-----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, Rr+iUSEXdEWCw03ikV7PUkkj3afrZf9jDwtNKEt6EcHjRjO7Yh11Q9Q1VMF7UAaD xIVDXhAKyHL7HW3/SFmcwA== 0000950137-96-000851.txt : 19960604 0000950137-96-000851.hdr.sgml : 19960604 ACCESSION NUMBER: 0000950137-96-000851 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960603 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960603 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSURE HOLDINGS CORP CENTRAL INDEX KEY: 0000073313 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 341010356 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03565 FILM NUMBER: 96576260 BUSINESS ADDRESS: STREET 1: 2 N RIVERSIDE PLZ STE 600 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3128791900 MAIL ADDRESS: STREET 1: TWO NORTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 JUNE 3, 1996 (Date of Report) CAPSURE HOLDINGS CORP. (Exact name of Registrant as specified in its charter) 0-3565 (Commission File No.) DELAWARE 34-1010356 (State or other jurisdiction) (IRS Employer Identification No.) TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 (Address of principal executive offices) (Zip code) (312) 879-1900 (Registrant's telephone number, include area code) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On February 29, 1996, Capsure Holdings Corp., a Delaware corporation, ("Capsure," the "Company" or "Registrant"), through its wholly owned subsidiary, NI Acquisition Corp., a Texas corporation, ("Seller") entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Frontier Insurance Company, a New York corporation, ("Buyer") pursuant to which Buyer agreed to purchase all of the issued and outstanding shares of Common Stock and Preferred Stock (collectively, the "Shares") of United Capitol Holding Company, a Delaware corporation and wholly owned subsidiary of the Seller, ("UCHC") and its subsidiaries, United Capitol Insurance Company, United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated. On May 22, 1996 (the "Closing Date"), the sale of UCHC was completed. In accordance with the Stock Purchase Agreement, Buyer paid to Capsure on the Closing Date $30.9 million (the "Purchase Price") in cash in consideration of the sale of the Shares of UCHC. Prior to closing, UCHC released $49.8 million of excess statutory surplus by payment of a dividend to Capsure. The Stock Purchase Agreement provides that the Purchase Price is subject to adjustment for the difference, if any, between the post-closing adjusted surplus (as defined in the Stock Purchase Agreement) and the estimated adjusted surplus at closing. Such an adjustment to the Purchase Price will be determined after completion of a closing balance sheet and closing income statement. Such closing financial statements must be delivered by Seller to Buyer within 45 days of the Closing Date. Any unresolved dispute concerning a possible adjustment to the Purchase Price will be subject to binding arbitration. In the Stock Purchase Agreement, Capsure made various representations and warranties as to itself and UCHC, and has agreed to indemnify Buyer for any breaches thereof. On the Closing Date, Capsure entered into various agreements with Buyer pursuant to the Stock Purchase Agreement including non-competition and non-solicitation agreements. In conjunction with the sale of UCHC, Capsure entered into an amended and restated senior reducing revolving credit facility with a syndicate of banks led by Chemical Bank. The amendment to the facility reduced the commitment to $100 million from $135 million and permits an initial draw for a special dividend of up to $70 million. The remaining $30 million of availability may be used for additional dividends, stock repurchases, acquisitions, and for general corporate purposes. Transaction costs totaled approximately $0.5 million. The credit available under the facility reduces semi-annually commencing March 31, 1997 and expires March 31, 2003. Interest on borrowings under the facility varies based on leverage. ITEM 5. OTHER EVENTS On May 28, 1996, the Company announced that it has retained Smith Barney Inc. to advise and assist Capsure's Board of Directors in an assessment of the strategic options available to Capsure to enhance long-term value for its stockholders. Options being explored include recapitalization of Capsure by means of the payment of a leveraged, special dividend to stockholders and a possible sale or merger of Capsure or its subsidiaries. The Board of Directors has not reached any decision regarding the course of action or combination of actions. -2- 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Businesses Acquired Not applicable. (b) Pro Forma Financial Information The following unaudited pro forma condensed consolidated financial statements are filed with this report: Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996... Page F-1 Pro Forma Condensed Consolidated Statements of Income: Year Ended December 31, 1995 .................................. Page F-2 Three Months Ended March 31, 1996.............................. Page F-3 The Pro Forma Condensed Consolidated Balance Sheet of Registrant as of March 31, 1996 reflects the financial position of Registrant after giving effect to the Disposition discussed in Item 2 and assumes the Disposition took place on March 31, 1996. The Pro Forma Condensed Consolidated Statements of Income for the fiscal year ended December 31, 1995 and the three months ended March 31, 1996 assume that the Disposition occurred on January 1, 1995 and are based on the operations of Registrant for the year ended December 31, 1995 and the three months ended March 31, 1996. The unaudited pro forma condensed consolidated financial statements have been prepared by Registrant based upon assumptions deemed appropriate. The unaudited pro forma condensed consolidated financial statements presented herein are shown for illustrative purposes only and are not necessarily indicative of the future financial position or future results of operations of Registrant, or of the financial position or results of operations of Registrant that would have actually occurred had the transaction been in effect as of the date or for the periods presented. In addition, it should be noted that Registrant's financial statements will reflect the Disposition as of May 22, 1996, the Closing Date. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and related notes of Registrant. (c) Exhibits 2.1 Stock Purchase Agreement, dated February 29, 1996, by and among Registrant, Seller and Buyer. 2.2 Credit Agreement, dated March 29, 1994, as amended and restated as of May 22, 1996. 99 Press Release issued by Registrant, dated May 28, 1996. -3- 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSURE HOLDINGS CORP. By: /s/ John S. Heneghan ----------------------------- John S. Heneghan Vice President and Controller Dated: June 3, 1996 -4- 5 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (UNAUDITED) (AMOUNTS IN THOUSANDS)
Pro Forma Adjustments ----------------------- Historical UCHC (a) Other Pro Forma ---------- -------- ---------- --------- ASSETS Invested assets and cash: Fixed maturities, at fair value .......... $ 201,485 $ 76,194 $ $ 125,291 Equity securities, at fair value ......... 13,720 -- 13,720 Short-term investments, at cost which approximates fair value ................ 67,379 45,083 67,664 (b) 89,960 Other investments, at fair value ......... 3,275 -- 3,275 Cash ..................................... 4,089 2,726 1,363 --------- --------- -------- --------- 289,948 124,003 67,664 233,609 Deferred policy acquisition costs ......... 28,570 459 28,111 Reinsurance receivable .................... 40,645 33,269 7,376 Intangible assets, net of amortization .... 15,289 -- 15,289 Excess cost over net assets acquired, net of amortization ...................... 68,016 4,805 63,211 Deferred income taxes, net of valuation allowance ................................ 27,030 5,212 21,818 Other assets .............................. 36,985 12,704 24,281 --------- --------- -------- --------- $ 506,483 $ 180,452 $ 67,664 $ 393,695 ========= ========= ======== ========= LIABILITIES Reserves: Unpaid losses and loss adjustment expenses................................. $ 125,940 $ 84,428 $ $ 41,512 Unearned premiums ........................ 82,385 12,405 69,980 --------- --------- -------- --------- 208,325 96,833 111,492 Reinsurance payable ....................... 701 701 -- Long-term debt ............................ 9,000 -- (9,000)(b) -- Other liabilities ......................... 27,115 6,254 -- 20,861 --------- --------- -------- --------- Total liabilities ........................ 245,141 103,788 (9,000) 132,353 Total stockholders' equity ............... 261,342 76,664 76,664 261,342 --------- --------- -------- --------- $ 506,483 $ 180,452 $ 67,664 $ 393,695 ========= ========= ======== =========
______________________________ (a) To eliminate the assets and liabilities of UCHC as of March 31, 1996. (b) The estimated net proceeds on the sale are expected to approximate the net assets of UCHC at March 31, 1996. The $76.7 million in net proceeds from the sale of UCHC are invested in short-term investments after retiring $9.0 million of outstanding long-term debt. F-1 6 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro Forma Adjustments -------------------- Historical UCHC (a) Other Pro Forma ---------- --------- --------- --------- Revenues: Net earned premiums ....................... $ 98,692 $ 13,709 $ $ 84,983 Net investment income ..................... 20,471 9,257 4,196(b) 15,410 Net investment gains (losses) ............. (1,653) (1,030) (623) Other income .............................. 6 -- 6 -------- -------- ------ -------- 117,516 21,936 4,196 99,776 -------- -------- ------ -------- Expenses: Net losses and loss adjustment expenses ... (7,451) (15,030) 7,579 Net commissions, brokerage and other underwriting .............................. 61,312 3,142 58,170 Interest expense .......................... 4,103 -- 4,103 Amortization of goodwill and intangibles .. 16,853 13,952 2,901 Other ..................................... 2,448 -- 2,448 -------- -------- ------ -------- 77,265 2,064 75,201 -------- -------- ------ -------- Income before income taxes ................. 40,251 19,872 4,196 24,575 Income taxes ............................... 19,721 11,215 1,469(c) 9,975 -------- -------- ------ -------- Net income ................................. $ 20,530 $ 8,657 $2,727 $ 14,600 ======== ======== ====== ======== Weighted average shares outstanding: Primary ................................... 15,404 15,404 ========= ======== Fully Diluted ............................. 15,917 15,917 ========= ======== Earnings per share: Primary ................................... $ 1.33 $ .95 ========= ======== Fully Diluted ............................. $ 1.29 $ .92 ========= ========
______________________________ (a) To eliminate the operations of UCHC for the entire period. (b) To reflect the investment of the net proceeds from the sale of UCHC, assuming a yield of 5.5%. (c) To reflect the tax effect of pro forma adjustments, calculated at the statutory rate of 35%. F-2 7 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro Forma Adjustments ------------------- Historical UCHC (a) Other Pro Forma ---------- -------- --------- --------- Revenues: Net earned premiums ....................... $23,349 $1,972 $ $21,377 Net investment income ..................... 5,034 2,262 1,107(b) 3,879 Net investment gains ...................... 523 297 226 Other income .............................. 1 -- 1 ------- ------ ------ ------- 28,907 4,531 1,107 25,483 ------- ------ ------ ------- Expenses: Net losses and loss adjustment expenses ... 3,396 431 2,965 Net commissions, brokerage and other underwriting ............................. 14,756 (83) 14,839 Interest expense .......................... 506 -- 506 Amortization of goodwill and intangibles .. 713 -- 713 Other ..................................... 619 -- 619 ------- ------ ------ ------- 19,990 348 19,642 ------- ------ ------ ------- Income before income taxes ................. 8,917 4,183 1,107 5,841 Income taxes ............................... 3,397 1,487 387(c) 2,297 ------- ------ ------ ------- Net income ................................. $ 5,520 $2,696 $ 720 $ 3,544 ======= ====== ====== ======= Weighted average shares outstanding: Primary ................................... 15,906 15,906 ======= ======= Fully Diluted ............................. 15,907 15,907 ======= ======= Earnings per share: Primary ................................... $ .35 $ .22 ======= ======= Fully Diluted ............................. $ .35 $ .22 ======= =======
______________________________ (a) To eliminate the operations of UCHC for the entire period. (b) To reflect the investment of the net proceeds from the sale of UCHC, assuming a yield of 5.5%. (c) To reflect the tax effect of pro forma adjustments, calculated at the statutory rate of 35%. F-3 EX-2.1 2 STOCK PURCHASE AGREEMENT 1 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT DATED FEBRUARY 29, 1996 AMONG FRONTIER INSURANCE COMPANY, NI ACQUISITION CORP. AND CAPSURE HOLDINGS CORP. 2 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS 1.1 Definitions..................................... 1 ARTICLE 2 PURCHASE AND SALE 2.1 Purchase and Sale............................... 6 2.2 Closing......................................... 6 2.3 Post-Closing Purchase Price Adjustment.......... 8 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER 3.1 Corporate Existence and Power................... 9 3.2 Corporate Authorization......................... 9 3.3 Governmental Authorization...................... 9 3.4 Non-Contravention............................... 9 3.5 Capitalization.................................. 10 3.6 Ownership of Shares............................. 10 3.7 Subsidiaries.................................... 10 3.8 Financial Statements............................ 10 3.9 Absence of Certain Changes...................... 11 3.10 Material Contracts.............................. 12 3.11 Litigation...................................... 12 3.12 Compliance with Laws............................ 12 3.13 Properties...................................... 12 3.14 Intentionally omitted........................... 13 3.15 Brokers' Fees................................... 13 3.16 ERISA and Employee Representations.............. 13 3.17 Environmental Matters........................... 14 3.18 Intercompany Accounts........................... 14 3.19 Reserves........................................ 14 3.20 The Company..................................... 15 3.21 Investments..................................... 15 3.22 Taxes........................................... 15 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER 4.1 Corporate Existence and Power................... 16 4.2 Corporate Authorization......................... 16 4.3 Governmental Authorization...................... 16 4.4 Non-Contravention............................... 16 3 4.5 Financing................................... 16 4.6 Purchase for Investment..................... 16 4.7 Brokers' Fees............................... 17 ARTICLE 5 COVENANTS OF SELLER 5.1 Conduct of the Business...................... 17 5.2 Access to Information........................ 17 5.3 Resignations................................. 17 5.4 Regulatory Matters........................... 18 5.5 Release from Lenders......................... 18 5.6 Audited Financial Statements................. 18 5.7 Investment Portfolio Adjustments............. 18 5.8 Estimated UCM Financial Statements........... 18 5.9 Case Reserves Files.......................... 18 5.10 Confidentiality.............................. 18 5.11 Intercompany Accounts........................ 18 5.12 Updated Schedules............................ 19 5.13 Estimated Adjusted Surplus................... 19 5.14 Tangible Net Worth of UCM.................... 19 ARTICLE 6 COVENANTS OF BUYER 6.1 Confidentiality.............................. 19 6.2 Post-Closing Access.......................... 19 6.3 Regulatory Matters........................... 19 6.4 Post-Closing Use of Office Space............. 19 6.5 Agreement to Sublease........................ 19 ARTICLE 7 COVENANTS OF BUYER AND SELLER 7.1 Necessary Assurances.......................... 20 7.2 Filings and Consents.......................... 20 7.3 Public Announcements.......................... 20 7.4 Post-Closing Reinsurance...................... 20 7.5 Government Filings............................ 21 7.6 Closing Statementx............................ 21 7.7 Termination Notices........................... 21 ARTICLE 8 TAX MATTERS 8.1 Buyer Tax Covenants........................... 21 ii 4 8.2 Property and Casualty Loss Discount Determination........... 22 8.3 Termination of Tax Sharing Agreements....................... 22 8.4 Tax Sharing................................................. 22 8.5 Cooperation on Tax Matters.................................. 22 8.6 Responsibility for Taxes and Tax Returns.................... 22 8.7 Intentionally omitted....................................... 23 8.8 Apportionment............................................... 23 ARTICLE 9 EMPLOYEE BENEFITS 9.1 Individual Account Plans.................................... 23 9.2 Plans Following the Closing................................. 23 ARTICLE 10 CONDITIONS TO CLOSING 10.1 Conditions to Obligations of Buyer and Seller.............. 24 10.2 Conditions to Obligation of Buyer.......................... 24 10.3 Conditions to Obligation of Seller......................... 26 ARTICLE 11 SURVIVAL; INDEMNIFICATION 11.1 Survival of Representations, Warranties and Covenants....... 27 11.2 Indemnification by Parent................................... 27 11.3 Indemnification by Buyer.................................... 28 11.4 Terms of Indemnification.................................... 29 11.5 Exclusive Remedy............................................ 31 11.6 Damages Net of Insurance, Etc............................... 31 ARTICLE 12 TERMINATION 12.1 Grounds for Termination...................................... 32 12.2 Effect of Termination........................................ 32 ARTICLE 13 MISCELLANEOUS 13.1 Notices..................................................... 32 13.2 Amendments and Waivers...................................... 33 13.3 Expenses.................................................... 33 13.4 Successors and Assigns...................................... 33 13.5 Governing Law............................................... 33 13.6 Counterparts; Facsimile Signatures.......................... 33 13.7 Third Party Beneficiaries................................... 34 13.8 Entire Agreement............................................ 34
iii 5 13.9 Headings................................... 34 13.10 Schedules.................................. 34 iv 6 STOCK PURCHASE AGREEMENT AGREEMENT dated this 29th day of February, 1996 ("Agreement") between Frontier Insurance Company, a New York corporation ("Buyer"), and NI Acquisition Corp., a Texas corporation ("Seller") and, for purposes of Section 2.3(c) and Article 11 hereof only, Capsure Holdings Corp., a Delaware corporation ("Parent"). WITNESSETH: WHEREAS, Seller is the record and beneficial owner of all of the issued and outstanding shares of common stock, $.01 par value per share (the "Common Stock"), and preferred stock, $.01 par value per share (the "Preferred Stock") of United Capitol Holding Company, a Delaware corporation (the "Company"); and WHEREAS, Seller desires to sell all of the issued and outstanding shares of Common Stock and Preferred Stock (collectively, the "Shares") to Buyer, and Buyer desires to purchase the Shares from Seller, upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. The following terms, as used herein, have the following meanings: "Adjusted Closing Statements" shall have the meaning ascribed to it in Section 2.3(b). "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person; provided, however, that for purposes of this Agreement neither the Company nor any of its Subsidiaries shall be considered an Affiliate of Seller. "Agreement" shall have the meaning ascribed to it in the first paragraph of this Agreement. "Applicable Tax Rate" means the corporate Tax rate (without the application of net operating loss carryovers) actually applicable to Buyer or Seller at the time a Tax Benefit becomes allowable to Buyer, any of its Affiliates, Seller, the Company or a Subsidiary of the Company (as the case may be). "Arbitrating Accountant" shall have the meaning ascribed to it in Section 2.3(b). "Audited Consolidated Financial Statements" shall have the meaning ascribed to it in Section 3.8(a). "Audited Statutory Financial Statements" shall have the meaning ascribed to it in Section 3.8(b). "Audited UCM Financial Statements" shall have the meaning ascribed to it in Section 3.8(a). "Balance Sheet Date" means December 31, 1995. 7 "Basket" shall have the meaning ascribed to it in Section 11.4(a)(i). "Benefit Arrangement" means any employment, severance or similar contract, or any plan or arrangement (whether or not written) providing for severance benefits, disability, health and life insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options or other forms of incentive compensation or post-retirement insurance, compensation or benefits that (a) is not an Employee Plan, (b) is entered into or maintained, by Seller or any of its ERISA Affiliates and (c) covers any employee or former employee of the Company or any of its Subsidiaries. "Buyer" shall have the meaning ascribed to it in the first paragraph of this Agreement. "Business" means the businesses of the Company and its Subsidiaries taken as a whole. "Closing" shall have the meaning ascribed to it in Section 2.2. "Closing Adjusted Surplus" means the Surplus of UCIC as set forth in the Closing Balance Sheet (i) minus the Invested Assets (including the investment in Subsidiaries) as set forth in the Closing Balance Sheet, (ii) plus such Invested Assets (excluding the investment in Subsidiaries) reflected at the fair market value thereof as of the Closing Date, (iii) plus the positive amount of any current liability for Taxes that is the responsibility of Seller pursuant to Section 8.6 hereof that is reflected in the Closing Balance Sheet, and (iv) minus the positive amount of any Taxes that is reflected as a recoverable in the Closing Balance Sheet and which is recoverable by Parent or an Affiliate of Parent pursuant to Section 8.1(c). "Closing Balance Sheet" shall have the meaning ascribed to it in Section 2.3(a). "Closing Date" means the date of the Closing. "Closing Income Statement" shall have the meaning ascribed to it in Section 2.3(a). "Closing Purchase Price" shall have the meaning ascribed to it in Section 2.1. "Closing Statements" shall have the meaning ascribed to it in Section 2.3(a). "Closing Worksheet" shall have the meaning ascribed to it in Section 2.3(a). "Code" means the United States Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder. "Common Stock" shall have the meaning ascribed to it in the second paragraph of this Agreement. "Company" shall have the meaning ascribed to it in the second paragraph of this Agreement. "Confidentiality Agreement" shall have the meaning ascribed to it in Section 6.1. "Credit Agreement" shall have the meaning ascribed to it in Section 5.5. "Damages" shall have the meaning ascribed to it in Section 11.2(a). 2 8 "Direct Rollover" shall have the meaning ascribed to it in Section 9.1. "Employee" shall mean any full time, part-time or former employee of the Company or any of its Subsidiaries who is eligible to participate in an Employee Plan. "Employee Plan" means any "employee benefit plan", as defined in Section 3(3) of ERISA, that (a) is subject to any provision of ERISA, (b) is maintained or contributed to by Seller or any ERISA Affiliate of Seller and (c) covers any employee or former employee of the Company or any of its Subsidiaries. "Environmental Laws" shall have the meaning ascribed to it in Section 3.17. