Permitted Senior Indebtedness shall have been discharged or (z) such Payment Blockage Period shall have been terminated by written notice to the Company or the Holder from the Agent or such other representative initiating such Payment Blockage Period, after which, in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Debenture, including any missed payments, together with interest on all missed payments. Notwithstanding any other provision of this Agreement, only one Payment Blockage Period may be commenced within any consecutive 365-day period, and no event of default with respect to Permitted Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period initiated by or behalf of such Permitted Senior Indebtedness shall be, or be made, the basis for the commencement of a second Payment Blockage Period whether or not within a period of 365 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days subsequent to the commencement of such initial Payment Blockage Period. In no event will a Payment Blockage Period extend beyond 180 days. (c) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Holder of the Debenture prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to the Company. SECTION 1303. Liquidation; Dissolution; Bankruptcy. (a) Upon any distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all principal, premium, if any and interest due on all Permitted Senior Indebtedness of the Company permitted by Section 1008 shall first be paid in full before the Holder is entitled to receive or retain any payment (excluding any class of shares of Common Stock); and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character whether in cash, property or securities (excluding any class of shares of Common Stock), which the Holder would be entitled to receive from the Company, except for the provisions of this Article Thirteen, shall be paid by the Company or by any receiver, trustee 46 in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, or by the Holder under this Debenture if received by them or it, directly to the holders of Permitted Senior Indebtedness of the Company or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Permitted Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, to the extent necessary to pay such Permitted Senior Indebtedness in full, in cash, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Permitted Senior Indebtedness, before any payment or distribution is made to the Holder. (b) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (excluding any class of shares of Common Stock), prohibited by the foregoing, shall be received by the Holder before all Permitted Senior Indebtedness of the Company permitted by Section 1008 is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Permitted Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Permitted Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, to the extent necessary to pay such Permitted Senior Indebtedness in full in cash, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Permitted Senior Indebtedness, before any payment or distribution is made to the Holders. (c) For purposes of this Article Thirteen, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article Thirteen with respect to the Debentures to the payment of all Permitted Senior Indebtedness of the Company, as the case may be, that may at the time be outstanding; provided, however, that (i) such Permitted Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Permitted Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The amalgamation or consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer its properties or assets substantially as an entirety, to another corporation upon the terms and conditions provided for in Article Eight of this Debenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 1303 if such other corporation shall, as a part of such amalgamation, consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Eight of this Debenture. SECTION 1304. Subrogation. (a) Subject to the payment in full of all Permitted Senior Indebtedness of the Company permitted by Section 1008 then outstanding, the rights of the Holder shall be subrogated to the rights of the holders of such Permitted Senior Indebtedness to receive 47 payments or distributions of such cash, property or securities of the Company, as the case may be, applicable to such Permitted Senior Indebtedness until the principal of and interest on the Debenture shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Permitted Senior Indebtedness of any cash, property or securities to which the Holder would be entitled except for the provisions of this Article Thirteen, and no payment over pursuant to the provisions of this Article Thirteen to or for the benefit of the holders of such Permitted Senior Indebtedness by the Holder, shall, as between the Company, its creditors other than holders of Permitted Senior Indebtedness of the Company, and the Holder, be deemed to be a payment by the Company to or on account of such Permitted Senior Indebtedness. It is understood that the provisions of this Article Thirteen are and are intended solely for the purposes of defining the relative rights of the Holder, on the one hand, and the holders of such Permitted Senior Indebtedness on the other hand. (b) Nothing contained in this Article Thirteen or elsewhere in this Debenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Permitted Senior Indebtedness of the Company, and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder the principal of and interest on the Debenture as and when the same shall become due and payable in accordance with its terms, or is intended to or shall affect the relative rights of the Holder and creditors of the Company, as the case may be, other than the holders of Permitted Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Holder from exercising all remedies otherwise permitted by applicable law upon default under this Debenture, subject to the rights, if any, under this Article Thirteen of the holders of such Permitted Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. (c) Upon any payment or distribution of assets of the Company referred to in this Article Thirteen, the Holder shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Holder, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Permitted Senior Indebtedness and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Thirteen. SECTION 1305. Holder to Effectuate Subordination. The Holder shall take such action as may be necessary or appropriate to effectuate the subordination provided in this Article. SECTION 1306. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Permitted Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, 48 provisions and covenants of this Debenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this Section, the holders of Permitted Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holder, without incurring responsibility to the Holder and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holder to the holders of Permitted Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or, subject to Section 1008, alter, Permitted Senior Indebtedness or any instrument evidencing the same or any agreement under which Permitted Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Permitted Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Permitted Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 1307. Notice to Holder. (a) The Company shall give prompt written notice in the form of an Officers' Certificate to the Holder of any fact known to the Company which would prohibit the making of any payment to or by the Holder in respect of the Debenture. Notwithstanding the provisions of this Article or any other provision of this Debenture, the Holder shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Holder in respect of the Debentures, unless and until the Holder shall have received written notice thereof from the Company or a holder of Permitted Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Holder shall be entitled in all respects to assume that no such facts exist; provided, however, that, if the Holder shall not have received the notice provided for in this Section at least three (3) Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Holder shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. (b) The Holder shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Permitted Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a holder of Permitted Senior Indebtedness (or a trustee, fiduciary or agent therefor). In the event that the Holder determines in good faith that further evidence is required with respect to the right of any Person as a holder of Permitted Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Holder may request such Person to furnish evidence to the reasonable satisfaction of the Holder as to the amount of Permitted Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article and, if 49 such evidence is not furnished, the Holder may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 1308. Intentionally Deleted. SECTION 1309. Intentionally Deleted. SECTION 1310. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Holder to take any action to accelerate the maturity of the Debentures pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law, except as provided in Article Five. SECTION 1311. Permitted Senior Indebtedness Entitled to Rely. The holders of Permitted Senior Indebtedness shall have the right to rely upon this Article 13, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. SECTION 1312. Certain Conversions Deemed Payment. For the purposes of this Article 13 only, (1) the issuance and delivery of junior securities upon conversion of the Debenture in accordance with Article 12 or on account of the redemption or other acquisition of the Debenture shall not be deemed to constitute a payment or distribution in respect of the Debenture, and (2) the payment, issuance or delivery of cash (except in satisfaction of fractional shares pursuant to Section 1208), property or securities (other than junior securities) upon conversion of the Debenture shall be deemed to constitute payment on account of the principal of such Debenture. For the purposes of this Section 1312, the term "junior securities" means any shares of any class of Common Stock of the Company (including, without limitation, the Common Shares). Nothing contained in this Article 13 or elsewhere in this Debenture is intended to or shall impair, as among the Company, its creditors other than holders of Permitted Senior Indebtedness and the Holders, the right, which is absolute and unconditional, of the Holder to convert the Debenture in accordance with Article 12. This Debenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Debenture. ARTICLE FOURTEEN FURTHER DISTRIBUTION (a) This Debenture (for the purpose of this Article Fourteen, "these securities") has not been registered under the United States Securities Act of 1933, as amended, or qualified for distribution to the public in Canada or qualified under state securities laws and may not be sold, pledged, or otherwise transferred unless (i) covered by an effective registration statement under the United States Securities Act of 1933, as amended (the "Securities Act"), and qualified under applicable state securities laws; (ii) sold outside the United States in accordance with Rule 904 of Regulation S under the Securities Act; (iii) sold inside the United States pursuant to an 50 exemption from registration under the Securities Act provided by Rule 144 thereunder, if available; or (iv) transferred in compliance with certain other procedures satisfactory to the Company upon the furnishing to the Company of an opinion from counsel in form and substance reasonably satisfactory to the Company to the effect that no registration or qualification is legally required for such transfer; and (b) The Holder, by acquiring these securities, agrees for the benefit of the Company that for a period (the "Minimum Holding Period") ending 120 days after the date of the issuance of these securities by the Company (but in any event the Minimum Holding Period shall end not later than December 31, 2001), the Holder will not resell these securities to any Canadian resident or in Canada. These securities are not listed on any stock exchange and are not freely transferable. 51 IN WITNESS WHEREOF, the parties hereto have caused this Debenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. HUB INTERNATIONAL LIMITED [SEAL] By: /s/ W. KIRK JAMES ------------------------------------ Name: W. Kirk James Title: V.P. & GENERAL COUNSEL United States Fire Insurance Company [SEAL] By: /s/ Mary Jane Robertson ------------------------------------ Name: Mary Jane Robertson Title: Vice President 52 EX-10.19 23 t06723ex10-19.txt CREDIT AGREEMENT - HUB & BANK OF AMERICA Exhibit 10.19 ================================================================================ CREDIT AGREEMENT dated as of July 19, 2001 between HUB INTERNATIONAL LIMITED and BANK OF AMERICA, N.A. ================================================================================ TABLE OF CONTENTS PAGE ---- SECTION 1 DEFINITIONS AND INTERPRETATION......................................1 1.1 Certain Definitions.................................................1 1.2 Other Interpretive Provisions......................................15 1.3 Accounting Terms...................................................15 1.4 Rounding...........................................................15 1.5 Exhibits and Schedules.............................................15 1.6 References to Agreements and Laws..................................16 SECTION 2 COMMITMENT OF THE BANK; TYPES OF LOANS; BORROWING AND CONVERSION PROCEDURES..............................................16 2.1 Commitment.........................................................16 2.2 Various Types of Loans.............................................16 2.3 Borrowing Procedures...............................................16 2.4 Conversion and Continuation Procedures.............................16 2.5 Warranty...........................................................17 2.6 Conditions.........................................................17 SECTION 3 NOTE EVIDENCING LOANS..............................................17 3.1 Note...............................................................17 3.2 Recordkeeping......................................................17 SECTION 4 INTEREST...........................................................18 4.1 Interest Rates.....................................................18 4.2 Interest Payment Dates.............................................18 4.3 Setting and Notice of Offshore Rates...............................18 4.4 Computation of Interest............................................18 SECTION 5 FEES...............................................................19 5.1 Facility Fee.......................................................19 5.2 Utilization Fee....................................................19 5.3 Closing Fee........................................................19 SECTION 6 REDUCTION OR TERMINATION OF THE COMMITMENT; VOLUNTARY PREPAYMENTS..............................................19 6.1 Reduction or Termination of the Commitment.........................19 6.2 Prepayments........................................................19 -i- PAGE ---- 6.2.1 Voluntary Prepayments.......................................19 6.2.2 Prepayments of Offshore Rate Loans..........................20 SECTION 7 MAKING AND APPLICATION OF PAYMENTS; SETOFF.........................20 7.1 Making of Payments.................................................20 7.2 Application of Certain Payments....................................20 7.3 Due Date Extension.................................................20 7.4 Setoff.............................................................20 SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR OFFSHORE RATE LOANS........20 8.1 Taxes..............................................................20 8.2 Increased Costs....................................................21 8.3 Basis for Determining Interest Rate Inadequate or Unfair...........23 8.4 Changes in Law Rendering Certain Loans Unlawful....................23 8.5 Funding Losses.....................................................23 8.6 Right of Bank to Fund through Other Offices........................24 8.7 Discretion of Bank as to Manner of Funding.........................24 8.8 Conclusiveness of Statements; Survival of Provisions...............24 SECTION 9 WARRANTIES.........................................................24 9.1 Organization, etc..................................................24 9.2 Authorization; No Conflict.........................................24 9.3 Validity and Binding Nature........................................25 9.4 Financial Information..............................................25 9.5 No Material Adverse Change.........................................26 9.6 Capitalization.....................................................26 9.7 Litigation and Contingent Liabilities..............................26 9.8 Ownership of Properties; Liens.....................................27 9.9 Subsidiaries.......................................................27 9.10 ERISA Compliance...................................................27 9.11 Regulation U.......................................................27 9.12 Taxes..............................................................28 9.13 Environmental Warranties...........................................28 9.14 Regulated Entities.................................................29 9.15 Absence of Default.................................................29 9.16 Information........................................................29 9.17 Acquisitions.......................................................30 SECTION 10 COVENANTS.........................................................31 10.1 Reports, Certificates and Other Information........................31 10.1.1 Audit Report...............................................31 10.1.2 Quarterly Reports..........................................31 -ii- PAGE ---- 10.1.3 Certificates...............................................31 10.1.4 Reports to Shareholders....................................32 10.1.5 Notice of Default, Litigation and Other Matters............32 10.1.6 Subsidiaries...............................................32 10.1.7 Management Reports.........................................32 10.1.8 Projections................................................32 10.1.9 Other Information..........................................33 10.2 Books, Records and Inspections.....................................33 10.3 Insurance..........................................................33 10.4 Compliance with Laws; Payment of Taxes and Liabilities.............33 10.5 Maintenance of Existence, etc......................................33 10.6 Financial Covenants................................................34 10.6.1 Net Worth..................................................34 10.6.2 Senior Leverage Ratio......................................34 10.6.3 Total Leverage Ratio.......................................34 10.6.4 Capital Expenditures........................................34 10.7 Limitations on Debt................................................34 10.8 Leases.............................................................34 10.9 Liens..............................................................34 10.10 Restricted Payments................................................35 10.11 Investments........................................................35 10.12 Mergers, Consolidations, Sales.....................................36 10.13 Use of Proceeds....................................................36 10.14 Transactions with Related Parties..................................36 10.15 Employee Benefit Plans.............................................36 10.16 Environmental Covenant.............................................36 10.17 Unconditional Purchase Obligations.................................37 10.18 Business...........................................................37 10.19 Inconsistent Agreements............................................37 10.20 Subordinated Debt..................................................37 10.21 Prepayment of Obligations to Redeem Shares.........................38 10.22 Use of Proceeds of Sale of Old Lyme................................38 SECTION 11 CONDITIONS PRECEDENT...............................................38 11.1 Initial Credit Extension...........................................38 11.1.1 Note.......................................................38 11.1.2 Guaranties.................................................38 11.1.3 Resolutions................................................38 11.1.4 Consents, etc..............................................38 11.1.5 Incumbency and Signatures..................................38 11.1.6 Corporate Documents........................................39 11.1.7 Opinions...................................................39 11.1.8 Bank of Montreal Credit Agreement..........................39 11.1.9 Debentures.................................................39 11.1.10 Projections................................................39 11.1.11 Other......................................................39 11.2 All Credit Extensions..............................................39 11.2.1 No Default.................................................39 -iii- PAGE ---- 11.2.2 Confirmatory Certificate...................................39 SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT.................................40 12.1 Events of Default..................................................40 12.1.1 Non-Payment of the Loans, etc..............................40 12.1.2 Non-Payment of Other Debt..................................40 12.1.3 Other Material Obligations.................................40 12.1.4 Bankruptcy, Insolvency, etc................................40 12.1.5 Non-Compliance with Provisions of This Agreement...........40 12.1.6 Warranties.................................................41 12.1.7 Pension Plans..............................................41 12.1.8 Judgments..................................................41 12.1.9 Invalidity of Guaranties...................................41 12.1.10 Change of Control..........................................41 12.1.11 Subordinated Debt..........................................41 12.2 Effect of Event of Default.........................................41 SECTION 13 GENERAL............................................................42 13.1 Waiver; Amendments.................................................42 13.2 Notices............................................................42 13.3 Computations.......................................................42 13.4 Costs, Expenses and Taxes..........................................42 13.5 Judgment Currency..................................................43 13.6 Governing Law......................................................43 13.7 Counterparts.......................................................44 13.8 Successors and Assigns.............................................44 13.9 Indemnification by the Company.....................................44 13.10 Subsidiary References..............................................45 13.11 Waiver of Jury Trial...............................................45 -iv- SCHEDULES SCHEDULE 8.1 Lending Offices SCHEDULE 9.6 Agreements with Respect to Stock SCHEDULE 9.7 Litigation and Contingent Liabilities SCHEDULE 9.9 Subsidiaries SCHEDULE 9.13 Environmental Matters SCHEDULE 10.7 Subsidiary Debt SCHEDULE 10.9 Existing Liens SCHEDULE 10.11 Investments SCHEDULE 11.1.2 Material Subsidiaries EXHIBITS EXHIBIT A Form of Note (Section 3.1) EXHIBIT B Form of Compliance Certificate (Section 10.1.4) EXHIBIT C Forms of Opinions (Section 11.1.6) -v- CREDIT AGREEMENT ---------------- This CREDIT AGREEMENT dated as of July 19, 2001 (this "Agreement") is entered into between HUB INTERNATIONAL LIMITED, a corporation organized under the laws of Ontario, Canada, (the "Company"), and BANK OF AMERICA, N.A. (the "Bank"). In consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: SECTION 1 DEFINITIONS AND INTERPRETATION. 1.1 Certain Definitions. When used herein, the following terms shall have the following meanings: Acquisition Agreements means the Burnham Acquisition Agreement, the Flanagan Acquisition Agreement and the Kaye Acquisition Agreement. Acquisitions means the Burnham Acquisition, the Flanagan Acquisition and the Kaye Acquisition. Affiliate means any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Agreement means this Credit Agreement, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. Attorney Costs means and includes all fees and disbursements of any law firm or other external counsel and the reasonable allocated cost of internal legal services and all reasonable disbursements of internal counsel. Audited Financial Statements means the audited consolidated balance sheet of the Company and its Subsidiaries for the fiscal year ended December 31, and the related consolidated statements of income and cash flows for such fiscal year of the Company Bank means Bank of America, N.A. Base Rate means a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and, (b) the rate of interest in effect for such day as publicly announced from time to time by the Bank as its "prime rate." Such rate is a rate set by the Bank based upon various factors including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by the Bank shall take effect at the opening of business on the day specified in the public announcement of such change. Borrower Party means the Company or any Person other than the Bank and any Affiliates of the Bank from time to time party to a Loan Document. Burnham means Burnham Stewart Group, Inc., a Michigan corporation. Burnham Acquisition means the acquisition by the Company of Burnham pursuant to the Burnham Acquisition Agreement. Burnham Acquisition Agreement means the Agreement and Plan of Merger dated as of July 1 , 2001 between Burnham, the Company, Burnham Insurance Agency No. 53, Inc. and the principal stockholders of Burnham, which agreement shall be in form and substance satisfactory to the Bank. Burnham Acquisition Costs means the $1,802,000 of costs incurred by Burnham with respect to the Burnham Acquisition. Business Day means any day other than a Saturday, Sunday, or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Bank's Office is located and, if such day relates to any Offshore Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the offshore Dollar interbank market. Capital Expenditures means, for any period, the sum of: (a) the aggregate amount of all expenditures of the Company and its Subsidiaries for fixed or capital assets made during such period, which, in accordance with GAAP, would be classified as capital expenditures; and (b) the aggregate amount of all Capital Lease liabilities incurred by the Company and its Subsidiaries during such period. Capital Lease means, with respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person. Cash Equivalent Investment means, at any time: (a) any evidence of Debt, maturing not more than one year after such time, issued or guaranteed by the United States Government; (b) commercial paper, maturing not more than 270 days from the date of issue, which is issued by 2 (i) a corporation (except an Affiliate of the Company) organized under the laws of any State of the United States of America or of the District of Columbia and rated at least A-1 by Standard & Poor's Ratings Group or P-1 by Moody's Investors Service, Inc., at the time of investment, or (ii) the Bank or any of its Affiliates; (c) any certificate of deposit or bankers' acceptance or eurodollar time deposit, maturing not more than one year after the date of issue, which is issued by either (i) a financial institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $100,000,000, or (ii) the Bank; (d) any repurchase agreement with a term of one year or less which (i) is entered into with (A) the Bank, or (B) any other commercial banking institution of the stature referred to in clause (c)(i), (ii) is secured by a fully perfected Lien in any obligation of the type described in any of clauses (a) through (c), and (iii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of the Bank (or other commercial banking institution) thereunder; (e) investments in money market funds that invest primarily in Cash Equivalent Investments of the types described in clauses (a) through (d); or (f) investments in short-term asset management accounts offered by the Bank for the purpose of investing in loans to any corporation (other than an Affiliate of the Company) organized under the laws of any state of the United States or of the District of Columbia and rated at least A-1 by Standard & Poor's Ratings Group or P-1 by Moody's Investors Service, Inc. The sign "Cdn$" means the lawful money of Canada. CERCLA means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. 3 CERCLIS means the Comprehensive Environmental Response Compensation Liability Information System List. Change of Control means the acquisition by any Person or any two or more Persons acting in concert of Beneficial Ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding voting stock of the Company. Code means the Internal Revenue Code of 1986, as amended from time to time. Commitment means the commitment of the Bank to make Loans pursuant to Section 2.1. The amount of the Commitment is $25,000,000 (as it may be reduced from time to time pursuant to Section 6.1). Company means Hub International Limited, a corporation organized under the laws of the Province of Ontario, Canada. Computation Period means each period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter. Consolidated Net Income means, with respect to the Company and its Subsidiaries or for any other Person for any period, the net income (or loss) of the Company and its Subsidiaries or such Person for such period. Debt of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (b) all lease payment obligations of such Person under Capital Leases, (c) all lease payment obligations of such Person under Synthetic Lease Obligations, (d) all obligations of such Person to pay the deferred purchase price of property or services (excluding current accounts payable in the ordinary course of business), (e) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person (it being understood that if such Person has not assumed or otherwise become personally liable for any such indebtedness, the amount of the Debt of such Person in connection therewith shall be limited to the lesser of the face amount of such indebtedness or the fair market value of all property of such Person securing such indebtedness), (f) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and banker's acceptances issued for the account of such Person, (g) liabilities of such Person in respect of Hedging Agreements, and (h) all Suretyship Liabilities of such Person (including, but not limited to, any guaranty by a Person of the Debt of any members of the Board of Directors, any officers or any other employees of such Person, (i) any accrued earn-out obligations of such Person, and (j) rights of holders of shares of a Person to put such shares to such Person. Debtor Relief Laws means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief 4 Laws of the United States of America or other applicable jurisdictions from time to time in effect affecting the rights of creditors generally. EBITDA means with respect to any Computation Period, the Company's Consolidated Net Income plus (to the extent deducted in computing Consolidated Net Income) Interest Expense, taxes, depreciation and amortization; provided, however, that if the Kaye Acquisition shall have occurred during such Computation Period, EBITDA of the Kaye Group for the portion of the Computation Period before the Kaye Acquisition Date shall be added, plus (to the extent deducted from such EBITDA for the Kaye Group) the Kaye Acquisition Costs; provided, further, that if the Burnham Acquisition shall have occurred during such Computation Period, EBITDA of Burnham for the portion of the Computation Period before the Burnham Acquisition Date shall be added, plus (to the extent deducted from such EBITDA for Burnham) the Burnham Acquisition Costs; provided, further, that if the Flanagan Acquisition shall have occurred during such Computation Period, EBITDA of Flanagan for the portion of the Computation Period before the Flanagan Acquisition Date shall be added, plus (to the extent deducted from such EBITDA for Flanagan) the Flanagan Acquisition Costs; and provided, further, that if the Old Lyme Purchase Date shall have occurred during such Computation Period, EBITDA for Old Lyme shall be excluded during the portion of the Computation Period that Old Lyme was owned by either the Company or the Kaye Group and 65% of the underwriting profits of Old Lyme (as calculated in a manner consistent with the underwriting profit sharing agreement between Old Lyme and the Company) shall be added. Effective Date - see Section 11.1. Environmental Laws means all applicable federal, state or local statutes, laws, ordinances, codes, rules, regulations and guidelines (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. ERISA means the Employee Retirement Income Security Act of 1974. ERISA Affiliate means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Sections 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). ERISA Event means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums 5 due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. Eurodollar Office means the office or offices of the Bank which shall be making or maintaining Offshore Rate Loans hereunder or the other office or offices through which the Bank determines its Offshore Rate. A Eurodollar Office of the Bank may be, at the option of the Bank, either a domestic or foreign office. Event of Default means any of the events described in Section 12.1. Facility Fee Rate means 0.15%. Fairfax means Fairfax Financial Holdings Limited, a Canada corporation. Fairfax Guaranty means the written agreement of Fairfax, in form and substance satisfactory to the Bank, to pay all amounts outstanding under this Agreement in the event that the Old Lyme Purchase Date shall not occur on or before October 31, 2001, which agreement shall expire by its terms upon the occurrence of the Old Lyme Purchase Date. Federal Funds Rate means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Bank of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Bank. Fiscal Quarter means any quarter of a Fiscal Year. Fiscal Year means any period of 12 consecutive calendar months ending on December 31. Flanagan means J.P. Flanagan Corporation, an Illinois corporation. Flanagan Acquisition means the acquisition by the Company of Flanagan, pursuant to the Flanagan Acquisition Agreement. Flanagan Acquisition Agreement means the Purchase Agreement dated as of May 31, 2001 among the Company, Hub U.S. Holdings, Inc., a Delaware company, Flanagan and Joseph P. Flanagan, Jr. Flanagan Acquisition Costs means the $388,000 of costs incurred by Flanagan with respect to the Flanagan Acquisition. 