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "ERISA Affiliate" of any entity means any other entity which, together with such entity, would be treated as a single employer under Section 414 of the Code. "Estimated Adjusted Surplus" means the Surplus of UCIC as set forth in the Estimated SAP Closing Balance Sheet (i) minus the Invested Assets (including the investment in Subsidiaries) as set forth in the Estimated SAP Closing Balance Sheet, (ii) plus such Invested Assets (excluding the investment in Subsidiaries) reflected at the fair market value thereof as of two business days prior to the date of delivery of the Estimated SAP Closing Balance Sheet, (iii) plus the positive amount of any current liability for Taxes that is the responsibility of Seller pursuant to Section 8.6 hereof, that is reflected in the Estimated SAP Closing Balance Sheet, and (iv) minus the positive amount of any Taxes that is reflected as a recoverable in the Estimated SAP Closing Balance Sheet and which is recoverable by Parent or an Affiliate of Parent pursuant to Section 8.1(c). "Estimated GAAP Closing Balance Sheet" shall have the meaning ascribed to it in Section 2.2(c)(ii). "Estimated SAP Closing Balance Sheet" shall have the meaning ascribed to it in Section 2.2(c)(i). "Estimated Worksheet" shall have the meaning ascribed to it in Section 2.3(c)(i). "Federal Tax" means any Tax imposed under Subtitle A of the Code. "Final Determination" means (a) with respect to Federal Taxes, a "determination" as defined in Section 1313(a) of the Code or execution of an Internal Revenue Service Form 870-AD and, with respect to Taxes other than Federal Taxes, any final determination of liability in respect of a Tax that, under applicable law, is not subject to further appeal, review or modification through proceedings or otherwise (including the expiration of a statute of limitations or a period for the filing of claims for refunds, amended returns or appeals from adverse determinations) or (b) the payment of Tax by Buyer, Seller or any of their Affiliates, whichever is responsible for payment of such Tax under applicable law, with respect to any item disallowed or adjusted by a Taxing Authority, provided that such responsible party determines that no action should be taken to recoup such payment and the other party agrees. "Frontier 401(k) Plan" shall have the meaning ascribed to it in Section 9.1. "Frontier Pacific" shall have the meaning ascribed to it in Section 10.1(d). "GAAP" means U.S. generally accepted accounting principles. 3 9 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Hazardous Materials" shall have the meaning ascribed to it in Section 3.17. "IBNR" shall have the meaning ascribed to it in Section 2.2(d)(i). "Indemnified Party" shall have the meaning ascribed to it in Section 11.6. "Individual Account Plans" means the Pension Plan and the Parent 401(k) Plan. "Intercompany Account Statement" shall have the meaning ascribed to it in Section 5.11. "Invested Assets" means, as of any date, with respect to (a) UCIC, those assets required to be included on Page 2, Line 8(a) of UCIC's Statutory Annual Statement and (b) the Company and its other Subsidiaries, assets of the type described in clause (a) above. "Investment Portfolio Adjustments" means the actions taken by Seller or any of its Subsidiaries to comply with the obligations set forth in Section 5.7 and in connection with the payment of the Special Dividends. "Leased Properties" means any offices, buildings and other real property that are leased by the Company or any of its Subsidiaries as of the date hereof and that are used in the operation of the Business. "Lien" means, with respect to any material property or asset, any mortgage, lien, pledge, security interest or encumbrance of any kind in respect of such material property or asset. For the purposes of the Agreement, a Person shall be deemed to own any property or asset subject to a Lien if it has acquired or holds such property or asset subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such property or asset. "Liquidated Damages" shall have the meaning ascribed to it in Section 11.4(a)(ii). "Litigation" shall have the meaning ascribed to it in Section 3.11. "Material Adverse Effect" means, with respect to any Person, a material adverse effect on the financial condition, business or assets of such Person and its Subsidiaries, taken as a whole, excluding the effect of the transactions contemplated under this Agreement including, without limitation, the Investment Portfolio Adjustments and the payment of the Special Dividends. "MGA Agreement" shall have the meaning ascribed to it in Section 7.4. "Multiemployer Plan" means each Employee Plan that is a multiemployer plan, as defined in Section 3(37) of ERISA. "Negative Material Breach" means aggregate costs and penalties in excess of $75,000; provided, however, that no individual cost or penalty shall be included in such aggregate unless it exceeds $10,000. "Parent" shall have the meaning ascribed to it in the first paragraph of this Agreement. "Parent 401(k) Plan" means the Capsure Holdings Corp. 401(k) Plan. 4 10 "Pension Plan" means the United Capitol Insurance Company Pension Plan and Trust. "Person" means an individual, corporation, partnership, association, trust, limited liability company, limited liability partnership or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Post-Closing Tax Period" means any Tax period (or portion thereof) commencing on or after the close of business on the Closing Date. "Post-Closing Purchase Price Adjustment" shall have the meaning ascribed to it in Section 2.3(c). "Pre-Closing Tax Period" means any Tax period (or portion thereof) ending on or before the close of business on the Closing Date. "Purchase Price" shall have the meaning ascribed to it in Section 2.1. "Reinsurance Agreement" shall have the meaning ascribed to it in Section 7.4. "Reserves" shall have the meaning ascribed to it in Section 3.19. "SAP" means the statutory accounting practices prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin or the National Association of Insurance Commissioners. "SAP Equity Adjustment" shall have the meaning ascribed to it in Section 2.2(f). "Seller" shall have the meaning ascribed to it in the first paragraph of this Agreement. "Seller Group" means, with respect to Federal income Taxes, the affiliated group of corporations (as defined in Section 1504(a) of the Code) of which Seller is a member. "Seller's Senior Officers" means Bruce A. Esselborn, Mary Jane Robertson, Kelly L. Stonebraker and Ronald D. Bobman. "Shares" shall have the meaning ascribed to it in the third paragraph of this Agreement. "Special Dividends" means the aggregate of all dividends paid by the Company to Seller and by the Company's Subsidiaries to the Company from January 1, 1996 through and including the Closing Date. "Straddle Period" shall have the meaning ascribed to it in Section 8.8. "Subsidiary" means, with respect to any Person, any entity whose securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are, at the time, directly owned by such Person or indirectly owned by such Person through a Subsidiary. "Surplus" means surplus as regards policyholders determined in accordance with SAP. "Tangible Net Worth" shall have the meaning ascribed to it in Section 5.14. 5 11 "Tax" means (a) any net income tax or franchise tax based on net income, (including any alternative or add-on minimum taxes, and gross income, gross receipts, premium, sales, use, ad valorem, value added, transfer, profits, license, payroll, employment, excise, severance, stamp, occupation, property or windfall profit tax, custom duty or other tax, governmental fee or other like assessments), together with any interest, penalty, addition to tax or additional amount due from, or in respect of, the Company and its Subsidiaries imposed by a Taxing Authority and (b) any liability for the payment of any amount of the type described in the immediately preceding clause (a) as a result of the Company or any of its Subsidiaries being a member of Seller Group. "Tax Benefit" means any deduction, amortization, exclusion from income or credit or other allowance. "Tax Loss" shall have the meaning ascribed to it in Section 11.2(c)(iii). "Tax Returns" means all material Tax returns, statements, reports and forms, including, without limitation, consolidated returns, statements, reports and forms, where applicable. "Tax Sharing Agreements" means the various Tax sharing agreements entered into by and between Parent, Seller, the Company and its Subsidiaries, applicable to all taxable periods commencing February 20, 1990 and ending on the Closing Date. "Taxing Authority" means any governmental authority (domestic or foreign) responsible for the imposition of any Tax. "Termination Notice" shall have the meaning ascribed to it in Section 10.1(d). "Third Party Claim" shall have the meaning ascribed to it in Section 11.4(d)(i). "UCIC" shall have the meaning ascribed to it in Section 2.2(c)(i). "UCM" means United Capitol Managers, Inc., a Delaware corporation and wholly-owned subsidiary of UCIC. "Western Surety" shall have the meaning ascribed to it in Section 7.4. ARTICLE 2 PURCHASE AND SALE 2.1 Purchase and Sale. Upon the terms and subject to the conditions set forth in this Agreement, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the Shares at the Closing. The purchase price for the Shares is Thirty Million Nine Hundred Twenty Thousand and 00/100 Dollars ($30,920,000) (the "Purchase Price") plus or minus the amount of the SAP Equity Adjustment calculated pursuant to Section 2.2(f) (the "Closing Purchase Price"). The Closing Purchase Price shall be paid in cash as provided in Section 2.2 and further adjusted, if applicable, pursuant to the provisions of Section 2.3 hereto. 2.2 Closing. The closing of the purchase and sale of the Shares hereunder (the "Closing") shall take place at the offices of Epstein Becker & Green, P.C., New York, New York as soon as possible, but in no event later than twelve business days after satisfaction of the conditions set forth in Article 10, or at such other time or place as Buyer and Seller may agree. At the Closing: 6 12 (a) Buyer shall deliver to Seller the Closing Purchase Price in immediately available funds by wire transfer to an account of Seller, designated in writing by Seller by notice to Buyer at least two business days prior to the Closing Date, and all documents to be delivered under Section 10.3. (b) Seller shall deliver to Buyer certificates for the Shares duly endorsed in blank or accompanied by stock powers duly endorsed in blank, and all documents to be delivered under Section 10.2. (c) At least five business days prior to the Closing Date, Seller shall deliver, or cause to be delivered, to Buyer the following: (i) a balance sheet of United Capitol Insurance Company, a Wisconsin corporation ("UCIC"), estimated as of the Closing Date prepared (x) in accordance with SAP and (y) on a basis consistent with the SAP balance sheet included in the Audited Statutory Financial Statements (the "Estimated SAP Closing Balance Sheet"), accompanied by a worksheet (the "Estimated Worksheet") setting forth the calculation of Estimated Adjusted Surplus, together with the related statement of income for the period January 1, 1996 through the Closing Date; (ii) an interim consolidated balance sheet of the Company and its Subsidiaries estimated as of the Closing Date prepared, except as noted in Section 2.2(e)(ii), (x) in accordance with GAAP, (y) on a basis consistent with the GAAP balance sheet included in the 1995 Audited Consolidated Financial Statements (the "Estimated GAAP Closing Balance Sheet"), together with the related consolidated statement of income for the period January 1, 1996 through and including the Closing Date; and (iii) a certification by the Chief Financial Officer of Seller and the Controller of the Company representing that the Estimated SAP Closing Balance Sheet and the Estimated GAAP Closing Balance Sheet, together with the respective related statements of income for the period January 1, 1996 through and including the Closing Date, have been prepared, in all material respects, in accordance with SAP and, except as noted in Section 2.2(e)(ii), in accordance with GAAP, respectively, applied on a basis consistent with the Audited Statutory Financial Statements and the 1995 Audited Consolidated Financial Statements, respectively, and in accordance with the provisions of Section 2.2(d) and 2.2(e), respectively. (d) The Estimated SAP Closing Balance Sheet shall be prepared in accordance with SAP as set forth in Section 2.2(c)(i) and shall reflect the following: (i) Reserves shall be estimated in accordance with generally accepted actuarial standards and consistent with past practice and, in estimating Reserves as at the Closing Date, such calculation shall include, among other things, the amounts of the (x) incurred but not reported losses (net of ceded reinsurance) and (y) unpaid unallocated loss adjustment expenses ((x) and (y) together referred to as "IBNR", which IBNR was twenty-six million dollars ($26,000,000) as of December 31, 1995); and (ii) Invested Assets comprised only of (x) cash and cash equivalents, (y) short-term investments and (z) fixed income securities that were owned by the Company on December 31, 1995, and which are not set forth on Schedule 2.2(d)(ii) hereto furnished by Buyer; (e) The Estimated GAAP Closing Balance Sheet shall be prepared on an interim basis in accordance with GAAP (except as provided in subsection (ii) below) applied as set forth in Section 2.2(c)(ii) and shall reflect the following: 7 13 (i) the accounts of the Company and its Subsidiaries on a stand-alone basis; and (ii) the exclusion of financial statement footnotes. (f) The "SAP Equity Adjustment" shall be equal to the positive amount of the difference between $19,000,000 and Estimated Adjusted Surplus. The Closing Purchase Price shall thereupon be determined as follows: (i) if Estimated Adjusted Surplus exceeds $19,000,000, then the Closing Purchase Price shall be equal to the Purchase Price plus the amount by which Estimated Adjusted Surplus exceeds $19,000,000, or (ii) if Estimated Adjusted Surplus is less than $19,000,000, then the Closing Purchase Price shall be equal to the Purchase Price minus the amount by which $19,000,000 exceeds Estimated Adjusted Surplus. 2.3 Post-Closing Purchase Price Adjustment. (a) Within 45 days after the Closing Date, Buyer shall cause to be prepared, under the supervision of Seller and its representatives, a balance sheet of UCIC as at the Closing Date (the "Closing Balance Sheet") and a statement of income of UCIC for the period January 1, 1996 through and including the Closing Date (the "Closing Income Statement"), each prepared on a basis consistent with the Estimated SAP Closing Balance Sheet, with account balances computed in accordance with SAP consistently applied, and a worksheet setting forth the calculation of Closing Adjusted Surplus (the "Closing Worksheet" and, together with the Closing Balance Sheet, the "Closing Statements") and certified to such effect by the Controller of the Company and approved by Buyer and Seller. (b) Within 15 days after receipt of the Closing Statements, either Buyer or Seller may notify the other that it disputes all or part of the Closing Statements, and if neither Buyer nor Seller so notifies the other, then Buyer and Seller shall be deemed to have accepted the Closing Statements. If either party notifies the other of a dispute, then, during the 15-day period following the date of the last notice of dispute given, Buyer and Seller shall use reasonable efforts to resolve the dispute and agree upon the Closing Statements. If Buyer and Seller are unable to resolve the dispute within such 15-day period, then the dispute shall be submitted within five days of such 15-day period to an office of KPMG Peat Marwick in the eastern United States having a significant property and casualty insurance practice for determination (the "Arbitrating Accountant"). The determination of the Arbitrating Accountant shall be made within 30 days after submission by the parties hereto, and any changes to the Closing Statements required by such determination shall be set forth by the Arbitrating Accountant in adjustments to the Closing Statements (the "Adjusted Closing Statements"), which Adjusted Closing Statements shall be final and binding and shall be delivered by the Arbitrating Accountant to Buyer and Seller. If the Arbitrating Accountant's determination with respect to all disputes (i) results in a net adjustment to the Closing Purchase Price in favor of Seller, then Buyer shall pay the reasonable fees and expenses of the Arbitrating Accountant; (ii) results in a net adjustment to the Closing Purchase Price in favor of Buyer, then Seller shall pay the reasonable fees and expenses of the Arbitrating Accountant; (iii) results in no net adjustment to the Closing Purchase Price, then the party giving the dispute notice shall pay the reasonable fees and expenses of the Arbitrating Accountant; or (iv) results in no net adjustment to the Closing Purchase Price and both Buyer and Seller gave a dispute notice, then Buyer shall pay fifty percent (50%) and Seller shall pay fifty percent (50%) of the reasonable fees and expenses of the Arbitrating Accountant. (c) The Closing Purchase Price shall be adjusted as follows (the "Post-Closing Purchase Price Adjustment"): (i) If Closing Adjusted Surplus set forth on the Closing Worksheet (or the closing worksheet included in the Adjusted Closing Statements, if applicable) exceeds Estimated Adjusted Surplus, then Buyer shall pay to Seller the amount of such difference, or (ii) if Closing Adjusted Surplus set forth on the Closing Worksheet (or the closing worksheet included in the Adjusted Closing Statements, if applicable) is less than Estimated Adjusted Surplus, then Parent shall pay to Buyer the amount of such difference. Any payment required in this Section shall be made in immediately available funds by wire transfer to an account of Seller or 8 14 Buyer, as the case may be, as designated in writing by notice by the other party, within 10 days following the determination of such Post-Closing Purchase Price Adjustment. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as of the date hereof and as of the Closing Date that: 3.1 Corporate Existence and Power. Seller has been incorporated and is validly existing as a corporation in good standing under the laws of the State of Texas and has all corporate powers required to carry on its business as now conducted. The Company (a) has been incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, (b) has all corporate powers required to carry on its business as now conducted, (c) has all governmental licenses, permits, authorizations, consents and approvals required to carry on the Business as now conducted, all of which are in full force and effect, and (d) is qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except, with respect to clauses (c) and (d) above, for those licenses, permits, authorizations, consents and approvals the absence of which, and those jurisdictions where failure to be so qualified, would not result in a Negative Material Breach. Seller has heretofore provided to Buyer true and complete copies of the certificate of incorporation and bylaws of Seller and the Company as in effect on the date hereof. 3.2 Corporate Authorization. Except as set forth in Schedule 3.2 hereto, the execution, delivery and, subject to the receipt of the approvals referred to in Section 3.3, performance by Seller of this Agreement and the transactions contemplated hereunder are within Seller's corporate powers and have been duly authorized by all necessary corporate action on the part of Seller. This Agreement constitutes a valid and legally binding agreement of Seller, enforceable against Seller in accordance with its terms, subject to (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other similar laws now or hereafter in effect relating to or affecting the enforcement of creditors' rights generally and the rights of creditors of insurance companies generally and (b) general principles of equity (regardless of whether considered in a proceeding at law or equity). 3.3 Governmental Authorization. Except as set forth in Schedule 3.3 hereto, the execution, delivery and performance by Seller of this Agreement requires no action by or in respect of, or filing with, any governmental body, agency, or official on the part of Seller or any of its Subsidiaries other than (a) compliance with any applicable requirements of the HSR Act, (b) approvals or filings under applicable Federal and state securities laws and under the applicable state insurance laws of the jurisdictions set forth on Schedule 3.3 hereto, (c) filings and notices not required to be made or given until after the Closing Date and filings, at any time, of Tax Returns, Tax reports and Tax information statements and (d) any such action or filing as to which the failure to make or obtain would not result in a Negative Material Breach. 3.4 Non-Contravention. Except as set forth in Schedule 3.4 hereto, the execution, delivery and performance by Seller of this Agreement do not and will not (a) violate the certificate of incorporation or bylaws of Seller, the Company or any of its Subsidiaries, (b) assuming compliance with the matters referred to in Section 3.3, violate any applicable law, rule, regulation, judgment, injunction, order or decree, (c) require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of the Company or any of its Subsidiaries, or to a loss of any benefit to which the Company or any Subsidiary of the Company is entitled, under any agreement or other instrument binding upon the Company or any of its Subsidiaries or (d) result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries except, in the case of clauses (b), 9 15 (c) and (d) above, to the extent that any such violation, failure to obtain any such consent or other action, default, right, loss or Lien would not result in a Negative Material Breach. 3.5 Capitalization. (a) The authorized capital stock of the Company consists of 650,000 shares of Common Stock and 493,750 shares of Preferred Stock. As of the date hereof, there are outstanding 73,850 shares of Common Stock and 447,418 shares of Preferred Stock. (b) All outstanding shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable. Except as set forth in this Section 3.5 and Schedule 3.5 hereto, there are no outstanding (i) shares of capital stock or voting securities of the Company, (ii) securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company or (iii) options or other rights to acquire from the Company, or other obligations of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company; and there are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any such securities. 3.6 Ownership of Shares. Except as set forth in Schedule 3.6 hereto, Seller is the record and beneficial owner of the Shares, free and clear of any Lien (except for the pledge pursuant to the Credit Agreement) and will transfer and deliver to Buyer at the Closing valid title to the Shares, free and clear of any Lien, except Liens arising as a result of any action taken by Buyer or any of its Affiliates; provided, however, that Seller makes no representation regarding the ability of any Person other than Seller to transfer or otherwise dispose of the Shares without registration or qualification under, or in compliance with, applicable Federal securities or state securities or insurance laws. 3.7 Subsidiaries. Except as set forth in Schedule 3.7: (a) Each Subsidiary of the Company has been incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has all corporate powers and all governmental licenses, permits, authorizations, consents and approvals required to carry on its business as now conducted, all of which are in full force and effect, and is qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where the failure to be so qualified, and those licenses, authorizations, consents and approvals the absence of which, would not result in a Negative Material Breach. Each Subsidiary of the Company, together with its jurisdiction of incorporation and percentage ownership of the capital stock of any other Subsidiary, is described on Schedule 3.7 hereto. Attached to Schedule 3.7 are true and complete copies of the articles of incorporation and by-laws of each of the Subsidiaries of the Company. (b) Except as set forth on Schedule 3.7 hereto, as of the Closing Date, all of the outstanding capital stock of, or other voting securities or ownership interests in, each Subsidiary of the Company will be owned by the Company, directly or indirectly, free and clear of any Lien. There are no outstanding (i) securities of the Company or any of its Subsidiaries convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary of the Company or (ii) options or other rights to acquire from the Company or any of its Subsidiaries, or other obligations of the Company or any of its Subsidiaries to issue, any capital stock or other voting securities or ownership interests in, or any securities convertible into or exchangeable for any capital stock or other voting securities or ownership interests in, any Subsidiary of the Company; and there are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any such securities. 