6 Floating Rate Loan means any Loan which bears interest at or by reference to the Base Rate. GAAP means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination, consistently applied, or the Canadian equivalent of the foregoing, in the event that the Company is required by any Governmental Authority to use such equivalent. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Company or the Bank shall so request, the Bank and the Company shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of reflect such change in GAAP, provided that, until so amended, (a) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (b) the Company shall provide to the Bank financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. Governmental Authority means (a) any international, foreign, federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality, central bank or public body, or (c) any court, administrative tribunal or public utility. Guaranties means the Fairfax Guaranty and the Material Subsidiaries Guaranty. Hazardous Material means (a) any "hazardous substance" as defined by CERCLA; (b) any "hazardous waste" as defined by RCRA; (c) any crude oil, petroleum product or fraction thereof (excluding gasoline and oil in motor vehicles, small amounts of cleaners and similar items used in the ordinary course of business); or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any Environmental Law. Hedging Agreement means any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices. 7 Interest Expense means for any period the consolidated interest expense of the Company and its Subsidiaries or any other Person for such period (including all imputed interest on Capital Leases). Interest Period means, for each Offshore Rate Loan, (a) initially, the period commencing on the date such Offshore Rate Loan is disbursed, Continued as, or Converted into, an Offshore Rate Loan and (b) thereafter, the period commencing on the last day of the preceding Interest Period, and ending, in each case, on the earlier of (x) the Termination Date, or (y) one, two, three or six months thereafter; provided that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) unless the Bank otherwise consents, there may not be more than four Interest Periods in effect at any time. Investment means, as to any Person, any acquisition or any investment by such Person, whether by means of the purchase or other acquisition of stock or other securities of any other Person or by means of a loan, creating a debt, capital contribution, guaranty or other debt or equity participation or interest in any other Person, including any partnership and joint venture interests in such other Person. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment. Kaye Acquisition means the acquisition by the Company of Kaye Group pursuant to the Kaye Acquisition Agreement. Kaye Acquisition Agreement means the Agreement and Plan of Merger dated as of January 19, 2001, among the Company, 416 Acquisition Inc., a Delaware corporation and a wholly owned subsidiary of the Company, and Kaye Group, which agreement shall be in form and substance satisfactory to the Bank. Kaye Acquisition Costs means the $ 694,000 of costs incurred by the Kaye Group with respect to the Kaye Acquisition. Kaye Group means Kaye Group Inc. a Delaware corporation. Laws or Law means all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or 8 authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law. Lending Office means the office or offices of the Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 8.1, or such other office or offices as the Bank may from time to time notify the Company. Lien means any mortgage, pledge, hypothecation, assignment, deposit arrangement (in the nature of compensating balances, cash collateral accounts or security interests), encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction), including the interest of a purchaser of accounts receivable. Loan means any advance made by the Bank to the Company as provided in Section 2 (collectively, the "Loans"). Loan Documents means this Agreement, the Note and the Guaranties. Margin means 1.35%. Margin Stock means any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System. Material Adverse Effect means any set of circumstances or events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of any Loan Document, (b) is or could reasonably be expected to be material and adverse to the condition (financial or otherwise), business, assets, operations or prospects of any Borrower Party, or (c) materially impairs or could reasonably be expected to materially impair the ability of any Borrower Party to perform the Obligations, in each case as determined by the Bank. Material Subsidiaries means the Subsidiaries of the Company listed on Schedule 11.1.2. Material Subsidiaries Guaranty means the written agreement of the Material Subsidiaries, in form and substance satisfactory to the Bank, to guaranty the payment of all amounts due under this Agreement. Mortgage means a mortgage, deed of trust, leasehold mortgage or similar instrument granting the Bank a Lien on real property of the Company or any Subsidiary. 9 Multiemployer Plan means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA. Net Worth means the net worth of the Company as determined in accordance with GAAP. Note - see Section 3.1. Obligations means all advances to, and debts, liabilities, obligations, covenants and duties of, any Borrower Party arising under any Loan Document, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and including interest that accrues after the commencement of any proceeding under any Debtor Relief Laws by or against any Borrower Party or any Subsidiary or Affiliate of any Borrower Party. Offshore Base Rate has the meaning set forth in the definition of Offshore Rate. Offshore Rate means for any Interest Period with respect to any Offshore Rate Loan, a rate per annum determined by the Bank pursuant to the following formula: Offshore Base Rate Offshore Rate = ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, Offshore Base Rate means, for such Interest Period: (a) the rate per annum (carried out to the fifth decimal place) equal to the rate determined by the Bank to be the offered rate that appears on the page of the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum (carried out to the fifth decimal place) equal to the rate determined by the Bank to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by the Bank as the rate of interest at which Dollar deposits (for delivery on the first day of such Interest Period) in same day funds in the approximate amount of the applicable Offshore Rate Loan and with a term equivalent to such Interest Period would be offered by its London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. 10 Eurodollar Reserve Percentage means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to the Bank, under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Offshore Rate for each outstanding Offshore Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and the Offshore Base Rate by the Bank shall be conclusive in the absence of manifest error. Offshore Rate Loan means a Loan bearing interest based on the Offshore Rate. Old Lyme means, collectively, Old Lyme Insurance Company of Rhode Island, a Rhode Island insurance company and Old Lyme Insurance Company of Bermuda, a Bermuda insurance company. Old Lyme Purchase Agreement means the written agreement of Fairfax or a Subsidiary thereof to purchase all of the capital stock of Old Lyme for not less than $35,000,000 in cash, which agreement shall be in form and substance satisfactory to the Bank. Old Lyme Purchase Date means the date on which the purchase contemplated by the Old Lyme Purchase Agreement is consummated. Other Taxes means any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. Pension Plan means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Company or any ERISA Affiliate or to which the Company or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. Permitted Acquisition means any purchase or acquisition by the Company or any Subsidiary of all or substantially all of the assets of any other Person (or of a particular business unit of any other Person), or of any equity interest in any other Person, subject to the terms of this definition. No such acquisition shall be deemed a Permitted Acquisition unless the Person being acquired is engaged in substantially the same business as the Company. No such acquisition that is financed, in whole or in part, with the proceeds of equity of the Company or any of its Subsidiaries shall be deemed a Permitted Acquisition unless such equity is the common equity of the Company or such Subsidiary, issued substantially concurrently with such acquisition, and which equity does not contain any put rights. All cash and other amounts used to finance Permitted Acquisitions (which other amounts shall include all Debt or contingent liabilities incurred by the Company or any of its Subsidiaries to finance such acquisition or assumed by the Company or any of its Subsidiaries as a result of such acquisition) shall not, in the aggregate, exceed $2,000,000 during the term of this Agreement. 11 Person means any natural person, corporation, partnership, limited liability company, trust, association, Governmental Authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity. Plan means any employee benefit plan maintained or contributed to by a Borrower Party or by any trade or business (whether or not incorporated) under common control with a Borrower Party as defined in Section 4001(b) of ERISA and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. RCRA means the Resource Conservation and Recovery Act, 42. U.S.C. Section 6901, et seq. Related Party - see Section 10.14. Release means a "release" as such term is defined in CERCLA. Reportable Event means any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. Senior Leverage Ratio means the ratio of (a) Total Senior Funded Debt as of any day to (b) EBITDA for the Computation Period ended as of the most recent quarter end for which the Company has delivered financial statements pursuant to Section 10.1.1 or 10.1.2. Subordinated Debentures means (a) the Cdn $42,500,000 debenture dated as of June 28, 2001 between the Company and Royal Trust Corporation of Canada as Trustee for Zurich Insurance Company, a Switzerland insurance company,(b) the $17,500,000 debenture dated as of June 28, 2001 between the Company and Odyssey Reinsurance Corporation, a Delaware corporation, and (c) the $17,500,000 debenture dated as of June 28, 2001 between the Company and United States Fire Insurance Company, a New York company. Subordinated Debt means, without duplication, (a) the Subordinated Debentures, and (b) other Debt of the Company having maturities and other terms, and which is subordinated to the obligations of the Company hereunder in a manner satisfactory to the Bank and including such covenants and other terms satisfactory to the Bank. Subsidiary means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by any Person. Subsidiary Debt means the Debt of any Subsidiary of the Company. Suretyship Liability means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to or otherwise to invest in a debtor, or otherwise to assure a creditor against loss) any indebtedness, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Suretyship Liability shall (subject to any limitation set forth therein) be deemed to be the principal amount of the debt, obligation or other liability guaranteed thereby. Synthetic Lease Obligations means all monetary obligations of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations which do not appear on the balance sheet of such 12 Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the Debt of such Person (without regard to accounting treatment). Taxes means any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Bank, such taxes (including income taxes or franchise taxes) as are imposed on or measured by the Bank's net income by the jurisdiction (or any political subdivision thereof) under the laws of which the Bank is organized or maintains a lending office. Termination Date means July 18, 2002 or such other date on which the Commitment terminates pursuant to Section 6.1 or Section 12. Total Funded Debt means all Debt of the Company and its Subsidiaries. Total Leverage Ratio means the ratio of (a) Total Funded Debt as of any date to (b) EBITDA for the Computation Period ended as of the most recent quarter end for which the Company has delivered financial statements pursuant to Section 10.1.1 or 10.1.2. Total Senior Funded Debt means all Debt of the Company and its Subsidiaries other than Subordinated Debt. Type of Loan or Borrowing - see Section 2.2. Unfunded Pension Liability means the excess of a Pension Plan's benefit liabilities under Section 40001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumption used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. United States Dollar, Dollar and the sign "$" mean lawful money of the United States of America. Unmatured Event of Default means any event which if it continues uncured will, with lapse of time or notice or both, constitute an Event of Default. Utilization Fee Rate - see Schedule 1.1. Welfare Plan means an "employee welfare benefit plan" as such term is defined in Section 3(1) ERISA. Wholly-Owned Subsidiary means, at any time, a Subsidiary, all the shares, partnership interest or other equity interests of which (except directors' qualifying shares) are at such time owned, directly or indirectly, by the Company and/or its other Subsidiaries. 1.2 Other Interpretive Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto or thereto, unless otherwise defined therein. (b) As used herein, unless the context requires otherwise, the masculine, feminine and neuter genders and the singular and plural include one another. (c) The words "herein" and "hereunder" and words of similar import when used in any Loan Document shall refer to the Loan Documents as a whole and not to any particular provision thereof. The term "including" is by way of example and not limitation. References herein to a Section, subsection or clause shall, unless the context otherwise requires, refer to the appropriate Section, subsection or clause in this Agreement. (d) The term "or" is disjunctive; the term "and" is conjunctive. The term "shall" is mandatory; the term "may" is permissive. Masculine terms also apply to females; feminine terms also apply to males. 13 1.3 Accounting Terms. All accounting terms not specifically or completely defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein. 1.4 Rounding. Any financial ratios required to be maintained by the Company pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed in this Agreement and rounding the result up or down to the nearest number (with a round-up if there is no nearest number) to the number of places by which such ratio is expressed in this Agreement. 1.5 Exhibits and Schedules. All exhibits and schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference. A matter disclosed on any Schedule shall be deemed disclosed on all Schedules. 1.6 References to Agreements and Laws. Unless otherwise expressly provided herein, (a) references to agreements (including the Loan Documents) and other contractual instruments shall include all amendments, restatements, extensions, supplements and other modifications thereto (unless prohibited by any Loan Document), and (b) references to any Law shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Law. SECTION 2 COMMITMENT OF THE BANK; TYPES OF LOANS; BORROWING AND CONVERSION PROCEDURES. 2.1 Commitment. On and subject to the terms and conditions of this Agreement, the Bank agrees to make loans to the Company on a revolving basis (each such loan, a "Loan") from time to time before the Termination Date in such amounts as the Company may request from time to time; provided that the sum of the aggregate principal amount of all outstanding Loans shall not at any time exceed the amount of the Commitment. 2.2 Various Types of Loans. Each Loan shall be divided into tranches which are, either a Floating Rate Loan or an Offshore Rate Loan, as the Company shall specify in the related notice of borrowing or conversion pursuant to Section 2.3 or 2.4 (each being herein called a "type" of Loan). Loans of different types may be outstanding at the same time, it being understood, however, that (i) not more than four different Interest Periods shall be outstanding at any one time for all Offshore Rate Loans and (ii) the principal amount of each Offshore Rate Loan shall at all times be $1,000,000 or a higher integral multiple of $500,000. 2.3 Borrowing Procedures. The Company shall give notice to the Bank of each proposed borrowing by 11:00 A.M., Chicago time, on a day which, in the case of a Floating Rate borrowing, is the proposed date of such borrowing and, in the case of a Offshore Rate borrowing, is at least three Business Days prior to the proposed date of such borrowing. Each such notice 14 shall be effective upon receipt by the Bank, shall be in writing (or by telephone to be promptly confirmed in writing by the Company), and shall specify the date, amount and type of borrowing and, in the case of a Offshore Rate borrowing, the initial Interest Period for such borrowing. Subject to the satisfaction of the conditions precedent set forth in Section 11 with respect to such borrowing, the Bank shall advance the requested amount to the Company in immediately available funds on the requested borrowing date. Each borrowing shall be on a Business Day and, in the case of a Offshore Rate borrowing, shall be in a principal amount of $1,000,000 or a higher integral multiple of $500,000 and, in the case of Floating Rate borrowing, shall be in a principal amount of $1,000,000 or a higher integral multiple of $500,000. 2.4 Conversion and Continuation Procedures. Subject to the provisions of Section 2.2, the Company may convert all or any part of any outstanding Loan into a Loan of the other type, or continue any Offshore Rate Loan for a new Interest Period, by giving notice to the Bank of such conversion or continuation by 11:00 A.M., Chicago time, on a day which, in the case of a conversion into a Floating Rate Loan, is the proposed date of such conversion and, in the case of a conversion into or continuation of an Offshore Rate Loan, is at least three Business Days prior to such date. Each such notice shall be effective upon receipt by the Bank and shall specify the date and amount of such conversion or continuation, the Loan to be so converted or continued and, in the case of a conversion into or continuation of an Offshore Rate Loan, the initial or new (as the case may be) Interest Period therefor. Subject to Sections 2.5 and 2.6, such Loan shall be so converted or continued on the requested date of conversion or continuation. Each conversion and continuation shall be on a Business Day and, in the case of a conversion into or continuation of an Offshore Rate Loan, shall be in a principal amount of $1,000,000 or a higher integral multiple of $500,000. Any conversion of an Offshore Rate Loan on a day other than the last day of the current Interest Period therefor shall be subject to Section 8.5. If the Company fails to give timely notice of the continuation of any Offshore Rate Loan, such Offshore Rate Loan shall automatically convert to a Floating Rate Loan on the last day of the current Interest Period therefor. 2.5 Warranty. Each notice of borrowing pursuant to Section 2.3 shall automatically constitute a warranty by the Company to the Bank to the effect that on the date of such requested borrowing, (a) the warranties of the Company contained in Section 9 of this Agreement shall be true and correct as of such requested date as though made on the date thereof and (b) no Event of Default or Unmatured Event of Default shall exist or will result therefrom. 2.6 Conditions. Notwithstanding any other provision of this Agreement, the Bank shall not be obligated to make any Loan or to convert into or permit the continuation of any Offshore Rate Loan if, in any such case, an Event of Default or Unmatured Event of Default exists or would result therefrom. If, pursuant to this Section 2.6, any Offshore Rate Loan is continued, such Loan shall, unless then repaid in full, automatically become a Floating Rate Loan at the end of such Loan's then-current Interest Period. SECTION 3 NOTE EVIDENCING LOANS. 3.1 Note. The Loans of the Bank shall be evidenced by a promissory note (the "Note") substantially in the form set forth in Exhibit A, with appropriate insertions, dated the Effective 15 Date (or such earlier date as shall be satisfactory to the Bank), payable to the order of the Bank. All Loans shall be paid in full on the Termination Date. 3.2 Recordkeeping. The Bank shall record in its records, or at its option on the schedule attached to the Note, the date and amount of each Loan made by the Bank, each repayment or conversion thereof and, in the case of each Offshore Rate Loan, the dates on which each Interest Period for such Loan shall begin and end. The aggregate unpaid principal amount so recorded shall (in the absence of demonstrable error) be conclusive evidence of the principal amount owing and unpaid on the Note. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of the Company hereunder or under the Note to repay the principal amount of the Loans together with all interest accruing thereon. SECTION 4 INTEREST. 4.1 Interest Rates. The Company hereby promises to pay interest on the unpaid principal amount of each Loan (before and after default, before and after maturity, before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Laws) from the date borrowed until paid in full (whether by acceleration or otherwise) for the period commencing on the date of such Loan until such Loan is paid in full, as follows: (a) at all times while such Loan is a Floating Rate Loan, at a rate per annum equal to the Base Rate from time to time in effect; (b) at all times while such Loan is an Offshore Rate Loan, at a rate per annum equal to the Offshore Rate applicable to each Interest Period for such Loan plus the Margin as in effect from time to time; and (c) notwithstanding the provisions of the preceding clauses (a) and (b), (i)(A) in the event that the Bank shall not receive evidence satisfactory to it that the Old Lyme Purchase Agreement has been executed by August 31, 2001, or (B) the Bank shall not receive evidence satisfactory to it that the transactions contemplated in the Old Lyme Purchase Agreement have been consummated by October 31, 2001, at a rate per annum equal to the Base Rate from time to time in effect (but not less than the applicable interest rate for such Loan as at such due date) plus 2%, and (ii) in the event that any principal of any Loan is not paid when due (whether by acceleration or otherwise), after the due date of such principal until such principal is paid, at a rate per annum equal to the rate specified in clause (i) above plus 2%. 4.2 Interest Payment Dates. Accrued interest on each Floating Rate Loan shall be payable on the last day of each calendar quarter and at maturity, commencing with the first of such dates to occur after the date hereof. Accrued interest on each Offshore Rate Loan shall be payable on the last day of each Interest Period relating to such Loan (and, in the case of an Offshore Rate Loan with a six-month Interest Period, on the three-month anniversary of the first day of such Interest Period) and at maturity. After maturity, accrued interest on all Loans shall be payable on demand. 16 4.3 Setting and Notice of Offshore Rates. The applicable Offshore Rate for each Interest Period shall be determined by the Bank, and notice thereof shall be given by the Bank promptly to the Company. Each determination of the applicable Offshore Rate by the Bank shall be conclusive and binding upon the Company, in the absence of demonstrable error. The Bank shall, upon written request of the Company, deliver to the Company a statement showing the computations used by the Bank in determining any applicable Offshore Rate hereunder. 4.4 Computation of Interest. Interest shall be computed for the actual number of days elapsed on the basis of a 360-day year; provided that at all times that the Base Rate is determined by reference to the Bank's prime rate, interest on Floating Rate Loans shall be computed for the actual number of days elapsed on the basis of a year of 365 or, if applicable, 366 days. The applicable interest rate under clauses (a) and (c) of Section 4.1 shall (to the extent applicable in the case of clause (c)) change simultaneously with each change in the Base Rate. SECTION 5 FEES. 5.1 Facility Fee. The Company agrees to pay to the Bank a facility fee for the period from and including the date of the execution and delivery of this Agreement to the Termination Date equal to the Facility Fee Rate on the daily average amount of the Commitment (whether used or unused). Such facility fee shall be payable in arrears on the last day of each calendar quarter and on the Termination Date for any period then ending for which such facility fee shall not have been theretofore paid. The facility fee shall be computed for the actual number of days elapsed on the basis of a year of 360 days. 5.2 Utilization Fee. (a) If on any day of any calendar quarter, the aggregate outstanding amount of Loans outstanding exceeds 50% of the then-applicable Commitment, the Company agrees to pay the Bank a utilization fee equal to the Utilization Fee Rate on the outstanding Loans. Such utilization fee shall be payable in arrears on the last day of each calendar quarter and on the Termination Date for any period then ending for which such utilization fee shall not have been theretofore paid. The utilization fee shall be computed for the actual number of days elapsed on the basis of a year of 360 days. For purposes of computing the utilization fee, the Commitment shall be deemed to be used in an amount equal to the sum of the principal amount of all outstanding Loans. 5.3 Closing Fee. The Company agrees to pay the Bank a closing fee of $5,000 on the Effective Date. 17 SECTION 6 REDUCTION OR TERMINATION OF THE COMMITMENT; VOLUNTARY PREPAYMENTS. 6.1 Reduction or Termination of the Commitment. The Company may from time to time prior to the Termination Date on at least two Business Days' prior written notice received by the Bank permanently reduce the amount of the Commitment to an amount not less than the aggregate unpaid principal amount of the Loans then outstanding. Any such reduction shall be in the amount of $1,000,000 or a higher integral multiple of $500,000. The Company may at any time on like notice prior to the Termination Date terminate the Commitment; provided that, concurrently with such termination, the Company shall pay in full all Loans and all other then-payable obligations of the Company hereunder in respect of the Commitment. 6.2 Prepayments. 6.2.1 Voluntary Prepayments. The Company may from time to time prepay the Loans in whole or in part, provided that (i) the Company shall give the Bank not less than one Business Day's prior notice thereof, specifying the Loans to be prepaid and the date and amount of prepayment, (ii) each partial prepayment shall be in a principal amount of $500,000 or an integral multiple thereof and (iii) any prepayment of Offshore Rate Loans shall be subject to Section 8.5. 6.2.2 Prepayments of Offshore Rate Loans. Any prepayment of an Offshore Rate Loan pursuant to Section 6.2.1 shall include accrued interest on the principal amount being prepaid and, if not made on the last day of the Interest Period therefor, shall be subject to Section 8.5. SECTION 7 MAKING AND APPLICATION OF PAYMENTS; SETOFF. 7.1 Making of Payments. All payments of principal of or interest on the Note, and any fees or other amounts payable hereunder, shall be made by the Company to the Bank in immediately available funds at its office in Chicago not later than 1:00 P.M., Chicago time, on the date due; and funds received after that hour shall be deemed to have been received by the Bank on the next following Business Day. 7.2 Application of Certain Payments. Each payment of principal shall be applied to such Loans as the Company shall direct by notice to be received by the Bank on or before the date of such payment, or in the absence of such notice, as the Bank shall determine in its discretion. 7.3 Due Date Extension. If any payment of principal or interest with respect to any Loan, or any fee, falls due on a Saturday, Sunday or other day which is not a Business Day, then such due date shall be extended to the next following Business Day (unless, in the case of an Offshore Rate Loan, such next following Business Day is the first Business Day of a calendar month, in which case such due date shall be the immediately preceding Business Day), and additional interest or fees shall accrue and be payable for the period of such extension. 7.4 Setoff. The Company agrees that the Bank and any other holder of the Note have all rights of set-off and bankers' lien provided by applicable law, and in addition thereto, the 18 Company agrees that at any time (i) any payment or other amount owing by the Company under this Agreement is then due to the Bank or any such holder or (ii) any Unmatured Event of Default under Section 12.1.4 or any Event of Default exists, the Bank and any such holder may apply to the payment of such payment or other amount (or, in the case of clause (ii), to any obligations of the Company hereunder, whether or not then due) any and all balances, credits, deposits, accounts or moneys of the Company then or thereafter with the Bank or such holder. SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR OFFSHORE RATE LOANS. 8.1 Taxes. (a) Any and all payments by the Company to the Bank under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for any Taxes. In addition, the Company shall pay all Other Taxes. (b) The Company agrees to indemnify and hold harmless the Bank for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 8.1) paid by the Bank and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank makes written demand therefor. (c) If the Company shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to the Bank, then: (1) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section 8.1) the Bank receives an amount equal to the sum it would have received had no such deductions or withholdings been made; (2) the Company shall make such deductions and withholdings; (3) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (4) the Company shall also pay to the Bank at the time interest is paid, all additional amounts which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes or Other Taxes had not been imposed. (d) On request of the Bank, the Company shall furnish the Bank the original or a certified copy of a receipt evidencing payment of Taxes or Other Taxes, or other evidence of payment satisfactory to the Bank. (e) If the Company is required to pay additional amounts to the Bank pursuant to subsection (c) of this Section 8.1, then the Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to 19 eliminate any such additional payment by the Company which may thereafter accrue, if such change in the judgment of the Bank is not otherwise disadvantageous to the Bank. 8.2 Increased Costs. (a) If, after the date hereof, the adoption of or any change in any applicable Law, or any change in the interpretation or administration of any applicable Law by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or any Eurodollar Office of the Bank) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency (1) shall subject the Bank (or any Eurodollar Office of the Bank) to any tax, duty or other charge with respect to its Offshore Rate Loans, the Note or its obligation to make Offshore Rate Loans, or shall change the basis of taxation of payments to the Bank of the principal of or interest on its Offshore Rate Loans or any other amounts due under this Agreement in respect of its Offshore Rate Loans or its obligation to make Offshore Rate Loans (except for changes in the rate of tax on the overall net income of the Bank or its Eurodollar Office imposed by the state in which the Bank is organized or the jurisdiction in which the Bank's Eurodollar Office is located); or (2) shall impose, modify or deem applicable any reserve (including any reserve imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve included in the determination of interest rates pursuant to Section 4), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank (or any Eurodollar Office of the Bank); or (3) shall impose on the Bank (or its Eurodollar Office) any other condition affecting, or increasing the cost to the Bank of making or maintaining, the Offshore Rate Loans, the Note or its obligation to make Offshore Rate Loans; and the result of any of the foregoing is to increase the cost to (or to impose a cost on) the Bank (or any Eurodollar Office of the Bank) of making or maintaining any Offshore Rate Loan, or to reduce the amount of any sum received or receivable by the Bank (or its Eurodollar Office) under this Agreement or under the Note with respect thereto, then within five days after demand by the Bank (which demand shall be accompanied by a statement setting forth the basis of such demand), the Company shall pay directly to the Bank such additional amount or amounts as will compensate the Bank for such increased cost or such reduction. (b) If the Bank shall reasonably determine that the adoption or phase-in of, or any change in, any applicable Law regarding capital adequacy, or any change in the interpretation or administration of any applicable Law regarding capital adequacy by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or its Eurodollar Office) or any Person controlling the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's or such controlling Person's capital as a consequence of the Bank's obligations hereunder (including the Commitment) to a level below that which the Bank or such controlling Person could have achieved but for such adoption, change or 20 compliance (taking into consideration the Bank's or such controlling Person's policies with respect to capital adequacy) by an amount deemed by the Bank or such controlling Person to be material, then from time to time, within five Business Days after demand by the Bank, the Company shall pay to the Bank such additional amount or amounts as will compensate the Bank or such controlling Person for such reduction. A statement of the Bank as to any such additional amount (including calculations thereof in reasonable detail) shall, in the absence of demonstrable error, be conclusive and binding on the Company. In determining such amount, the Bank may use any reasonable method of averaging and attribution it deems appropriate. (c) The Bank will promptly notify the Company of any event of which it has knowledge which will entitle the Bank to compensation pursuant to this Section 8.2 and will designate a different Eurodollar Office if such designation will not, in the sole judgment of the Bank, be otherwise disadvantageous to the Bank. 8.3 Basis for Determining Interest Rate Inadequate or Unfair. If with respect to any Interest Period deposits in Dollars (in the applicable amounts) are not being offered to the Bank in the relevant market for such Interest Period, the Bank otherwise reasonably determines (which determination shall be binding and conclusive on the Company) that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the underlying rate for such Offshore Rate or such underlying interest rate does not adequately and fairly reflect the cost to the Bank of funding such Offshore Rate Loan, then the Bank shall promptly notify the Company thereof and until the Bank revokes such notice, (i) the Bank shall be under no obligation to make, convert into or continue any Offshore Rate Loan and (ii) on the last day of the current Interest Period for each Offshore Loan, such Loan shall, unless then repaid in full, automatically convert to a Floating Rate Loan. 8.4 Changes in Law Rendering Certain Loans Unlawful. If the Bank determines that any change in (including the adoption of any new) applicable Law, or any change in the interpretation of applicable Law by any Governmental Authority, should make it (or in the good faith judgment of the Bank cause a substantial question as to whether it is) unlawful for the Bank to make, maintain or fund Offshore Rate Loans, then the Bank shall promptly notify the Company and, until the Bank notifies the Company that the circumstances giving rise to such determination no longer exist, (i) the Bank shall have no obligation to make, convert into or continue any Offshore Rate Loan and (ii) on the last day of the current Interest Period for each Offshore Rate Loan (or, if the Bank so requests, on such earlier date as may be required by the relevant Law or interpretation), such Offshore Rate Loan shall, unless then repaid in full, automatically Convert to a Floating Rate Loan. 8.5 Funding Losses. The Company hereby agrees that upon demand by the Bank (which demand shall be accompanied by a statement setting forth the basis for the calculations of the amount being claimed) the Company will indemnify the Bank against any net loss or expense which the Bank may sustain or incur (including any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain Offshore Rate Loans, but excluding lost profits), as reasonably determined by the Bank, as a result of (i) any payment, prepayment or conversion of any Offshore Rate Loan on a date other than the last day of an Interest Period for such Loan (including any conversion pursuant to 21 Section 8.4) or (ii) any failure of the Company to borrow, convert or continue any Loan on a date specified therefor in a notice of borrowing, conversion or continuation pursuant to this Agreement. For this purpose, all notices to the Bank pursuant to this Agreement shall be deemed to be irrevocable. 8.6 Right of Bank to Fund through Other Offices. The Bank may, if it so elects, fulfill its commitment as to any Offshore Rate Loan by causing a foreign branch or affiliate of the Bank to make such Loan, provided that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by the Bank and the obligation of the Company to repay such Loan shall nevertheless be to the Bank and shall be deemed held by it, to the extent of such Loan, for the account of such branch or affiliate. 8.7 Discretion of Bank as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, the Bank shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for purposes of this Agreement all determinations hereunder shall be made as if the Bank had actually funded and maintained each Offshore Rate Loan during each Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Offshore Rate for such Interest Period. 8.8 Conclusiveness of Statements; Survival of Provisions. Determinations and statements of the Bank pursuant to Section 8.1, 8.2, 8.3, 8.4 or 8.5 shall be conclusive absent demonstrable error. The Bank may use reasonable averaging and attribution methods in determining compensation under Sections 8.1, 8.4, and 8.5 and the provisions of such Sections shall survive termination of this Agreement. SECTION 9 WARRANTIES. To induce the Bank to enter into this Agreement and to make Loans hereunder, the Company warrants to the Bank that: 9.1 Organization, etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Province of Ontario, Canada; each Subsidiary is a corporation, limited partnership or other entity, as the case may be, duly organized, validly existing and, if applicable, in good standing under the jurisdiction of its organization; the Company and each Subsidiary is duly qualified to do business in each jurisdiction where the nature of its business makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect; and the Company and each Subsidiary has full power and authority to own its property and conduct its business as presently conducted by it. 9.2 Authorization; No Conflict. The execution and delivery by the Company of this Agreement and each other Loan Document to which it is a party, the borrowings hereunder, the execution and delivery by each Subsidiary of each Loan Document to which it is a party and the performance by each of the Company and each Subsidiary of its obligations under each Loan Document to which it is a party are within the organizational powers of the Company and each Subsidiary, have been duly authorized by all necessary action on the part of the Company and 22 each Subsidiary (including any necessary member, general partner or shareholder action), have received all necessary governmental approval (if any shall be required), and do not and will not (a) violate any provision of Law or any order, decree or judgment of any court or other government agency which is binding on the Company or any Subsidiary, (b) contravene or conflict with, or result in a breach of, any provision of the operating agreement, certificate of incorporation, by-laws, partnership agreement or other organizational documents of the Company or any Subsidiary or of any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding on the Company or any Subsidiary or (c) result in, or require, the creation or imposition of any Lien on any property of the Company or any Subsidiary. 9.3 Validity and Binding Nature. This Agreement is, and upon the execution and delivery thereof each other Loan Document to which the Company is a party will be, the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or at law); and each Loan Document will be, upon the execution and delivery thereof by each Subsidiary which is a party thereto, the legal, valid and binding obligation of such Subsidiary, enforceable against such Subsidiary in accordance with its terms, except that enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or at law). 9.4 Financial Information. (a) The Audited Financial Statements of the Company, the unaudited financial statements of the Company as of March 31, 2001 the unaudited proforma income statements of the Company for the six months ending June 30, 2001, giving effect to the Acquisitions, copies of which have been furnished to the Bank, present fairly the financial position of the Company as of said date. The audited financial statements of Burnham and Kaye Group, each as of December 31, 2000 and the unaudited financial statements of Flanagan as of December 31, 2000, copies of which have been furnished to the Bank, were prepared in accordance with GAAP and present fairly the financial position of each such Person as of said date. (b) The projections delivered by the Bank to the Company from time to time shall be based on the reasonable assumptions set forth therein. (c) The Company has provided to the Bank all material documents related to the Debt of the Company and its Subsidiaries, which Debt is listed on Schedule 10.7 and which documents present fairly the terms of such Debt. 23 9.5 No Material Adverse Change. Since March 31, 2001, no events have occurred which, individually or in the aggregate, have had or are reasonably likely to have a Material Adverse Effect. 9.6 Capitalization. (a) The authorized capital stock of the Company consists of (a) an unlimited number of common shares of the Company (the "Common Shares") and (b) an unlimited number of preference shares of the Company (the "Preferred Shares"). As of the date hereof, (a) 19,870,405 Common Shares and (b) no Preferred Shares were issued and outstanding. After giving effect to the Acquisitions, (a) 21,613,505 Common Shares and (b) no Preferred Shares will be issued and outstanding. After giving effect to the Acquisitions, all of the issued and outstanding Common Shares will be validly issued, fully paid and nonassessable. No Common Shares or Preferred Shares are, or after giving effect to the Acquisitions will be, held in the treasury of the Company or by any Subsidiary of the Company. There are, and after giving effect to the Acquisitions and other than as contemplated in the Subordinated Debentures, will be, no issued or outstanding bonds, debentures, notes, convertible notes or other indebtedness of the Company having the right to vote on any matters on which shareholders of the Company may vote. Except for the agreements or arrangements described in Schedule 9.6 and the Subordinated Debentures, there are, and after giving effect to the Acquisitions, will be, no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued stock of the Company or conditionally or absolutely obligating the Company or any Subsidiary to issue or sell any shares of stock of, or other equity interests in, the Company. All Common Shares subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and non-assessable. There are, and after giving effect to the Acquisitions, will be, no outstanding obligations (whether conditional or absolute) of the Company to repurchase, redeem or otherwise acquire any shares or other equity interests of Common Shares except as set forth in Schedule 9.6. Each outstanding share of stock or other equity interest of each Subsidiary is, and after giving effect to the Acquisitions, will be, duly authorized, validly issued, fully paid and nonassessable and each such share or other equity interest owned by the Company is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Company's voting rights, charges and other encumbrances of any nature whatsoever. There are, and after giving effect to the Acquisitions, will be, no earn-out obligations of the Company or any of its Subsidiaries other than those set forth in Schedule 9.6. 9.7 Litigation and Contingent Liabilities. No litigation (including, without limitation, derivative actions), arbitration proceeding or governmental proceeding is pending or, to the Company's knowledge, threatened against the Company or any Subsidiary which is reasonably likely to have a Material Adverse Effect, except as set forth on Schedule 9.7. Other than any liability incident to such litigation or proceeding, neither the Company nor any Subsidiary has any material contingent liabilities, obligations with respect to letters of credit, guaranties, debentures or stock purchases not provided for or disclosed in the financial statements referred to in Section 9.4 or listed on Schedule 9.7. 9.8 Ownership of Properties; Liens. Each of the Company and each Subsidiary owns good and marketable title to, or a valid leasehold interest in, all of its material properties and 24 assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, copyrights and the like) except as permitted pursuant to Section 10.9. 9.9 Subsidiaries. The Company has no Subsidiaries except those listed in Schedule 9.9. 9.10 ERISA Compliance. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state Laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of the Company, nothing has occurred which would prevent, or cause the loss of, such qualification. The Company and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of the Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that has a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. 9.11 Regulation U. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. 9.12 Taxes. Each of the Company and each Subsidiary has filed all material tax returns and reports required by Law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except for any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. 25 9.13 Environmental Warranties. Except as set forth on Schedule 9.13: (a) to the Company's knowledge, all facilities and property (including underlying groundwater) owned, leased or operated by the Company or any of its Subsidiaries are owned, leased or operated by the Company and its Subsidiaries in material compliance with all Environmental Laws; (b) to the Company's knowledge, there have been no past and there are no pending or threatened (1) claims, complaints, notices or requests for information received by the Company or any of its Subsidiaries with respect to any alleged violation of any Environmental Law, or (2) complaints, notices or inquiries to the Company or any of its Subsidiaries regarding potential liability under any Environmental Law; (c) there have been no Releases of Hazardous Materials at, on or under any property or facility now owned, leased or operated by (or, to the Company's knowledge, at, on or under any property or facility previously owned, leased or operated by) the Company or any of its Subsidiaries that, singly or in the aggregate, have had, or may reasonably be expected to have, a Material Adverse Effect; (d) to the Company's knowledge, the Company and its Subsidiaries have been issued and are in material compliance with all permits, licenses and other authorizations required by Environmental Laws; (e) no property or facility now owned, leased or operated by the Company or any of its Subsidiaries is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; (f) to the Company's knowledge, no property or facility previously owned, leased or operated by the Company or any of its Subsidiaries is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up (i) as a result of actions or inactions (including but not limited to the operating, use, or leasing of said property or facility) attributable to the Company or any of its Subsidiaries or (ii) which may reasonably be expected to have, a Material Adverse Effect; (g) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property or facility now owned, leased or operated by (or, to the Company's knowledge, on or under any property or facility previously owned, leased or operated by) the Company or any of its Subsidiaries that, singly or in the aggregate, have had, or may reasonably be expected to have, a Material Adverse Effect; 26 (h) to the Company's knowledge, neither the Company nor any of its Subsidiaries has transported or arranged for the transportation or disposal of any Hazardous Material to any location which is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against the Company or such Subsidiary for any remedial work, damage to natural resources or personal injury, including claims under CERCLA, that, singly or in the aggregate with all other such claims, have had, or may reasonably be expected to have, a Material Adverse Effect; (i) there are no polychlorinated biphenyls or friable asbestos present at any property or facility now owned, leased or operated by (or, to the Company's knowledge, present at any property or facility previously owned, leased or operated by) the Company or any of its Subsidiaries that, singly or in the aggregate, have had, or may reasonably be expected to have, a Material Adverse Effect; and (j) to the Company's knowledge, no condition exists at, on or under any property or facility now or previously owned, leased or operated by the Company or any of its Subsidiaries which would give rise to liability under any Environmental Law that, singly or in the aggregate with all other such conditions, has had, or may reasonably be expected to have, a Material Adverse Effect. 9.14 Regulated Entities. None of the Company, any Person controlling the Company or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other federal, state or provincial statute or regulation limiting its ability to incur Indebtedness. 9.15 Absence of Default. Neither the Company nor any Subsidiary is in material default under any material contract to which it is a party or by which it is bound. 9.16 Information. Taken as a whole, all written information heretofore or contemporaneously herewith furnished by the Company or any Subsidiary to the Bank for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of the Company or any Subsidiary to the Bank pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and such information taken as a whole is not, or at the time of delivery thereof will not be, incomplete by omitting to state any material fact necessary to make such information not misleading (it being understood that the Company does not warrant the accuracy of any projections provided to the Bank pursuant hereto or in connection herewith, but the Company warrants that all such projections have been or will be prepared in good faith and have represented or will represent a reasonable estimate of the anticipated financial condition and results of operations for the period(s) in question based upon assumptions which the Company believes (at the time of preparation) to be reasonable). 27 9.17 Acquisitions. (a) The Company has heretofore furnished to the Bank a true and correct copy of each of the Acquisition Agreements. (b) Each of the Company and each other party (other than individuals) to each of the Acquisition Agreements, has duly taken all necessary corporate or other organizational action to authorize the execution, delivery and performance of such Acquisition Agreement and the consummation of transactions contemplated thereby. (c) Each of the Acquisitions will comply in all material respects with all applicable legal requirements, and all necessary governmental, regulatory, creditor, shareholder, member and other consents, approvals and exemptions required to be obtained by the Company and each other party to the applicable Acquisition Agreement in connection with the related Acquisition will be, prior to consummation of such Acquisition, duly obtained and will be in full force and effect. (d) The execution and delivery of each of the Acquisition Agreements did not, and the consummation of the related Acquisition will not, violate any statute or regulation of the United States (including, without limitation, any securities Law) or of any state or other applicable jurisdiction, or any order, judgment or decree of any court or governmental body binding on the Company or any other party to the applicable Acquisition Agreement, or result in a breach of, or constitute a default under, any material agreement, indenture, instrument, order or decree to which the Company is a party or by which the Company is bound or to which any other party to the applicable Acquisition Agreement is a party or by which any such party is bound. (e) No statement or representation made in any of the Acquisition Agreements by the Company or any other Person, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they are made, not misleading. SECTION 10 COVENANTS. Until the expiration or termination of the Commitment and thereafter until all obligations of the Company hereunder and under the Note are paid in full, the Company agrees that, unless at any time the Bank shall otherwise expressly consent in writing, it will: 10.1 Reports, Certificates and Other Information. Furnish to the Bank: 10.1.1 Audit Report. Promptly when available and in any event within 90 days after the close of each Fiscal Year, a copy of the annual audit report of the Company and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets of the Company and its Subsidiaries as of the end of such Fiscal Year and consolidated statements of earnings and cash flow of the Company and its Subsidiaries for such Fiscal Year, which audit report shall be without qualification as to going concern or scope and shall be prepared by PricewaterhouseCoopers or other independent auditors selected by the Company and reasonably acceptable to the Bank, together with a written statement from such auditors to the effect that in making the examination necessary for the signing of such audit report by such accountants, they 28 have not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if they have become aware of any such event, describing it in reasonable detail. 10.1.2 Quarterly Reports. Promptly when available and in any event within 45 days after the end of each Fiscal Quarter (except the last Fiscal Quarter of any Fiscal Year), (i) consolidated statements of cash and Cash Equivalent Investments not held in a fiduciary capacity ("Non-Fiduciary Cash") (excluding Non-Fiduciary Cash of Old Lyme), (ii) consolidated statements of cash and Cash Equivalent Investments held in a fiduciary capacity ("Fiduciary Cash") (excluding Fiduciary Cash of Old Lyme), (iii) consolidated statements of accounts receivable detailing the aging of such receivables, (iv) consolidated statements of accounts payable, each for such month, (v) a consolidated balance sheet of the Company and its Subsidiaries as of the end of such Fiscal Quarter and (vi) consolidated statements of earnings and cash flows for such Fiscal Quarter and for the period beginning with the first day of the applicable Fiscal Year and ending on the last day of such Fiscal Quarter, together with a certificate of the chief financial officer, the treasurer or the controller of the Company, certifying that such financial statements fairly present the financial condition and results of operations of the Company and its Subsidiaries as of the dates and periods indicated, subject to changes resulting from normal year-end adjustments. 10.1.3 Reports - Acquisitions. Prior to September 1, 2001, audited financial statements for Burnham for the six months ended June 30, 2001, audited financial statements for Flanagan for the six months ended June 30, 2001 and unaudited financial statements for Kaye Group for the six months ended June 30, 2001. 10.1.4 Certificates. Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 10.1.1 and of each set of statements as of the end of any Fiscal Quarter pursuant to Section 10.1.2, a duly completed certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such quarterly statements and signed by the chief financial officer, the treasurer or the controller of the Company, containing a computation of each of the financial ratios and restrictions set forth in this Section 10 and to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it. 10.1.5 Reports to Shareholders. Promptly upon the sending thereof, a copy of any annual, quarterly or similar disclosure document (inclusive of exhibits thereto) sent to the Company's shareholders generally. 10.1.6 Notice of Default, Litigation and Other Matters. Promptly (and in any event within one Business Day in the case of clause (a) and within five Business Days in the case of clauses (b) through (d)) after learning of any of the following, written notice describing the same and the steps being taken by the Company or the Subsidiary affected thereby with respect thereto: (a) the occurrence of an Event of Default or an Unmatured Event of Default; (b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Company to the Bank which has been instituted or, to the knowledge of the Company, is threatened against the Company or any Subsidiary or to which any of the properties of any 29 thereof is subject which has had or is reasonably likely to have a Material Adverse Effect; (c) any material adverse development which occurs in any litigation, arbitration or governmental investigation or proceeding previously disclosed pursuant to clause (b); (d) the institution of any steps by the Company, any of its Subsidiaries or any other Person to terminate any Pension Plan, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could reasonably be expected to result in the requirement that the Company furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could reasonably be expected to result in the incurrence by the Company of any material liability, fine or penalty, or any material increase in the contingent liability of the Company with respect to any post-retirement Welfare Plan benefit; and (e) the occurrence of any other event or circumstance which has had or is reasonably likely to have a Material Adverse Effect. 10.1.7 Subsidiaries. Promptly upon the occurrence thereof, a written report of any change in the list of its Subsidiaries. 10.1.8 Management Reports. Promptly upon the request of the Bank, copies of all detailed financial and management reports submitted to the Company by independent auditors in connection with any annual or interim audit made by such auditors of the books of the Company. 10.1.9 Projections. As soon as practicable and in any event within 60 days after the commencement of each Fiscal Year, a business plan and financial forecast for such Fiscal Year including (a) a forecasted consolidated balance sheet and a consolidated statement of cash flow of the Company for such Fiscal Year and (b) forecasted consolidated statements of income, depreciation, amortization and capital expenditures of the Company for each quarter of such Fiscal Year. Such information shall be described on a monthly basis for the Fiscal Year ended December 31, 2002, and on a yearly basis for each of the next two succeeding Fiscal Years. 10.1.10 Other Information. Promptly from time to time, such other information concerning the Company and its Subsidiaries as the Bank may reasonably request. 10.2 Books, Records and Inspections. Keep, and cause each Subsidiary to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; permit, and cause each Subsidiary to permit, on reasonable notice and at reasonable times and intervals (or at any time without notice during the existence of an Event of Default) the Bank or any representative thereof to inspect the properties and operations of the Company and of such Subsidiary; and permit, and cause each Subsidiary to permit, on reasonable notice and at reasonable times and intervals (or at any time without notice during the existence of an Event of Default) the Bank or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and the Company hereby authorizes such independent auditors to discuss such financial matters with the Bank or any representative thereof, provided that the Company shall have the right to be present at any such discussions) and to examine (and, at the expense of the Company or the applicable Subsidiary, photocopy extracts from) any of its books or other 30 corporate records. The Company agrees to pay the fees of its auditors incurred in connection with any reasonable exercise of the rights of the Bank pursuant to this Section. 10.3 Insurance. Maintain, and cause each Subsidiary to maintain, with reputable, financially sound insurance companies, insurance in such amounts and covering such risks as are necessary or appropriate for the business and operations of the Company and its Subsidiaries from time to time, as determined in good faith by the management of the Company (and, in any event, such insurance as may be required by any Law or any court order or decree); and, upon request of the Bank, furnish to the Bank a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Company and its Subsidiaries. 10.4 Compliance with Laws; Payment of Taxes and Liabilities. (a) Comply, and cause each Subsidiary to comply, in all material respects with all material applicable laws, rules, regulations and orders; and (b) pay, and cause each Subsidiary to pay, prior to delinquency, all material taxes and other governmental charges against it or any of its property; provided, however, that the foregoing shall not require the Company or any Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP. 10.5 Maintenance of Existence, etc. Maintain and preserve, and (subject to Section 10.12) cause each Subsidiary to maintain and preserve, (a) its existence and, wherever applicable, good standing in the jurisdiction of its organization and (b) its qualification and good standing as a foreign entity in each jurisdiction where the nature of its business makes such qualification necessary. 10.6 Financial Covenants. 10.6.1 Net Worth. Not permit the Net Worth during any period to be less than 85% of the Net Worth of the Company on the date of execution and delivery of this Agreement, which Net Worth was $155,000,000. 10.6.2 Senior Leverage Ratio. Not permit the Senior Leverage Ratio to be greater than 3.60 to 1, at any time before December 31, 2001, or greater than 3.00 to 1 at any time on or after December 31, 2001. 10.6.3 Total Leverage Ratio. Not permit the Total Leverage Ratio to be greater than 4.20 to 1 at any time on or after December 31, 2001. 10.6.4 Capital Expenditures. Not incur Capital Expenditures in an amount exceeding $10,000,000 for Fiscal Year 2001, and in an amount exceeding $3,000,000 per Fiscal Year thereafter. 10.7 Limitations on Debt. Not, and not permit any Subsidiary to, create, incur, assume or suffer to exist any Debt, except (a) obligations arising under the Loan Documents; (b) Debt of Subsidiaries to the Company or to other Subsidiaries; (c) Hedging Agreements entered into by the Company or any Subsidiary, provided that any Hedging Agreement with any Person other 31 than the Bank or any Affiliate of the Bank shall be unsecured; (d) Debt in respect of taxes, assessments or governmental charges to the extent that payment thereof shall not at the time be required to be made in accordance with Section 10.4; (e) Debt of Subsidiaries of the Company listed on Schedule 10.7; (f) Subsidiary Debt in an amount not in excess of $17,000,000 (which amount shall be reduced by the amount of any payment of Subsidiary Debt after the date of this Agreement); (g) Subordinated Debt in an amount not in excess of the principal amount of the Subordinated Debentures as of the date of this Agreement; (h) guaranties of indebtedness of officers, directors, or other employees of the Company or any of its Subsidiaries in an amount not in excess of Cdn$10,000,000; and (i) other Debt, in addition to the foregoing, in an amount not in excess of $2,000,000, which amount shall include the $2,000,000 of Permitted Acquisitions financed other than exclusively with the proceeds of the common equity, as described in the definition of "Permitted Acquisitions" in Section 1.1 above. 