3.8 Financial Statements. (a) GAAP Financial Statements. As of the date of this Agreement, the draft consolidated balance sheets of the Company and its Subsidiaries as of December 31, 1994 and 1995 and the related draft consolidated statements of income and cash flows for the years then ended, which previously have been furnished to Buyer, present fairly, in all material respects, the consolidated financial 10 16 position of the Company and its Subsidiaries as of the dates thereof and the consolidated results of operations of the Company and its Subsidiaries for the respective periods then ended in conformity with GAAP. In addition, the draft balance sheet of UCM as of December 31, 1995 and the related statement of income and cash flows for the year then ended, which previously have been furnished to Buyer, present fairly, in all material respects, the financial position of UCM as of December 31, 1995 and the results of operations of UCM for the year then ended in conformity with GAAP. As of the Closing Date, the audited consolidated balance sheets of the Company and its Subsidiaries as of December 31, 1994 and 1995 and the related audited consolidated statements of income and cash flows for the years then ended (the "Audited Consolidated Financial Statements"), to be furnished to Buyer pursuant to Section 5.6 hereof, will present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and the consolidated results of operations of the Company and its Subsidiaries for the respective periods then ended in conformity with GAAP. In addition, as of the Closing Date the audited balance sheets of UCM as of December 31, 1994 and 1995 and the related audited statements of income and cash flows for the years then ended (the "Audited UCM Financial Statements"), to be furnished to Buyer pursuant to Section 5.6 hereof, will present fairly, in all material respects, the financial position of UCM as of the dates thereof and the results of operations of UCM for the years then ended in conformity with GAAP. (b) Statutory Financial Statements. The audited statutory balance sheets of UCIC as of December 31, 1993 and December 31, 1994, and the related audited statutory statements of income and changes in capital and surplus and cash flows for each of the years then ended and, as at the date of this Agreement, the draft statutory balance sheet of UCIC as of December 31, 1995 and the related draft statutory statements of income and changes in capital and surplus and cash flows for the year then ended, which previously have been furnished to Buyer, present fairly, in all material respects, the admitted assets, liabilities, capital and surplus, cash flows and other funds of UCIC as at the dates and for the periods indicated, in conformity with SAP. As of the Closing Date, the audited statutory balance sheet of UCIC as of December 31, 1995 and the related audited statutory statements of income and changes in capital and surplus and cash flows for the year then ended (the "Audited Statutory Financial Statements") to be furnished to Buyer pursuant to Section 5.6 hereof, will present fairly, in all material respects, the admitted assets, liabilities, capital and surplus, cash flows and other funds of UCIC as at the date and for the period indicated, in conformity with SAP. 3.9 Absence of Certain Changes. Except as disclosed in Schedule 3.9 hereto, since the Balance Sheet Date, the Business has been conducted, in all material respects, in the ordinary course consistent with past practices, and other than (a) the Investment Portfolio Adjustments and the transactions relating to, and the payment of, the Special Dividends, (b) any payments pursuant to the Tax Sharing Agreements, and (c) a downgrade, if any, in UCIC's A.M. Best & Co. rating to "A-" or an announcement, if any, that UCIC's rating is under review with or without negative implications, there has not been: (i) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company or any of its Subsidiaries or any repurchase, redemption or other acquisition by the Company or any of its Subsidiaries of any outstanding shares of capital stock or other securities of, or other ownership interests in, the Company or any of its Subsidiaries; (ii) any incurrence, assumption or guarantee by the Company or any of its Subsidiaries of any outstanding indebtedness for borrowed money in excess of an aggregate of $100,000 other than under, or in connection with, the Credit Agreement; 11 17 (iii) any transaction or commitment made, or any contract or agreement entered into, by the Company or any of its Subsidiaries requiring payments aggregating in excess of $250,000, other than obligations arising under or in connection with insurance, reinsurance or indemnity agreements or policies, surety bonds, agency, brokerage or similar contracts or undertakings issued or entered into in the ordinary course of the Business consistent with past practices, or transactions or commitments contemplated by this Agreement; (iv) any material change in any method of accounting or accounting practice by the Company or any of its Subsidiaries, except for any such change after the date hereof as a result of a change in GAAP or SAP or as contemplated by Sections 2.2(d) and 2.2(e) hereto; or (v) any (x) employment, deferred compensation, severance, retirement or other similar agreement entered into with any director, officer or employee of the Company or any of its Subsidiaries (or any amendment to any such existing agreement), other than in the ordinary course of Business consistent with past practice, (y) grant of any severance or termination pay to any director, officer or employee of the Company or any of its Subsidiaries other than in the ordinary course of Business consistent with existing policies, or (z) change in compensation or other benefits payable to any director, officer or employee of the Company or any of its Subsidiaries other than in the ordinary course of Business consistent with past practice. 3.10 Material Contracts. Except as disclosed in Schedule 3.10 hereto, neither the Company nor any of its Subsidiaries is bound by or a party to any contract, other than insurance, reinsurance or indemnity agreements or policies, surety bonds, agency, brokerage or similar contracts or undertakings, or contracts cancelable on not more than 60 days' notice, which provides for payments aggregating $100,000 or more, and the Company has not received written notice of any breach under any such contract. 3.11 Litigation. Except as set forth on Schedule 3.11 hereto and except for any action, suit, investigation or proceeding ("Litigation") which may result in, or which relates in any way to, any insurance, reinsurance or indemnity policy or agreement, surety bond or similar contract or undertaking issued or entered into by the Company or any of its Subsidiaries, there is no Litigation pending or, to the knowledge of Seller's Senior Officers, threatened against or affecting, the Company or any of its Subsidiaries or any of their respective properties before any court or arbitrator or any governmental body, agency or official which, assuming an adverse decision, individually and net of insurance proceeds or other recoveries and any financial statement reserve for such Litigation, would reasonably be expected to require payments by the Company or any of its Subsidiaries of an amount in excess of $50,000. 3.12 Compliance with Laws. Except as set forth on Schedule 3.12 hereto or as previously disclosed to Buyer in writing expressly for the purposes of this Section 3.12 prior to the date hereof, the Company and its Subsidiaries are in compliance with all applicable laws, statutes, ordinances and regulations, whether Federal, state or local, except where the failure to comply would not result in a Negative Material Breach. 3.13 Properties. Schedule 3.13-A hereto sets forth a schedule of the fixed assets of the Company and its Subsidiaries as set forth on the draft consolidated balance sheet of the Company and its Subsidiaries as at December 31, 1995 previously furnished to Buyer and the related costs thereof and will, at the Closing Date, set forth a schedule of such fixed assets as set forth on the audited consolidated balance sheet of the Company and its Subsidiaries as at December 31, 1995 to be delivered pursuant to Section 5.6 hereof, and related costs thereof, except where the failure to schedule assets would not result in a Negative Material Breach. Except as set forth on Schedule 3.13-B hereto, the Company and its Subsidiaries have good title to or, in the case of leased property, have valid leasehold interests in, all property and assets (whether real or personal, tangible 12 18 or intangible, other than the Invested Assets which are referred to in Section 3.21 hereof), to be reflected on the audited consolidated balance sheet of the Company and its Subsidiaries as at December 31, 1995 or acquired after the Balance Sheet Date except for (a) property and assets sold or otherwise disposed of since the Balance Sheet Date in the ordinary course of Business consistent with past practice, (b) property or assets sold or distributed to Seller by the Company pursuant to the Special Dividends, and (c) such imperfections in title or invalidities in leasehold interests as do not result in a Negative Material Breach. None of such property or assets is subject to any Liens, except: (i) Liens disclosed on the balance sheet contained in the 1995 Audited Consolidated Financial Statements; (ii) Liens for Taxes not yet due or being contested in good faith (and for which adequate accruals or reserves have been established on the balance sheet contained in the 1995 Audited Consolidated Financial Statements); (iii) Liens arising after the Balance Sheet Date in the ordinary course of the Business consistent with past practice; or (iv) Liens which do not materially detract from the value or materially interfere with any present or intended use of such property or assets. 3.14 Intentionally omitted. 3.15 Brokers' Fees. Except for Smith Barney Inc., whose fees will be paid by Seller, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Seller, the Company or any of its Subsidiaries who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. 3.16 ERISA and Employee Representations. (a) Schedule 3.16(a) identifies each Employee Plan. Seller has furnished or made available to Buyer copies of the Employee Plans (and, if applicable, related trust agreements) and all amendments thereto together with the most recent annual report prepared in connection with any Employee Plan (Form 5500 including, if applicable, Schedule B thereto). Except as set forth on Schedule 3.16(a) hereto, all required reports and descriptions of the Employee Plans (including Form 5500 Annual Reports, Summary Annual Reports and Summary Plan Descriptions, as required) have been appropriately filed and distributed, and any notice required by ERISA or the Code or any other state or Federal law or any ruling or regulation of any state or Federal administrative agency with respect to the Employee Plans have been appropriately made, and all contributions for all periods prior to the date hereof have been made, except where the failure to make such filings, distributions, notices or contributions would not result in a Negative Material Breach. (b) Neither Seller nor any ERISA Affiliate of Seller has incurred, or reasonably expects to incur prior to the Closing Date, any liability under Title IV or ERISA arising in connection with the termination of, or complete or partial withdrawal from, any Employee Plan that is reasonably expected to become a liability of Buyer or any of its ERISA Affiliates after the Closing Date. (c) Except as described in Schedule 3.16(c) hereto, each Employee Plan that is intended to be qualified under Section 401(a) of the Code is and has been subject to a favorable determination letter from the Internal Revenue Service and/or has pending a request for a determination timely filed with the Internal Revenue Service in respect of compliance with the Code. Except as set forth in Schedule 3.16(c) hereto, each Employee Plan has been maintained in compliance with its terms and with requirements prescribed by 13 19 ERISA and the Code, except where the failure to so comply would not result in a Negative Material Breach. No Employee Plan is a Multiemployer Plan. (d) Schedule 3.16(d) identifies each Benefit Arrangement, and identifies all outstanding claims for benefits made by any Employee thereunder as of the date hereof other than health, dental, long-term disability, group life, and group accidental death and dismemberment claims. Seller has furnished or made available to Buyer copies or descriptions of each Benefit Arrangement. Except as set forth in Schedule 3.16(d), each Benefit Arrangement has been maintained in compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations including, without limitation, the payment in full of insurance premiums due through the date hereof, except where the failure to so comply would not result in a Negative Material Breach. (e) Seller previously has furnished Buyer with a list of all Employees, together with their respective salaries and accrued vacation days, and identifying those Employees classified by the Company as "exempt" under the Federal Labor Standards Act as at the delivery date of such list. 3.17 Environmental Matters. To the actual knowledge of Seller's Senior Officers without inquiry, except as disclosed on Schedule 3.17, neither the Company nor any of its Subsidiaries nor any other Person, has stored, disposed or discharged, on, under or about any of the Leased Properties any flammables, contaminants, gasoline, petroleum products, crude oil, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, polychlorinated biphenyls or related or similar materials, asbestos or any material containing asbestos, any air, soil or water pollution, or any other substance or material as may be defined as a hazardous or toxic substance (collectively, "Hazardous Materials") under any applicable Federal or state governmental law, rule, or regulation, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et. seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801, et. seq.), the Solid Waste Disposal Act, as amended (42 U.S.C. Section 6901 et. seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901 et. seq.), the Federal Water Pollution Prevention and Control Act, as amended (33 U.S.C. Sections 1251 et. seq.), the Clean Air Act, as amended (42 U.S.C. Sections 7401 et. seq.), the Toxic Substances Control Act, as amended (15 U.S.C. Sections 2601 et. seq.), the Occupational Safety and Health Act, as amended (29 U.S.C. Sections 651 et. seq.) and the state laws implementing said acts (collectively, "Environmental Laws") requiring remediation or notice to any governmental authority under the Environmental Laws, and neither the Company nor any of its Subsidiaries has received written notice from any governmental authority alleging violations of any Environmental Laws. To the actual knowledge of Seller's Senior Officers without inquiry, none of the Leased Properties has ever been used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process material amounts of Hazardous Materials, except in compliance with Environmental Laws. Notwithstanding anything to the contrary contained in this Section, no representation or warranty is being made with respect to the liability of the Company and its Subsidiaries under any policy or agreement of insurance, reinsurance or indemnity relating to any Environmental Laws or Hazardous Materials. 3.18 Intercompany Accounts. Schedule 3.18 hereto lists all intercompany balances as of the Balance Sheet Date between Seller and its Affiliates, on the one hand, and the Company and its Subsidiaries, on the other hand (except for inaccuracies which would not result in a Negative Material Breach), and describes the general types of intercompany transactions that have occurred between the Balance Sheet Date and the date of this Agreement. 3.19 Reserves. The reserves for unpaid losses and loss adjustment expenses, including but not limited to IBNR (collectively, the "Reserves"), in the draft consolidated balance sheet of the Company and its Subsidiaries as of December 31, 1995 and the draft statutory financial statement of UCIC as of December 31, 14 20 1995, each previously furnished to Buyer, were, and upon delivery of the audited consolidated balance sheet of the Company and its Subsidiaries as of December 31, 1995 and the audited statutory balance sheet of UCIC as of December 31, 1995 the Reserves therein will be, estimated as of December 31, 1995 in accordance with generally accepted actuarial standards, in accordance with GAAP and SAP, respectively. Due to the variability and uncertainty which are intrinsic to the claim evaluation and settlement processes, neither Parent nor Seller can guaranty, and neither Parent nor Seller assumes any liability or makes any representation or warranty with respect to, the ultimate adequacy of Reserves or the sufficiency of Reserves to provide for all unpaid loss and loss adjustment expense obligations. 3.20 The Company. Prior to the date hereof, the Company has not engaged in any operations or activities other than operations or activities in connection with (a) its formation and organization, (b) this Agreement and the transactions contemplated hereby and (c) the ownership of stock of one or more of its Subsidiaries. 3.21 Investments. Except as set forth on Schedule 3.21 hereof, the Company or its Subsidiaries are in possession of all certificates and other documentation necessary to evidence ownership of the Invested Assets, and has good and marketable title, free and clear of all Liens, to all Invested Assets as of December 31, 1995 or acquired after December 31, 1995, other than Invested Assets that (a) have been disposed of in the ordinary course of the Business consistent with past practices, or (b) have been transferred or disposed of by the Company or its Subsidiaries (i) in connection with the Investment Portfolio Adjustments or (ii) pursuant to transactions relating to, and the payment of, the Special Dividends. 3.22 Taxes. Except as set forth on Schedule 3.22-A hereto, (a) all Tax Returns required to be filed with any Taxing Authority by or with respect to the Company or any of its Subsidiaries with respect to any Pre-Closing Tax Period have been filed or will be filed in accordance with all applicable laws (taking into account any extension of a required filing date); (b) the Company and its Subsidiaries have timely paid all Taxes including, without limitation, pursuant to the Tax Sharing Agreements, shown as due and payable on the Tax Returns that have been filed by or on behalf of the Company and its Subsidiaries; (c) the Company and its Subsidiaries have made or will on or before the Closing Date make provision for all Taxes payable by the Company and its Subsidiaries for any pre-Closing Tax Period for which no Tax Return has yet been filed; (d) the amounts paid to Seller or Parent pursuant to the Tax Sharing Agreements and the reserves for Taxes with respect to the Company and its Subsidiaries to be reflected on the Estimated GAAP Closing Balance Sheet will be adequate to cover the Tax liabilities accruing through the date thereof; (e) there is no action, suit, proceeding, investigation, audit or claim now pending or, to the knowledge of Seller's Senior Officers, proposed against or with respect to the Company or its Subsidiaries in respect of any Tax; (f) the Company and its Subsidiaries have withheld payments of all amounts required to be withheld and have paid all withholding Taxes required to be paid under Federal, state, local and foreign Tax laws or have made adequate provision for all such withholding or payments; (g) no election under Sections 108, 168, 338, 441, 1017, 1033 or 4977 of the Code is in effect with respect to the Company or any of its Subsidiaries; (h) neither the Company nor any of its Subsidiaries is required to make any adjustment pursuant to Section 481 of the Code by reason of a change in accounting method, and there are no applications for changes in accounting method pending with any Tax Authority; (i) there are no deferred intercompany gains or losses (as defined in Treasury Regulation 1.1502-13 of the Code) with respect to the Company and its Subsidiaries, on the one hand, and the Seller and its Affiliates, on the other hand; (j) neither the Company nor any of its Subsidiaries is jointly or severally liable for Federal Taxes on income as a result of being a member of another consolidated group, other than Seller Group; and (k) each of the Company and its Subsidiaries has paid or made adequate provision for payment of all guarantee fund assessments that are due, claimed or asserted by any insurance regulatory authority, provided, however, with respect to guarantee fund assessments claimed or asserted, that written notice of such claimed or asserted assessments has been received by the Company or its Subsidiaries. Schedule 3.22-B hereto lists all of the Tax Sharing Agreements, 15 21 and a list of jurisdictions in which the Company or any of its Subsidiaries has filed an income, franchise or premium Tax Return. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as of the date hereof and as of the Closing Date that: 4.1 Corporate Existence and Power. Buyer has been incorporated and is validly existing as a corporation in good standing under the laws of the State of New York and has all corporate powers and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, consents and approvals the absence of which would not have a Material Adverse Effect on Buyer. Buyer has heretofore provided to Seller true and complete copies of its certificate of incorporation and bylaws as in effect on the date hereof. Schedule 4.1 hereto sets forth a list of each insurance Affiliate of Buyer and its respective State of incorporation. 4.2 Corporate Authorization. The execution, delivery and, subject to the receipt of the approvals referred to in Section 4.3, performance by Buyer of this Agreement is within the corporate powers of Buyer and have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement constitutes a valid and legally binding agreement of Buyer, enforceable against Buyer in accordance with its terms, subject to (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other similar laws now or hereafter in effect relating to or affecting the enforcement of creditors' rights generally and the rights of creditors of insurance companies generally and (b) general principles of equity (regardless of whether considered in a proceeding at law or in equity). 4.3 Governmental Authorization. The execution, delivery and performance by Buyer of this Agreement requires no action by or in respect of, or filing with, any governmental body, agency or official on the part of Buyer or any of its Subsidiaries other than (a) compliance with any applicable requirements of the HSR Act, (b) approvals or filings under the applicable insurance laws of the jurisdictions set forth in Schedule 4.3, and (c) filings and notices not required to be made or given until after the Closing Date and filings, at any time, of Tax Returns, Tax reports and Tax information statements. 