10.8 Leases. Not, and not permit any Subsidiary to enter into operating leases, except operating leases entered into in the ordinary course of business, including leases of entities acquired pursuant to Permitted Acquisitions, provided that the aggregate rental payments for all such operating leases are not in excess of 5% of consolidated total revenues for the Company and its Subsidiaries in any Fiscal Year 10.9 Liens. Not, and not permit any Subsidiary to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature, including, but not limited to 100% of the capital stock of each of the Subsidiaries (whether now owned or hereafter acquired), except (a) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves; (b) Liens arising in the ordinary course of business (such as (i) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by Law and (ii) Liens incurred in connection with worker's compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety and appeal bonds, bids, performance bonds and similar obligations) for sums not overdue or being contested in good faith by appropriate proceedings and not involving any deposits, advances, borrowed money or the deferred purchase price of property or services, and, in each case, for which it maintains adequate reserves; (c) attachments, judgments and other similar Liens, for sums not exceeding $250,000 (excluding any portion thereof which is covered by insurance so long as the insurer has a rating of A- or better from A.M. Best and has accepted a tender of defense and indemnification without preservation of rights) arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (d) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of the Company and its Subsidiaries taken as a whole; (e) Liens on Fiduciary Cash held by the Company or any of its Subsidiaries; (f) leases or subleases granted by the Company or any Subsidiary in the ordinary course of its business; (g) the interest or title of the lessor of any lease with respect to which the Company or a Subsidiary is lessee; (h) Liens existing on the Effective Date and described on Schedule 10.9; (i) extensions, renewals or replacements of any Lien permitted by the foregoing provisions of this Section 10.9, but only if the principal amount of the Debt secured thereby immediately prior 32 to such extension, renewal or replacement is not increased and such Lien is not extended to any other property; (j) Liens in favor of the Bank or any Affiliate of the Bank; and (k) additional Liens securing Debt not in excess of $2,000,000 at any time outstanding. 10.10 Restricted Payments. Not (a) pay or declare dividends to any of its shareholders in any Fiscal Quarter in an aggregate amount in excess of Cdn $0.07 per share (adjusted for stock splits), (b) purchase or redeem any of its shares or any warrants, options or other rights in respect of such shares; provided, however, that the Company shall be permitted to purchase shares from departing employees in the ordinary course of business in an aggregate purchase price not exceeding $500,000 during the term of this Agreement, (c) pay any management fees or similar fees to any of its shareholders or any Affiliate thereof or (d) set aside funds for any of the foregoing. 10.11 Investments. The Company will not, and will not permit any Subsidiary to, make, incur, assume or suffer to exist any Investment in any other Person, except: (a) Cash Equivalent Investments; (b) loans or advances for travel, commissions and similar items in the ordinary course of business to officers and employees of the Company and its Subsidiaries not in excess of $250,000 in the aggregate at any time; (c) loans and advances made by the Company to any Subsidiary or by any Subsidiary to the Company; (d) Investments existing on the Effective Date and described on Schedule 10.11; and (e) Permitted Acquisitions. 10.12 Mergers, Consolidations, Sales. Not, and not permit any Subsidiary to, be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person (or of a particular business unit of any other Person), or, except in the ordinary course of its business, sell, transfer, convey or lease any of its assets, or sell or assign with or without recourse any receivables, except for (i) any such merger or consolidation, sale, transfer, conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into the Company or into, with or to any other Wholly-Owned Subsidiary, (ii) any such purchase or other acquisition by the Company or any Wholly-Owned Subsidiary of the assets or stock of any Wholly-Owned Subsidiary; (iii) Permitted Acquisitions; and (iv) sales of assets outside the ordinary course of business so long as such assets are sold at fair market value pursuant to arms length transactions and the proceeds of such sale are used to retire Debt of the Company. 10.13 Use of Proceeds. Use the proceeds of the Loans for liquidity and other general corporate purposes; and not use or permit any proceeds of any Loan to be used, either directly or 33 indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying" any Margin Stock (within the meaning of Regulation U). 10.14 Transactions with Related Parties. Not, and not permit any Subsidiary to, enter into or cause, suffer or permit to exist any transaction, arrangement or contract with any Related Party (as defined below) which is on terms which are less favorable than are obtainable from any Person which is not a Related Party (other than management agreements which impose no obligations on the Company except payment of management fees which are permitted by Section 10.10). For purposes of the foregoing, "Related Party" means (a) any shareholder of the Company, (b) any member, officer, director, partner or shareholder of any shareholder of the Company and (c) any Affiliate of any of the foregoing. 10.15 Employee Benefit Plans. Maintain, and cause each Subsidiary to maintain, each Pension Plan in compliance in all material respects with all applicable requirements of Law. 10.16 Environmental Covenant. Cause, and cause each Subsidiary to, (a) own, use, lease and operate all of its facilities and properties in material compliance with all Environmental Laws; (b) (i) promptly after receipt thereof, notify the Bank (and provide copies) of all written claims, complaints, notices or investigations relating to the condition of the facilities and properties owned, leased or operated by the Company or any of its Subsidiaries and/or compliance with Environmental Laws, except claims, complaints, notices or investigations for which the liability of the Company and its Subsidiaries is reasonably expected to be less than $250,000; and (ii) promptly undertake reasonable measures to cure and have dismissed with prejudice to the satisfaction of the Bank any action or proceeding relating to compliance with Environmental Laws (it being understood that the Company shall not be in default under this clause (ii) with respect to any action or proceeding so long as (x) the Company or the applicable Subsidiary is diligently defending such action or proceeding in good faith by appropriate proceedings and has set aside on its books adequate reserves with respect thereto or (ii) in the case of all proceedings not covered by clause (x), there is no material interference with or disruption of the business of the Company or the applicable Subsidiary as a result of such action or proceeding and the aggregate liability of the Company and its Subsidiaries in connection with all such proceedings is reasonably expected to be less than $250,000); and (c) provide such information and certifications which the Bank may reasonably request from time to time to evidence compliance with this Section 10.16. 10.17 Unconditional Purchase Obligations. Not, and not permit any Subsidiary to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services, if such contract requires that payment be made by it regardless of whether or not delivery is ever made of such materials, supplies or other property or services. 34 10.18 Business. Not, and not permit any Subsidiary to, engage in any material line of business substantially different from those lines of business carried on by the Company and its Subsidiaries on the date hereof; provided, however, that the Company and its Subsidiaries may not engage in the business of underwriting property and casualty insurance except through Old Lyme and only then through and including the Old Lyme Purchase Date. 10.19 Inconsistent Agreements. Not, and not permit any Subsidiary to, enter into any material agreement containing any provision which would be violated or breached by any borrowing by the Company hereunder or by the performance by the Company or any Subsidiary of any of its obligations hereunder or under any other Loan Document. 10.20 Subordinated Debt. (a) Give notice to the Bank, at least ten days, before the occurrence of an event with which the passage of time or the giving of notice or both would constitute an "Event of Default" with respect to any Subordinated Debt or which would permit the holder of any Subordinated Debt to require redemption thereof, including, without limitation, upon the occurrence of a "Change of Control" or similar event. (b) Not make any optional repayment or redemption of any Subordinated Debt. 10.21 Prepayment of Obligations to Redeem Shares. Not, and not permit any Subsidiary to, prepay any obligation to redeem stock of the Company or such Subsidiary, as applicable, except with the proceeds of equity of the Company or such Subsidiary issued substantially concurrently with such prepayment. 10.22 Use of Proceeds of Sale of Old Lyme. Use the proceeds of the sale of Old Lyme to pay Debt other than Subordinated Debt of the Company and its Subsidiaries. SECTION 11 CONDITIONS PRECEDENT The obligation of the Bank to make any Loan is subject to the following conditions precedent: 11.1 Initial Credit Extension. The obligation of the Bank to make its initial Loan is, in addition to the conditions precedent specified in Section 11.2, subject to the conditions precedent that the Bank shall have received (a) evidence, reasonably satisfactory to the Bank, that the Company has completed, or concurrently with the initial credit extension hereunder will complete, the Acquisitions in accordance with the terms of the Acquisition Agreements (without any amendment thereto or waiver thereunder unless consented to by the Bank); and (b) all of the following, each duly executed and dated the Effective Date (or such earlier date as shall be satisfactory to the Bank), in form and substance satisfactory to the Bank (and the date on which all such conditions precedent have been satisfied or waived in writing by the Bank is called the "Effective Date"): 11.1.1 Note. The Note of the Company payable to the order of the Bank. 35 11.1.2 Guaranties. Each of the Guaranties, executed and dated the Effective Date (or such other date as shall be satisfactory to the Bank). 11.1.3 Resolutions. (a) Certified copies of resolutions of the board of directors of the Company authorizing or ratifying the execution, delivery and performance of this Agreement, the Note and the other documents provided for herein to be executed by the Company; (b) Certified copies of resolutions of the board of directors of Fairfax authorizing and ratifying the execution, delivery, and performance of the Fairfax Guaranty and the other documents provided for therein; and (c) Certified copies of resolutions of the boards of directors of the Material Subsidiaries authorizing and ratifying the execution, delivery and performance of the Material Subsidiaries Guaranty and the other documents provided for therein. 11.1.4 Consents, etc. Certified copies of all documents evidencing any necessary consents and governmental approvals with respect to this Agreement, the Note, the Guaranties and the other documents provided for herein. 11.1.5 Incumbency and Signatures. (a) A certificate of the Secretary of the Company certifying the names of the officer or officers of the Company authorized to sign the Loan Documents, together with a sample of the true signature of each such officer; (b) a certificate of the Secretary of Fairfax certifying the names of the officer or officers of Fairfax authorized to sign the Fairfax Guaranty, together with a sample of the true signature of each such officer; and (c) certificates of the Secretaries of the Material Subsidiaries, certifying the names of the officer or officers of the Material Subsidiaries authorized to sign the Material Subsidiaries Guaranty, together with a sample of the true signature of such officer. 11.1.6 Corporate Documents. Certificates of the Secretaries of each of the Company, Fairfax and the Material Subsidiaries certifying (i) the articles of incorporation, (ii) by-laws of such company and (iii) consents described in Section 11.1.4. 11.1.7 Opinions. (a) The opinion of (i) counsel to the Company, substantially in the form of Exhibit C-1, (ii) counsel to Fairfax and (iii) counsel to the Material Subsidiaries, each substantially in the form of Exhibit C-2; and (b) all opinions delivered in connection with the closing of the Acquisitions (which opinions shall state, or be accompanied by letters which state, that the Bank may rely thereon). 11.1.8 Bank of Montreal Credit Agreement. The Amended and Restated Credit Agreement dated as of June 21, 2001, between Bank of Montreal and the Company. 11.1.9 Debentures. Evidence satisfactory to the Bank that the Subordinated Debentures shall have been issued and at least $35,000,000 and Cdn $42,500,000 in net proceeds thereof shall have been received by the Company. 11.1.10 Projections. For the period from July 1, 2001 through and including December 31, 2001, forecasted consolidated statements of income, depreciation, amortization and capital expenditures of the Company for each such month. 36 11.1.11 Other. Such other documents as the Bank may reasonably request. 11.2 All Credit Extensions. The obligation of the Bank to make each Loan is subject to the conditions precedent that: 11.2.1 No Default. (a) No Event of Default, or Unmatured Event of Default, has occurred and is continuing or will result from the making of such Loan and (b) the warranties of the Company contained in Section 9 are true and correct in all material respects as of the date of such requested Loan, with the same effect as though made on such date. 11.2.2 Confirmatory Certificate. If requested by the Bank, the Bank shall have received a certificate dated the date of such requested Loan and signed by the Company's President, chief financial officer, treasurer or controller as to the matters set out in Sections 11.2.1 (it being understood that each request by the Company for the making of a Loan shall be deemed to constitute a certification as to the matters set out in Sections 11.2.1), together with such other documents as the Bank may reasonably request in support thereof, including duly executed and updated copies or other confirmations of the continuing effectiveness of any or all of the documents (except the Note) provided for in Section 11.1. SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT. 12.1 Events of Default. Each of the following shall constitute an Event of Default under this Agreement: 12.1.1 Non-Payment of the Loans, etc. Default, and continuance thereof for five days, in the payment when due of any principal, interest, fee, or other amount payable by the Company hereunder, under any other Loan Document or under any other agreement between the Company and the Bank. 12.1.2 Non-Payment of Other Debt. Any default shall occur under the terms applicable to any Debt of the Company or any Subsidiary (other than Debt hereunder) in an aggregate amount (for all Debt so affected) exceeding $250,000 and such default shall (a) consist of the failure to pay any portion of such Debt when due (subject to any applicable grace period), whether by acceleration or otherwise, or (b) accelerate the maturity of such Debt or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable prior to its expressed maturity. 12.1.3 Other Material Obligations. Default in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, the Company or any Subsidiary with respect to any material purchase or lease of goods or services (except only to the extent that the existence of any such default is being contested by the Company or such Subsidiary in good faith and by appropriate proceedings and appropriate reserves have been set aside in respect of such default) if, in the reasonable judgment of the Bank, such default has had, or is reasonably likely to have, a Material Adverse Effect. 37 12.1.4 Bankruptcy, Insolvency, etc. The Company or any Subsidiary becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or any Borrower Party or any of its Subsidiaries institutes or consents to the institution of any proceeding under Debtor Relief Laws, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of that Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under Debtor Relief Laws relating to any such Person or to all or any part of its property is instituted without the consent of that Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding. 12.1.5 Non-Compliance with Provisions of This Agreement. Failure by the Company to comply with or to perform any provision of Section 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12 or 10.13; failure by the Company to comply with or to perform any provision of Section 10.20, 10.21 or 10.22 and continuance of such failure for five days after notice thereof to the Company from the Bank; or failure by the Company to comply with or to perform any other provision of this Agreement (and not constituting an Event of Default under any of the other provisions of this Section 12) and continuance of such failure for 30 days after notice thereof to the Company from the Bank. 12.1.6 Warranties. Any warranty made by the Company herein is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by the Company to the Bank is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified. 12.1.7 Pension Plans. (i) Institution of any steps by the Company or any other Person to terminate a Pension Plan if as a result of such termination the Company could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $250,000, or (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. 12.1.8 Judgments. Final judgments which exceed an aggregate of $250,000 (excluding any portion thereof which is covered by insurance so long as the insurer has a rating of A- or better from A.M. Best Company and has accepted a tender of defense and indemnification without reservation of rights) shall be rendered against the Company or any Subsidiary and shall not have been discharged or vacated or had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments. 12.1.9 Invalidity of Guaranties. Any guaranty issued by any Subsidiary shall cease to be in full force and effect with respect to such Subsidiary, any Subsidiary shall fail (subject to any applicable grace period) to comply with or to perform any applicable provision of any applicable guaranty, or any Subsidiary (or any Person by, through or on behalf of any Subsidiary) shall contest in any manner the validity, binding nature or enforceability of any applicable guaranty. 38 12.1.10 Change of Control. Any Change of Control shall occur. 12.1.11 Subordinated Debt. A notice shall be given pursuant to Section 10.20(a) and the event giving rise to such notice shall be continuing for five days. 12.2 Effect of Event of Default. If any Event of Default described in Section 12.1.4 shall occur, the Commitment (if it has not theretofore terminated) shall immediately terminate and the Note and all other obligations hereunder shall become immediately due and payable, all without presentment, demand, protest or notice of any kind; and, in the case of any other Event of Default, the Bank may declare the Commitment (if it has not theretofore terminated) to be terminated and/or declare the Note and all other obligations hereunder to be due and payable, whereupon the Commitment (if it has not theretofore terminated) shall immediately terminate each without presentment, demand, protest or notice of any kind. The Bank shall promptly advise the Company of any such declaration, but failure to do so shall not impair the effect of such declaration. SECTION 13 GENERAL. 13.1 Waiver; Amendments. No delay on the part of the Bank or any holder of the Note in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the Note shall in any event be effective unless the same shall be in writing and signed and delivered by the Bank and, in the case of any such amendment or modification, the Company. 13.2 Notices. Except as otherwise provided in Sections 2.3 and 2.4, all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown below its signature hereto or at such other address as such party may, by written notice received by the other party, have designated as its address for such purpose. Notices sent by telegram or facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery shall be deemed to have been given when received. 13.3 Computations. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purposes of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP; provided that if the Company notifies the Bank that the Company wishes to amend any covenant in Section 10 to eliminate the effect of any change in GAAP on the operation of such covenant, or if the Bank notifies the Company that the Bank wishes to amend Section 10 for such purpose, then the Company's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Bank. 39 13.4 Costs, Expenses and Taxes. The Company agrees to pay on demand all reasonable out-of-pocket costs and expenses of the Bank (including Attorney Costs) in connection with the preparation, execution, delivery and administration of this Agreement, the Note, the other Loan Documents and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendments to or other modifications of any of the foregoing documents) and all reasonable out-of-pocket costs and expenses (including Attorney Costs) incurred by the Bank in connection with the enforcement of this Agreement, the Note, any other Loan Document or any such other instrument or document or in connection with any "work-out" or restructuring of the Company's obligations hereunder. In addition, the Company agrees to pay, and to save the Bank harmless from all liability for, any stamp or other taxes or filing fees or recording charges which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, the issuance of the Note or the issuance of any other instrument or document provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided for in this Section 13.4 shall survive any termination of this Agreement. 13.5 Judgment Currency. (a) All sums due and payable hereunder shall be paid in United States Dollars. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder in United States Dollars into another currency, the Company and the Bank agree, to the fullest extent permitted by law, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Bank could purchase United States Dollars with such other currency on the business day preceding that on which the final judgment is given. (b) The obligation of the Company in respect of any sum due from it to the Bank hereunder shall, notwithstanding any judgment in a currency other than United States Dollars, be discharged only to the extent that on the business day following receipt by the Bank of any sum adjudged to be so due in such other currency the Bank may in accordance with normal banking procedures purchase United States Dollars with such other currency; if the United States Dollars so purchased are less than the sum originally due to the Bank in United States Dollars, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Bank against such loss, and if the United States Dollars so purchased exceed the sum originally due to the Bank in the United States Dollars, the Bank agrees to remit to the Company such excess. 13.6 Governing Law. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE; PROVIDED THAT BANK SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. 40 (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF THE STATE OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH BORROWER PARTY AND THE BANK CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH BORROWER PARTY AND EACH THE BANK IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER DOCUMENT RELATED HERETO. EACH BORROWER PARTY AND THE BANK WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF THE STATE OF ILLINOIS. 13.7 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. 13.8 Successors and Assigns. This Agreement shall be binding upon the Company, the Bank and their respective successors and assigns, and shall inure to the benefit of the Company and the Bank and the successors and assigns of the Bank. The Bank shall not assign its rights or obligations hereunder without the prior written consent of the Company, which shall not be unreasonably withheld. 13.9 Indemnification by the Company. (a) In consideration of the execution and delivery of this Agreement by the Bank and the agreement of the Bank to extend the Commitment provided hereunder, the Company hereby agrees to indemnify, exonerate and hold the Bank and each of the officers, directors, employees and agents of the Bank (collectively the "Bank Parties" and individually each a "Bank Party") free and harmless from and against any and all actions, causes of action, suits, losses, liabilities, damages and reasonable out-of-pocket expenses, including Attorney Costs (collectively, the "Indemnified Liabilities"), incurred by the Bank Parties or any of them as a result of, or arising out of, or relating to (i) any tender offer, merger, purchase of stock, purchase of assets or other similar transaction (including the Acquisitions) financed or proposed to be financed in whole or in part, directly or indirectly, with the proceeds of any of the Loans or (ii) the execution, delivery, performance or enforcement of this Agreement or any other Loan Document by any of the Bank Parties, except for any Indemnified Liabilities arising on account of any such Bank Party's gross negligence or willful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable Law. (b) Without limiting clause (a), the Company agrees to reimburse each Bank Party for, and hold each Bank Party harmless from, any and all out-of-pocket losses, claims, damages, 41 penalties, judgments, liabilities and reasonable expenses (including Attorney Costs and consultant's fees) which any Bank Party may pay, incur or become subject to arising out of or relating to the use, handling, emission, discharge, transportation, storage, treatment or disposal of any Hazardous Material at any real property owned, operated or leased by the Company, except to the extent caused by the acts or omissions of such Bank Party. (c) All obligations provided for in this Section 13.9 shall survive any termination of this Agreement. 13.10 Subsidiary References. References herein to Subsidiaries of the Company, or to the Company's financial statements being prepared on a "consolidated" basis or similar references, shall be applicable only at such times as the Company has one or more Subsidiaries. 13.11 Waiver of Jury Trial. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 42 Delivered at Chicago, Illinois, as of the day and year first above written. HUB INTERNATIONAL LIMITED By: /s/ W. Kirk James ------------------------------------------------- Name: W. Kirk James --------------------------------------------- Title: Vice President, Secretary and General Counsel --------------------------------------------- 55 East Jackson Boulevard Chicago, Illinois 60604 Telephone: 312-279-4881 Facsimile: 312-279-4981 Attention: General Counsel BANK OF AMERICA, N.A. By: /s/ Mehul D. Mehta ------------------------------------------------- Name: Mehul D. Mehta Title: Vice President 231 South LaSalle Street, 10th Floor Chicago, Illinois 60697 Telephone: 312-828-2147 Facsimile: 312-987-0889 Attention: Mehul D. Mehta EX-10.20 24 t06723ex10-20.txt CREDIT AGREEMENT -HUB & LASALLE BANK Exhibit 10.20 CREDIT AGREEMENT BY AND BETWEEN LASALLE BANK NATIONAL ASSOCIATION AND HUB INTERNATIONAL LIMITED JULY 19, 2001 TABLE OF CONTENTS
PAGE ---- SECTION 1. DEFINITIONS .......................................................................... 1 SECTION 2. CREDIT FACILITY .......................................................................... 11 Section 2.A. Revolving Loans and Revolving Note......................................... 11 2.A.1. Revolving Loans............................................................ 11 2.A.2. Revolving Note............................................................. 11 SECTION 3. GENERAL PROVISIONS APPLICABLE TO ALL LOANS................................................ 12 Section 3.A. Applicable Interest Rates.................................................. 12 Section 3.B. Minimum and Maximum Borrowing Amounts...................................... 13 Section 3.C. Borrowing Procedures....................................................... 13 Section 3.D. Interest Periods........................................................... 14 Section 3.E. Maturity of LIBOR Loans.................................................... 14 Section 3.F. Prepayments................................................................ 14 Section 3.G. Default Rate............................................................... 15 Section 3.H. Note....................................................................... 16 Section 3.I. Funding Indemnity.......................................................... 16 Section 3.J. Change in Circumstances, Etc............................................... 17 SECTION 4. FEES...................................................................................... 19 Section 4.A. Revolving Commitment Fees.................................................. 19 Section 4.B. Non-Utilization Fee........................................................ 19 SECTION 5. PLACE AND APPLICATION OF PAYMENTS......................................................... 19 Section 5.A. Place and Application of Payments.......................................... 19 SECTION 6. CONDITIONS PRECEDENT AND SUBSEQUENT....................................................... 19 Section 6.A. Delivery of Documents as Conditions Precedent.............................. 20 6.A.1. Agreement.................................................................. 20 6.A.2. Note....................................................................... 20 6.A.3. Evidence of Insurance...................................................... 20 6.A.4. Articles of Incorporation.................................................. 20 6.A.5. Good Standing.............................................................. 20 6.A.6. Secretary's Certificate.................................................... 20 6.A.7. Solvency Certificate....................................................... 20 6.A.8. Opinion.................................................................... 20 6.A.9. Environmental Data......................................................... 20 6.A.10. Officer's Certificate...................................................... 21 6.A.11. Guarantees................................................................. 21 6.A.12. Financial Statements of Guarantors......................................... 21 6.A.13. Other Documents............................................................ 21 6.A.14. Subordinated Debentures................................................... 21 Section 6.B. Fees....................................................................... 21 Section 6.C. Conditions Precedent....................................................... 21 6.C.1. Materially Adverse Effect.................................................. 21