4.4 Non-Contravention. The execution, delivery and performance by Buyer of this Agreement do not and will not (a) violate the certificate of incorporation or bylaws of Buyer or any of its Subsidiaries, (b) assuming compliance with the matters referred to in Section 4.3, violate (x) any applicable law, rule or regulation or (y) any judgment, injunction, order or decree, (c) require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of Buyer or any of its Subsidiaries or to a loss of any benefit to which Buyer or any of its Subsidiaries is entitled under, any agreement or other instrument binding upon Buyer or any of its Subsidiaries or any license, franchise, permit or other similar authorization held by Buyer or any of its Subsidiaries or (d) result in the creation or imposition of any Lien on any asset of Buyer or any of its Subsidiaries except, in the case of clauses (b), (c) and (d) above, to the extent that any such violation, failure to obtain any such consent or other action, default, right, loss or Lien would not result in a Material Adverse Effect on Buyer. 4.5 Financing. Buyer has, or will have prior to the Closing, sufficient immediately available funds to enable it to make payment at the Closing of the Closing Purchase Price, plus a Post-Closing Purchase Price Adjustment, if any, and any other amounts to be paid by it hereunder. 16 22 4.6 Purchase for Investment. Buyer is purchasing the Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. Buyer is an "accredited investor" within the meaning of Rule 501 of the Securities Act of 1933, as amended, and (either alone or together with its advisors) has had access to Seller and the Company and has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Shares and is capable of bearing the economic risks of such investment. 4.7 Brokers' Fees. There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Buyer who might be entitled to any fee or commission from Seller or any of its Affiliates upon consummation of the transactions contemplated by this Agreement. ARTICLE 5 COVENANTS OF SELLER Seller hereby covenants and agrees that: 5.1 Conduct of the Business. Except as contemplated by this Agreement (including, without limitation, the Investment Portfolio Adjustments, the transactions relating to, and the payment of, the Special Dividends and the payments under the Tax Sharing Agreements), including the Schedules hereto, from the date hereof until the Closing Date, Seller shall cause the Company and its Subsidiaries to conduct the Business in all material respects in the ordinary course consistent with past practice. Without limiting the generality of the foregoing, from the date hereof until the Closing Date, except as set forth on Schedule 5.1(c) hereto, Seller will not permit the Company or any of its Subsidiaries to: (a) adopt or propose any change in its certificate of incorporation or bylaws; (b) merge or consolidate with any other Person or acquire a material amount of assets of any other Person; (c) sell, lease, license or otherwise dispose of any assets or property having a value in excess of $5,000 except (i) pursuant to existing contracts or commitments, (ii) in the ordinary course of the Business consistent with past practices, or (iii) the furniture and equipment set forth on Schedule 5.1(c) hereof; or (d) agree or commit to do any of the foregoing. 5.2 Access to Information. From the date hereof until the Closing Date and subject to the terms of the Confidentiality Agreement, applicable legal privileges and legal or contractual restrictions, Seller will (a) give, and will cause the Company and its Subsidiaries to give, Buyer, its counsel, financial advisors, auditors and other authorized representatives full access, upon reasonable prior notice and during normal business hours, to the offices, properties, books and records of the Company and each of its Subsidiaries and to the books and records of Seller relating to the Company and its Subsidiaries, (b) furnish, and will cause the Company and its Subsidiaries to furnish, to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to the Company or any of its Subsidiaries as such Persons may reasonably request and (c) instruct the employees, counsel and financial advisors of Seller or the Company or any of its Subsidiaries to cooperate with Buyer in its investigation of the Company or any of its Subsidiaries. 17 23 5.3 Resignations. At or prior to the Closing Date, Seller will deliver to Buyer the resignations of Bruce A. Esselborn, Mary Jane Robertson, Kelly L. Stonebraker, and all other non-employee officers and directors of the Company and its Subsidiaries from their positions with the Company or any of its Subsidiaries. 5.4 Regulatory Matters. Seller, with Buyer's cooperation, will promptly prepare and file all applications and notices to obtain the state regulatory approvals specified on Schedule 3.3, and use all reasonable efforts to process such applications and notices and obtain the requisite consents. 5.5 Release from Lenders. Seller will use all reasonable efforts to cause the release of the pledged capital stock of the Company and its Subsidiaries by, and any and all obligations of the Company and the Subsidiaries to, Chemical Bank and the other lenders named in the Credit Agreement dated March 29, 1994 among such lenders, Capsure Financial Group, Inc. and Parent (the "Credit Agreement"). 5.6 Audited Financial Statements. Within ten days following the date of this Agreement, Seller shall deliver to Buyer the Audited Consolidated Financial Statements, the Audited Statutory Financial Statements and the Audited UCM Financial Statements, each of which shall be substantially similar to their respective drafts previously furnished to Buyer. 5.7 Investment Portfolio Adjustments. Prior to the Closing Date, Seller shall take such actions as is required to cause UCIC's Invested Assets to conform to the description set forth in Section 2.2(d)(ii) of this Agreement. 5.8 Estimated UCM Financial Statements. At least five business days prior to the Closing Date, Seller shall deliver, or cause to be delivered, to Buyer, an unaudited balance sheet of UCM estimated as of the Closing Date, and related statements of income and cash flows for the period January 1, 1996 through and including the Closing Date (on an estimated basis), prepared, except as noted in Section 2.2(e)(ii) of this Agreement, (x) in accordance with GAAP and (y) on a basis consistent with the audited balance sheet of UCM as of December 31, 1995 included as part of the Audited UCM Financial Statements to be delivered to Buyer pursuant to Section 5.6 hereof. 5.9 Case Reserves Files. At least five business days prior to the Closing Date, Seller shall deliver, or cause to be delivered, to Buyer, a schedule setting forth every case reserve file opened or closed and every change in the estimate of case reserves of UCIC from January 1, 1996 through and including a date not more than ten business days prior to the Closing Date. 5.10 Confidentiality. Seller will hold, and will use reasonable efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by any judicial or administrative process or by other requirements of law, all confidential documents and information concerning the Company or any of its Subsidiaries provided to it pursuant to Section 6.2 or otherwise. 5.11 Intercompany Accounts. At least five business days prior to the Closing, Seller shall prepare and deliver to Buyer a statement (the "Intercompany Account Statement") setting forth in reasonable detail the calculation of the intercompany account balances between Seller or any of its Affiliates, on the one hand, and the Company and its Subsidiaries, on the other hand, based upon the latest available financial information as of five business days prior to such date and, to the extent requested in writing by Buyer, provide Buyer with supporting documentation to verify the underlying intercompany charges and transactions. All such intercompany account balances (other than those under or relating to reinsurance contracts, agency agreements and arrangements) shall be paid in full in cash at or prior to the Closing. 18 24 5.12 Updated Schedules. No later than ten business days prior to the Closing Date, Seller shall provide updated, amended and/or supplemental Schedules to Buyer. 5.13 Estimated Adjusted Surplus. Prior to the Closing Date, Seller shall use its reasonable efforts to cause Estimated Adjusted Surplus to be $19,000,000. 5.14 Tangible Net Worth of UCM. The payment of the Special Dividends shall not cause the net worth of UCM as reflected on the balance sheet of UCM described in Section 5.8 above, after excluding excess cost over net assets acquired, net of amortization ("Tangible Net Worth") to be less than such Tangible Net Worth as calculated from the audited UCM balance sheet as of December 31, 1995. ARTICLE 6 COVENANTS OF BUYER Buyer hereby covenants and agrees that: 6.1 Confidentiality. All information provided to Buyer or any of the persons referred to in Section 5.2 hereof will be treated as if provided under the confidentiality agreement dated as of September 29, 1995 by and between Frontier Insurance Group, Inc. and Parent (the "Confidentiality Agreement"). 6.2 Post-Closing Access. Buyer will cause the Company and each of its Subsidiaries, on and after the Closing Date, so long as Parent has indemnification obligations to Buyer pursuant to Article 11 hereof, to afford promptly to Seller and its agents and representatives full access, upon reasonable prior notice and during normal business hours, to their offices, properties, books, records, employees and auditors to the extent reasonably necessary to permit Seller to determine any matter relating to its rights and obligations hereunder or to any period ending on or before the Closing Date, including, without limitation, in connection with the preparation of Tax Returns and the Closing Financial Statements. 6.3 Regulatory Matters. Buyer, with Seller's cooperation will promptly, and in any event no later than ten business days after the date hereof, prepare and file all applications, notices, consents and other documents necessary or advisable to obtain the state regulatory approvals specified in Schedule 4.3, promptly file all supplements or amendments thereto and use all reasonable efforts to obtain the regulatory approvals specified in Schedule 4.3 hereto as promptly as practicable. Buyer will provide Seller and its counsel (a) the opportunity to review in advance and comment on all such filings with regulatory authorities and rating agencies relating to this transaction and all written communications with respect thereto a reasonable time prior to such filings or written communications, (b) prompt notice of all contacts by such regulatory authorities and rating agencies, and (c) with respect to any regulatory approval or review required by any state other than Buyer's and UCIC's states of domicile, the right to approve any filings, written communications and the substance of any oral communications and to participate in any meetings. Buyer will keep Seller informed of the status of matters relating to obtaining the regulatory approvals specified in Schedule 4.3 hereto and will promptly furnish Seller with copies of all written communications with respect thereto. 6.4 Post-Closing Use of Office Space. To assist in an orderly transition of ownership of the Business, Buyer shall permit each of Bruce A. Esselborn, Mary Jane Robertson, Ronald D. Bobman and Vicki Hicks to continue to use the office space currently occupied by them for a period of 60 days following the Closing Date. 6.5 Agreement to Sublease. In the event Richard Weingarten & Company ("Weingarten"), which currently occupies office space within the Company's leased premises, is unable to enter into an 19 25 independent lease with Taylor & Mathis, the landlord of such premises, on or prior to the Closing Date with respect to such office space, Buyer hereby agrees to cause the Company to enter into a sublease with Weingarten or any other Person reasonably satisfactory to Buyer with respect to such space, on substantially the same terms and conditions as are contained in the master lease, with rent to be determined according to the pro rata portion attributable to the space being sublet, and expiring on the expiration date of the initial term of the master lease. Notwithstanding the foregoing, if Weingarten elects to vacate such space on or before the Closing Date and gives Buyer written notice thereof at least 30 days prior to the Closing Date, the requirement provided in Section 10.2(b)(xi) shall be waived. ARTICLE 7 COVENANTS OF BUYER AND SELLER Buyer and Seller hereby covenant and agree that: 7.1 Necessary Assurances. Subject to the terms and conditions of this Agreement, Buyer and Seller will use reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. Seller and Buyer agree, and Seller, prior to the Closing and Buyer, after the Closing, agree to cause the Company and each of its Subsidiaries to execute and deliver such other documents, certificates, applications, agreements and other writings and to take such other actions as may be reasonably necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. 7.2 Filings and Consents. Seller and Buyer shall cooperate with one another (a) with respect to any filing with any governmental body, agency, official or authority required in connection with this Agreement or the consummation of the transactions contemplated by this Agreement, or any actions, consents, approvals or waivers required to be obtained from parties to any material contracts, in connection with this Agreement or the consummation of the transactions contemplated by this Agreement and (b) in taking such actions or making any such filings, furnishing information required in connection therewith, timely seeking to obtain any such actions, consents, approvals or waivers and Seller shall have the right to attend meetings with governmental authorities or rating agencies in connection therewith. 7.3 Public Announcements. The parties agree to consult with each other before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated hereby and, subject to any such party's disclosure obligations under applicable law or any applicable listing agreement, manual, by-laws, rules or regulations of any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation. 7.4 Post-Closing Reinsurance. Prior to the Closing Date, Seller shall cause (a) UCIC and Western Surety Company ("Western Surety") to agree to continue in full force and effect the Directors' and Officers' and Errors and Omissions Liability Quota Share Reinsurance Agreement between Western Surety and UCIC dated August 15, 1994 (the "Reinsurance Agreement") until the 61st day following the Closing Date and granting UCIC the unilateral right to terminate the Reinsurance Agreement at any time prior to the expiration date upon three days' prior written notice, pursuant to the Termination Addendum with respect to the Reinsurance Agreement to be delivered pursuant to Section 10.2(b)(ix) hereof, and (b) Western Surety and UCM to agree to continue in full force and effect the Managing General Agency Agreement dated October 29, 1992 between Western Surety and UCM (the "MGA Agreement") until the 61st day following the Closing Date and granting UCM the unilateral right to terminate the MGA Agreement at any time prior to the expiration date upon three days' prior written notice, pursuant to the Termination Addendum with respect to the MGA Agreement to 20 26 be delivered pursuant to Section 10.2(b)(ix) hereof, such MGA Agreement to be amended to terminate the authority with respect to certain lines of business reinsured under the Reinsurance Agreement, pursuant to Amendment No. 4 to the MGA Agreement to be delivered pursuant to Section 10.2(b)(ix) hereof. Buyer hereby agrees to cause UCIC to continue to manage, adjust and settle claims under the policies reinsured under the Reinsurance Agreement consistent with past practices, and shall use its reasonable efforts prior to and during the 60-day period following the Closing Date to replace Western Surety as the direct insurer under all policies reinsured under the Reinsurance Agreement. Buyer hereby agrees to save, indemnify and hold Seller and Western Surety harmless from and against any Damages relating to policies issued by Western Surety pursuant to the MGA Agreement and reinsured under the Reinsurance Agreement subsequent to the Closing Date, or arising out of any actions taken by UCIC or its Subsidiaries subsequent to the Closing Date with respect to the Reinsurance Agreement or MGA Agreement, including all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including reasonable outside attorneys' fees, incident to the foregoing. 7.5 Government Filings. Each of Buyer, Seller, the Company and its Subsidiaries shall as soon as practicable, but no later than ten business days following execution of this Agreement, make any and all filings required to be made by it with any and all governmental authorities in connection with the consummation of the transactions contemplated herein. Accordingly, and not in limitation of the preceding sentence, Buyer, Seller and the Company shall promptly file, after the execution of this Agreement, (a) the notification required by the HSR Act and any requested or supplementary filings required pursuant to the HSR Act in such manner and at such places as are specified in the HSR Act and the applicable rules and regulations thereunder, and (b) any other notifications or requests, including the filing by the Buyer at its expense of an application for authority to acquire control of the Company and its Subsidiaries with the insurance authorities of the jurisdictions specified on Schedule 4.3 hereto. Buyer and Seller equally shall pay the fee due in connection with the filing of the notification required under the HSR Act. Each party shall furnish the other party with any information, certificates and other documents in a timely manner and shall cooperate with the other party in all reasonable ways necessary to effect such filings. 7.6 Closing Statements. Buyer and Seller shall cooperate, use reasonable efforts and act in good faith in the preparation and delivery, each on a timely basis, of the Closing Statements in accordance with Section 2.3(a) hereof. 7.7 Termination Notices. Until six months after the Closing Date, Buyer shall cause the Company to use its reasonable efforts, with Seller's cooperation to the extent required, to cure any Termination Notices received prior to the Closing Date. ARTICLE 8 TAX MATTERS 8.1 Buyer Tax Covenants. (a) Buyer covenants that it will not cause or permit the Company, any Subsidiary or any Affiliate of Buyer to (i) make any election or deemed election under Section 338 of the Code or (ii) amend any Tax Returns for any Pre-Closing Tax Periods. (b) Buyer agrees to cause the Company and its Subsidiaries to elect, where permitted by law, to carry forward any net operating loss or other item arising after the Closing Date that would, absent such election, be carried back to a Pre-Closing Tax Period of the Company or a Subsidiary which filed a consolidated, combined or unitary Tax Return with Seller or an Affiliate of Seller. 21 27 (c) Buyer shall promptly pay or shall cause prompt payment to be made to Parent of (i) the amount of any reduction of Tax liability attributable to the carryover of any net operating loss or capital loss, and (ii) all refunds of Taxes and interest thereon realized or received, respectively, by Buyer, any Affiliate of Buyer, the Company or any of its Subsidiaries, attributable to Taxes paid by or on behalf of Seller, the Company or any of its Subsidiaries, whether pursuant to the Tax Sharing Agreements or otherwise, with respect to any Pre-Closing Tax Period. (d) All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement (including any state real property transfer and gains taxes, city real property transfer tax and any similar tax imposed in other states or subdivisions) shall be borne and paid by Buyer and Buyer will, at its own expense, file all necessary Tax Returns and other documentation with respect to all such Taxes and fees if required by applicable law. 8.2 Property and Casualty Loss Discount Determination. Seller shall determine the provision for discounted unpaid losses of the Company and its Subsidiaries under Sections 832(b)(5) and 846 of the Code for all Pre-Closing Tax Periods, provided that such determination shall be made in a manner consistent with past practice of the Company and its Subsidiaries and in compliance with the Code. 8.3 Termination of Tax Sharing Agreements. The Tax Sharing Agreements between the Company and its Subsidiaries and any member of the Seller Group shall be terminated as of the Closing Date. Subject to Sections 8.1(c) and 8.4 hereof, after the Closing Date neither the Company and its Subsidiaries, Seller nor any Affiliate of Seller shall have any further rights or liabilities thereunder. 8.4 Tax Sharing. Immediately preceding the Closing, the Company and each of its Subsidiaries shall pay to Seller and Seller shall pay to Parent the amount, with respect to all Pre-Closing Tax Periods for which no Tax Return has yet been filed, required by the Tax Sharing Agreements and, with respect to pre-Closing interim periods not required by the Tax Sharing Agreements, estimated in accordance with the provisions of the Tax Sharing Agreements, or determined in accordance with principles comparable thereto, based upon Seller's good faith estimates, as of the Closing Date, of the consolidated Tax liability of the Company and its Subsidiaries, and reduced by the amount of any payments on account of such Taxes previously paid to Seller. 8.5 Cooperation on Tax Matters. Buyer and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information (including access to books and records) and assistance relating to the Company or its Subsidiaries as is reasonably necessary (i) for the filing of any Tax Return, (ii) for the verification of any amounts due in accordance with Section 8.1(c), (iii) for the preparation for any audit and (iv) for the prosecution or defense of any claim, suit or proceeding relating to any proposed adjustment. Buyer and Seller agree to retain or cause to be retained all books and records pertinent to the Company or its Subsidiaries (such books and records not limited solely to Tax accounting books, records and work papers) until the applicable period for assessment under applicable law (giving effect to any and all extensions or waivers and to the period of Tax indemnification provided in this Agreement) has expired, and to abide by or cause the abidance with all record retention agreements entered into with any Taxing Authority. Buyer agrees, and after the Closing shall cause the Company and its Subsidiaries, to give Seller reasonable notice prior to transferring, discarding or destroying any such books and records and, if Seller so requests, the Company and its Subsidiaries shall allow Seller to take possession of such books and records. Buyer and Seller shall notify each other in writing of, and cooperate with each other in the conduct of, any claim, audit, examination or other proceeding or proposed change or other adjustment involving the Company and its Subsidiaries for any Tax purposes and each shall execute and deliver such other documents as are necessary to carry out the intent of this Section 8.5. 22 28 8.6 Responsibility for Taxes and Tax Returns. Except as expressly provided otherwise in this Article 8, Seller is responsible for all Taxes, and for preparing and filing all Tax Returns, with respect to the Company and its Subsidiaries, for all periods commencing prior to and ending on the Closing Date, and Buyer is so responsible for all periods commencing on the Closing Date and ending thereafter. 8.7 Intentionally omitted. 8.8 Apportionment. For any Tax period that begins on or before and ends after the Closing Date (a "Straddle Period"), for purposes of apportioning a Tax to the portion of such Tax period that ends on the Closing Date, (i) the parties shall treat the Closing Date as the last day of such period, and (ii) the Tax for the Tax period that is allocable to the portion of the Tax period ending on the Closing Date shall be (A), in the case of a Tax that is not based on income or gross receipts, the total Tax for the Straddle Period multiplied by a fraction, the numerator of which is the number of days in the Tax period ending on (and including) the Closing Date and the denominator of which is the total number of days in the Straddle Period, and (B), in the case of a Tax that is based on income or gross receipts, the Tax that would be due with respect to the period ending on (and including) the Closing Date, based on actual operations of the Company and its Subsidiaries during such period as shown on their permanent books and records. ARTICLE 9 EMPLOYEE BENEFITS 9.1 Individual Account Plans. Prior to the Closing Date, Seller shall cause the sponsorship of the Pension Plan to be transferred to and assumed by Parent. Seller shall take such action as may be necessary (not including the termination of the Pension Plan and/or Parent 401(k) Plan), to permit each Employee to elect within a reasonable period of time following the Closing Date, an immediate distribution of the vested balance of such Employee's respective accounts under the Pension Plan and the Parent 401(k) Plan or to effect a tax-free rollover (a "Direct Rollover") of the taxable portions of the respective account balances into the 401(k) Plan maintained for the employees of Frontier Insurance Group, Inc. and its subsidiaries, which constitutes an eligible retirement plan within the meaning of Section 401(a)(31) of the Code (the "Frontier 401(k) Plan"), and Buyer shall cooperate with Seller in its efforts to permit such election; provided, however, that nothing contained herein shall obligate the Frontier 401(k) Plan to accept a Direct Rollover in a form other than cash. If, in the opinion of counsel for Seller, a distribution or Direct Rollover of the Employees' respective accounts under the Pension Plan and/or Parent 401(k) Plan could adversely affect the qualification of such Plan(s) under Section 401 of the Code unless such Plan(s) were terminated or, in the opinion of counsel to Buyer, such Direct Rollover could adversely affect the qualification of the Frontier 401(k) Plan under Section 401 of the Code, then at Buyer's election, either the account balances of all Employees participating in such Plan(s) who cease to be covered by virtue of the transaction contemplated hereunder will be transferred to the Frontier 401(k) Plan by means of a direct trustee-to-trustee transfer in a manner consistent with Sections 411(d)(6) and 414(l) of the Code, or the account balances of such Employees will be retained in the Pension Plan and/or Parent 401(k) Plan and such Employees will thereafter be treated as inactive participants, and such distribution or Direct Rollover shall be accomplished with respect to the Employees when it is permissible, in the opinion of such counsel. 9.2 Plans Following the Closing. (a) Following the Closing, the Employees will be entitled to participate in the employee plans and benefit arrangements generally available to employees of Frontier Insurance Group, Inc. and its subsidiaries and, for purposes of eligibility, vesting and pre-existing medical conditions thereunder (but not for benefit accrual purposes), will be given full credit, as applicable, for services recognized for such purposes under the Employee Plans and Benefit Arrangements. 23 29 (b) For a period of one year from the Closing Date, the Employees (other than Employees party to change in control agreements assumed by Buyer) will be entitled to the more favorable of the following severance arrangements: (i) the Company's current severance arrangement, consisting of severance payment of two weeks' salary for non-management-level employees and four weeks' salary for management-level employees upon termination of employment; and (ii) the standard severance arrangement available to employees of Frontier Insurance Group, Inc. and its subsidiaries. (c) Buyer shall cause UCIC and its Subsidiaries to pay their respective employees, in December 1996, an aggregate of $200,000 in special cash bonuses (in addition to bonuses or compensation, if any, which such employees are otherwise entitled to receive as employees of the Company and its Subsidiaries at such time), which shall be distributed in accordance with written instructions to be furnished by Seller to Buyer not later than ten days prior to the Closing Date. In the event any person designated to receive such a special cash bonus is not employed by the Company or its Subsidiaries at the date of distribution, such person's special cash bonus shall be distributed per capita to all other distributees. ARTICLE 10 CONDITIONS TO CLOSING 10.1 Conditions to Obligations of Buyer and Seller. The obligations of Buyer and Seller to consummate the transactions contemplated hereunder at the Closing are subject to the satisfaction or waiver by both parties of the following conditions: (a) any applicable waiting period under the HSR Act relating to the transactions contemplated hereby shall have expired or been terminated; (b) no action or proceeding shall have been instituted before any court or instituted or threatened by any governmental agency to restrain or prohibit, or to obtain damages in respect of, this Agreement, or the consummation of the transactions contemplated by this Agreement; (c) all regulatory approvals set forth in Schedule 3.3 and approvals from insurance authorities in the jurisdictions set forth in Schedule 4.3 and any other regulatory approvals requested of Buyer or its Affiliates after the date of this Agreement in a written notice received from any other State in which an insurance company Affiliate of Buyer is domiciled and necessary for the execution and performance of this Agreement shall have been obtained and be in full force and effect and without conditions or limitations which unreasonably restrict the ability of the parties hereto to perform this Agreement or the Company's or any of its Subsidiaries' ability to conduct their respective businesses as presently conducted and Buyer and Seller shall have been furnished with appropriate evidence, reasonably satisfactory to them and their respective counsel, of the granting of such consents and approvals. (d) neither Buyer, the Company nor its Subsidiaries shall have received written notice from any state commissioner of insurance of the states in which the Company or its Subsidiaries conduct business that such state will seek to terminate the authority of the Company and its Subsidiaries to conduct business in such state following the Closing (a "Termination Notice"); provided, however, that no failure of this condition shall be deemed to have occurred if a Termination Notice is received with respect to (i) any state in which Frontier Pacific Insurance Company ("Frontier Pacific") has authority to act as an excess and surplus lines insurer as set forth in Schedule 10.1(d) hereof or (ii) any state not described in clause (i) above in which UCIC's direct written premiums in 1995 (as set forth in Schedule T of UCIC's 1995 Statutory Annual Statement) did not exceed $200,000, provided that UCIC's direct written premiums in 1995 (as set forth in such Schedule T) from 24 30 all states for which a Termination Notice has been received and which are not described in clause (i) above did not, in the aggregate, exceed $700,000. 10.2 Conditions to Obligation of Buyer. The obligation of Buyer to consummate the transactions contemplated hereunder at the Closing is subject to the satisfaction or waiver by Buyer of the following further conditions: (a) (i) Seller shall have performed, in all material respects, all of its obligations hereunder required to be performed by it on or prior to the Closing Date, (ii) the representations and warranties and covenants of Seller contained in this Agreement shall be true and correct at and as of the Closing Date, as if made at and as of such date, except for any inaccuracies in any such representations and warranties which have not had a Material Adverse Effect on the Company, and (iii) Buyer shall have been delivered a certificate signed by the Chief Financial Officer of Seller and the Controller of the Company, certifying the information in subsections (i) and (ii) hereof. (b) Buyer shall have received the following deliveries from Seller: (i) certificates of good standing (or comparable documents) for the Company (long-form with a statement as to the payment of franchise taxes from the State of Delaware) and each of its Subsidiaries from their respective States of incorporation, and certificates of good standing (or comparable documents) as foreign corporations in each jurisdiction where the Company and its Subsidiaries are so qualified, in each case issued as of a date not more than fourteen days prior to the Closing Date; (ii) a Secretary's certificate of Seller certifying as to the incumbency of Seller's authorized officers, genuineness of their respective signatures and validity and effectiveness of attached copies of the Company's certificate of incorporation, by-laws and authorizing corporate resolutions; (iii) an opinion of counsel to Seller, addressed to Buyer, substantially in the form attached as Exhibit A hereto; (iv) an opinion of counsel to Parent, addressed to Buyer, as to the authorization and enforceability of Section 2.3(c) and Article 11 hereof with respect to Parent, substantially in the form attached as Exhibit B hereto; (v) evidence reasonably satisfactory to Buyer that the Company and its Subsidiaries have been released of any and all obligations under the Credit Agreement; (vi) non-competition/non-solicitation agreements executed by Parent and Bruce A. Esselborn substantially in the forms attached as Exhibit C-1 and Exhibit C-2 hereof, and a non-solicitation agreement executed by Mary Jane Robertson substantially in the form attached as Exhibit C-3 hereto; (vii) a signed letter from Tillinghast substantially in the form attached as Exhibit D hereto, to be furnished at Buyer's expense; (viii) the resignations specified in Section 5.3 hereof; 25 31 (ix) executed copies of the Termination Addendum with respect to the Reinsurance Agreement substantially in the form attached as Exhibit E-1 hereto, Amendment No. 4 to the MGA Agreement substantially in the form attached as Exhibit E-2 hereto, the Termination Addendum with respect to the MGA Agreement, substantially in the form attached as Exhibit E-3 hereto, and the Termination Addendum with respect to the Surety Bond Quota Share Reinsurance Agreement effective September 1, 1992 between Western Surety and UCIC substantially in the form attached as Exhibit E-4 hereto; (x) evidence reasonably satisfactory to Buyer of the termination of (A) the Tax Sharing Agreements pursuant to Section 8.3 hereof, and (B) the Service Agreement dated January 1, 1993 between Parent and UCIC; and (xi) a signed letter from Equity Group Investments, Inc. with respect to certain matters relating to Section 6.5 hereof, substantially in the form attached as Exhibit F hereto. (c) Except as disclosed in Schedule 3.9 hereto, since the Balance Sheet Date, there has not been any event, occurrence, development or state of circumstances or facts which has had a Material Adverse Effect on the Company other than those resulting from (i) changes in general conditions applicable to the property and casualty insurance industry (excluding changes in statutes and regulations applicable to UCIC) or changes in general economic conditions, (ii) the Investment Portfolio Adjustments and the transactions relating to, and the payment of, the Special Dividends, and (iii) any payments pursuant to the Tax Sharing Agreements. (d) The capital stock of the Company and its Subsidiaries shall be free and clear of all Liens. (e) UCIC shall have maintained a rating by A.M. Best & Co. of "A-" ("A Minus") or better from the date of this Agreement through and including one business day prior to the Closing Date. For purposes hereof, any notice that UCIC's rating is under review, whether with or without negative implications, by A.M. Best & Co. shall not constitute a downgrade below A Minus. 10.3 Conditions to Obligation of Seller. The obligation of Seller to consummate the transactions contemplated hereunder at the Closing is subject to the satisfaction or waiver by Seller of the following further conditions: (a) (i) Buyer shall have performed, in all material respects, all of its obligations hereunder required to be performed by it at or prior to the Closing Date; provided, however, that the obligation to pay to Seller the Closing Purchase Price and any other amounts hereunder shall be without qualification of any kind; (ii) the representations and warranties of Buyer contained in this Agreement shall be true and correct at and as of the Closing Date, as if made at and as of such date, except for any inaccuracies in any such representations and warranties which have not had a Material Adverse Effect on Buyer, and (iii) Seller shall have received a certificate signed by the Chief Financial Officer (or equivalent officer) of Buyer to the foregoing effect. (b) Seller shall have received from Buyer the following: (i) an executed Assignment and Assumption of Executive Change In Control And Termination Benefits Agreement substantially in the form attached as Exhibit G hereto, providing for the assumption by Buyer of the obligations of the Executive Change in Control and Termination Benefits Agreements previously furnished to Buyer, provided that the transaction bonus payments thereunder have been paid by Parent; 26 32 (ii) a Secretary's certificate of Buyer certifying as to the incumbency of Seller's authorized officers, genuineness of their respective signatures and validity of and effectiveness of attached copies of the Company's certificate of incorporation, by-laws and authorizing corporate resolution; (iii) an opinion of counsel to Buyer, addressed to Seller, substantially in the form attached as Exhibit H hereto; (iv) an officer's certificate of Frontier Pacific or Buyer certifying the states in which Frontier Pacific has authority to act as an excess and surplus lines insurer as of the Closing Date; and (v) executed Assignments of Employment Agreement and Guaranty substantially in the forms attached as Exhibit I-1 and Exhibit I-2 hereto. (c) Seller, the Company or its Subsidiaries, as the case may be, shall have received all approvals from all state commissioners of insurance of the states in which the Company and its Subsidiaries conduct the Business that any of the Company and its Subsidiaries is required by applicable law or regulation to obtain or provide in connection with the Special Dividends, all in amount, form and substance acceptable to Seller. ARTICLE 11 SURVIVAL; INDEMNIFICATION 11.1 Survival of Representations, Warranties and Covenants. The representations and warranties of Seller set forth in Article 3 hereof, and of Buyer set forth in Article 4 hereof, shall survive the Closing, as follows: (a) the representations and warranties of Seller set forth in Sections 3.5, 3.6 and 3.7(b), and the representations and warranties of Buyer in Section 4.6 hereof shall survive the Closing without limitation, (b) the representations and warranties of Seller contained in Section 3.22 and the covenants and agreements set forth in Section 5.10 and Article 8 hereof shall survive until the applicable statutes of limitations have expired, and (c) all other representations and warranties set forth in Articles 3 and 4 hereof and, unless expressly provided otherwise in this Agreement, the covenants and agreements contained in Article 9 hereof shall survive the Closing for a period of one year following the Closing Date. Except as set forth above, no covenant or indemnity contained in this Agreement shall survive (i) the Closing unless the express terms of such covenant or agreement provide for performance or effect after the Closing; or (ii) after the time at which it would otherwise terminate pursuant to the preceding clause (i), unless notice of the breach thereof shall have been given to the party against whom such indemnity may be sought prior to such time. 11.2 Indemnification by Parent. Parent agrees to save, indemnify and hold Buyer and, effective after the Closing Date but without duplication, the Company and its Subsidiaries, harmless from and against: (a) any and all actual loss, liability or damage (collectively, "Damages") resulting from any misrepresentation or breach of warranty by Seller or non-fulfillment of any covenant or condition to be performed or complied with by Seller under the terms of this Agreement or as a result of any Litigation set forth on Schedule 3.11, or as a result of the receipt of any Termination Notices subject, however, to the cure period in Section 7.7 hereof and excluding, however, any Damages resulting from the termination or demotion of any Employee after the Closing Date; 27 33 (b) any and all Damages directly resulting from the failure by Seller and, prior to the Closing Date, the Company or any of its Subsidiaries, to substantially perform their respective obligations pursuant to Section 9.1; (c) (i) any and all Taxes with respect to any Pre-Closing Period resulting from the Company or its Subsidiaries ceasing to be included in the consolidated Federal income Tax Return filed by Seller Group including, without limitation, any Taxes attributable to the restoration of a "deferred intercompany transaction" within the meaning of Treasury Regulations Section 1.1502-13 (a)(2), and the recognition of excess loss accounts; (ii) any and all unpaid Federal, state, local, or foreign Taxes imposed on the Company or its Subsidiaries directly or indirectly, whether determined on a separate, consolidated, combined, unitary, or group basis, (A) pursuant to Treasury Regulation Section 1.1502-6 or any comparable provisions of state, local, or foreign law by reason of the Company or its Subsidiary having been a member of a consolidated, combined, unitary, or group Tax Return during any Pre-Closing Taxable Period, or (B) pursuant to any guaranty, indemnification, or similar agreement made on or before the Closing Date relating to the sharing of liability for, or payment of, Taxes, or (C) arising out of, resulting from, or attributable to any transaction contemplated by this Agreement to be performed by Seller or, prior to the Closing Date, by the Company or its Subsidiaries; (iii) any (x) Tax of the Company and its Subsidiaries and (y) liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and outside attorneys' fees and expenses), arising out of or incident to the imposition, assessment or assertion of any Tax, including those incurred in the contest of good faith in appropriate proceedings relating to the imposition, assessment or assertion of any Tax, in each case with respect to any Pre-Closing Tax Period and in each case incurred or suffered by Buyer, any of its Affiliates or, effective upon the Closing, the Company and its Subsidiaries (the sum of paragraphs (i) and (ii) above and clauses (x) and (y) of this paragraph (iii) being referred to as a "Tax Loss"); provided, however, that Parent shall have no liability for any Tax Loss attributable to or resulting from any action described in Section 8.1(a) hereof, including, but not limited to, an election made or deemed made by Buyer under Section 338 of the Code or any comparable provision of applicable law. In the event Parent's indemnification obligation under this Section 11.2(c) arises in respect of an adjustment which makes allowable to Buyer, any of its Affiliates or, effective upon the Closing, the Company or any of its Subsidiaries, a Tax Benefit which would not, but for such adjustment be allowable, then Buyer shall reimburse Parent for such Tax Benefit when and if realized; and (d) all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including reasonable outside attorneys' fees, incident to the foregoing. (e) Notwithstanding the foregoing, Parent shall not be liable under Section 11.2(c) for (i) any Tax the payment of which was made without Parent's prior written consent or (ii) any settlements effected without the consent of Parent, not to be unreasonably withheld, or resulting from any claim, suit, action, litigation or proceeding in which Parent was not permitted an opportunity to participate. 11.3 Indemnification by Buyer. Buyer agrees to save, indemnify and hold Seller harmless from and against: (a) any and all Damages resulting from any misrepresentation or breach of warranty by Buyer or non-fulfillment of any covenant or condition to be performed or complied with by Buyer under the terms of this Agreement; 28 34 (b) any Tax or any reduction in the value of any net operating loss carryover, Tax credit deduction, recovery of Tax or deferred Tax asset resulting from any action referred to in Section 8.1(a) hereof, of the Company and its Subsidiaries, Buyer or any Affiliate of Buyer; and (c) all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including reasonable outside attorneys' fees, incident to the foregoing. 11.4 Terms of Indemnification. The foregoing indemnification obligations are subject to the following: (a) Limitations on Time Periods and Amounts. (i) No party hereto shall be required to indemnify another party pursuant to the foregoing unless the party claiming the right to be indemnified promptly notifies the other party of facts which are the basis for indemnification hereunder specifying in reasonable detail the basis of any such claim ("Notice") pursuant to this Article 11 on or before the expiration or termination of such representation, warranty, covenant or agreement. If, after the Closing Date and prior to the close of business on the date any representation, warranty or covenant ceases to survive, the indemnifying party shall have received the written Notice and such claim shall not have been finally resolved or disposed of at such date, such claim shall continue as a basis for indemnity until it is finally resolved or disposed of, subject to applicable statutes of limitation. If the recipient of the Notice desires to dispute such claim, it shall, within 30 days after notice of the claim of loss against it is given, give a counternotice, setting forth the basis for disputing such claim, to Buyer or Parent, as the case may be. If no such counternotice is given within such 30-day period, or if Buyer or Parent, as the case may be, acknowledges liability for indemnification, then such loss shall be promptly satisfied. The amount of any indemnification for Damages recoverable from Parent under this Agreement shall be reduced by the amount of any reserve, contra-liability or other provision for such Damages reflected in the Closing Statements. In the event that Damages arise as a result of new or corrected disclosures set forth in updated Schedules furnished to Buyer after the date hereof which are not reflected in the Closing Statements, then 70% of such Damages shall be indemnifiable by Parent hereunder if the updated Schedules do not correct disclosures in the Schedules delivered as of the date of this Agreement, and 100% of such Damages shall be so indemnifiable if such updated Schedules correct the disclosures in the Schedules delivered as of the date of this Agreement. Notwithstanding anything to the contrary in this Agreement and subject to the provisions of Sections 11.4(a)(ii) and 11.6 below, except for liability for a breach of the representations set forth in Sections 3.5, 3.6, 3.7(b) and 3.22 hereof, and a breach of the covenants set forth in Sections 8.6 and 11.2(c) hereof, Buyer shall not be entitled to recover under rights to indemnification hereunder until the aggregate Damages suffered by Buyer in respect of all such claims exceed $300,000 (such amount being referred to herein as the "Basket"), at which time Buyer shall be entitled to indemnification for all such Damages, including the Basket; and in no event shall any party hereto be entitled to consequential or punitive damages or damages for lost profits in any action under this Agreement or relating to the subject matter hereof. The maximum aggregate liability of Parent and Seller to Buyer pursuant to this Article 11 for all Damages suffered by Buyer, and all other expenses, Taxes and other amounts indemnifiable by Parent to Buyer under this Article 11, is $7,500,000. 