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PAGE ---- 6.C.2. Representations and Warranties............................................. 21 6.C.3. Covenants.................................................................. 21 6.C.4. Event of Default........................................................... 22 6.C.5. Revolving Commitments...................................................... 22 6.C.6. No Violations.............................................................. 22 6.C.7. Note; Notice of Borrowing.................................................. 22 6.C.8. Satisfactory Completion of Due Diligence................................... 22 SECTION 7. REPRESENTATIONS AND WARRANTIES............................................................ 22 Section 7.A. Corporate Existence and Related Matters.................................... 22 Section 7.B. Corporate Authority........................................................ 23 Section 7.C. Consents, Approvals, etc................................................... 23 Section 7.D. Binding Effect and Enforceability.......................................... 23 Section 7.E. Default of Debt, Licenses, Permits, Orders and Other Agreements............ 24 Section 7.F. Financial Condition and Litigation......................................... 24 Section 7.G. Title and Liens............................................................ 24 Section 7.H. Employee Plans............................................................. 24 Section 7.I. Taxes...................................................................... 25 Section 7.J. Compliance with Laws....................................................... 25 Section 7.K. Corporate Structure and Affiliates......................................... 25 Section 7.L. Corporate Names............................................................ 25 Section 7.M. Solvency................................................................... 25 Section 7.N. Margin Regulations......................................................... 25 Section 7.O. Indebtedness to and Transactions with Affiliates........................... 25 Section 7.P. Acts of God................................................................ 26 Section 7.Q. Labor Controversies; Union Contracts, Etc.................................. 26 Section 7.R. Surety Obligations; Financial Assurances................................... 26 Section 7.S. Business Relations......................................................... 26 Section 7.T. Accuracy of Information.................................................... 26 Section 7.U. Hazardous Materials........................................................ 27 Section 7.V. Ranking.................................................................... 27 Section 7.W. Business Loan.............................................................. 27 Section 7.X. Complete Information....................................................... 27 Section 7.Y. Intellectual Property...................................................... 28 SECTION 8. COVENANTS................................................................................. 28 Section 8.A. Affirmative Covenants...................................................... 28 8.A.1. Financial Covenants........................................................ 28 8.A.2. Financial Information and Reporting........................................ 29 8.A.3. Corporate Existence and Conduct of Business................................ 30 8.A.4. Taxes and Laws............................................................. 31 8.A.5. Inspection................................................................. 31 8.A.6. Lender Costs............................................................... 31 8.A.7. Employee Plans............................................................. 31 8.A.8. Use of Proceeds of Loans................................................... 32 8.A.9. Financial Assurance........................................................ 32 8.A.10. Compliance with Laws....................................................... 32
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PAGE ---- 8.A.11. Maintenance of Insurance................................................... 32 Section 8.B. Negative Covenants......................................................... 33 8.B.1. Liens...................................................................... 33 8.B.2. Fiscal Year, Name Changes, Mergers and Acquisitions........................ 33 8.B.3. Restricted Payments........................................................ 33 8.B.4. Transactions with Affiliates............................................... 33 8.B.5. Capital Structure.......................................................... 33 8.B.6. Change in Nature of Business............................................... 34 8.B.7. Prepayment or Modification of Debt......................................... 34 8.B.8. False Statements........................................................... 34 8.B.9. Inconsistent or Restrictive Agreements..................................... 34 8.B.10. Investments................................................................ 34 8.B.11. Indebtedness............................................................... 34 SECTION 9. EVENTS OF DEFAULT......................................................................... 35 Section 9.A. Obligations................................................................ 35 Section 9.B. Breach or Default Under Loan Documents..................................... 35 Section 9.C. Representation and Warranties.............................................. 35 Section 9.D. Judgments.................................................................. 35 Section 9.E. Insolvency and Related Proceedings......................................... 36 Section 9.F. Other Material Agreements.................................................. 36 Section 9.G. State Action............................................................... 36 Section 9.H. ERISA Matters.............................................................. 36 Section 9.I. Tax Liens.................................................................. 37 Section 9.J. Failure of Lien............................................................ 37 Section 9.K. Environmental or Other Remediation Costs................................... 37 Section 9.L. Operating Permits and Licenses............................................. 37 Section 9.M. Material Adverse Change.................................................... 37 Section 9.N. Change in Control.......................................................... 37 SECTION 10. RIGHTS AND REMEDIES...................................................................... 38 Section 10.A. Termination of Commitment and Acceleration................................. 38 Section 10.B. Rescission................................................................. 38 Section 10.C. Application of Payments.................................................... 38 Section 10.D Attorney-in-Fact........................................................... 39 SECTION 11. MISCELLANEOUS............................................................................ 39 Section 11.A. Assignments and Participations............................................. 39 Section 11.B. Withholding Taxes.......................................................... 39 Section 11.C. Amendment and Waivers...................................................... 40 Section 11.D. Merger and Integration Clause.............................................. 40 Section 11.E. Applicable Law............................................................. 40 Section 11.F. Severability............................................................... 40 Section 11.G. Section Headings........................................................... 40 Section 11.H. Binding Effect............................................................. 40 Section 11.I. Notices.................................................................... 41 Section 11.J. Counterparts............................................................... 42
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PAGE ---- Section 11.K. Indemnification............................................................ 42 Section 11.L. Independence of Covenants.................................................. 42 Section 11.M. Limitation of Liability.................................................... 43 Section 11.N. Consent to Jurisdiction and Waiver of Jury Trial and Personal Service...... 43
v EXHIBITS Exhibit A. Form of Revolving Note Exhibit B. Form of Borrowing Notice Exhibit C. Form of Compliance Certificate Exhibit D. New Subsidiary Certificate Exhibit E. Form of Guaranty SCHEDULES Schedule 1.A. Exclusions to Definition of "Contingent Liability" Schedule 1.B. Historical Pro Forma Basis Schedule 1C. Current Loans and Advances Schedule 7.A. Corporate organizational, ownership and related matters for Borrower Schedule 7.C. Required Third Party Consents Schedule 7.F. Pending or threatened litigation and government proceedings Schedule 7.G. Existing Liens (which are included as Permitted Liens) Schedule 7.H. Employee Plans Schedule 7.I. Deficiency or additional tax assessments Schedule 7.O. Indebtedness to/from Affiliates Schedule 7.R. Financial Assurances Schedule 8.A.8. Capital Expenditures and Acquisitions Schedule 8.B.2. Existing Investments (permitted to be maintained by Borrower) Schedule 8.B.4. Transactions with Affiliates Schedule 8.B.11. Indebtedness CREDIT AGREEMENT This Credit Agreement is made as of July 19, 2001, by and between LASALLE BANK NATIONAL ASSOCIATION, a national banking association with its principal offices located in Chicago, Illinois, ("Lender"), and Hub International Limited, a corporation incorporated under the laws of Ontario, Canada ("Borrower"). WITNESSETH: WHEREAS, the Borrower desires to borrow from the Lender certain amounts for the purposes set forth in Section 8.A.8 below; WHEREAS, the Lender is agreeable to extending said credit facility on the terms and conditions provided herein; WHEREAS, certain financial covenants of the Borrower hereinafter set forth relate to the financial condition and results of Borrower, and the financial condition and results of Borrower are a material inducement to the Lender's willingness to enter into this Credit Agreement and extend the financial accommodations referred to herein; WHEREAS, as a condition for extending such financial accommodations, the Lender requires that Borrower enter into this Credit Agreement establishing the terms and conditions thereof; NOW THEREFORE, for and in consideration of the foregoing premises and the mutual agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: SECTION 1. DEFINITIONS. Section 1.A. In addition to the terms that are elsewhere defined herein, when used herein, the following terms have the meanings as set forth below: "Act" or "Acts" means, collectively, the Laws of any state or governmental subdivision thereof which apply to the conduct of business by the Borrower. "Adjusted LIBOR" is defined in Section 3.A hereof. "Affiliate" of any Person means any other Person that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person and includes, without limitation, each shareholder, director and any Subsidiaries of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. For purposes of this Agreement, all Subsidiaries of Borrower are Affiliates of Borrower. "Agreement" means, collectively, this Credit Agreement, together with any and all exhibits, appendices, schedules and amendments hereto and modifications, renewals, extensions, restatements and substitutions thereof and therefor. "Applicable LIBOR Margin," for purposes of determining the interest rate on a LIBOR Loan, means 1.50%. "Authorized Officer" means one or more officers of the Borrower duly authorized (and so certified to the Lender by the corporate Secretary of the Borrower involved pursuant to a certificate of authority and incumbency from time to time satisfactory to the Lender), acting alone, to request Loans hereunder and execute and deliver documents, instruments, agreements, reports, statements and certificates in connection herewith. "Borrowing" means the total of Loans made by Lender to the Borrower on a single date and for a single Interest Period. "Borrowing Notice" means the request of the Borrower for Loans as further described in Section 3.C hereof. "Business Day" means any day other than a Saturday, Sunday or other day on which banks are authorized or required to be closed in Chicago, Illinois, and with respect to LIBOR Loans, a day on which dealings in United States Dollars may be carried on by the Lender or the Reference Bank in the London interbank eurodollar market. "Capital Expenditures" means all payments, expenditures and the obligations incurred by a Person for the purchase, creation, improvement, replacement, substitution, addition, renovation or lease of a fixed or capital asset with a useful life of more than one year and which are required to be classified or accounted for as a capital asset or capital lease on the balance sheet or statement of cash flow of such Person, as determined in accordance with GAAP, including equipment which is purchased simultaneously with the trade-in of existing equipment owned by such Person to the extent of the gross amount of the purchase price of such purchased equipment less the book value of the equipment being traded in at such time, but excluding (a) expenditures made in connection with the replacement or restoration of assets, to the extent such replacement or restoration is financed out of (i) insurance proceeds paid on account of the loss of or damage to the assets so replaced or restored or (ii) awards or compensation arising from the taking by condemnation or eminent domain of the assets so replaced, (b) any portion of capital lease obligations that is not required to be capitalized on such Person's balance sheet, and (c) interest capitalized during construction. "Capital Lease" shall mean, as to any Person, any lease of (or other agreement conveying the right to use) immovable or real property or movable or personal property, which would be required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP; "Closing Date" means the later of the date hereof or the date on which all of the conditions precedent to the Loans set forth in Section 6 hereof have been fully satisfied. "Commitment" means the Revolving Commitment. 2 "Consolidated" means the consolidation of accounts in accordance with GAAP, including principles of consolidation. "Contingent Liability" or "Contingent Liabilities" means any agreement, undertaking or arrangement by which any Person (i) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsement of instruments G18 in the course of collection), or (ii) guarantees the payment of dividends or other distributions upon the shares of any other Person, or (iii) undertakes or agrees (contingently or otherwise) (a) to purchase, repurchase, or otherwise acquire any Debt, obligation or liability or any security therefor, or (b) to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or (c) to maintain solvency, assets, level of income or other financial condition, or (d) to make payment other than for values received; provided, however, that Contingent Liability shall not include those items listed on Schedule 1.A. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the debt, obligation or other liability guaranteed or supported thereby. "Debt" of any Person means all items of indebtedness, obligation or liability of any kind or nature, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several, of such Person, including without limitation and without duplication: Contingent Liabilities of such Person; any indebtedness secured by a Lien on or payable out of the proceeds or production from any property of such Person regardless of whether such indebtedness has been assumed by such Person; obligations representing the deferred purchase price of property; obligations which are evidenced by notes, acceptances, or other instruments; capitalized lease obligations; and obligations in respect of letters of credit. "Default" means any event which, with the giving of notice or the passage of time or both, would constitute, become or mature into an Event of Default. "Default Rate" is as defined at Section 3.G hereof. "EBITDA" means, for any period, on a Consolidated basis for the Borrower, for the Measurement Period, the sum for such period of (a) Net Income, plus (b) depreciation and amortization expense deducted in the determination of such Net Income, plus (c) Interest Expense deducted in the determination of such Net Income, plus (d) federal and state income taxes as determined in accordance with GAAP and deducted in the determination of such Net Income, and minus (e) any items of gain which are extraordinary items as defined in GAAP to the extent reflected in the determination of such Net Income. "Employee Plan" means any pension, retirement, disability, medical, dental or other health plan, life insurance or other death benefit plan, profit sharing, deferred compensation, stock option, bonus or other incentive plan, vacation benefit plan, severance plan, or other employee benefit plan or arrangement, including, without limitation, those pension, profit-sharing and retirement plans of the Borrower described from time to time in the Financial Statements and any pension plan, welfare plan, Defined Benefit Pension Plans (as defined in ERISA) or any multi-employer plan, maintained 3 or administered by the Borrower or any Affiliate of the Borrower, to which the Borrower or any Affiliate of the Borrower is a party or may have any liability or by which the Borrower or any Affiliate is bound. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all rules and regulations issued thereunder or in connection therewith. "Eurodollar Reserve Percentage" is defined in Section 3.A hereof. "Event of Default" means an event or occurrence described in Section 9 of this Agreement. "Executive Share Purchase Plan" refers to the plan described in Schedule 1.A. "Expiration Date" is defined at Section 2.A.1 hereof. "Financial Assurance" means the financial assurance (whether in the form of a bond, letter of credit, cash or otherwise) required pursuant to any Act. "Financial Hedge" means a swap, collar, floor, cap, or other contract which is intended to reduce or eliminate the risk of fluctuations in interest rates; "Financial Statements" means all of the balance sheets, statements of operations, statements of cash flow and statements of changes in shareholders' equity of the Borrower for each Fiscal Year or each month or quarter thereof which have been delivered to the Lender on or prior to the date hereof and which are to be delivered to the Lender pursuant to Section 8.A.2 of this Agreement. "Fiscal Quarter" means any quarter of a Fiscal Year. "Fiscal Year" means the fiscal year of Borrower ending on December 31 for each year. "Funded Debt" means Debt for or with respect to borrowed money with an ultimate maturity greater than one (1) year from the date of determination, provided in any event that for all purposes hereof all Loans shall be considered as and included in Funded Debt. "Funded Senior Debt" means (without duplication), with respect to the Borrower and Affiliates on a consolidated basis, the sum of the following senior debt: (a) all liabilities, obligations, and indebtedness which in accordance with GAAP should be classified upon their balance sheet as senior liabilities in respect of (i) money borrowed, including, without limitation, the debt incurred pursuant to this Credit Agreement and (ii) obligations under Capital Leases; (b) senior obligations under reimbursement agreements for advances made by an issuer of a letter of credit but only if such obligation is payable over more than, or outstanding longer than, thirty (30) days from the date such obligation arises; (c) senior obligations with respect to Financial Hedges, but only following the occurrence of a default under the applicable Financial Hedge or an Event of Default hereunder; and (d) senior obligations with respect to Debt for which a Company is responsible or liable solely as a guarantor, but only from and after the date demand for payment is made under the applicable guaranty. Funded Senior Debt shall not include those debentures listed in Section 6.A.14 herein. 4 "Funded Total Debt" means (without duplication), with respect to the Borrower and Affiliates on a consolidated basis, the sum of the following: (a) all liabilities, obligations, and indebtedness which in accordance with GAAP should be classified upon their balance sheet as liabilities in respect of (i) money borrowed, including, without limitation, the debt incurred pursuant to this Credit Agreement and (ii) obligations under Capital Leases; (b) obligations under reimbursement agreements for advances made by an issuer of a letter of credit but only if such obligation is payable over more than, or outstanding longer than, thirty (30) days from the date such obligation arises; (c) obligations with respect to Financial Hedges, but only following the occurrence of a default under the applicable Financial Hedge or an Event of Default hereunder; and (d) obligations with respect to Debt for which a Company is responsible or liable solely as a guarantor, but only from and after the date demand for payment is made under the applicable guaranty; "GAAP" means generally accepted accounting principles, applied on a basis consistent with prior periods, as required in the United States or Canada depending on the country of reporting; provided, however, that GAAP with respect to any interim financial statements or reports shall be deemed subject to year-end adjustments and footnotes made in accordance with GAAP. "Guarantor" means, individually, each of the following companies: 798676 Alberta Ltd., a corporation incorporated under the laws of Alberta, Canada, 805977 Alberta Ltd., a corporation incorporated under the laws of Alberta, Canada, Hubacq Inc., a corporation incorporated under the laws of Ontario, Canada, Hub U.S. Holdings, Inc., a Delaware corporation. "Guarantors" means, collectively, the four (4) Guarantors. "Guaranty" means a guaranty in the form of Exhibit E delivered by a Guarantor. "Guarantees" means, collectively, the four (4) separate Guarantees delivered by the four (4) Guarantors. "Hazardous Materials" is defined in Section 7.U hereof. "Historical Pro Forma Basis" means, for any Measurement Period, ending as at the end of the Fiscal Quarter or month, as the case may be, the relevant financial terms (i.e. those included in calculating the financial covenants in Section 8.A.1) as calculated and determined for the Borrower and any Subsidiaries acquired during the Measurement Period and/or to be acquired and with respect to which the calculation of the various financial covenants on a Historical Pro Forma Basis is being made, all determined in accordance with GAAP and calculated as if all such acquired and to be acquired Subsidiaries had been owned by the Borrower and Guarantors through the Measurement Period involved, and adjusted for nonrecurring acquisition expenses reflected on Schedule 1.B. "Interest Expense" means, with respect to any Person, for any period, the aggregate interest expense for such period (including, without duplication, all commissions, discounts, and other fees and charges owed with respect to letters of credit, the portion of any capitalized lease obligations allocable to interest expense, and capitalized interest) determined in accordance with GAAP (but in any event excluding interest on tax assessments to the extent such interest is included in deferred taxes). "Interest Period" is defined at Section 3.D hereof. 5 "Laws" means all ordinances, statutes, rules, regulations, codes, orders, injunctions, writs or decrees of any government, whether federal, state, municipal, local or foreign, of any political subdivision or agency thereof, or of any court, board or similar entity established by any of the foregoing. "LIBOR" is defined in Section 3.A hereof. "LIBOR Loan" means a Loan bearing interest at the rate specified in Section 3.A(b) hereof. "Lien" means any security interest, mortgage, pledge, hypothecation, collateral assignment, lien (statutory or otherwise), charge or encumbrance of any kind or nature whatsoever, any deposit or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, or any financing lease involving substantially the same economic effect as any of the foregoing. "Loan" means a Revolving Loan and "Loans" means the Revolving Loans, collectively and in the aggregate. "Loan Documents" means, collectively, all of those documents set forth and described in Section 6 hereof, as amended, modified, supplemented or restated from time to time, and any facilities or agreements in replacement thereof. "Materially Adverse Effect" means, relative to any occurrence, event, condition or circumstance, or any change therein, of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), a materially adverse effect on: (i) the assets of or the business, revenues, financial condition, operations of the Borrower on a consolidated basis or any Guarantor; or (ii) the ability of the Borrower or any Guarantor to timely or fully perform any of the payment or other material obligations involving any of its Debt. "Measurement Period" means with respect to each quarter then ending, beginning with the quarter ending December 31, 2000 and thereafter, the rolling period of the four fiscal quarters then ending. "Monies" means (i) all cash at any time on deposit with or held by the Lender or any other bank or institution for the account of the Borrower, (ii) all accounts of the Borrower with the Lender or any other bank or institution, (iii) all investments and reinvestments of amounts from time to time credited to such accounts, and (iv) all interest, dividends, distributions and other proceeds payable on or with respect to such investments and reinvestments and such accounts. "Net Income" means, for any period, the net income of Borrower and its Subsidiaries on a consolidated basis for such period, before the payment of dividends on all capital stock, determined in accordance with GAAP. "Net Worth" means, with respect to the Borrower on a consolidated basis, as calculated at any date of determination, the amount of Stockholder's Equity of Borrower, determined on a consolidated basis at such date in accordance with GAAP but exclusive of any adjustments under FASB 115. 6 "Note" means the Revolving Note. "Obligations" means each and every promise, agreement, covenant, debt and all other liabilities, obligations and indebtedness of the Borrower, its successors or assigns, to the Lender, whether primary, secondary, contingent, direct, or indirect, howsoever incurred, created, arising or evidenced, whether presently or hereafter existing, evidenced, arising or becoming due, which such promise, agreement, covenant, debt, liabilities, obligations or indebtedness arises from or in connection with the Loans or under this Agreement, the Note, or any other Loan Documents, or any refinancings, substitutions, extensions, renewals, replacements and modifications for or of the foregoing, or the enforcement by the Lender of its rights and remedies under any or all of the foregoing (including all costs, expenses and reasonable attorneys' and paralegals' fees and expenses incurred by the Lender), including any of the foregoing that arises after the filing of a petition by or against the Borrower under any insolvency or related proceeding, even if the obligations do not accrue because of the automatic stay under bankruptcy laws or otherwise. "Outstanding Principal Obligations" means, at any time, the sum of the aggregate principal amount of all Loans advanced to the Borrower outstanding and unpaid at such time, all expressed in U.S. Dollars; "Permitted Investments" means (i) cash, (ii) readily marketable securities issued or guaranteed by the government of the United States of America or any agency thereof or by the government of Canada or any province thereof having a maturity at the time of issuance of not exceeding one year, (iii) commercial paper rated at least A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., having a maturity at the time of issuance not exceeding one year, and money market funds invested in short-term securities rated at least as provided in the preceding clause, (iv) certificates of deposit of or demand or time deposits with or repurchase agreements of any commercial bank which is organized under the laws of the United States of America or any state thereof or of any Canadian national chartered bank or trust company and has capital and surplus of in excess of $100,000,000, and demand deposits or local operating accounts with the Lender or any other financial institutions acceptable to the Lender, (v) property used in the ordinary course of business, the purchase of which does not otherwise violate or cause or result in a violation of any provision hereof, (vi) current assets arising from the sale of goods and services in the ordinary course of business, (vii) current loans or advances to employees in the ordinary course of business, which are set forth in Schedule 1.C, and future loans to officers or employees not in excess of $50,000 in the aggregate at any time outstanding or loans or guarantees under the Executive Share Purchase Plan not exceeding $10,000,000 or under the Restricted Stock Plan not to exceed $ 1,000,000, and (viii) existing investments in existing Subsidiaries or Affiliates of Borrower. "Permitted Liens" means any Liens (i) provided for hereunder or under the Loan Documents in favor of the Lender; (ii) for taxes or assessments not yet due and payable; (iii) of vendors incurred in the ordinary course of business, payment with respect to which is not then due and payable; (iv) which arise out of pledges or deposits under any Laws relating to workers' compensation, unemployment insurance, old age pensions or other social security or retirement benefits; (v) which are being contested in good faith by appropriate and lawful proceedings, so long as levy and execution thereon have been and continue to be stayed and which do not materially impair or adversely affect the value or use of the assets and properties of the Borrower or the operation or 7 condition of the business of the Borrower; (vi) which are existing on Equipment, Fixtures and/or real property of the Borrower and are set forth on Schedule 7.G hereto, provided, however, that the Debt secured by existing Liens on Equipment, Fixtures and/or real property shall not be increased and such Debt shall not be secured by any Equipment, Fixtures and/or real property other than that securing such Debt as of the date hereof; (vii) which are purchase money security interests on Equipment and/or Fixtures (exclusive of any such Liens referred to in subparagraph (vi) above) securing the deferred purchase price thereof hereinafter; provided, however, that any such Lien shall attach only to the Equipment and/or Fixture financed by the holder of such Lien; (viii) which are currently existing on Accounts of the Borrower and are set forth on Schedule 7.G hereto; or (ix) with respect to the property (other than Accounts) of any new Subsidiary of the Borrower which becomes a Subsidiary after the date hereof, so long as such Liens are either incurred in connection with an acquisition by the Borrower permitted under Section 8.B.2 hereof or were in existence prior to such acquisition, and, if incurred in connection with such an acquisition, are subordinated to the Liens in favor of the Lender. "Equipment", "Fixture" and "Accounts" shall be defined as in the Uniform Commercial Code of Illinois, as amended from time to time. "Person" means any individual, sole proprietorship, joint venture, partnership, association, unincorporated organization, joint-stock company or association, limited liability company, trust, corporation, entity, institution or government body (or agency or political subdivision thereof). "Pro Forma EBITDA" means EBITDA calculated on a Historical Pro Forma Basis. "Prime Rate" means the rate of interest announced or referred to by the Lender from time to time as its prime or reference rate for interest rate determinations, with each change in such Prime Rate to take effect on the same day such change is announced by the Lender. The use of the term "Prime Rate" herein or in the Note is not intended nor does it imply that said rate of interest is a preferred rate of interest or one which is offered by the Lender to its most creditworthy customers. "Prime Rate Loan" means a Loan bearing interest at the rate specified in Section 3.A(a) hereof. "Reference Bank" means ABN/AMRO Bank. "Refunding Borrowing" is defined in Section 3.C.(c) hereof. "Restricted Payments" means (i) any dividend payment or other distribution, direct or indirect, of assets, properties, cash, rights, obligations or securities on account of any shares of any class of capital stock of the Borrower which is not a wholly-owned Subsidiary of Borrower except Canadian $0.07/share quarterly dividend if Event of Default has not occurred, or (ii) any exchange, conversion, repurchase, purchase, redemption, retirement, sinking fund or other similar acquisition for value, direct or indirect, of any shares of any class of capital stock of the Borrower or any warrants, rights or options to acquire any such shares, now or hereafter outstanding, or (iii) any earn-out under any acquisition agreement, unless permitted by the terms thereunder and approved by Lender. "Restricted Stock Plan" refers to the plan described in Schedule 1.A. 8 "Revolving Commitment" is defined in Section 2.A.1 hereof. "Revolving Loans" is defined in Section 2.A.1 hereof. "Revolving Note" means the promissory note of the Borrower evidencing the Revolving Loans. "Revolving LIBOR Loan" means a Revolving Loan which is also a LIBOR Loan. "Revolving Prime Rate Loan" means a Revolving Loan which is also a Prime Rate Loan. "SEC" means the Securities and Exchange Commission. "Stockholder's Equity" means the sum of the capital stock, additional paid-in-capital and retained earnings (after deducting treasury stock) as determined in accordance with GAAP. "Subsidiary" with respect to any Person means any corporation or other business entity of which more than fifty percent (50%) of the outstanding common stock or other ownership interests is owned, directly or indirectly, by such Person. "Termination Date" means the earlier of (a) July 17, 2002 , and (b) the date on which the Obligations shall automatically, or by virtue of a declaration by the Lender made in accordance with this Agreement, become due and payable. "UCC" means the version of the Uniform Commercial Code as enacted in Illinois, as amended from time to time. Section 1.B. Any accounting terms used but not otherwise defined herein shall have their customary meanings as defined in, pursuant to, or in accordance with GAAP. All other terms used but not otherwise defined herein shall have the meanings provided by the UCC to the extent said terms are used or defined therein. Section 1.C. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the other Loan Documents. Section 1.D. In this Agreement and each other Loan Document, unless a clear contrary intention appears: (i) the singular number includes the plural number, and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) references to any agreement (including this Agreement and the Schedules, Appendices and Exhibits hereto), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor; (v) unless the context indicates otherwise, reference to any Article, Section, Appendix, Schedule or 9 Exhibit means such Article or Section hereof or Schedule, Appendix or Exhibit hereto; (vi) "hereunder," "hereof," "hereto" and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision hereof; (vii) "including" (and with correlative meaning "include") means including without limiting the generality of any description preceding such term; and (viii) relative to the determination of any period of time, "from" means "from and including" and "to" and "through" means "to but excluding." Section 1.E. If, after the date of this Agreement, there shall occur any change in GAAP from those used in the preparation of the Borrower's audited financial statements for the Fiscal Year ending December 31, 2000, and such change shall result in a change in the method of calculation of any financial covenant, standard or term found in this Agreement, either Borrower or the Lender may by notice to the other require that the Lender and the Borrower negotiate in good faith to amend such covenant, standard or term so as equitably to reflect such change in GAAP, with the desired result being that the criteria for evaluating the financial condition of the Borrower shall be the same as if such change had not been made. SECTION 2. CREDIT FACILITY. Section 2.A. Revolving Loans and Revolving Note. Subject to the terms and conditions of this Agreement, the Lender agrees to lend to the Borrower the Revolving Loans as provided in this Section. 2.A.1. Revolving Loans. Subject to the terms and conditions of this Agreement, the Lender agrees to lend to the Borrower from time to time until the earlier of the Termination Date or the occurrence of either a Default or an Event of Default hereunder (the earlier of such date being hereinafter referred to as the "Expiration Date"), such sums, in a minimum amount(s) as set forth in Section 3.B hereof, as Borrower may request from time to time by a Borrowing Notice pursuant to Section 3.C hereof; provided, however, that the aggregate principal amount of all loans outstanding under this Section 2.A.1 (individually, a "Revolving Loan" or "Loan" or, collectively, the "Revolving Loans" or "Loans") at any one time shall not exceed Twenty-Five Million Dollars ($25,000,000) less any amounts committed and/or outstanding under Lender's credit facilities for J.P. Flanagan Corporation, pursuant to a credit agreement between Lender and J.P. Flanagan dated October 31, 2000, and Burnham Stewart Group, Inc. pursuant to a credit agreement between Michigan National Bank dated November 20, 2000, at the Closing Date (such amount hereinafter referred to as the "Revolving Commitment"). Subject to the terms and conditions hereof, the Borrower may borrow or repay and reborrow hereunder, from the date hereof until the Expiration Date, either the full amount of the Revolving Commitment or any lesser sum in the minimum amounts referred to herein. If, at any time, the Revolving Loans exceed the Revolving Commitment, the Borrower shall immediately notify the Lender of the existence of and pay to the Lender the amount of such excess. For all purposes of this Agreement, where a determination of the unused or available amount of the Revolving Commitment is necessary, the Revolving Loans shall be deemed to utilize the Revolving Commitment. 2.A.2. Revolving Note. In order to evidence the Revolving Loans, at the time of the making of the initial Revolving Loan, the Borrower will execute and deliver a promissory note, substantially in the form of Exhibit A hereto (together with any and all amendments, modifications, supplements, 10 substitutions, renewals, extensions and restatements, thereof and therefor, the "Revolving Note"). The Revolving Loans shall bear and pay interest and mature on the date as set forth therein and herein. SECTION 3. GENERAL PROVISIONS APPLICABLE TO ALL LOANS. Section 3.A. Applicable Interest Rates. The Borrower may elect that each Borrowing of each Loan be made by means of a Prime Rate Loan or a LIBOR Loan. (a) Prime Rate Loans. Each Prime Rate Loan by the Lender shall bear interest (computed on the basis of a year of 360 days and actual days elapsed) on the unpaid principal amount thereof from the date such Loan is made until maturity (whether by acceleration or otherwise) at a rate per annum equal to the Prime Rate from time to time in effect. Interest on all Prime Rate Loans is payable on the last day of each calendar month and at maturity (whether by acceleration or otherwise), commencing July 31, 2001. (b) LIBOR Loans. Each LIBOR Loan made by the Lender shall bear interest (computed on the basis of a year of 360 days and actual days elapsed) on the unpaid principal amount thereof from the date such Loan is made until maturity (whether by acceleration or otherwise) at a rate per annum equal to the sum of the Applicable LIBOR Margin plus the Adjusted LIBOR, payable on the last day of the applicable Interest Period and at maturity (whether by acceleration or otherwise), and, if the applicable Interest Period is longer than three months, on each day occurring every three months after the date such Loan is made. "Adjusted LIBOR" means, for any Borrowing of LIBOR Loans, a rate per annum determined in accordance with the following formula: LIBOR ----------------------------- Adjusted LIBOR = 100% - Eurodollar Reserve Percentage "LIBOR" means, for an Interest Period for a Borrowing of LIBOR Loans, the rate of interest per annum (rounded upwards, if necessary, to nearest 1/100 of 1%) at which deposits in U.S. dollars in immediately available funds are offered by the Lender or the Reference Bank at approximately 11:00 a.m. (London, England time) two (2) Business Days before the beginning of such Interest Period by prime banks in the interbank eurodollar market for a period equal to such Interest Period and in an amount equal or comparable to the principal amount of the LIBOR Loan scheduled to be made by the Lender as part of such borrowing. "Eurodollar Reserve Percentage" means, for any Borrowing of LIBOR Loans, the daily average for the applicable Interest Period of the maximum rate at which reserves (including, without limitation, any supplemental, marginal and emergency reserves) are imposed during such Interest Period by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on "eurocurrency liabilities", as defined in such Board's Regulation D, (or in respect of any other category of liabilities that includes deposits by reference to which the interest rate on LIBOR Loans is determined or any category of extension of credit or other assets that include loans by non-United States offices of Lender to United States residents) subject to any amendments of such reserve requirement by such Board or its successor, taking into account any transitional 11 adjustments thereto. For purposes of this definition, the LIBOR Loans shall be deemed to be "eurocurrency liabilities" as defined in Regulation D. (c) Margin, Rate and Fee Determinations. The Lender shall determine each interest rate applicable to the Loans hereunder and its determination thereof shall be conclusive and binding except in the case of manifest error. Section 3.B. Minimum and Maximum Borrowing Amounts. Each Borrowing shall be in an amount not less than $1,000,000 or any larger amount that is an integral multiple of $1,000,000. Section 3.C. Borrowing Procedures. (a) Notice to the Lender. The Borrower shall give telephonic or telecopy notice to the Lender in the form attached hereto as Exhibit B (the "Borrowing Notice") (which notice shall be irrevocable once given and, if by telephone, shall be promptly confirmed in writing) by no later than 12:00 noon (Chicago time) (i) on the date at least three (3) Business Days prior to the date of each requested Borrowing of LIBOR Loans and (ii) on the date of any requested Borrowing of Prime Rate Loans. Each such notice shall specify the date of the requested Borrowing (which shall be a Business Day), the amount of the requested Borrowing, the type of Loans to comprise such Borrowing (if no election as to type of Borrowing is specified in any such notice, then the requested Borrowing shall be of Prime Rate Loans) and, if such Borrowing is to be comprised of LIBOR Loans, the Interest Period applicable thereto. The Borrower agrees that the Lender may rely on any such telephonic or telecopy notice given by any person the Lender in good faith believes is an Authorized Officer without the necessity of independent investigation and in the event any notice by such means conflicts with the written confirmation, such notice shall govern if the Lender has acted in reliance thereon. (b) Borrower's Failure to Notify. In the event the Borrower fails to give notice pursuant to Section 3.C.(a) above of the reborrowing of the principal amount of any maturing Borrowing and has not notified the Lender by 12:00 noon (Chicago time) on the day such Borrowing matures that it intends to repay such Borrowing with funds not borrowed hereunder, the Borrower shall be deemed to have requested a Borrowing of Prime Rate Loans on such day in the amount of the maturing Borrowing then due, in each case subject to Section 6.C hereof, which new Borrowing shall be applied to pay, as the case may be, the maturing Borrowing then due. (c) Disbursement of Loans. Not later than 2:00 p.m. (Chicago time) on the date of any Borrowing (a "Funding Date") of LIBOR Loans or Prime Rate Loans, Lender shall make available its Loan in funds immediately available in Chicago, Illinois, except to the extent such Borrowing is either a reborrowing, in whole or in part, of the principal amount of a maturing Borrowing of Loans (a "Refunding Borrowing") in which case Lender shall record the Loan made by it as a part of such Refunding Borrowing on its books or records or on a schedule to the appropriate Note, as provided in Section 3.H.(b) hereof, and shall effect the repayment, in whole or in part, as appropriate, of its maturing Loan through the proceeds of such new Loan. Subject to Section 6 hereof, the Lender shall make the proceeds of each Borrowing available to the Borrower at the Lender's principal office in Chicago, Illinois. 12 Section 3.D. Interest Periods. As provided in Section 3.C hereof, at the time of each request for the Borrowing of LIBOR Loans hereunder the Borrower shall select an Interest Period applicable to such Loans from among the available options. The term "Interest Period" means the period commencing on the date a Borrowing of LIBOR Loans is made and ending on the date, as the Borrower may select, 1, 2, 3 or 6 months thereafter; provided, however, that: (a) the Borrower may not select an Interest Period that extends beyond the Termination Date; (b) whenever the last day of any Interest Period would otherwise be a day that is not a Business Day, the last day of such Interest Period shall be extended to the next succeeding Business Day, provided that, if such extension would cause the last day of such Interest Period to occur in the following calendar month, the last day of such Interest Period shall be the immediately preceding Business Day; and (c) for purposes of determining the Interest Period for a Borrowing of LIBOR Loans, a month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month; provided, however, that if there is no numerically corresponding day in the month in which such an Interest Period is to end or if such an Interest Period begins on the last Business Day of a calendar month, then such Interest Period shall end on the last Business Day of the calendar month in which such Interest Period is to end. Section 3.E. Maturity of LIBOR Loans. Each LIBOR Loan shall mature and become due and payable by the Borrower on the last day of the Interest Period applicable thereto. Section 3.F. Prepayments. (a) Generally. The Borrower shall have the privilege of prepaying without premium or penalty and in whole or in part (but, if in part, then: (i) in an amount not less than $1,000,000 or any larger amount that is an integral multiple of $1,000,000 in the case of Prime Rate Loans, and in an amount not less than $1,000,000 or any larger amount that is an integral multiple of $1,000,000 in the case of LIBOR Loans and (ii) in an amount such that the minimum amount required for a Borrowing pursuant to Section 3.B hereof remains outstanding) on any Business Day upon prior notice to the Lender which must be received by the Lender by no later than 12:00 noon (Chicago time) on the date of such prepayment in the case of Prime Rate Loans and by no later than 12:00 noon (Chicago time) on the date three Business Days in advance of the date of such prepayment in the case of LIBOR Loans, such prepayment to be made by the payment of the principal amount to be prepaid and accrued interest thereon and, in the case of LIBOR Loans, any compensation required by Section 3.I hereof. Partial prepayments of any outstanding type of Loan shall be applied to the various Borrowings and various installments of principal thereof in the inverse order of their maturity. (b) Reborrowings. Any amount paid or prepaid on the Revolving Loans before the Expiration Date may, subject to the terms and conditions of this Agreement, be borrowed, repaid and borrowed again. (c) Mandatory Repayments. 13 (i) Subject to the terms and conditions hereof, the Outstanding Principal Obligations under the Credit Facility shall be repaid forthwith, upon demand by or on behalf of the Lender, to the extent that the Outstanding Principal Obligations under the Credit Facility exceed the then current Commitment in respect of the Credit Facility, whether as a result of oversight or otherwise, together with all accrued interest to the date of such repayment on the principal amount so repaid and any other amounts payable to the Lender by the Borrower hereunder in respect thereof including, without limitation, pursuant to Section 11.K. (ii) The Loans shall be immediately repaid in and by an amount equal to the percentage thereof which is equal to a fraction, the numerator of which is the amount of any permanent repayment of all or any portion of the credit facilities of the Borrower with Bank of Montreal and/or Bank of America dated June 21, 2001 and July 19, 2001, respectively, and the denominator of which is the then current aggregate amount of Loans outstanding hereunder and credit extended under said credit facilities with Bank of Montreal and Bank of America at the time of said repayment. Section 3.G. Default Rate. If any Event of Default has occurred and is continuing, then each Loan or other monetary Obligation shall bear interest, after as well as before judgment (computed on the basis of a year of 360 days and actual days elapsed) from the date of such Event of Default until such Loan or other monetary Obligation is paid in full, payable on demand, at a rate per annum (the "Default Rate") equal to: (a) with respect to any Prime Rate Loan, the sum of two percent (2%) plus the Prime Rate from time to time in effect; and (b) with respect to any LIBOR Loan, the sum of two percent (2%) plus the rate of interest in effect thereon at the time of such default until the end of the Interest Period applicable thereto and, thereafter, at a rate per annum equal to the sum of two percent (2%) plus the Prime Rate from time to time in effect; and (c) with respect to other monetary Obligations for which a Default Rate is not otherwise specified, the sum of two percent (2%) plus the Prime Rate from time to time in effect. Section 3.H. Note. (a) The Loan made to the Borrower by Lender shall be evidenced by a promissory note of the Borrower, dated the date hereof, payable to the order of Lender in the principal amount of the Commitment, and otherwise be in the form of Exhibit A hereto. (b) Lender shall record on its books or records or on a schedule to the appropriate Note the amount of each Loan made by it to the Borrower, the Interest Period thereof (if applicable), all payments of principal and interest and the principal balance from time to time outstanding thereon, the interest rate applicable thereto, and, in respect of any Loan, the type of such Loan; provided that prior to the transfer of the Note all such amounts shall be recorded on a schedule to the Note. The record thereof, whether shown on such books or records of Lender or on a schedule to the Note, shall be prima facie evidence as to all such amounts; provided, however, that the failure of Lender to 14 record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay all Loans made hereunder together with accrued interest thereon. At the request of Lender and upon Lender tendering to the Borrower the Note to be replaced, the Borrower shall furnish a new Note to Lender to replace any outstanding Note and at such time the first notation appearing on a schedule on the reverse side of, or attached to, the Note shall set forth the aggregate unpaid principal amount of all Loans, if any, then outstanding thereon. Section 3.I. Funding Indemnity. In the event Lender shall incur any loss, cost or expense (including, without limitation, any loss of profit, and any loss, cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Lender to fund or maintain any LIBOR Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to Lender) as a result of: (a) any payment (including prepayment) of a LIBOR Loan on a date other than the last day of its Interest Period for any reason, whether before or after default, and whether or not such payment is required by any provisions of this Agreement, or (b) any failure (because of a failure to meet the conditions of Section 6 or otherwise) by the Borrower to borrow a LIBOR Loan on the date specified in a notice given pursuant to Section 3.C hereof, then, upon the demand of Lender, the Borrower shall pay to Lender such amount as will reimburse Lender for such loss, cost or expense. If Lender makes such a claim for compensation, it shall provide to the Borrower a certificate executed by an officer of Lender setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation of such loss, cost or expense) and the amounts shown on such certificate shall be deemed rebuttably presumptive evidence of the correctness thereof. Section 3.J. Change in Circumstances, Etc. (a) Change of Law. Notwithstanding any other provisions of this Agreement or the Note, if at any time after the date hereof any change in applicable Law or in the interpretation thereof makes it unlawful for Lender to make or continue to maintain LIBOR Loans or to give effect to its obligations as contemplated hereby, Lender shall promptly give notice thereof to the Borrower, and Lender's obligations to make or maintain LIBOR Loans under this Agreement shall terminate until it is no longer unlawful for Lender to make or maintain LIBOR Loans. The Borrower shall prepay on demand the outstanding principal amount of any such affected LIBOR Loans, together with all interest accrued thereon and all other amounts then due and payable to Lender under this Agreement; provided, however, subject to all of the terms and conditions of this Agreement, the Borrower may then elect to borrow the principal amount of the affected LIBOR Loan from Lender by means of a Prime Rate Loan from Lender. (b) Unavailability of Deposits or Inability to Ascertain, or Inadequacy of, LIBOR. If on or prior to the first day of any Interest Period for any Borrowing of LIBOR Loans: (i) the Lender advises the Borrower that deposits in United States Dollars (in the applicable amounts) are not being offered to it or the Reference Bank in the interbank eurodollar market, for such Interest Period, or 15 (ii) Lender advises the Borrower that LIBOR as determined by the Lender will not adequately and fairly reflect the cost to Lender of funding LIBOR Loans for such Interest Period, then, until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of the Lender to make LIBOR Loans shall be suspended. (c) Increased Cost and Reduced Return. (1) If on or after the date hereof, the adoption of any applicable Law, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject Lender to any tax, duty or other charge with respect to the Loans, the Note or its obligation to make Loans, or shall change the basis of taxation of payments to Lender of the principal of or interest on the Loans or any other amounts due under this Agreement in respect of its Loans or its obligation to make Loans (except for changes in the rate of tax on the overall net income of Lender imposed by the jurisdiction in which Lender's principal executive office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposition or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any LIBOR Loans any such requirement included in an applicable Eurodollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, Lender or shall impose on Lender or on the interbank market any other condition affecting the Loans, the Note or Lender's obligation to make Loans; and the result of any of the foregoing is to increase the cost to Lender of making or maintaining any Loan, or to reduce the amount of any sum received or receivable by Lender under this Agreement or under the Note with respect thereto, by an amount deemed by Lender to be material, then, within fifteen (15) days after demand by Lender, the Borrower shall be obligated to pay Lender such additional amount or amounts as will compensate Lender for such increased cost or reduction (computed commencing on the effective date of any event mentioned herein). Lender agrees to use its best efforts to give the Borrower notice of the occurrence of any event mentioned herein. (2) If Lender shall determine that the adoption after the date hereof of any applicable Law regarding capital adequacy, or any change in any existing Law, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender (or any of its branches or any corporation controlling Lender (or any of its branches or any corporation controlling Lender) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the 16 effect of reducing the rate of return on Lender's or such corporation's capital, as the case may be, as a consequence of Lender's obligations hereunder or for the credit which is the subject matter hereof to a level below that which Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration Lender's or such corporation's policies with respect to liquidity and capital adequacy) by an amount deemed by Lender to be material, then from time to time, within fifteen (15) days after demand by Lender, the Borrower shall pay to the Lender such additional amount or amounts reasonably determined by Lender as will compensate Lender for the reduction. (d) Discretion of Lender as to Manner of Funding. Notwithstanding any other provision of this Agreement, Lender shall be entitled to fund and maintain its funding of all or any part of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if Lender had actually funded and maintained each LIBOR Loan through the purchase of deposits in the relevant market having a maturity corresponding to such Loan's Interest Period and bearing an interest rate equal to LIBOR, for such Interest Period. (e) Implementation of European Economic and Monetary Union ("EMU"). This Agreement (including, without limitation, the definition of LIBOR and related definitions) will be amended to the extent determined by the Lender (acting reasonably and in consultation with the Borrower) to be necessary to reflect implementation of the EMU and change in currency and to put the Lender and the Borrower in the same position, so far as possible, that they would have been in if such implementation and change in currency had not occurred. SECTION 4. FEES. Section 4.A. Revolving Commitment Fees. The Borrower shall pay to the Lender such fees as set forth in the letter agreement dated the date hereof between Borrower and Lender with respect to the Revolving Commitment ("Commitment Fees"). Section 4.B. Non-Utilization Fee. The Borrower agrees to pay to the Lender a non-utilization fee equal to one-fifth of one percent (0.2%) of the total of (a) the Revolving Loan Commitment, less (b) the daily average of the aggregate principal amount of all Revolving Loans outstanding which non-utilization fee shall be (A) calculated on the basis of a year consisting of 360 days, (B) paid for the actual number of days elapsed, and (C) payable quarterly in arrears on the last day of each Fiscal Quarter and on the Revolving Loan Maturity Date. 17 SECTION 5. PLACE AND APPLICATION OF PAYMENTS. Section 5.A. Place and Application of Payments. All payments of principal of and interest on the Loans and all payments of fees and all other amounts payable under this Agreement shall be made to the Lender no later than 12:00 Noon (Chicago time) at the principal office of the Lender in Chicago, Illinois (or such other location in the State of Illinois as the Lender may designate to the Borrower). Any payments received after such time shall be deemed to have been received by the Lender on the next Business Day. All such payments shall be made in lawful money of the United States of America, in immediately available funds at the place of payment, without setoff or counterclaim. Alternatively, at its sole discretion, the Lender may charge against or debit any deposit account or other Monies of the Borrower on deposit with or in possession of the Lender, all or any part of any amount due hereunder or under the Note. The Lender's right from time to time after the occurrence or happening of an Event of Default hereunder (which has not been cured or waived in a writing signed by the Lender) to set off indebtedness owing by Borrower to the Lender against the Borrower's Monies, deposits, credits, accounts or other property now or at any time in the possession or control of the Lender, except as provided herein, is hereby acknowledged and agreed to by the Borrower. SECTION 6. CONDITIONS PRECEDENT AND SUBSEQUENT. Notwithstanding any other provisions of this Agreement, the Lender, at its sole option and in its sole discretion, need not make any Loans to the Borrower for the account of the Borrower, unless the conditions precedent described below are fulfilled: Section 6.A. Delivery of Documents as Conditions Precedent. The delivery of each of the following documents, each of which shall be satisfactory to the Lender in substance and form, by or on behalf of the Borrower to the Lender shall constitute separate and distinct conditions precedent to the effectiveness of this Agreement and the making of any Loans: 6.A.1. Agreement. A copy of this Agreement duly executed by Borrower. 6.A.2. Note. The Revolving Note dated as of the Closing Date duly executed by the Borrower and payable to the Lender. 6.A.3. Evidence of Insurance. Evidence that the Borrower has insurance as required by Section 8.A.11, including property, casualty and liability insurance satisfactory to the Lender, together with: (i) loss payable/mortgagee endorsements naming the Lender as loss payee and mortgagee with respect to property and casualty insurance; and (ii) certificate(s) of insurance(s) and binder(s) naming the Lender as additional insured with respect to liability insurance. 6.A.4. Articles of Incorporation. Articles of Incorporation or similar document, and each and every amendment thereto, of the Borrower and each Guarantor, certified of recent date by the Secretary of State or appropriate government official in the State or Canadian Province in which the Borrower is incorporated. 6.A.5. Good Standing. Certificate of the appropriate Secretary of State or government official of recent date and certificate of non-restriction, as to the good standing or status of the 18 Borrower and each Guarantor in the State of its incorporation and where it is qualified to do business. 6.A.6. Secretary's Certificate. Certificate of Secretary of the Borrower and each Guarantor as to (i) resolutions authorizing entry into, execution, delivery and performance of its obligations under this Agreement and related Loan Documents to which it is a party, (ii) the incumbency and signatures of the officers authorized to execute on its behalf the Loan Documents to which it is a party, (iii) its Articles of Incorporation, and (iv) its bylaws. 6.A.7. Solvency Certificate. Certificate of Solvency duly executed by the Borrower and each Guarantor, with pro forma balance sheet and cash flow projections provided for thereunder. 6.A.8. Opinion. The satisfactory opinion letters of Torys, counsel for the Borrower and the Guarantors, and W. Kirk James, general counsel of the Borrower dated as of the Closing Date and addressed to the Lender as to the matters referred to in Sections 7.A., 7.B., 7.C., 7.D., 7.E., 7.F. (as far as litigation is concerned), 7.J., of this Agreement, and Guaranties of the Guarantors. 6.A.9. Environmental Data. All environmental data, information and reports concerning any real estate or any other property which the Lender may request. 6.A.10. Officer's Certificate. A certificate of the President of Borrower certifying: (i) that the conditions herein insofar as they relate to the Borrower have been satisfied, (ii) as to the truth of the representations and warranties herein contained, and (iii) that no Materially Adverse Effect has occurred since March 31, 2001. 6.A.11. Guarantees. Each of the four (4) Guarantees dated as of the Closing Date duly executed by the respective Guarantor in favor of the Lender. 6.A.12. Financial Statements of Guarantors. Internally prepared financial statements as of December 31, 2000 for each of the Guarantors, including a balance sheet and income statements, which are the basis for the consolidated statements previously delivered. 6.A.13. Other Documents. In form and substance satisfactory to the Lender, any other documents which the Lender may reasonably request from or to be delivered by the Borrower from time to time to effect the intent of this Agreement and the Loan Documents. 6.A.14. Subordinated Debentures. Borrower has provided Lender with satisfactory evidence that the Subordinated Debentures in the amounts of $17,500,000 from Odyssey Reinsurance Corporation, a Delaware Corporation, $17,500,000 from United States Fire Insurance Company, a New York corporation and Cdn $42,500,000 from Royal Trust Corporation of Canada as Trustee for Zurich Insurance Company, a corporation incorporated under the laws of Switzerland have been executed and funded. Section 6.B. Fees. All fees referred to in Section 4 hereof which are then due shall have been paid to the Lender on the Closing Date. 19 Section 6.C. Conditions Precedent. The following conditions are conditions precedent to the obligation of the Lender to make or disburse any Loan hereunder at any time requested by the Borrower, and each request by the Borrower for a Loan hereunder shall be deemed to constitute the Borrower's representation and warranty to the Lender that, as of the dates of such request and on which such Loan is disbursed, these conditions have been satisfied: 6.C.1. Materially Adverse Effect. No Materially Adverse Effect shall have occurred, as determined by the Lender in its sole and complete discretion, since the date hereof. 6.C.2. Representations and Warranties. The representations and warranties set forth in Section 7 hereof and in each Loan Document to which the Borrower is a party shall be true and correct in all material respects. 6.C.3. Covenants. The affirmative and negative covenants set forth herein (including, without limitation, those covenants set forth in Section 8 hereof) and in any other Loan Documents to which the Borrower is a party, are not being breached and are inviolate in all material respects. 6.C.4. Event of Default. No Default or Event of Default shall have occurred and then be continuing or would occur as a result of making such Loan. 6.C.5. Revolving Commitments. After giving effect to the Loan (if it is a Revolving Loan), the aggregate principal amount of all such Loans outstanding hereunder shall not exceed the applicable Revolving Commitment. 6.C.6. No Violations. Such Loan shall not violate any order, judgment or decree of any court or other authority or any provision of Law applicable to Lender (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System) as then in effect. 6.C.7. Note; Notice of Borrowing. The Lender shall have received the Note of the Borrower and the notice required by Section 3.C hereof. 