29 35 (ii) Notwithstanding anything to the contrary contained in Section 11.4(a)(i) above, the Basket shall not be applicable to (x) Tax Losses and (y) Damages that arise in connection with the EEOC claim set forth on Schedule 3.11 and the receipt of Termination Notices. For purposes of this Agreement, Damages from the receipt of Termination Notices shall be deemed to be the following: for each state for which a Termination Notice is received, 50% of Buyer's expenses incurred in connection with curing such Termination Notice (subject to a maximum of $25,000 per state in expenses), to be increased to 15% of UCIC's direct written premiums in 1995 in such state (as set forth in Schedule T of UCIC's 1995 Statutory Annual Statement) in the event such Termination Notice is not cured within six months following the Closing Date ("Liquidated Damages"); provided, however, that Parent shall be entitled to a credit against such Liquidated Damages for the amount of Buyer's expenses reimbursed by Seller. (b) Arbitration. If, within thirty (30) days after giving the counternotice by Buyer or Parent, as the case may be, Parent and Buyer shall not have reached agreement as to the claim in question, then the claim for indemnification may be submitted to and settled by arbitration as hereinafter provided. Arbitration shall be by a single arbitrator experienced in the matters at issue selected by Parent and Buyer in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The meeting of the arbitrator shall be held in Atlanta, Georgia and shall be conducted in accordance with, but not under the auspices of, the Commercial Arbitration Rules existing at the date thereof of the American Arbitration Association to the extent not inconsistent with this Agreement. The decision of the arbitrator shall be final and binding as to any matters submitted to such arbitrator under this Agreement, and to the extent this decision is that a loss has been suffered for which either party is to be indemnified under this Agreement, it shall be promptly satisfied; provided, however, that, if necessary, such decision and satisfaction procedure may be enforced by either Buyer or Parent in any court of record having jurisdiction over the subject matter or over any of the parties hereto. All costs and expenses incurred in connection with any such arbitration proceeding shall be borne by the party against whom the decision is rendered or, if no decision is rendered or if the decision is a compromise, equally by Buyer and Parent. (c) Satisfaction of Damages. Any Damages suffered by Seller and Parent or Buyer, as the case may be, for which it is to be indemnified hereunder shall be paid promptly by the indemnifying party. (d) Notice and Right to Contest. (i) Upon obtaining knowledge of the institution or threat of any action, proceeding or other event by a third party which could give rise to a claim of indemnity under Section 11.2 or 11.3 hereof ("Third Party Claim"), the party seeking indemnification shall promptly notify the indemnifying party of such claim. (ii) The provisions of this Section 11.4(d)(ii) shall apply to any Third Party Claim (other than those under Section 11.4(d)(iv) hereto relating to Taxes), for which the indemnifying party is liable hereunder. The indemnifying party shall have the right, at the indemnifying party's expense to defend such claim or demand. Any defense undertaken by the indemnifying party hereunder shall not be deemed an admission by the indemnifying party and may be subject to a reservation of rights as to the indemnified party's rights to indemnification pursuant to this Article 11. If the indemnifying party fails to notify the indemnified party of its election to defend such Third Party Claim within 30 days after notice thereof was given to the indemnifying party, the indemnifying party shall be deemed to have waived its right to defend such Third Party Claim. If the indemnifying party elects to defend such Third Party Claim, it shall not be responsible for attorney's fees incurred by the indemnified party; provided, however, that the indemnified party may participate in such defense at its own cost and expense. So long 30 36 as the indemnifying party is defending such Third Party Claim in good faith, the indemnified party will not settle such claim or demand without the indemnifying party's consent, which consent shall not be unreasonably withheld. The indemnified party shall make available to the indemnifying party all records and other materials and employees reasonably required by it in contesting a Third Party Claim and shall cooperate in the defense thereof. (iii) If with respect to any claim for indemnification under this Article 11 the indemnified party refuses to consent to any settlement recommended by the indemnifying party and the indemnified party elects to contest or continue any dispute or legal proceedings in connection with such claim, then in connection with such claim (x) the indemnifying party's liability for all Damages, including all costs of defense, plus any later settlements or Damage awards arising from such claim, shall not exceed the amount for which the claim could have been settled (the "Recommended Settlement"), and the indemnified party (y) shall assume all costs of defense reasonably incurred by the indemnifying party after the date of such refusal in contesting or continuing any dispute or legal proceedings and (z) shall hold the indemnifying party harmless from all amounts in excess of the Recommended Settlement. (iv) Notwithstanding the foregoing Section 11.4(d)(ii), if any claim or demand for Taxes in respect of which indemnity may be sought pursuant to this Section 11.4(d)(iv) is asserted in writing against Buyer, any of its Affiliates or, effective upon the Closing, the Company and its Subsidiaries, Buyer shall notify Parent of such claim or demand within 10 days of receipt thereof, or such earlier time that would allow Parent to timely respond to such claim or demand, and shall give Parent such information with respect thereto as Parent may reasonably request. Parent may discharge, at any time, its indemnification obligation under this Section 11.4(d)(iv) by paying to Buyer the amount of the applicable Tax Loss, calculated on the date of such payment. Parent may, at its own expense, participate in and, upon notice to Buyer, assume the defense of any such claim, suit, action, litigation or proceeding (including any Tax audit), provided, however, that Parent shall not agree to any settlement of an issue without the consent of Buyer, which consent shall not be unreasonably withheld, to the extent that such settlement would have an adverse effect, with respect to any Taxes which are the responsibility of Buyer hereunder, on the Company or its Subsidiaries after the Closing Date. Any defense undertaken by the indemnifying party hereunder shall not be deemed an admission by the indemnifying party and may be subject to a reservation of rights as to the indemnified party's rights to indemnification pursuant to this Article 11. If Parent assumes such defense, Buyer shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by Parent. Whether or not Parent chooses to defend or prosecute any claim, all of the parties hereto shall cooperate in the defense or prosecution thereof. 11.5 Exclusive Remedy. The provisions of this Article 11 are the exclusive remedy of any party to this Agreement against any other party to this Agreement (excluding the Parent non-competition/non-solicitation agreement delivered pursuant to Section 10.2(b)(vi) hereof) for any claim for breach of any covenant, agreement, representation, warranty or other provision of this Agreement or any agreement, certificate or other document delivered hereto by any party to this Agreement (other than a claim for specific performance or injunctive relief or a claim based upon intentional fraud) with the intent that all such claims shall be subject to the limitations and other provisions contained in this Article 11. 11.6 Damages Net of Insurance, Etc. The amount of any Damages or Tax for which indemnification is provided under this Agreement shall be net of any amounts actually recovered by any party seeking indemnification under this Agreement (the "Indemnified Party"), and shall be net of any amounts recoverable under insurance policies or reinsurance agreements, proceeds from indemnity, contribution or recoveries from Third Party Actions, with respect to such Damages or Tax and shall be reduced by any Tax Benefit arising from the incurrence or payment of any such Damages or Tax by the Indemnified Party. Any 31 37 indemnity payment by Parent to Buyer under Article 11 shall be treated as an adjustment to Buyer's basis in the Shares unless such treatment would be inconsistent with any Final Determination governing such treatment, in which case Parent shall also indemnify Buyer for any increase in liability for Taxes that is imposed on Buyer, the Company, and/or any Subsidiary, which is attributable to the indemnity payment or other payment made by Parent being treated as currently taxable. Buyer and/or its Subsidiaries shall not be a party to any such Final Determination without the written approval of Seller which approval shall not be unreasonably withheld. ARTICLE 12 TERMINATION 12.1 Grounds for Termination. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written agreement of Seller and Buyer; or (b) by either Seller or Buyer if the Closing shall not have been consummated on or before June 30, 1996; or (c) by Buyer within five business days following receipt of updated Schedules pursuant to Section 5.12 hereof containing new or corrected information which would reasonably be expected to have a Material Adverse Effect on the Company. The party desiring to terminate this Agreement shall give written notice of such termination to the other party. 12.2 Effect of Termination. If this Agreement is terminated as permitted by Section 12.1, termination shall be without liability of either party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement, except that no such termination shall relieve Buyer of its obligations under Section 6.1. The provisions of Sections 6.1, 7.3, this Section 12.2 and Section 13.4 shall survive any termination hereof pursuant to Section 12.1. ARTICLE 13 MISCELLANEOUS 13.1 Notices. Any notices hereunder shall be in writing and shall be deemed to have been given when delivered by hand or when transmitted by facsimile transmission, the first business day after sent by a nationally-recognized overnight courier (such as Airborne or Federal Express), or on the fifth business day after deposit in the United States Mail, registered or certified, return receipt requested, postage prepaid, addressed to: 32 38 if to Buyer, to: Mr. Walter A. Rhulen, President Frontier Insurance Group, Inc. 195 Lake Louise Marie Road Rock Hill, New York 12775 Fax: (914) 796-1900 with a copy to: Sidney Todres, Esq. Epstein Becker & Green, P.C. 250 Park Avenue New York, New York 10177 Fax: (212) 661-0989 if to Seller, to: Bruce A. Esselborn, President Capsure Holdings Corp. Two N. Riverside Plaza Suite 1600 Chicago, Illinois 60606 Fax: (312) 454-1819 with a copy to: Kelly L. Stonebraker, Esq. Rosenberg & Liebentritt, P.C. Two N. Riverside Plaza Suite 1515 Chicago, Illinois 60606 Fax: (312) 454-0335 or at such other address, or facsimile number or to the attention of such other person as Buyer or Seller may designate by written notice to the other party hereto. Notice by facsimile transmission shall be confirmed by certified or registered mail, postage prepaid, return receipt requested but shall be deemed given when such facsimile was transmitted. 13.2 Amendments and Waivers. (a) Any provision of this Agreement may be amended or waived prior to the Closing Date if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights and remedies provided by law. 33 39 13.3 Expenses. Unless otherwise expressly provided herein, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. 13.4 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the written consent of each other party hereto. 13.5 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of New York without regard to the conflict of laws rules of such state. 13.6 Counterparts; Facsimile Signatures. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. The parties hereto acknowledge and agree that original signatures delivered by facsimile transmission shall be acceptable as original signatures. 13.7 Third Party Beneficiaries. No provision of this Agreement is intended to confer upon any Person, other than the parties hereto, any rights or remedies hereunder, including, without limitation, any employee or former employee of the Company or any of its Subsidiaries. 13.8 Entire Agreement. This Agreement, together with the Exhibits and Schedules hereto and the Confidentiality Agreement, constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by either party hereto. 13.9 Headings. The headings of the articles, sections and schedules of this Agreement are inserted for the sake of convenience only and shall not constitute a part hereof. 13.10 Schedules. For purposes of this Agreement, the disclosure of an item on a schedule hereto shall be deemed to be disclosure of such item on each other applicable schedule. 34 40 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. FRONTIER INSURANCE COMPANY By: /s/ Peter H. Foley ---------------------- Name: Peter H. Foley Title: Vice President NI ACQUISITION CORP. By: /s/ Bruce A. Esselborn -------------------------- Name: Bruce A. Esselborn Title: President FOR PURPOSES OF SECTIONS 2.3(c) AND ARTICLE 11 ONLY: CAPSURE HOLDINGS CORP. By: /s/ Bruce A. Esselborn -------------------------- Name: Bruce A. Esselborn Title: President 35 41 Schedule 4.1 Insurance Affiliate of Buyer State of Incorporation ---------------------------- ---------------------- Frontier Pacific Insurance Company California 42 Schedule 4.3 Governmental Authorization 1. New York 2. Wisconsin 43 INDEX OF EXHIBITS A Form of Opinion of Counsel to Seller B Form of Opinion of Counsel to Parent (contained in Exhibit A) C-1 Form of Non-Solicitation/Non-Competition Agreement to be executed by Parent C-2 Form of Non-Solicitation/Non-Competition Agreement to be executed by Bruce A. Esselborn C-3 Form of Non-Solicitation Agreement to be executed by Mary Jane Robertson D Form of Tillinghast letter E-1 Form of Termination Addendum with respect to the Reinsurance Agreement E-2 Form of Amendment No. 4 to the MGA Agreement E-3 Form of Termination Addendum with respect to the MGA Agreement E-4 Form of Termination Addendum with respect to the Surety Bond Quota Share Reinsurance Agreement effective September 1, 1992 between Western Surety and UCIC F Form of letter from Equity Group Investments, Inc. re: obligations under sublease G Form of Assignment and Assumption of Executive Change In Control And Termination Benefits Agreements to be executed by Buyer H Form of Opinion of Counsel to Buyer I-1 Form of Assignment of Employment Agreement and Guaranty for Mr. Zeitman I-2 Form of Assignment of Employment Agreement and Guaranty for Mr. Fischer EX-2.2 3 CREDIT AGREEMENT 1 EXHIBIT 2.2 - ------------------------------------------------------------------------------- CREDIT AGREEMENT Dated as of March 29, 1994, as amended and restated as of May 22, 1996 Among CAPSURE FINANCIAL GROUP, INC., CAPSURE HOLDINGS CORP., THE LENDERS NAMED HEREIN and CHEMICAL BANK, as Administrative Agent - ------------------------------------------------------------------------------- [CS&M Ref. No. 6700-202] 2 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms ......................................... 1 SECTION 1.02. Terms Generally........................................ 19 ARTICLE II THE CREDITS SECTION 2.01. Commitments ........................................... 19 SECTION 2.02. Loans ................................................. 19 SECTION 2.03. Notice of Borrowings................................... 21 SECTION 2.04. Notes; Repayment of Loans.............................. 21 SECTION 2.05. Fees................................................... 21 SECTION 2.06. Interest on Loans...................................... 22 SECTION 2.07. Default Interest....................................... 22 SECTION 2.08. Alternate Rate of Interest............................. 22 SECTION 2.09. Termination and Reduction of Commitments .............. 23 SECTION 2.10. Prepayment............................................. 23 SECTION 2.11. Lender Reserve Requirements; Change in Circumstances ...................................... 24 SECTION 2.12. Change in Legality..................................... 25 SECTION 2.13. Indemnity.............................................. 26 SECTION 2.14. Pro Rata Treatment..................................... 26 SECTION 2.15. Sharing of Setoffs..................................... 26 SECTION 2.16. Payments............................................... 27 SECTION 2.17. Taxes.................................................. 27 3 Contents, p. 2 Page ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. Organization; Powers.................................. 29 SECTION 3.02. Authorization......................................... 30 SECTION 3.03. Enforceability........................................ 30 SECTION 3.04. Governmental Approvals................................ 30 SECTION 3.05. Financial Statements.................................. 30 SECTION 3.06. No Material Adverse Change............................ 30 SECTION 3.07. Title to Properties; Possession Under Leases.......... 31 SECTION 3.08. Subsidiaries.......................................... 31 SECTION 3.09. Litigation; Compliance with Laws...................... 31 SECTION 3.10. Agreements............................................ 31 SECTION 3.11. Federal Reserve Regulations........................... 32 SECTION 3.12. Investment Company Act; Public Utility Holding Company Act........................................... 32 SECTION 3.13. Use of Proceeds....................................... 32 SECTION 3.14. Tax Returns........................................... 32 SECTION 3.15. No Material Misstatements............................. 32 SECTION 3.16. Employee Benefit Plans................................ 32 SECTION 3.17. Environmental and Safety Matters...................... 33 SECTION 3.18. Security Documents.................................... 33 SECTION 3.19. Absence of Certain Restrictions....................... 33 SECTION 3.20. Reserves.............................................. 33 ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. All Credit Events .................................... 34 SECTION 4.02. First Credit Event.................................... 35 4 Contents, p. 3 Page ARTICLE V AFFIRMATIVE COVENANTS SECTION 5.01. Existence; Businesses and Properties................ 38 SECTION 5.02. Insurance........................................... 38 SECTION 5.03. Obligations and Taxes............................... 39 SECTION 5.04. Financial Statements, Reports, Etc.................. 39 SECTION 5.05. Litigation and Other Notices........................ 41 SECTION 5.06. Employee Benefits................................... 41 SECTION 5.07. Maintaining Records; Access to Properties and Inspections..................................... 42 SECTION 5.08. Use of Proceeds..................................... 42 SECTION 5.09. Further Assurances.................................. 42 SECTION 5.10. Environmental and Safety Laws....................... 43 SECTION 5.11. Risk-Based Capital.................................. 43 SECTION 5.12. Insurance Regulatory Information System............. 44 SECTION 5.13. Investment Ratios................................... 44 SECTION 5.14. Deposit and Investment Accounts..................... 44 SECTION 5.15. Fiscal Year......................................... 44 ARTICLE VI NEGATIVE COVENANTS SECTION 6.01. Indebtedness........................................ 45 SECTION 6.02. Liens............................................... 45 SECTION 6.03. Sale and Leaseback Transactions..................... 46 SECTION 6.04. Investments, Loans and Advances..................... 46 SECTION 6.05. Mergers, Consolidations and Acquisitions............ 47 SECTION 6.06. Dividends and Distributions......................... 49 SECTION 6.07. Transactions with Affiliates........................ 49 SECTION 6.08. Nature of Business.................................. 49 SECTION 6.09. Net Operating Losses................................ 49 SECTION 6.10. Debt Payments....................................... 49 SECTION 6.11. Limitation on Surplus Relief Reinsurance Agreements.......................................... 50 SECTION 6.12. Reinsurance......................................... 50 SECTION 6.13. Total Debt to Adjusted Capital Ratio................ 50 SECTION 6.14. Fixed Charge Coverage Ratio......................... 50 5 Contents, p. 4 Page SECTION 6.15. Total Debt to Total Cash Flow Sources Ratio.......... 51 SECTION 6.16. Operating Leverage Ratio............................. 51 SECTION 6.17. Amendment of Certain Documents....................... 51 ARTICLE VII EVENTS OF DEFAULT...................... 51 ARTICLE VIII GUARANTEE.......................... 55 ARTICLE IX THE ADMINISTRATIVE AGENT................... 58 ARTICLE X MISCELLANEOUS SECTION 10.01. Notices............................................. 60 SECTION 10.02. Survival of Agreement............................... 61 SECTION 10.03. Binding Effect...................................... 61 SECTION 10.04. Successors and Assigns.............................. 61 SECTION 10.05. Expenses; Indemnity................................. 63 SECTION 10.06. Right of Setoff..................................... 64 SECTION 10.07. Applicable Law...................................... 64 SECTION 10.08. Waivers; Amendment.................................. 64 SECTION 10.09. Interest Rate Limitation............................ 65 SECTION 10.10. Entire Agreement.................................... 65 SECTION 10.11. Waiver of Jury Trial................................ 65 SECTION 10.12. Severability........................................ 66 SECTION 10.13. Counterparts........................................ 66 SECTION 10.14. Headings............................................ 66 6 Contents, p. 5 Page SECTION 10.15. Jurisdiction; Consent to Service of Process ............. 66 Exhibits - -------- Exhibit A Form of Note Exhibit B Assignment and Acceptance Exhibit C Administrative Questionnaire Exhibit D Form of Opinion of Rosenberg & Liebentritt, P.C. Exhibit E Form of Indemnity, Subrogation and Contribution Agreement Exhibit F Form of Pledge Agreement Exhibit G Form of Security Agreement Exhibit H Form of Pledgeholder Agreement Exhibit I Form of Guarantee Agreement Exhibit J Form of Mortgage Schedules - ----------------- Schedule 2.01 Lenders and Commitments Schedule 3.08 Subsidiaries Schedule 3.17 Environmental and Safety Matters Schedule 3.18(b) UCC Filing Offices Schedule 3.20 Reinsurance Agreements Schedule 4.02(g) Stocks to be Pledged Schedule 6.01 Indebtedness Schedule 6.02 Liens 7 CREDIT AGREEMENT dated as of March 29, 1994, as amended and restated as of May 22, 1996, among CAPSURE FINANCIAL GROUP, INC., an Oklahoma corporation (the "Borrower"), CAPSURE HOLDINGS CORP., a Delaware corporation ("Capsure"), the financial institutions listed on Schedule 2.01 (the "Lenders") and CHEMICAL BANK, a New York banking corporation ("Chemical Bank"), as agent for the Lenders (in such capacity, the "Administrative Agent"). The Borrower has requested the Lenders to extend credit in order to enable the Borrower, on the terms and subject to the conditions set forth in this Agreement, to borrow on a revolving basis, at any time and from time to time prior to the Maturity Date (such term and each other capitalized term used but not defined in this introductory statement having the meanings assigned to such terms in Section 1.01), an aggregate principal amount at any time outstanding not to exceed $100,000,000 less the amount of any reductions in Commitments pursuant to Section 2.09. The proceeds of such borrowings are to be used (a) on the Restatement Date, to continue or convert all loans outstanding under the Existing Credit Facility and (b) on or after the Restatement Date, (i) in an aggregate amount not to exceed $70,000,000, to finance a portion of a special dividend to be paid by Capsure to its common stockholders prior to December 31, 1996 in an amount not to exceed $145,000,000 (the "Special Dividend"), (ii) for general corporate purposes in the ordinary course of business of the Borrower and the Subsidiaries, including funding the working capital requirements of the Borrower and the Subsidiaries, whether now owned or hereafter existing (such working capital requirements to include investment activities to the extent permitted by Section 6.04 and dividend payments to the extent permitted by Section 6.06), (iii) to finance all or part of the purchase price to be paid in connection with any Permitted Acquisition, (iv) to make capital contributions to any Subsidiary to the extent permitted hereunder and (v) in an aggregate amount not to exceed (A) $100,000,000 minus (B) the sum of (x) the aggregate principal amount of loans outstanding under the Existing Credit Facility on the Restatement Date (excluding any such loans repaid on the Restatement Date) and (y) the aggregate principal amount of Loans made to finance the payment of the Special Dividend, to pay dividends on, or repurchase shares of, common stock of Capsure. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth in this Agreement. 8 2 Accordingly, the Borrower, Capsure, the Lenders and the Administrative Agent agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Adjusted Capital" shall mean, at any time, the sum of (a) Total Debt at such time and (b) the difference between (i) Stockholders' Equity at such time and (ii) the aggregate amount of deferred tax assets relating to the Available Net Operating Losses at such time, net of any valuation allowance, determined in accordance with GAAP, of Capsure and its subsidiaries on a consolidated basis at such time. "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form of Exhibit C. "Affiliate" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, the term "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. The term "Base CD 9 3 Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Bank Reserves and (b) the Assessment Rate. The term "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H. 15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Amendment Agreement" shall mean the Amendment Agreement dated as of the Restatement Date among the Borrower, Capsure, the financial institutions party thereto and Chemical Bank, as Administrative Agent. "Analysis of Assets" shall mean the information set forth on page 12 in the Annual Statement or on page 2 in the Quarterly Statement of the Insurance Subsidiary most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.04 (or, in the case of any Insurance Subsidiary acquired after the date hereof that has not yet delivered such statement to the Administrative Agent, in the Annual or Quarterly Statement of such Insurance Subsidiary most recently filed with the Applicable 10 4 Insurance Regulatory Authority) or, if such statement shall be modified, the equivalent item on any applicable successor form. "Annual Statement" shall mean, with respect to any Insurance Subsidiary, the Annual Statement of such Insurance Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. "Applicable Commitment Fee Percentage" shall mean, for any date, the applicable percentage set forth below based on the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date:
Ratio Commitment Fee Below 1.25 to 1.00 0.250% At least 1.25 to 1.00 but below 2.25 to 1.00 0.300% At least 2.25 to 1.00 but below 3.25 to 1.00 0.325% At least 3.25 to 1.00 but below 4.00 to 1.00 0.350% At least 4.00 to 1.00 0.375%
For purposes of the foregoing, the Applicable Commitment Fee Percentage at any time shall be determined by reference to the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date and any change in the Applicable Commitment Fee Percentage shall become effective for all purposes on and after the date of delivery to the Administrative Agent of the certificate described in Section 5.04(c) relating to such fiscal quarter; provided, however, that if the proceeds of any Borrowing are used to finance a Permitted Acquisition and the ratio of Total Debt to Total Cash Flow Sources after giving effect to such Permitted Acquisition would result in a change in the Applicable Commitment Fee Percentage, such change shall become effective for all purposes simultaneously with such Borrowing. Notwithstanding the foregoing, at any time during which the Borrower has failed to deliver the certificate described in Section 5.04(c) with respect to a 11 5 fiscal quarter in accordance with the provisions thereof, the ratio of Total Debt to Total Cash Flow Sources shall be deemed, solely for the purposes of this definition, to be 4.00 to 1.00 until such time as the Borrower shall deliver such certificate in accordance with the provisions of Section 5.04(c). "Applicable Insurance Regulatory Authority" shall mean, with respect to any Insurance Subsidiary, the insurance commission or similar Governmental Authority located in the state in which such Insurance Subsidiary is domiciled and any Federal insurance Governmental Authority and any successor to any of the foregoing. "Applicable Margin" shall mean, for any date, with respect to the Loans comprising any Eurodollar Borrowing or ABR Borrowing, as the case may be, the applicable spread set forth below based on the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date:
Ratio Eurodollar Loan Spread ABR Loan Spread Below 1.25 to 1.00 0.750% None At least 1.25 to 1.00 but below 2.25 to 1.00 1.000% None At least 2.25 to 1.00 but below 3.25 to 1.00 1.125% 0.125% At least 3.25 to 1.00 but below 4.00 to 1.00 1.250% 0.250% At least 4.00 to 1.00 1.500% 0.500%
For purposes of the foregoing, the Applicable Margin at any time shall be determined by reference to the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date and any change in the Applicable Margin shall become effective upon the delivery to the Administrative Agent of the certificate described in Section 5.04(c) relating to such fiscal quarter and shall apply (a) to ABR Loans outstanding on such delivery date or made on or after such delivery date and (b) to Eurodollar Loans made on or after such delivery date; provided, however, that, if the proceeds of any Borrowing are used to finance a Permitted Acquisition and the ratio of Total Debt to Total Cash Flow 12 6 Sources after giving effect to such Permitted Acquisition would result in a change in the Applicable Margin, such change shall become effective for all purposes simultaneously with such Borrowing and shall apply (a) to ABR Loans outstanding on such date or made on or after such date and (b) to Eurodollar Loans made on or after such date. Notwithstanding the foregoing, at any time during which the Borrower has failed to deliver the certificate described in Section 5.04(c) with respect to a fiscal quarter in accordance with the provisions thereof, the ratio of Total Debt to Total Cash Flow Sources shall be deemed, solely for the purposes of this definition, to be 4.00 to 1.00 until such time as the Borrower shall deliver such certificate in accordance with the provisions of Section 5.0.4(c). "Arlington" shall mean Arlington Leasing Co., a Nevada corporation. "Assessment Rate" shall mean for any date the annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative Agent as the then-current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Administrative Agent's domestic offices. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B or such other form as shall be approved by the Administrative Agent and as shall be reasonably satisfactory to the parties to such assignment and acceptance. "Available Net Operating Losses" shall mean, for any date in any taxable year, the net operating loss carryforwards to such taxable year for Federal income tax purposes of Capsure and its subsidiaries that are not subject to the limitations of Section 382 of the Code, Treasury Regulation Section 1.1502 - 21(c), Treasury Regulation Section 1.1502 - 21(d) or any similar limitation. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrower Tax Sharing Agreement" shall mean each Tax Sharing Agreement as in effect on the date hereof between the Borrower and any of its direct subsidiaries. 13 7 "Borrowing" shall mean a group of Loans of a single Type made by the Lenders on a single date and as to which a single Interest Period is in effect. "Business Day" shall mean any day (other than a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Cash Equivalents" shall mean: (a) United States Government Securities maturing within 90 days from the date of acquisition thereof; (b) investments in commercial paper maturing within 90 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A1 or higher from Standard & Poor's or a rating of P1 or higher from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits (including Eurodollar time deposits) maturing within 90 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank of recognized standing organized under the laws of the United States of America or any state thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and the deposits of which are rated (or the senior debt securities of the holding company of such commercial bank are rated) A- or better by Standard & Poor's or A3 or better by Moody's or carrying an equivalent rating by another nationally recognized rating agency if neither of the two named rating agencies 14 8 shall rate such commercial bank (or the holding company of such commercial bank); (d) other investment instruments approved in writing by the Required Lenders and offered by financial institutions that have a combined capital and surplus and undivided profits of not less than $250,000,000; and (e) investments in repurchase agreements, dollar rolls, money market preferred and collateralized short term puts, in each case maturing within 90 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A1 or higher from Standard & Poor's or a rating of P1 or higher from Moody's. A "Change in Control" shall be deemed to have occurred if (a) the Zell Entities, collectively, shall cease to own in the aggregate, directly, beneficially and of record, shares representing at least 20% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Capsure, provided that such 20% shall be reduced by dilution suffered by such persons on a pro rata basis with all other shareholders of Capsure as a result of any issuance by Capsure for fair value after the Closing Date of any capital stock representing ordinary voting power (i) to a seller as consideration for a Permitted Acquisition or (ii) in a public offering, the entire net proceeds (after underwriting discount and expenses incurred in connection with such offering) of which are (A) paid to a seller as consideration for a Permitted Acquisition or (B) contributed as capital to the Borrower; (b) Capsure shall cease to own and control directly, of record and beneficially, 100% of each class of outstanding capital stock of the Borrower free and clear of all Liens (other than any Liens under the Security Documents); or (c) the Borrower shall issue any class of capital stock (or security convertible into any of its capital stock) that is not pledged to the Collateral Agent for the ratable benefit of the Secured Parties. "Closing Date" shall mean March 29, 1994. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time and any successor statute thereto. "Collateral" shall mean all the "Collateral" as such term is defined in any Security Document. 15 9 "Collateral Agent" shall mean Chemical Bank, as Collateral Agent under the Security Documents, or any successor thereto. "Commitment" shall mean, with respect to each Lender, the commitment of such Lender to make Loans hereunder as set forth on Schedule 2.01, as the same may be reduced from time to time pursuant to Section 2.09. "Commitment Fee" shall have the meaning assigned to such term in Section 2.05(a). "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "Controlling" and "Controlled" shall have meanings correlative thereto. "Credit Event" shall have the meaning assigned to such term in Article IV. "Default" shall mean any event or condition that upon notice, lapse of time or both would constitute an Event of Default. "dollars" or "$" shall mean lawful money of the United States of America. "EBIDA" shall mean, with respect to any person for any period, the sum of (a) Net Income of such person for such period, (b) Interest Expense deducted in determining such Net Income and (c) depreciation, amortization and other noncash charges deducted in determining such Net Income. "Environmental and Safety Laws" shall mean any and all applicable current and future treaties, laws, regulations, requirements, binding determinations, orders, decrees, judgments, injunctions, permits, approvals, authorizations, licenses, permissions, notices or binding agreements issued, promulgated or entered by any Governmental Authority, relating to the environment, to employee health or safety as it pertains to the use or handling of, or exposure to, Hazardous Substances, to preservation or reclamation of natural resources or to the management, release or threatened release of contaminants or noxious odors, including the Hazardous Materials Transportation Act, the Comprehensive Environmental Response, 16 10 Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, the Clean Air Act of 1970 (to the extent it pertains to the use or handling of, or exposure to, Hazardous Substances), as amended, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act of 1970, as amended, the Emergency Planning and Community Right-to-Know Act of 1986, the Safe Drinking Water Act of 1974, as amended, and any similar or implementing state law and all amendments or regulations promulgated thereunder. "Environmental Claim" shall mean any written notice of any Governmental Authority alleging liability for damage to the environment or by any person alleging liability for personal injury (including sickness, disease or death), in either case resulting from or based upon (a) the presence or release (including intentional and unintentional, negligent and nonnegligent, sudden or nonsudden, accidental or nonaccidental leaks or spills) of any Hazardous Substance at, in or from the property of any person, whether or not owned or leased by such person, or (b) any other circumstances forming the basis of any violation, or alleged violation, of any Environmental and Safety Law; provided, that the term "Environmental Claim" shall not include any allegation of liability on the part of any Insurance Subsidiary for any of the foregoing under any bond or policy issued by such Insurance Subsidiary. "Equity Contribution" shall mean the contribution by Capsure to the Borrower of (a) all the capital stock of, and intercompany indebtedness owing to Capsure by, each subsidiary of Capsure in existence on the date hereof and any other interest Capsure may hold with respect to any such subsidiary or such subsidiary's assets, (b) all marketable securities held by Capsure on the date hereof and (c) all cash held by Capsure on the date hereof (other than $250,000 (net of fees and expenses incurred in connection with the Transactions) to be retained by Capsure for the payment of reasonable and customary accounting, legal and other administrative expenses in the ordinary course of Capsure's business). "Equity Holdings" shall mean Equity Holdings, an Illinois partnership. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. 17 11 "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that is, together with Capsure and/or the Borrower, treated as a single employer under Section 414 of the Code. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VII. "Excess Cash Flow" shall mean, for any period, the difference between (a) Total Cash Flow Sources for such period (determined without giving effect to (i) clauses (a)(ii), (b)(ii) and (c)(ii) of the definition of the term "Total Cash Flow Sources" and (ii) any gain resulting from the sale of any assets by any Subsidiary other than any realized gain from the sale of Invested Assets by the Borrower or any Subsidiary (other than any Insurance Subsidiary)) and (b) Total Cash Flow Uses for such period minus the aggregate amount of reductions in the Commitments required under Section 2.09(b) and Section 2.09(c) during such period, but only to the extent that such reductions (i) have been included in Total Cash Flow Uses for such period and (ii) did not result in a required payment or prepayment under Section 2.10(b). "Excluded Distribution Amount" shall mean the excess of (a) the sum of (i) the amount of the Special Dividend and (ii) $100,000,000 over (b) the sum of (i) the aggregate principal amount of loans outstanding under the Existing Credit Facility on the Restatement Date (excluding any such loans repaid on the Restatement Date) and (ii) the aggregate principal amount of Loans made to finance the Special Dividend. "Excluded Investments" shall have the meaning assigned to such term in Section 6.04(f). "Existing Credit Facility" shall mean the Credit Agreement dated as of March 29, 1994 among the parties hereto, including all amendments and modifications thereto prior to the Restatement Date. 18 12 "Extraordinary Dividend" shall mean any dividend paid or payable by any Insurance Subsidiary that is not an Ordinary Dividend at the time of payment thereof. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean the Fee Letter dated April 5, 1996, between Capsure and the Administrative Agent. "Fees" shall mean the Commitment Fees, the Participation Fees and all other amounts required to be paid to the Administrative Agent and/or the Lenders pursuant to Section 2.05. "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, Treasurer or Controller of such corporation. "Fixed Charge Coverage Ratio" shall mean, with respect to any period, the ratio of (a) Total Cash Flow Sources for such period to (b) Total Cash Flow Uses for such period. "Funded Indebtedness" shall mean, for Capsure and its subsidiaries at any time, the aggregate amount of Indebtedness consisting of obligations for borrowed money and Capital Lease Obligations of Capsure and its subsidiaries at such time. "GAAP" shall mean generally accepted accounting principles applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. 19 13 "Guarantee" of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term "Guarantee" shall not include (i) endorsements for collection or deposit, or (ii) surety bonds issued by any Insurance Subsidiary in either case in the ordinary course of business. "Guarantee Agreement" shall mean the Guarantee Agreement, substantially in the form of Exhibit I, among the Subsidiary Guarantors, any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. "Guarantor" shall mean Capsure and each Subsidiary Guarantor. "Hazardous Substances" shall mean any toxic, radioactive, caustic or otherwise hazardous substance, material or waste, including petroleum, its derivatives, by-products and other hydrocarbons, including polychlorinated biphenyls ("PCBs"), asbestos or asbestos-containing material, and any substance, waste or material regulated under Environmental and Safety Laws. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, 20 14 whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of Rate Protection Agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner. "Indemnity, Subrogation and Contribution Agreement" shall mean the Indemnity, Subrogation and Contribution Agreement, substantially in the form of Exhibit E, among the Subsidiary Guarantors, any person that shall become a party thereto pursuant to Section 5.09 and the Borrower. "Insurance Business" shall mean one or more aspects of the business of selling, issuing, underwriting, reinsuring, producing, administering, managing or servicing property and casualty insurance and activities incidental thereto. "Insurance Liabilities" shall mean (a) with respect to any Insurance Subsidiary at any time, the amount set forth on line 21 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement of such Insurance Subsidiary or line 22 of the Liabilities, Surplus and Other Funds Statement in the Quarterly Statement of such Insurance Subsidiary, in each case most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.04 (or, in the case of any Insurance Subsidiary acquired after the date hereof that has not yet delivered any such statement to the Administrative Agent, in the Annual Statement or Quarterly Statement of such Insurance Subsidiary most recently filed with the Applicable Insurance Regulatory Authority) or, if any such statement shall be modified, the equivalent item on any applicable successor form and (b) with respect to any other Subsidiary engaged in the Insurance Business at such time, the total liabilities (other than Funded Indebtedness and amounts available to be borrowed under credit facilities the proceeds of which are to be used for working capital purposes of such Subsidiary) of such Subsidiary that would properly be classified as liabilities at such time, determined in accordance with GAAP. "Insurance Regulatory Information System" shall mean the Insurance Regulatory Information System promulgated by the NAIC, or any successor system promulgated by the NAIC. 21 15 "Insurance Subsidiaries" shall mean Western Surety, Universal Surety, Surety Bonding Company of America and any other Subsidiary, whether now owned or hereafter acquired, that is regulated, in accordance with applicable state law or any Federal law, as an insurer by an insurance commission or similar Governmental Authority located in the state in which such Subsidiary is domiciled or by any Federal insurance Governmental Authority. "Interest Expense" shall mean, with respect to any person for any period, the interest expense of such person for such period, as shown on the unconsolidated statement of earnings of such person for such period, determined in accordance with GAAP. "Interest Payment Date" shall mean, with respect to any Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Borrowing, and, in addition, the date of any refinancing or conversion of such Borrowing with or to a Borrowing of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect, and (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Maturity Date and (iii) the date such Borrowing is prepaid in accordance with Section 2.10; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. "Invested Assets" of any person shall mean (a) in the case of any Insurance Subsidiary, the amount equal to the sum of (i) lines 1 through 8 of 22 16 column (1) less the sum of lines 1 through 8 of column (3) of Exhibit 1-Analysis of Assets in the Annual Statement and (ii) line 8a of column (1) less the line 8(a) of column (3) of Analysis of Assets in the Quarterly Statement of the Insurance Subsidiary most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.04 (or, in the case of any Insurance Subsidiary acquired after the date hereof that has not yet delivered any such statement to the Administrative Agent, in the Annual Statement or Quarterly Statement of such Insurance Subsidiary most recently filed with the Applicable Insurance Regulatory Authority) or, if any such statement shall be modified, the equivalent item on any applicable successor form or (b) in the case of any other person, assets of such person of the type described in clause (a) above consistently applied. "Investment-Grade Security" shall mean any of the following: (a) any United States Government Security, (b) any Invested Asset that is rated NAIC 1 or NAIC 2 by the NAIC, (c) any Invested Asset that is rated BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's and (d) any Invested Asset that is rated BBB- or higher by Duff & Phelps Credit Rating Co. or by Fitch Investors Service, Inc., provided that any Invested Asset specified in this clause (d) shall cease to be an Investment-Grade Security if such Invested Asset shall not receive a rating of NAIC 1 or NAIC 2 from the NAIC on or before the day that is 90 days following the date of issuance of such Invested Asset. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the product of (a) the rate at which dollar deposits approximately equal in principal amount to the Administrative Agent's portion of such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period and (b) Statutory Bank Reserves. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. 