6.C.8. Satisfactory Completion of Due Diligence. In the case of the initial draw only, the Lender shall have satisfactorily completed its due diligence examination of the Borrower and any related parties, their respective operations and properties, including historical and pro forma financial information, and projections and business plans. SECTION 7. REPRESENTATIONS AND WARRANTIES. As further inducement to the Lender to enter into this Agreement and make the Loans hereunder, the Borrower represents and warrants, as of the date hereof, and as of the date of each disbursement of each of the Loans, the following, which shall survive the execution and delivery of this Agreement, the Note and the Loan Documents and until all of the Obligations have been paid, satisfied or discharged in full, regardless of any investigation by the Lender of the Borrower's financial condition or assets: Section 7.A. Corporate Existence and Related Matters. Each of the Borrower and each Guarantor is a corporation duly organized, validly existing and in good standing under the Laws of 20 the State, province, or country of its incorporation and is duly qualified to do and transact business and is in good standing as a foreign corporation in each and every state, province, or country in which the conduct of its business or the location of its properties requires such qualification and the failure to so qualify would have a Materially Adverse Effect. As of the date hereof, the only Subsidiaries or Affiliates of Borrower are designated in Schedule 7.A hereto. Schedule 7.A hereto correctly sets forth, as to each such Subsidiary or Affiliate, whether or not it is a Consolidated Subsidiary, the jurisdiction of its incorporation, the percentage of issued and outstanding shares of each class of its capital stock owned by Borrower and the Subsidiaries and, if such percentage is not 100%, a description of each class of its authorized capital stock and the number of shares of each class issued and outstanding. All of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and outstanding and fully paid and nonassessable and all such shares indicated in Schedule 7.A as owned by Borrower or a Subsidiary are owned, beneficially and of record, by Borrower or such Subsidiary, free of any Lien. Schedule 7.A contains all assumed or business names utilized by the Borrower or Affiliate, the jurisdiction of incorporation of the Borrower, and all jurisdictions where the Borrower is qualified to do business. The information in Schedule 7.A hereto is true and complete. Section 7.B. Corporate Authority. Each of the Borrower and Guarantors has all corporate power and authority to own its property and assets and to carry on and engage in its business as it is presently being conducted, and has all licenses, permits, franchises, consents, approvals and authorizations required in connection with the foregoing, including without limitation all of the foregoing required under applicable Laws. The execution, issuance, delivery, and performance of all documents in connection with this Agreement, the Note and the Loan and other Loan Documents to which either the Borrower or each Guarantor is a party or signatory and the incurrence and performance of the Obligations hereunder and thereunder (i) are within the corporate power and authority of the Borrower, (ii) have been duly and properly authorized by all necessary corporate, director, shareholder and any other action of the Borrower, and (iii) have not resulted in and will not result in: (a) the creation or imposition of any Lien of any nature whatsoever (except in favor of the Lender) upon the Borrower's property or assets; or (b) the violation or contravention of, the occurrence of a default, event of default or event, which with the passage of time or giving of notice or both, would constitute, mature into or become a default or event of default under, (1) any term or provision of the Borrower's Articles of Incorporation or bylaws, (2) any licenses, permits, franchises, consents, approvals or authorizations referred to above, (3) any certificates of authority to do or transact business, (4) any applicable order of any court or government or administrative agency, or (5) any material contract, agreement (including any loan or credit agreement), mortgage, indenture, instrument, judgment or Laws to which the Borrower is a party or signatory or by which it or its properties or assets are, or may be, bound. Section 7.C. Consents, Approvals, etc. No consent, approval or authorization or order of, or filing, registration or qualification with, any Person (governmental, regulatory, or otherwise) is required to be obtained or effected by the Borrower in connection with the execution, issuance, delivery and performance of all documents in connection with this Agreement, the Note and the Loan and other Loan Documents to which the Borrower is a party or signatory or the incurrence or 21 performance of the Obligations or, if so required, has been duly obtained or effected before the date hereof and are indicated on Schedule 7.C hereto. Section 7.D. Binding Effect and Enforceability. Upon delivery hereof and thereof, this Agreement, the Note and the Loan and other Loan Documents to which the Borrower or any Guarantor is a party or signatory will be its respective legal, valid and binding obligations enforceable in accordance with their respective terms and provisions (except as limited by bankruptcy, insolvency or other laws or equitable principles of general application relating to the enforcement of creditors' rights generally) and, on the date of said delivery, neither the Borrower nor any Guarantor will be in violation or contravention of, and no Default or Event of Default will exist under, any of the foregoing. Section 7.E. Default of Debt, Licenses, Permits, Orders and Other Agreements. The Borrower is not in breach or default of (in any material respect), and no event of default or event, which with the passage of time or giving of notice or both, would constitute, mature into or become a default or event of default, has occurred and is continuing with respect to (i) any Debt of any kind or nature, (ii) any license, permit, franchise, approval, consent or authorization referred to in Section 7.B above, (iii) any order of any court or governmental or administrative agency, or (iv) any agreement to which it is a party, which breach or default might have a Materially Adverse Effect. Section 7.F. Financial Condition and Litigation. The Financial Statements of the Borrower delivered to the Lender (including, without limitation, the audited financial statements of Borrower as at/of December 31, 2000, and the unaudited financial statements of Borrower for the period ended March 31, 2001, have been prepared in accordance with GAAP, are true and correct in all material respects and fairly present the financial condition of the Borrower as at the dates thereof and results of operations for the periods covered thereby. Since the ending date of the period covered by the most recent Financial Statements dated March 31, 2001, delivered to the Lender and received thereby, no Materially Adverse Effect has occurred and no dividends on or redemptions of the Borrower's common or preferred stock have been made. Except as disclosed to the Lender on said most recent Financial Statements: (i) the Borrower has no Debt, except as permitted hereunder, or liabilities, contingent or otherwise; and (ii) except as disclosed on Schedule 7.F, no proceedings, suits, orders, claims, investigations, or other actions which individually or in the aggregate exceeding $100,000 are pending before any court or governmental authority or, to the best knowledge of Borrower, threatened against the Borrower that are not fully covered by insurance. With respect to any representation and warranty which is deemed to be made after the date hereof by the Borrower, the Financial Statements which as of such date shall most recently have been furnished by the Borrower to the Lender for purposes of or in connection with this Agreement shall have been prepared in accordance with GAAP, shall be true and correct in all material respects, and shall fairly present the financial condition of the Borrower as of the dates thereof and results of operations for the periods covered thereby. Section 7.G. Title and Liens. The Borrower has good and marketable title to all of its property and assets, including all such property and assets listed on the most recent Financial Statements and, except as set forth on Schedule 7.G, the assets of the Borrower are not subject to any liens, claims, security interests, mortgages, pledges, charges or other encumbrance of any Person, except the holders of the Permitted Liens. 22 Section 7.H. Employee Plans. All of the Borrower's Employee Plans are listed on Schedule 7.H hereto and are in material compliance with all provisions of ERISA and meet the minimum funding standards of Section 302 of ERISA where applicable. No withdrawal liability has been incurred under any such Employee Plans. No Prohibited Transaction or Reportable Event, as defined in ERISA, has occurred with respect to any such Employee Plans. No proceedings have been instituted to terminate or appoint a trustee to administer any such Employee Plans. Section 7.I. Taxes. Except as listed on Schedule 7.I. hereto, the Borrower has filed all federal, state and local tax returns and reports required by Law, has paid all taxes, assessments, penalties, interest and any other governmental charges which are or were due and payable, has made adequate provision for the payment of all taxes, assessments, penalties, interest and other governmental charges which are accruing but are not yet due and payable, and has no knowledge and are not aware of any deficiency or additional assessment which may have or has arisen in connection of the foregoing. Section 7.J. Compliance with Laws. To the best knowledge of the Borrower, the Borrower has complied in all material respects with all Laws applicable to it or to the conduct of its business, noncompliance with which could have a Materially Adverse Effect, and the Borrower has not received any notice of any kind from any Person claiming or alleging, directly or indirectly, a violation of any Law, noncompliance with which could have a Materially Adverse Effect. Section 7.K. Corporate Structure and Affiliates. Borrower has no Subsidiaries and no Affiliates, except as identified on Schedule 7.A hereto, which shall include the directors and shareholders of the Borrower. Borrower's authorized and outstanding capital stock is as set forth in Schedule 7.A hereto. Section 7.L. Corporate Names. The Borrower has no assumed corporate names and is not doing business under any corporate name, other than as identified on Schedule 7.A hereto. Section 7.M. Solvency. The Borrower (i) is solvent and will not be rendered insolvent by the incurrence of the Obligations, by the execution of this Agreement, the Note, and any other Loan or other Loan Documents to which it is a party or signatory, or by any transactions contemplated hereunder or thereunder, (ii) is able to pay its debts as they come due and does not intend to incur, or believe that it will incur, debts beyond its ability to pay such debts as they mature or come due, (iii) has capital sufficient to carry on its business and any business in which it intends or is about to engage, and (iv) owns property and assets having a value in excess of its liabilities and debts. Section 7.N. Margin Regulations. No portion of the proceeds of the Loans shall be used by the Borrower, or any Affiliates of the Borrower, either directly or indirectly, for the purpose of purchasing or carrying any margin stock, within the meaning of Regulation U as adopted by the Board of Governors of the Federal Reserve System. Section 7.O. Indebtedness to and Transactions with Affiliates. Except as set forth on Schedule 7.O hereto, there are no outstanding loans from any Affiliate to the Borrower, or from the Borrower to any Affiliate. Except as set forth on Schedule 7.O hereto, the Borrower is not a party to a material transaction with any of its Affiliates, other than transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than such company could 23 obtain or could become entitled to in an arm's length transaction with a Person that was not its Affiliate. Section 7.P. Acts of God. Neither the business nor properties of the Borrower are presently affected by any fire, explosion, accident, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or of political unrest, or potential expropriation, or other casualty (whether or not covered by insurance) which could have a Materially Adverse Effect. Section 7.Q. Labor Controversies; Union Contracts, Etc. There are no labor controversies pending or, to the knowledge of the Borrower, threatened against the Borrower, which if adversely determined could have a Materially Adverse Effect. There are no pending or, to the Borrower's knowledge, threatened or anticipated (i) employment discrimination charges or complaints against or involving the Borrower before any governmental Person, (ii) unfair labor practice charges or complaints, disputes or grievances or arbitration proceedings or controversies affecting the Borrower, (iii) union representation petitions respecting the employees of the Borrower, or (v) strikes, slowdowns, work stoppages, or lockouts or threats thereof affecting the Borrower. There are no collective bargaining agreements covering any of the employees of the Borrower. The Borrower has not breached or otherwise failed to comply with any provision of any collective bargaining agreement or other labor union contract applicable to any of its employees. Section 7.R. Surety Obligations; Financial Assurances. The Borrower is not obligated as surety or indemnitor under any surety or similar bond or other contract, or issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. The Borrower has not posted or placed any Financial Assurance except as indicated in Schedule 7.R hereto. Section 7.S. Business Relations. There exists no actual or threatened termination, cancellation, or adverse limitation of, or any adverse modification or change in, the contractual and/or business relationship between the Borrower and any owner/lessor of any facility utilized in the Borrower's business, municipality, customer and/or supplier, and there exists no present condition or state of facts or circumstances in such relations, which in each case would have a Materially Adverse Effect. Section 7.T. Accuracy of Information. All factual information heretofore, or contemporaneously furnished by or on behalf of the Borrower in writing to the Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby, and all other such factual information hereafter furnished by or on behalf of the Borrower to the Lender will be, true and accurate in every material respect on the date as of which such information is dated, or certified, and to the best knowledge of Borrower such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. To the best knowledge of the Borrower there is no fact which has a Materially Adverse Effect or in the future may (so far as the Borrower may now foresee), have a Materially Adverse Effect, which has not been set forth herein or in written materials, certificates or statements furnished to the Lender prior to the date hereof. Section 7.U. Hazardous Materials. Borrower has not caused or permitted any Hazardous Material to be disposed of or incorporated into, either on or under real property legally or 24 beneficially owned or operated by Borrower, and no such real property has ever been used as a dump site or long-term storage site for any Hazardous Materials which would be reasonably likely to (a) give rise to present or future legal liability, and (b) have a material adverse effect on the business or financial condition of Borrower. The failure, if any, of Borrower in connection with the operation of their business, to obtain or be in compliance with any permit, certificate, license, approval and other authorization, or to file any notification or report relating to chemical substances, air emissions, effluent discharges and Hazardous Material storage, treatment, transport and disposal has not had, nor will it have, a Materially Adverse Effect, and no facts or circumstances exist which could give rise to liabilities with respect to Hazardous Materials on the business or financial condition of Borrower which would be reasonably likely to have a Materially Adverse Effect. "Hazardous Materials" means and includes (a) any friable asbestos (or asbestos which becomes friable), PCBs or dioxins or insulation or other material composed of or containing friable asbestos (or asbestos which becomes friable), PCBs or dioxins and (b) any petroleum or any fraction thereof and any hazardous or toxic waster, substance or material defined as such in (or for purposes of) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, any applicable so-called "superfund" or "superlien" law, or any other applicable law regulating or pertaining to any such waste, substance or material, as now or at any time hereafter in effect. Section 7.V. Ranking. The Obligations will rank at least pari passu with all Debt of the Borrower including but not limited to any credit facilities of the Bank of Montreal and Bank of America, except Debt secured by Permitted Liens, provided that such Permitted Liens shall not at any time secure Debt of the Borrower and all of its Subsidiaries exceeding at any time $20,000,000, in the aggregate. Section 7.W. Business Loan. The Loans, including interest rate, fees and charges as contemplated hereby, (i) are business loans within the purview of 815 ILCS 205/4(1)(c), as amended from time to time, (ii) are an exempted transaction under the Truth in Lending Act, 12 U.S.C. 1601 et seq., as amended from time to time, and (iii) do not, and when disbursed shall not, violate the provisions of the Illinois usury laws, any consumer credit laws or the usury laws of any state which may have jurisdiction over the transaction or the Borrower. Section 7.X. Complete Information. This Agreement and all financial statements, schedules, certificates, confirmations, agreements, contracts, and other materials submitted to the Lender in connection with or in furtherance of this Agreement by or on behalf of the Borrower fully and fairly state the matters with which they purport to deal, and neither misstate any material fact nor, separately or in the aggregate, fail to state any material fact necessary to make the statements made not misleading. Section 7.Y. Intellectual Property. The Borrower owns or has sufficient and legally enforceable rights to use all material licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, and trade names necessary to continue to conduct its businesses as heretofore conducted by it, now conducted by it, and now proposed to be conducted by it. The Borrower is conducting its business without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret, or other intellectual property right of others, other than any such infringements or claims which, if successfully asserted against or determined adversely to the Borrower, could not, individually or collectively reasonably be expected to be a Material Adverse Event. 25 SECTION 8. COVENANTS. The Borrower hereby covenants and agrees with the Lender that, until the Obligations have been satisfied and discharged in full, the Borrower will comply and/or cause compliance with the following covenants, unless the Lender shall give its prior written consent to the contrary: Section 8.A. Affirmative Covenants. 8.A.1. Financial Covenants. The Borrower shall maintain compliance with the following financial covenants measured on a consolidated basis during the periods indicated below: (a) Net Worth. The Borrower's Net Worth shall not at any time be less than $150,000,000, excluding the Subordinated Debentures listed in Section 6.A.14 herein. (b) Consolidated Interest Coverage Ratio. As of the end of each Measurement Period the Borrower and Affiliates shall maintain a ratio of EBITDA to Interest Expense of not less than 3.0 to 1.0. (c) Leverage Ratios. (i) The ratio of Funded Senior Debt plus Contingent Liabilities to total Pro Forma EBITDA shall not exceed the following with respect to the Measurement Periods: Measurement Period Ratio ------------------ ----- Ending September 30, 2001 3.00 to 1.00 Thereafter 2.75 to 1.00 (ii) The ratio of Funded Total Debt plus Contingent Liabilities to total Pro Forma EBITDA shall not exceed the following with respect to the Measurement Periods: Measurement Period Ratio ------------------ ----- Ending September 30, 2001 4.25 to 1.00 Thereafter 4.00 to 1.00 8.A.2. Financial Information and Reporting. The Borrower shall keep and cause to be kept proper books and records in which full and true entries will be made, in accordance with GAAP, of all dealings or transactions relating to its business and affairs, and the Borrower shall cause to be furnished to the Lender: (i) As soon as practicable and, in any event, within sixty (60) days after the end of each quarter of each Fiscal Year, all of the Borrower's consolidated and consolidating statements of income and retained earnings and of cash flows through the quarter then ended and a balance sheet of the Borrower as of the end of such quarter, all in reasonable detail and certified by Borrower's president or chief financial officer as fairly presenting the financial 26 condition and operations of the Borrower as of and for the period then ending and being accurate in all material respects and having been prepared in accordance with GAAP; (ii) As soon as practicable and, in any event, within one hundred twenty (120) days after the end of each Fiscal Year, all of the Borrower's consolidated and consolidating audited and unaudited statements of income and retained earnings and of cash flows through the Fiscal Year then ended and a balance sheet of the Borrower as of the end of such Fiscal Year, in each case with comparable information at the close of and for the prior Fiscal Year, all in reasonable detail, containing no qualifications unacceptable to the Lender and audited by an independent certified public accountant selected by the Borrower and acceptable to the Lender and prepared in accordance with GAAP; (iii) Together with the Financial Statements for each quarter of each Fiscal Year, (a) a certificate executed by the chief financial officer of Borrower in the form of Exhibit C hereto certifying to the Lender that the Borrower is in compliance with each of the financial covenants set forth in Section 8.A.1 hereof and setting forth in detail satisfactory to the Lender the calculations and computations showing such compliance, and (b) a certificate executed by the president or chief financial officer of Borrower stating whether any Default or Event of Default currently exists and is continuing and what action, if any, the Borrower is taking or proposes to take with respect thereto; (iv) When and as so furnished, such other financial information concerning the Borrower, its business, financial condition or assets as may be furnished to the holders of the Borrower's common or preferred stock (including all financial statements, reports and proxy statements), or as the Lender may reasonably request from time to time; (v) Promptly upon discovery thereof, notice of any action, suit, arbitration, investigation, administrative or other proceeding instituted, commenced or threatened against or affecting the Borrower which may reasonably be expected to cause the Borrower to incur or be liable for claims, damages and/or costs of any kind (including, without limitation, attorneys' fees, expert witness fees and court, judgment, settlement and compliance or remedial costs), aggregating in excess of $100,000; (vi) Promptly upon the Borrower's becoming aware thereof, notice of any proposed Laws, or amendments thereto, which would regulate, restrict or prohibit the Borrower in such a way as might have a Materially Adverse Effect; (vii) Notice of the occurrence or existence of any Default or Event of Default immediately upon the Borrower's becoming aware thereof; and promptly upon discovery thereof, notice of any development, financial or otherwise, which might have a Materially Adverse Effect; (viii) Upon request of the Lender from time to time, any information concerning the Borrower's compliance with any and all Laws; (ix) Promptly upon the Borrower becoming aware thereof, notice of any claim of violation of any Law, and notice of any violation or breach by the Borrower of the terms of, 27 or any revocation or suspension or threatened revocation or suspension of, any license or permit of the Borrower; (x) Notice of the cancellation or expiration of any bond, letter of credit or similar instrument issued as Financial Assurance and the terms of any replacement or renewal bond, letter of credit or similar instrument if not issued by the Lender; (xi) Within forty-five (45) days after the end of each six-month period, regardless of whether any New Subsidiary has been acquired during such period, a New Subsidiary Certificate substantially in the form of Exhibit D hereto; and (xii) Within sixty (60) days of the end of each Fiscal Year, updated annual budgets, financial projections (rolling three years) and business plans for the ensuing Fiscal Year. 8.A.3. Corporate Existence and Conduct of Business. The Borrower will maintain and preserve its corporate existence, good standing, certificates of authority, licenses, permits, franchises, patents, trademarks, trade names, service marks, copyrights, leases and all other contracts and rights necessary or desirable to continue its operations and business on a profitable basis and will generally continue the same line of business as that being presently conducted, except that the Borrower intends to sell Old Lyme Insurance Company of Rhode Island, a Rhode Island corporation, and Old Lyme Insurance Company Limited, a corporation incorporated under the laws of Bermuda, for approximately $40,000,000 on or before October 31, 2001. 8.A.4. Taxes and Laws. The Borrower will pay and shall cause each Guarantor to pay when due, all taxes, assessments, charges and levies imposed on the Borrower or each Guarantor or any of its property or assets or which it is required to withhold and pay out and will comply in all material respects with all applicable present and future Laws applicable to the Borrower or each Guarantor or any of its property or assets, unless the Borrower or any Guarantor is contesting in good faith, by an appropriate proceeding, the validity, amount, imposition or applicability of the above while maintaining reserves therefor which are appropriate and adequate as determined in accordance with GAAP, and such contest does not have or cause a Materially Adverse Effect. 8.A.5. Inspection. Upon the Lender's request, the Borrower will allow and shall cause each Guarantor to allow the Lender, and any of its officers, employees or agents, to visit, during normal business hours, for inspection and review, the Borrower's or any Guarantor's premises and will make available and furnish to the Lender the Borrower's or any Guarantor's books and records and such financial information concerning the Borrower's or any Guarantor's property or assets, business, affairs, operations or financial condition as reasonably requested by the Lender. 8.A.6. Lender Costs. The Borrower shall pay upon demand, all reasonable out-of-pocket fees, costs and expenses (including those of outside counsel, auditors, appraisers, accountants, insurance and environmental advisors, title companies, surveyors, and other consultants and agents) incurred or paid by the Lender in connection with the preparation, negotiation, documentation, administration (including periodic field and collateral audits and site visits), amendment, modification, waiver, interpretation, collection or enforcement of this Agreement, the Note, or any other Loan Documents and the credit and security therefor. In addition, the Borrower shall pay upon 28 demand all such costs and expenses of the Lender in connection with any Default or Event of Default by the Borrower hereunder, or in connection with the collection or enforcement of any of the terms hereof or of the other Loan Documents and the credit therefor, or any "work-out," refinancing or restructuring of the credit arrangement set forth herein. Any attorneys' fees due hereunder are to be calculated at the attorneys' customary hourly rates, and not as a percentage of the indebtedness or of the amount recovered. The Borrower agrees to indemnify the Lender, its successors and assigns, and its respective officers, directors and employees, from and hold each of them harmless against (i) any transfer taxes, documentary taxes and any other taxes, penalties, assessments or charges made by any governmental authority by reason of the execution, delivery and performance of the Loan Documents and any security therefor, and (ii) any and all losses, claims, damages, liabilities and expenses, including all expenses of litigation or preparation therefor, which any of them may incur or which may be asserted against any of them in connection with or arising out of the direct or indirect application of the proceeds of Loans. The obligations under this Section 8.A.6 shall survive repayment of the Loans and the assignment of any rights hereunder. 8.A.7. Employee Plans. The Borrower shall and shall cause each Guarantor to (i) keep in full force and effect any and all Employee Plans which are presently in existence or may, from time to time, come into existence under ERISA, and not withdraw from any such Employee Plans, unless such withdrawal can be effected or such Employee Plans can be terminated without material liability to the Borrower or each Guarantor; (ii) make contributions to all of such Employee Plans in a timely manner and in a sufficient amount to comply with the requirements of ERISA, including the minimum funding standards of Section 302 of ERISA; (iii) comply with all material requirements of ERISA which relate to such Employee Plans; (iv) notify the Lender immediately upon receipt of any notice concerning the imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Employee Plans or the appointment of a trustee to administer such Employee Plans; and (v) promptly advise the Lender of the occurrence of any Reportable Event or Prohibited Transaction, as defined in ERISA, with respect to any such Employee Plans. 8.A.8. Use of Proceeds of Loans. The Borrower shall use the proceeds of the Loans for general corporate purposes, including working capital, repayment of the Advance Request for $40,000,000 between Borrower and Bank of Montreal, dated as of June 26, 2001, the acquisition of Burnham Stewart Group, Inc. and permitted capital expenditures and acquisitions as listed on Schedule 8.A.8. 8.A.9. Financial Assurance. The Borrower shall timely comply or cause compliance with the requirements of any Act or any other Law concerning Financial Assurance. If any funds are drawn on any Financial Assurance at any time, the Borrower shall promptly notify the Lender in writing of the amount of and the reason for the draw. The Borrower shall not maintain more in Financial Assurance than is required pursuant to any Act or any Law at any time. At the earliest available opportunity under any Act or other Law, the Borrower shall request that the amount of Financial Assurance be reduced if and as permitted under the Act, or such other Law. 8.A.10. Compliance with Laws. Borrower shall comply or cause compliance with all applicable building codes, zoning ordinances, environmental protection, health and safety laws and regulations and other laws and regulations governing it. 29 8.A.11. Maintenance of Insurance. The Borrower shall maintain insurance with financially sound and respectable insurance companies or associations in such companies or associations in such amounts and covering such casualties and risks as are customary in accordance with prudent business practice in the case of companies engaged in the same or a similar business and similarly situated, which insurance may provide for reasonable deductibility from coverage thereof. The Borrower will, upon request, furnish to the Lender at reasonable intervals a certificate of an Authorized Officer setting forth the nature and extent of all insurance maintained by the Borrower. The Borrower shall retain all incidents of ownership of the insurance maintained pursuant hereto and shall not borrow upon or otherwise impair its rights to receive the proceeds of such insurance. In the event the Borrower either fails to provide the Lender with evidence of the insurance coverage required by this Section or at any time hereafter shall fail to obtain or maintain any of the policies of insurance required above, or to pay any premium in whole or in part relating thereto, then the Lender, without waiving or releasing any obligation or default by the Borrower hereunder, may at any time (but shall be under no obligation to act), obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto, which the Lender deems advisable. The Borrower may later cancel any such insurance purchased by the Lender, but only after providing the Lender with evidence that the Borrower has obtained the insurance coverage required by this Section. The costs of such insurance obtained by the Lender, through and including the effective date such insurance coverage is canceled or expires, shall be payable on demand by the Borrower to the Lender, together with interest at the Default Rate on such amounts until repaid and any other charges by the Lender in connection with the placement of such insurance. The costs of such insurance, which may be greater than the cost of insurance which the Borrower may be able to obtain on its own, together with interest thereon at the Default Rate and any other charges by the Lender in connection with the placement of such insurance may be added to the total Obligations due and owing. Section 8.B. Negative Covenants. 8.B.1. Liens. The Borrower shall not directly or indirectly create, assume, grant, pledge, incur, permit or suffer to exist, any Lien or change of any kind or character upon any assets of the Borrower whether owned at the date hereof or hereafter acquired, except Permitted Liens. 8.B.2. Fiscal Year, Name Changes, Mergers and Acquisitions. The Borrower shall not (i) change its Fiscal Year or its corporate name or without prior written notice to Lender and adopt an assumed corporate name other than as set forth in Schedule 8.B.2, (ii) consolidate or merge with any Person, (iii) acquire any stock in, or acquire all or substantially all of the assets or properties of, or make any investment in, any Person, except that the existing investments listed on Schedule 8.B.2 and any acquisitions not exceeding $2,000,000 individually or $5,000,000 in the aggregate, provided that such acquisition(s) would not cause the Borrower to be in Default hereunder are permitted hereunder, or (iv) create any Subsidiaries. 8.B.3. Restricted Payments. The Borrower shall not declare or make any Restricted Payments. 8.B.4. Transactions with Affiliates. Except as set forth in Schedule 8.B.4, the Borrower shall not enter into any transaction with its Affiliates or any of its or its Affiliates' shareholders, directors, officers or employees, except in the ordinary course of business and upon fair and 30 reasonable terms which are no less favorable to the Borrower than those that would be available at the time of such transaction in a comparable arm's length transaction with a Person not an Affiliate. The Borrower shall not pay any management fee to any Affiliate other than Borrower. 8.B.5. Capital Structure. The Borrower shall not have outstanding or issue any shares of preferred stock. The Borrower shall not make any changes in its capital structure (including the terms of its outstanding stock), amend its articles of incorporation, certificate of designation, or bylaws, or make any changes in any of its business objectives, purposes or operations if such change has a reasonable likelihood of having a Materially Adverse Effect. The Borrower shall not be permitted to issue any stock. Notwithstanding the foregoing, Borrower may issue stock for acquisitions pursuant to Section 8.B.2 provided that such acquisitions do not cause an Event of Default and Borrower may issue stock pursuant to the Executive Share Purchase Plan and, when finalized, the Restricted Stock Plan provided that such issuance does not cause an Event of Default. 8.B.6. Change in Nature of Business. The Borrower shall not engage in any business unrelated to, or make any material change in the nature of, its business as carried on at the date hereof. 8.B.7. Prepayment or Modification of Debt. The Borrower will not (i) prepay any Funded Debt owing to, or any indebtedness for money borrowed by the Borrower from a Person other than the Lender, or any Debt secured by any of its assets, except: (x) Debt to the Lender or to any holder of Permitted Liens, (y) prepayment of Debt secured by an asset if a replacement asset of equal or greater value is purchased in connection therewith and (z) prepayment of revolving Debt, the amount of which may be subsequently reborrowed, or (ii) enter into or modify any agreement as a result of which the terms of payment of any of the foregoing Debt are amended or modified. 8.B.8. False Statements. The Borrower will not furnish the Lender any certificate or other document that knowingly contains any untrue statement of material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. 8.B.9. Inconsistent or Restrictive Agreements. The Borrower shall not enter into any agreement which would violate or cause a breach of or under this Agreement or any Loan Documents or the performance by the Borrower of any obligation hereunder or thereunder. 8.B.10. Investments. The Borrower shall not make any loan or advance to any Person, or purchase or otherwise acquire any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any Person, or participate as a partner or joint venturer with any other Person, except for Permitted Investments and acquisitions contemplated by Section 8.B.2. 8.B.11. Indebtedness. The Borrower shall not, directly or indirectly, create, assume, incur or have outstanding any Debt (including purchase money indebtedness), or become liable, whether as an endorser, guarantor, surety or otherwise, for any debt or obligation of any other Person, except: (a) the Obligations; 31 (b) endorsement for collection or deposit of any commercial paper secured in the ordinary course of business; (c) obligations of the Borrower for taxes, assessments, municipal or other governmental charges; (d) obligations of the Borrower for accounts payable, other than for money borrowed, incurred in the ordinary course of business; (e) obligations existing on the date hereof which are disclosed on the financial statements referred to in Section 7; and (f) those noted on Schedule 8.B.11. SECTION 9. EVENTS OF DEFAULT. The following events shall constitute and be deemed Events of Default hereunder: Section 9.A. Obligations. Failure by the Borrower (i) to make any payment of principal on any Loan or Note on the date such payment Obligation is due, or (ii) to make any payment of interest on any Loan or Note or any payment of any fee due hereunder within 3 Business Days after such payment Obligation is due. Section 9.B. Breach or Default Under Loan Documents. (i) failure or neglect of the Borrower to perform, keep or observe any of the covenants at Sections 8.A.1, 8.A.2, 8.A.6, 8.A.8, or 8.B hereof; or (ii) failure or neglect of the Borrower or Guarantor to perform, keep or observe any of its respective other covenants, conditions, promises or agreements contained herein or in any other Loan Document to which it is a party or signatory and the Borrower or Guarantor fails to cure the foregoing within thirty (30) days after notice from the Lender to the Borrower or Guarantor thereof; or (iii) an Event of Default occurs under any other Loan Document; or (iv) at any time any notice is given by the Borrower of the discontinuance, invalidity or unenforceability of or the Borrower's obligations thereunder. Section 9.C. Representation and Warranties. Any warranty or representation now or hereafter made by the Borrower or by any Guarantor hereunder or under any Loan Document, is untrue or incorrect in any material respect or fails to state a material fact necessary to make such warranty or representation not misleading in light of the circumstances in which it was made, or any schedule, certificate, statement, report, financial data, notice or writing furnished to the Lender at any time by the Borrower is untrue or incorrect in any material respect or fails to state a material fact needed to make the foregoing not misleading in light of the circumstances in which the foregoing were furnished, in each case on the date as of which the facts set forth therein are stated or certified and the Borrower or each Guarantor fails to cure any of the foregoing within thirty (30) days after the Borrower should have become aware of the same. Section 9.D. Judgments. A final and non-appealable judgment or order, or an aggregate of final and non-appealable outstanding judgments or orders, requiring payment in excess of $150,000, either not fully covered by insurance or the insurance for which is disputed or contested, 32 shall have been entered against the Borrower, and such judgments or order(s) shall remain unsatisfied or undischarged and in effect for thirty (30) consecutive days without a stay of enforcement or execution thereof. Section 9.E. Insolvency and Related Proceedings. If the Borrower or Guarantor (i) is dissolved; (ii) authorizes or makes an assignment for the benefit of creditors; (iii) generally shall not pay its debts as they become due; (iv) shall admit in writing its inability to pay its debts generally; or (v) shall authorize or commence (whether by the entry of an order for relief or the appointment of a receiver, trustee, examiner, custodian or other similar official therefor or for any substantial part of its property) any proceeding or voluntary case under any bankruptcy, reorganization, insolvency, dissolution, liquidation, adjustment or arrangement of debt, receivership or similar Laws or if such proceedings are commenced or instituted, or an order for relief or approving any petition commencing such proceedings is entered against the Borrower and such party, by any action or failure to act, authorize, approve, acquiesce, or consent to the commencement or institution of such proceedings, or such proceedings are not dismissed within sixty (60) days after the date of filing, commencement or institution. Section 9.F. Other Material Agreements. If the Borrower defaults or a default or an event of default occurs under or in the performance of its obligations under (i) any other agreement with the Lender, or (ii) under any other material exceeding $100,000 agreement, document or instruments for borrowed money, and such default, breach, or event of default continues beyond any applicable grace period thereunder and the effect of which shall be to allow the holder of such agreement, document or instrument to terminate the foregoing, or the Person to whom such obligation is owed to cause such obligation to become due prior to its stated maturity or otherwise accelerated, including, but not limited to any credit facility with Bank of Montreal or Bank of America or (iii) under any other material agreement, document or instrument (not for borrowed money), and such default, breach, or event of default continues beyond any applicable grace period thereunder and the effect of which shall be to allow the holder of such agreement, document or instrument to terminate the foregoing or to accelerate obligations exceeding $100,000 owed to it thereunder. Section 9.G. State Action. If any proceeding is instituted or commenced by the State or country of incorporation of the Borrower, seeking a forfeiture of the Certificate of Incorporation of the Borrower and any order entered in such proceeding shall fail to be vacated within thirty (30) days. Section 9.H. ERISA Matters. If any of the following events shall have occurred with respect to any Employee Plan and the resultant or potential liability of the Borrower therefor exceeds $100,000: (i) a Reportable Event or Prohibited Transaction, as such terms are defined in ERISA, shall have occurred; (ii) a trustee is appointed by any governmental body or agency or any court to administer any Employee Plan; (iii) any Employee Plan is involuntarily terminated, or circumstances exist which constitute grounds entitling the Pension Benefit Guaranty Corporation to institute proceedings to terminate any Employee Plan; or (iv) any withdrawal liability is incurred in connection with any termination of an Employee Plan. Section 9.I. Tax Liens. If a notice of lien, levy or assessment is filed or recorded with respect to all or a material part of the assets owned by the Borrower by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipality or other 33 governmental agency, or any taxes or debts owing at any time or times hereafter to any one or more of the foregoing become a lien upon a material part of the assets owned by the Borrower, unless such notice or lien is a Permitted Lien or is removed within ninety (90) days after filing or recording of such notice or becoming such lien. Section 9.J. Failure of Lien. If any Loan Document shall at any time after its execution and delivery and for any reason (other than as a result of any action or inaction by the Lender) cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested or the Borrower or any Guarantor shall deny it has any further liability or obligation under any Loan Document, or the Borrower or any Guarantor shall fail to perform any of its obligations under any Loan Document beyond any applicable grace period. Section 9.K. Environmental or Other Remediation Costs. If the Borrower or Affiliate becomes aware of, any environmental contamination or similar site deficiency which may reasonably be expected to cause the Borrower or Affiliate to incur or be liable for costs of any kind aggregating in excess of a cost of $100,000. Section 9.L. Operating Permits and Licenses. If the Borrower fails to maintain any permits or licenses which are necessary and required for the ownership, use, occupancy or operation of its business, if such deficiency would have a Materially Adverse Effect and is not cured within 30 days. Section 9.M. Material Adverse Change. If since March 31, 2001, there shall have occurred any condition or event which the Lender determines has or might be reasonably expected to have a Materially Adverse Effect. Section 9.N. Change in Control. If a Change in Control shall occur. "Change in Control" means (i) the direct or indirect sale, lease, exchange or other transfer of all or substantially all of the assets of Borrower to any Person or Group, as defined in Rule 13d-5 under the Exchange Act ("Group"), other than an Affiliate of Borrower, (ii) the merger or consolidation of Borrower with or into another entity with the effect that the then existing shareholders of Borrower, collectively, hold less than 50.1% of the combined voting power of the then outstanding securities of the surviving entity of such merger or the corporation resulting from such consolidation ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors, (iii) during any two-year period, the replacement of a majority of the Board of Directors of Borrower from the directors who constituted the Board of Directors at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of Borrower then still in office who were either members of the Board of Directors at the beginning of such period or whose election as a member of the Board of Directors was previously so approved, (iv) a Person or Group (other than existing shareholders of Borrower, and/or any executive officer of Borrower or its Subsidiaries, or its successors) shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of Borrower representing 50% or more of the combined voting power of the then outstanding securities of Borrower ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors or shall have acquired the right to designate a majority of the Board of Directors of Borrower, (v) any Person or Group (other than existing shareholders of Borrower, or its executive officers) shall acquire the right, by contract or otherwise, to elect, appoint or otherwise designate a 34 majority of the Board of Directors of Borrower, whether or not such right is exercised, or (vi) the occurrence of any event specified in Section 9.E. with respect to Borrower or any of its Subsidiaries. SECTION 10. RIGHTS AND REMEDIES. Section 10.A. Termination of Commitment and Acceleration. Upon the happening or occurrence of an Event of Default described in Section 9.E. above, the Commitment shall immediately terminate, and upon the happening or occurrence of any other Event of Default set forth in Section 9, such Event of Default not having been previously cured or waived in writing by the Lender, the Lender may declare the Commitment terminated, if they have not yet been terminated. Following the termination of the Commitment, the Lender may accelerate the Obligations by declaring that the Obligations are then due and payable and, thereupon, the Note shall be and become forthwith, due and payable without any presentment, demand, protest, notice of any of the foregoing or other notice of any kind, all of which are hereby expressly waived notwithstanding anything contained herein or in the Note to the contrary, and the Lender shall have all rights and remedies now or hereafter provided by applicable Laws and without limiting the generality of the foregoing may, at its option, also appropriate and apply toward the payment of the Note, any indebtedness of the Lender to the Borrower, howsoever created or arising, and may also exercise any and all rights and remedies hereunder, under the Loan Documents. Section 10.B. Rescission. In the event of an uncured Event of Default, if at any time after acceleration of the maturity of the Loans, Borrower shall pay all arrears of interest and all payments on account of principal of the Loans which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by laws, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Defaults (other than nonpayment of principal of and accrued interest of the Loans due and payable solely by virtue or acceleration) shall be remedied or waived pursuant to this Agreement, then by written notice to Borrower, the Lender may elect, in its sole discretion, to rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Default or impair any right or remedy consequent thereon. The provisions of the preceding sentence do not give Borrower the right to require Lenders to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. Section 10.C. Application of Payments. All monies received by the Lender from the exercise of any rights or remedies shall, unless otherwise required by applicable Law, be applied as follows: A. First, to the payment of all reasonable expenses (to the extent not paid by Borrower) actually incurred by the Lender in connection with the exercise of such rights or remedies, including all out-of-pocket costs and expenses of collection, reasonable attorneys' fees and court costs, all costs incurred by the Lender directly or indirectly in carrying out the terms, covenants and agreements contained in any Loan Document, together with interest thereon as provided therein, and all other costs and expenses described in Section 8.A.6; B. Next, to the payment of any outstanding fees due hereunder; C. Next, to the payment of interest then accrued and unpaid on the Note; 35 D. Next, to the payment of principal then owing on the Note; E. Next, to all of the other Obligations; F. Surplus, if any, unless a court of competent jurisdiction decrees otherwise, to the Borrower. Section 10.D Attorney-in-Fact. In the event of an uncured Event of Default, the Borrower hereby irrevocably makes, constitutes and appoints the Lender (and any officer of the Lender or any Person designated by the Lender for that purpose) as the Borrower's true and lawful proxy and attorney-in-fact (and agent-in-fact) in the Borrower's name, place and stead, with full power of substitution, to take such actions as are permitted in this Agreement. The Borrower hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. The Borrower hereby ratifies and confirms all that said attorney-in-fact may do or cause to be done by virtue of any provision of this Agreement. SECTION 11. MISCELLANEOUS. Section 11.A. Assignments and Participations. Lender, without the consent of the Borrower, may assign or sell participation, to one or more banks or other financial institutions all or a portion of its rights and obligations under this Agreement (including without limitation all or a portion of its Commitments and the Loans owing to it. Section 11.B. Withholding Taxes. Except as otherwise required by Law, each payment by the Borrower under this Agreement or the Note shall be made without setoff or counterclaim and without withholding for or on account of any present or future taxes imposed by or within the jurisdiction in which the Borrower is domiciled, any jurisdiction from which the Borrower makes any payment hereunder, or (in each case) any political subdivision or taxing authority thereof or therein (excluding any such tax imposed on the overall net income of Lender). If any such withholding is so required, the Borrower shall make the withholding, pay the amount withheld to the appropriate governmental authority before penalties attach thereto or interest accrues thereon and forthwith pay such additional amount as may be necessary to ensure that the net amount actually received by Lender free and clear of such taxes (including such taxes on such additional amount) is equal to the amount which Lender would have received had such withholding not been made. If the Lender pays any amount in respect of any such taxes, penalties or interest, the Borrower shall reimburse the Lender for that payment on demand in the currency in which such payment was made. If a Borrower pays any such taxes, penalties or interest, it shall deliver official tax receipts evidencing that payment or certified copies thereof to the Lender on or before the thirtieth day after payment. Section 11.C. Amendment and Waivers. No amendment or modification of any provision of this Agreement shall be effective without the written agreement of Lender and Borrower. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Borrower in any case shall entitle Borrower to any further notice or demand in similar or other circumstances. 36 Section 11.D. Merger and Integration Clause. This Agreement and the Loan Documents contain the entire agreement between the parties hereto with respect to the subject matter hereof and specifically supersedes in its entirety the proposal letter of the Lender to Borrower dated October 12, 1999, and any prior drafts thereof or proposals or letters from the Lender with respect to the terms of credit facility hereunder or any other matter which is the subject matter of this Agreement or any of the Loan Documents. Section 11.E. Applicable Law. This Agreement, the Note and the other Loan Documents have been executed, issued, delivered and accepted in and shall be deemed to have been made under and shall be governed by and construed in accordance with the Laws of the State of Illinois. Section 11.F. Severability. This Agreement, the Note and the other Loan Documents shall be construed and interpreted in such manner as to be effective, enforceable and valid under all applicable Laws. If any provision of this Agreement, the Note or the other Loan Documents shall be held invalid, prohibited or unenforceable under any applicable Laws of any applicable jurisdiction, such invalidity, prohibition or unenforceability shall be limited to such provision and shall not affect or invalidate the other provisions hereof or thereof or affect the validity or enforceability of such provision in any other jurisdiction, and to that extent, the provisions hereof and thereof are severable. Section 11.G. Section Headings. Section headings used in this Agreement are for convenience only and shall not effect the construction or interpretation of this Agreement. Section 11.H. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Lender and the Borrower, and their respective successors and assigns; provided, however, that the Borrower has no right to assign any of its rights or its obligations hereunder without the prior written consent of Lender. Section 11.I. Notices. Any notices, requests or consents required or permitted by this Agreement shall be (i) in writing, and (ii) delivered in person, telexed, telecopied or sent by certified or registered mail, postage prepaid, return receipt requested, or by overnight mail or express delivery service to the addresses of the parties hereto set forth below, unless such address, telex number or telecopier number is changed by written notice hereunder. Each such notice, request, consent or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified on the signature page hereof and a confirmation of such telecopy has been received by the sender, (ii) if given by telex, when such telex is transmitted to the telex number specified on the signature page hereof and the answerback is received by sender, (iii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iv) if given by any other means, when delivered at the addresses specified on the signature page hereof; provided that any notice given pursuant to Sections 2 and 3 hereof shall be effective only upon receipt. (a) To the Borrower, to it at: Hub International Limited 55 East Jackson Boulevard Chicago, Illinois 60604 37 Telecopy: (312) 279-4981 for the attention of: W. Kirk James, Vice President, Secretary and General Counsel (b) To the Lender, to it at: LaSalle Bank National Association 135 South LaSalle Street Chicago, Illinois 60603 Telecopy: (312) 904-6189 for the attention of: Commercial Banking Insurance Division, Suite 216 with copy to: Lord, Bissell & Brook 115 S. LaSalle Street Chicago, IL 60603 Telecopy: (312) 443-0336 for the attention of: Kay W. McCurdy or to such other address or facsimile or telecopy number as any party hereto may from time to time designate to the other parties hereto in such manner. Section 11.J. Counterparts. This Agreement may be executed in any number of counterparts, and by the different parties on different counterparts, each of which when executed shall be deemed an original but all such counterparts taken together shall constitute one and the same instrument. Section 11.K. Indemnification. The Borrower hereby indemnifies, exonerates and holds free and harmless the Lender, each of its Affiliates and each of their officers, directors, employees, agents-and attorneys (collectively, the "Indemnified Parties" or, individually, an "Indemnified Party"), from and against any and all actions, causes of action, suits, proceedings, investigations, losses, costs, liabilities, damages, punitive damages, penalties and expenses, including reasonable attorneys' and paralegals' fees and disbursements (the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (irrespective of whether such Indemnified Party is a party to the action for which indemnification hereunder is sought): (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (b) the entering into and performance under this Agreement or any other Loan Document or by any party thereto; or (c) any investigation, litigation, or proceeding related to any acquisition or proposed acquisition by the Borrower of all or any portion of the stock or all or substantially 38 all the assets of any Person or merger or proposed merger of the Borrower with any other Person, whether or not the Lender is party thereto and whether or not the proceeds of any Loans are used or to be used in connection therewith; except for any such Indemnified Liabilities arising by reason of an Indemnified Party's gross negligence or wilful misconduct. In addition, if the Borrower institutes any action, suit or proceeding against any of the Indemnified Parties and such action, suit or proceeding is unsuccessful, the Borrower shall indemnify and hold harmless the Indemnified Parties from and against all Indemnified Liabilities arising in connection with or relating to such action, suit or proceeding. The Borrower shall pay or reimburse the Indemnified Parties for any Indemnified Liabilities from time to time within thirty (30) days after demand. This Section and the agreements of the Borrower set forth herein shall survive the termination of this Agreement and any or all of the Loan Documents and repayment of all of the Obligations hereunder and thereunder. If and to the extent that the undertaking described in this Section 11.K. is held or determined by any court of competent jurisdiction to be unenforceable for any reason, the Borrower hereby agree to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable Laws. Section 11.L. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Default if such action is taken or condition exists, and if a particular action or condition is expressly permitted under any covenant, unless expressly limited to such covenant, the fact that it would not be permitted under the general provisions of another covenant shall not constitute an Event of Default or Default if such action is taken or condition exists. Section 11.M. Limitation of Liability. To the extent permitted by applicable Law, no claim may be made by Borrower or any other Person against Lender, or its Affiliates, directors, officers, employees, attorneys or agents, for special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 11.N. Consent to Jurisdiction and Waiver of Jury Trial and Personal Service. THE BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN COOK COUNTY, ILLINOIS IN ANY ACTION, SUIT OR PROCEEDING (WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY) COMMENCED THEREIN IN CONNECTION WITH OR WITH RESPECT TO THE OBLIGATIONS, THIS AGREEMENT, THE NOTE OR ANY OTHER LOAN DOCUMENTS (INCLUDING, WITHOUT LIMITATION, ANY DEFENSES OR COUNTER CLAIMS THEREIN), AND THE BORROWER AND THE LENDER EACH WAIVE ANY RIGHT TO JURY TRIAL THAT THEY MAY NOW OR HEREAFTER HAVE UNDER ANY LAWS AND ANY OBJECTION TO VENUE IN CONNECTION THEREWITH. THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS OR PAPERS ISSUED OR SERVED IN CONNECTION WITH THE FOREGOING AND AGREES THAT SERVICE OF SUCH PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, 39 POSTAGE PREPAID, RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER AS SET FORTH IN SECTION 11.I. ABOVE AND THE BORROWER'S REGISTERED AGENT, IN WHICH CASE SUCH PROCESS OR PAPERS SHALL BE DEEMED RECEIVED FIVE (5) DAYS THEREAFTER, OR BY OVERNIGHT MAIL OR EXPRESS DELIVERY SERVICE, IN WHICH CASE SUCH PROCESS OR PAPERS SHALL BE DEEMED RECEIVED ONE (1) DAY THEREAFTER. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWER: -------- HUB INTERNATIONAL LIMITED By: /s/ W. Kirk James -------------------------------------- Name: W. Kirk James ------------------------------------ Title: Vice President and General Counsel ----------------------------------- Address: 55 East Jackson Boulevard Chicago, Illinois 60604 Telephone: (312) 279-4881 ------------------------------ Telecopy: (312) 279-4981 ------------------------------ LENDER: ------ LASALLE BANK NATIONAL ASSOCIATION By: /s/ Janet R. Gates -------------------------------------- Name: Janet R. Gates Title: Senior Vice President Address: 135 South LaSalle Street Chicago, IL 60603 Telephone: (312) 904-4617 Telecopy: (312) 904-6189 40 EX-21.1 25 t06723ex21-1.txt LIST OF REGISTRANT'S SUBSIDIARIES Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION 798676 Alberta Ltd. Alberta, Canada 805977 Alberta Ltd. Alberta, Canada Advanced Benefit Resources Corp. Delaware American Coverage Administrators, Inc. Delaware Barton Insurance Brokers Ltd. British Columbia, Canada Beacon Underwriting Ltd. British Columbia, Canada Blais Assurance & Gestion de Risques Inc. Quebec, Canada Brentwood Insurance Agencies Ltd. British Columbia, Canada Brokerage Underwriting Services Inc. Ontario, Canada Bru Agencies Ltd. Alberta, Canada Burnham Insurance Agency of Ohio, Inc. Ohio Burnham Insurance Center LLC Michigan Burnham Insurance Group, Inc. Michigan Burnham Stewart Reinsurance Ltd. Turks & Caicos C.J. McCarthy Insurance Agency, Inc Massachusetts Claims Administration Corporation Delaware Colwood Insurance Services Inc. British Columbia, Canada Ernest-Roy Hobbs Inc. Quebec, Canada Evans-Bastion Insurance Agencies British Columbia, Canada Gifford Associates Insurance Brokers Ltd. Ontario, Canada Gulliver Insurance Brokers Ltd. Ontario, Canada Halton-Caird Insurance Brokers Limited Ontario, Canada Halton Caird Life Insurance Agency Ltd. Ontario, Canada HUB 724 Holdings, Inc. Delaware HUB 724.com, Inc. Delaware Hub Capital Inc. Ontario, Canada Hub e-com, Inc. Delaware Hub Financial Inc. Ontario, Canada Hub Financial (British Columbia) Inc. British Columbia, Canada Hub Financial (Prairies) Inc. Alberta, Canada The Hub Group Ontario (2002) Inc. Ontario, Canada The Hub Group (Ontario) Inc. Ontario, Canada Hub Hungary Liquidity Management Limited Liability Company Hungary Hub International Limited Ontario, Canada Hub U.S. Holdings, Inc. Delaware Hubacq Inc. Ontario, Canada I.C. Insurance Brokers Limited Ontario, Canada Kaye Group Inc. Delaware Kaye Insurance Associates, Inc. Delaware Kaye Insurance Associates, Inc. New England Delaware Kaye-Western Insurance & Risk Services, Inc. Delaware Keard Insurance Brokers Limited Ontario, Canada Mack and Parker, Inc. Illinois Martin Assurance & Gestion de Risques Inc. Quebec, Canada MBA/BIG Management Partners LLC Michigan
1 SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION McIntosh Insurance Services Inc. British Columbia, Canada Michigan Banker's Insurance Center LLC Michigan Mitchell McConnell Insurance Ltd. New Brunswick, Canada NILA Financial Group Inc. Quebec, Canada NILA Financial & Insurance Services Inc. Quebec, Canada Old Lyme Insurance Company, Ltd. Bermuda Old Lyme Insurance Company of Rhode Island, Inc. Rhode Island P. Moauro & Associates Inc. Ontario, Canada Page Insurance Ltd. Alberta, Canada Park Brokerage, Ltd. Bermuda Paul Ayotte Insurance Broker Ltd. Ontario, Canada Paul Ayotte Insurance Brokers (Kapuskasing) Ltd. Ontario, Canada The Power Group Insurance Brokers Inc. Ontario, Canada Pro-Form Insurance Services Inc. Ontario, Canada Program Brokerage Corporation Delaware Rose, Horne & Stevenson Insurance Brokers Inc. Ontario, Canada Smallwood Insurance Services Ltd. British Columbia, Canada TOS Insurance Services Ltd. British Columbia, Canada Tenax Employee Benefits & Consulting Inc. Ontario, Canada The Wholesale Insurance Group Inc. Ontario, Canada
2 EX-23.1 26 t06723ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP Chartered Accountants PO Box 82 Royal Trust Tower, Suite 3000 Toronto Dominion Centre Toronto, Ontario Canada M5K 1G8 Telephone +1 416 863 1133 Facsimile +1 416 365 8215 The Board of Directors Hub International Limited 55 East Jackson Blvd. Chicago, IL 60604 U.S.A. March 20, 2002 Dear Sirs: We hereby consent to the use in this Registration Statement on Form S-1 of our report dated March 18, 2002 relating to the financial statements and financial statement schedules of Hub International Limited, which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected historical consolidated financial data" in such Registration Statement. Yours truly, /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Chartered Accountants PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization. EX-23.2 27 t06723ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of Hub International Limited of our reports dated March 12, 2002 and February 26, 2001 relating to the financial statements of Kaye Group Inc., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP New York, New York March 20, 2002 -----END PRIVACY-ENHANCED MESSAGE-----