23 17 "Loan Documents" shall mean this Agreement, the Notes, the Security Documents, the Guarantee Agreement, the Indemnity, Subrogation and Contribution Agreement and the Fee Letter. "Loans" shall mean the revolving loans made by the Lenders to the Borrower pursuant to Section 2.01. Each Loan shall be a Eurodollar Loan or an ABR Loan. "Long Tail Insurance Line of Business" shall mean any line of business in respect of which the NAIC requires, at the time of determination, computation of an excess statutory reserve of the type set forth on page 93 of the Annual Statement of any Insurance Subsidiary for the year ended December 31, 1993, or, if such statement shall be modified, the equivalent item on any applicable successor form. "Margin Stock" shall have the meaning given such term under Regulation U. "Material Adverse Effect" shall mean (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of Capsure and its subsidiaries, taken as a whole, or (b) a material impairment of the ability of Capsure, the Borrower or any of the Subsidiaries to perform any of its material obligations under any Loan Document to which it is or will be a party or under any of its other Indebtedness. "Maturity Date" shall mean March 31, 2003. "Moody's" shall mean Moody's Investors Service, Inc. "Mortgage" shall mean each Mortgage Security Agreement and Assignment of Leases and Rents, substantially in the form of Exhibit J hereto, entered into after the date hereof between the Borrower or any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which Capsure, the Borrower or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) is making or accruing or has within any of the preceding five plan years made or accrued an obligation to contribute. 24 18 "NAIC" shall mean the National Association of Insurance Commissioners or any association or Governmental Authority succeeding to any or all of the functions of the National Association of Insurance Commissioners. "NAIC 1" shall mean the rating NAIC 1 of the NAIC. "NAIC 2" shall mean the rating NAIC 2 of the NAIC. "Net Income" shall mean with respect to any person for any period, the aggregate net income (or net deficit) of such person for such period computed in accordance with GAAP, provided that the term "Net Income" shall exclude all extraordinary items determined in accordance with GAAP. "Net Written Premiums" shall mean, with respect to any Insurance Subsidiary for any period of four consecutive fiscal quarters, the amount set forth on line 1 of Exhibit 3 to the Reconciliation of Ledger Assets in the Annual Statement and/or Quarterly Statement of such Insurance Subsidiary relating to such period or, if any such statement shall be modified, the equivalent item on any applicable successor form. "NI Acquisition" shall mean NI Acquisition Corp., a Texas corporation and a wholly owned subsidiary of the Borrower. "Note" shall mean a promissory note of the Borrower, substantially in the form of Exhibit A, evidencing Loans. "Obligations" shall mean all obligations defined as "Obligations" in the Guarantee Agreement and the Security Documents. "Operating Leverage Ratio" shall mean the ratio, with respect to any Insurance Subsidiary, of (a) Net Written Premiums of such Insurance Subsidiary for the period of four consecutive fiscal quarters preceding the date of any determination to (b) Surplus of such Insurance Subsidiary at such date. "Ordinary Dividends" shall mean, with respect to any Insurance Subsidiary, the maximum amount of dividends that such Insurance Subsidiary may pay during any period of four consecutive fiscal quarters without seeking regulatory approval under applicable regulations, in effect during such period. 25 19 "Participation Fee" shall have the meaning given to such term in Section 2.05(c). "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Perfection Certificate" shall mean the Perfection Certificate, substantially in the form of Annex 2 to the Security Agreement, prepared by Capsure and the Borrower. "Permitted Acquisition" shall have the meaning assigned to such term in Section 6.05(c)(ii). "Permitted Investments" shall mean: (a) United States Government Securities maturing within 360 days from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A1 or higher from Standard & Poor's or a rating of P1 or higher from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits (including Eurodollar time deposits) maturing within 360 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank of recognized standing, organized under the laws of the United States of America or any state thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and the deposits of which are rated (or the senior debt securities of the holding company of such commercial bank are rated) A- or better by Standard & Poor's or A3 by Moody's or carrying an equivalent rating by another nationally recognized rating agency if neither of the two named rating agencies shall rate such commercial bank (or the holding company of such commercial bank); (d) other investment instruments approved in writing by the Required Lenders and offered by financial institutions that have a 26 20 combined capital and surplus and undivided profits of not less than $250,000,000; and (e) other Investment Grade Securities maturing within three years from the date of acquisition thereof. "person" shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) that is subject to the provisions of Title IV of ERISA or Section 412 of the Code and is maintained for current or former employees, or any beneficiary thereof, of Capsure, the Borrower or any ERISA Affiliate. "Pledge Agreement" shall mean the Pledge Agreement, substantially in the form of Exhibit F, among Capsure, the Borrower, each Subsidiary Guarantor, certain other Subsidiaries, any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. "Pledgeholder Agreement" shall mean each Pledgeholder Agreement, substantially in the form of Exhibit H hereto, between the Borrower or any person that shall become a party thereto pursuant to Section 5.09, any Pledgeholder named therein and the Collateral Agent. "Quarterly Statement" shall mean, with respect to any Insurance Subsidiary, the Quarterly Statement of such Insurance Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. "Rate Protection Agreements" shall mean interest rate swap, cap, collar or floor agreements or other similar agreements entered to provide protection against fluctuations in interest rates. Each Rate Protection Agreement shall be with a Lender or a person whose unsecured debt securities, debt instruments or redeemable preferred stock is rated BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's. "Register" shall have the meaning given such term in Section 10.04(d). 27 21 "Regulation G" shall mean Regulation G of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Reinsurance Agreements" shall mean all agreements, contracts, treaties, certificates and other arrangements whereby an insurance company agrees to transfer or cede to another insurer all or part of the liability assumed by such insurance company under a policy or policies of insurance reinsured by such insurance company, provided that, for purposes of Section 3.20 and Section 5.04(j) only, the term "Reinsurance Agreements" shall not include individual facultative reinsurance agreements or arrangements. "Reportable Event" shall mean any reportable event as defined in Section 4043(b) of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code). "Required Lenders" shall mean, at any time, Lenders holding Loans representing at least a majority of the aggregate principal amount of the Loans outstanding or, if no Loans are outstanding, Lenders having Commitments representing at least a majority of the aggregate Commitments. "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Restatement Date" shall mean May 22, 1996, the effective date of this Amended and Restated Credit Agreement. "Risk-Based Capital" shall mean, with respect to the Insurance Subsidiaries at any time, the Risk-Based Capital (as defined by the NAIC at 28 22 such time and as computed in accordance with SAP) of the Insurance Subsidiaries (consolidated in accordance with SAP) at such time. "SAP" shall mean, with respect to any Insurance Subsidiary, the accounting procedures prescribed or permitted by the Applicable Insurance Regulatory Authority applied on a basis consistent with those that are indicated in Section 1.02. "Secured Parties" shall have the meaning assigned to such term in the Security Agreement. "Security Agreement" shall mean the Security Agreement, substantially in the form of Exhibit G, among Capsure, the Borrower, each Subsidiary Guarantor, any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. "Security Documents" shall mean the Pledge Agreement, the Security Agreement, each Mortgage, each Pledgeholder Agreement and each of the security agreements and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.09. "Short Tail Insurance Line of Business" shall mean any line of business in the Insurance Business that is not, at the time of determination, a Long Tail Insurance Line of Business. "Special Dividend" shall have the meaning assigned to such term in the preamble hereto. "Standard & Poor's" shall mean Standard and Poor's Rating Services, a division of The McGraw Hill Companies, Inc. "Statement of Actuarial Opinion" shall mean, with respect to any Insurance Subsidiary, the Statement of Actuarial Opinion required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law or, if such Applicable Insurance Regulatory Authority shall no longer require such a statement, information equivalent to that required to be included in the Statement of Actuarial Opinion that was filed immediately prior to the time such statement was no longer required. "Statutory Bank Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of 29 23 which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which the Administrative Agent is subject (a) with respect to the Base CD Rate (as such term is used in the definition of "Alternate Base Rate"), for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the LIBO Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets which may be available from time to time to any Lender under such Regulation D. Statutory Bank Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Statutory Surplus" or "Surplus" shall mean, with respect to any Insurance Subsidiary at any time, the amount set forth on line 25 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement of such Insurance Subsidiary or line 26 of the Liabilities, Surplus and Other Funds Statement in the Quarterly Statement of such Insurance Subsidiary, in each case most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.04 (or, in the case of any Insurance Subsidiary acquired after the date hereof that has not yet delivered any such statement to the Administrative Agent, in the Annual Statement or Quarterly Statement of such Insurance Subsidiary most recently filed with the Applicable Insurance Regulatory Authority) or, if such statement shall be modified, the equivalent item on any applicable successor form. "Stock Purchase Agreement" shall mean the Stock Purchase Agreement and related agreements, each dated as of February 29, 1996, among Capsure, NI Acquisition and Frontier Insurance Company. "Stockholders' Equity" shall mean, at any date, for Capsure and its subsidiaries on a consolidated basis, stockholders equity at such date, determined in accordance with GAAP and after giving effect to all adjustments required thereby. "subsidiary" shall mean, with respect to any person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more 30 24 than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of the Borrower. "Subsidiary Guarantor" shall mean SI Acquisition Corp., NI Acquisition, Surewest Financial Corp., Universal Surety Holdings Corp., Pin Oak Petroleum Inc., Capsure Agency Holding Corp., APGO Drilling & Production Services, Capital Dredge & Dock Corp., Cogburn Pump & Supply Co., Condor Pipe, Incorporated, Crowder Tank, Inc., Del-Tex, Inc., Eagle Upsetters, Inc., Jim Williams & Associates, Inc., Martin Pipe Co., Inc., Nucorp Compressor, Inc., Nucorp Management Company, Nucorp Properties, Inc., SMCI Incorporated, Superior Allied Products, Inc., Sweetwater Pump & Supply, Inc., Taylor Rig and Equipment Company and Wildcat Supply, Inc., and each person that shall become a Subsidiary Guarantor pursuant to Section 5.09. "Surplus Relief Reinsurance Agreement" shall mean any agreement whereby any Insurance Subsidiary either assumes or cedes business under a Reinsurance Agreement that would be considered a "financing-type" reinsurance agreement and is entered into solely for the purpose of impacting or affecting the income statement of such Insurance Subsidiary. "Tax Sharing Agreement" shall mean each Tax Sharing Agreement (including each Borrower Tax Sharing Agreement) as in effect on the date hereof between (a) Capsure and the Borrower, (b) the Borrower and any of its subsidiaries or (c) any subsidiary of the Borrower and any other subsidiary of the Borrower. "Tax Sharing Payments" shall mean payments made pursuant to the Tax Sharing Agreements. "Total Cash Flow Sources" shall mean, at any measurement date, for the period of four consecutive fiscal quarters preceding such measurement date (the "Reference Period"), the sum, without duplication, of (a)(i) in the case of Western Surety and, for any measurement date occurring after the completion of three consecutive fiscal quarters immediately following the 31 25 fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05, any Insurance Subsidiary (other than any Insurance Subsidiary that is a subsidiary of any other Insurance Subsidiary) hereafter acquired, (A) the capacity to pay Ordinary Dividends (calculated as if the measurement date is the end of a calendar year and determined by reference to the regulations governing the payment of dividends by insurance companies to insurance holding companies promulgated by the Applicable Insurance Regulatory Authority as in effect from time to time) of such persons during the Reference Period or (B) if Ordinary Dividends have not been paid during the Reference Period, the aggregate amount of dividends actually paid during the Reference Period by such persons or (ii) for purposes of determining compliance with Section 6.05 (c)(ii)(H), and for any measurement date occurring prior to the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05 (but occurring after the date on which such acquisition is consummated), the capacity to pay Ordinary Dividends (calculated as if the measurement date is the end of a calendar year and determined by reference to the regulations governing the payment of dividends by insurance companies to insurance holding companies promulgated by the Applicable Insurance Regulatory Authority as in effect from time to time) during the Reference Period of any Insurance Subsidiary hereafter acquired, calculated as if such Subsidiary had been a Subsidiary as of the first day of the Reference Period, (b)(i) EBIDA during the Reference Period of all Subsidiaries (other than Insurance Subsidiaries and subsidiaries of Insurance Subsidiaries) now owned and, for any measurement date occurring after the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05, any Subsidiary (other than Insurance Subsidiaries and subsidiaries of Insurance Subsidiaries) hereafter acquired and (ii) for purposes of determining compliance with Section 6.05(c)(ii)(H), and for any measurement date occurring prior to the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05 (but occurring after the date on which such acquisition is consummated), EBIDA during the Reference Period of any Subsidiary (other than Insurance Subsidiaries and subsidiaries of Insurance Subsidiaries) hereafter acquired, calculated as if such Subsidiary had been a Subsidiary as of the first day of the Reference Period, (c)(i) in the case of any direct subsidiary of the Borrower existing on the date hereof and, for any measurement date occurring after the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition 32 26 thereof is consummated in accordance with Section 6.05, any other direct subsidiary of the Borrower hereafter acquired, the net payments (determined without giving effect to the tax benefit resulting from the payment of interest under the Existing Credit Facility) required to be made to the Borrower during the Reference Period under the Borrower Tax Sharing Agreements by such persons and (ii) for purposes of determining compliance with Section 6.05(c)(ii)(H), and for any measurement date occurring prior to the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05 (but occurring after the date on which such acquisition is consummated), the net payments that would have been required to have been made to the Borrower under the Borrower Tax Sharing Agreements during the Reference Period by any direct subsidiary of the Borrower hereafter acquired, assuming such Subsidiary had been a Subsidiary as of the first day of the Reference Period, and (d) cash received by the Borrower during the Reference Period (or, for any Reference Period that includes one or more of the four consecutive fiscal quarters ended March 31, 1994, by Capsure during any of such fiscal quarters included in such Reference Period) as a result of income from management fees earned and income (determined in accordance with GAAP) from Invested Assets of the Borrower or Capsure, as applicable. The term "Total Cash Flow Sources" shall in all cases exclude aggregate amount of Extraordinary Dividends and extraordinary distributions or other payments received by the Borrower during the applicable Reference Period. "Total Cash Flow Uses" shall mean, for any period of four consecutive fiscal quarters, the sum, without duplication, of (a) the aggregate amount of Commitment reductions required under Section 2.09(b) and Section 2.09(c) during such period to the extent that the amount of Commitments outstanding after any such reduction is less than the greatest amount of Loans that has been outstanding at any time during such period before giving effect to such reduction, (b) the aggregate amount of Indebtedness required to be repaid by Capsure and its subsidiaries during such period (other than amounts included in clause (a) above), (c) Interest Expense of Capsure and its subsidiaries during such period, (d) the aggregate amount of taxes paid by the Borrower or Capsure during such period, (e) the aggregate amount of dividends, distributions or other payments made by the Borrower to Capsure during such period (excluding dividends, distributions or other payments made pursuant to Sections 6.06(b) or 6.06(c) in an aggregate amount not to exceed the Excluded Distribution Amount, so long as the Borrower has cash and Cash Equivalents equal to the amount of any such excluded dividend, 33 27 distribution or other payment immediately prior to the payment thereof) and (f) any other expenses of the Borrower and the Subsidiaries during such period and any other uses of cash by Capsure (excluding expenses of Capsure for which dividends have been paid to Capsure under Section 6.06(c) to the extent such dividends have been included under clause (e) of this definition) and its subsidiaries (other than Insurance Subsidiaries) during such period (including dividends or other distributions in respect of the capital stock of Capsure and its subsidiaries), in each case to the extent not otherwise included in EBIDA during such period of such Subsidiaries (other than Insurance Subsidiaries). "Total Debt" shall mean, at any time, the aggregate amount of Funded Indebtedness at such time. "Transactions" shall have the meaning assigned to such term in Section 3.02. "Transferee" shall have the meaning assigned to such term in Section 2.17. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term "Rate" shall include the LIBO Rate and the Alternate Base Rate. "United States Government Securities" shall mean direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America, any agency thereof, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, the Student Loan Market Association, the Federal Home Loan Bank or the Federal Farm Credit Bank. "Universal Surety" shall mean Universal Surety of America, a Texas corporation. "Western Surety" shall mean Western Surety Company, a South Dakota corporation. 34 28 "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "UC Sale" shall mean the sale by NI Acquisition to Frontier Insurance Company of all the issued and outstanding capital stock of United Capitol Holding Company pursuant to the terms and conditions of the Stock Purchase Agreement. "United Capitol" shall mean United Capitol Insurance Company, a Wisconsin corporation. "Zell Entities" shall mean (a) each of Equity Holdings and Arlington so long as Samuel Zell, Ann B. Lurie and the persons specified in clauses (b) and (c) of this definition, collectively, (i) shall Control each such entity and (ii) shall own, directly and indirectly, beneficially and of record, at least 51% of the aggregate ordinary voting power represented by the issued and outstanding capital stock or general partnership interests of each such entity, (b) trusts created for the benefit of Samuel Zell, Ann Lurie or their respective immediate family members and (c) any other person Controlled by Samuel Zell or the trusts specified in clause (b) of this definition. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP or, to the extent such terms apply to an Insurance Subsidiary, SAP, in each case as in effect from time to time; provided, however, that for purposes of determining compliance with any covenant set forth in Article VI, such terms shall be construed in accordance with GAAP or SAP (and the NAIC and the Insurance Regulatory Information System), as applicable, as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing Capsure's audited financial statements referred to in Section 305 or the Insurance Subsidiaries' financial statements filed with 35 29 their respective Applicable Insurance Regulatory Authorities, as the case may be. ARTICLE II THE CREDITS SECTION 2.01. Commitments. Upon the terms and subject to the conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Loans to the Borrower, at any time and from time to time on or after the Restatement Date and until the earlier of the Maturity Date and the termination of the Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding not to exceed (after giving effect to all Loans repaid) an amount equal to the Commitment set forth opposite such Lender's name on Schedule 2.01, as such Commitment may be reduced from time to time pursuant to Section 2.09. Within the limits set forth in the preceding sentence, the Borrower may borrow, pay or prepay and reborrow Loans on or after the Restatement Date and prior to the Maturity Date, upon the terms and subject to the conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). The Loans comprising each Borrowing shall be in an aggregate principal amount that is an integral multiple of $1,000,000 and not less than $1,000,000 (or, if less, an aggregate principal amount equal to the remaining balance of the Commitments). (b) Each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans, as the Borrower may request pursuant to Section 2.03. Each Lender may at its option fulfill its Commitment with respect to any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement and the applicable Note. 36 30 Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in an aggregate of more than three separate Eurodollar Loans of any Lender being outstanding hereunder at any one time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. (c) Subject to paragraph (e) below, each Lender shall make a Loan in the amount of its pro rata portion, as determined under Section 2.14, of each Borrowing hereunder on the proposed date thereof by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 12:00 noon, New York City time, and the Administrative Agent shall by 3:00 p.m., New York City time, credit the amounts so received to the general deposit account of the Borrower with the Administrative Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Unless the Administrative Agent shall have received notice from a Lender prior to any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. 37 31 (e) The Borrower may refinance all or any part of any Borrowing with a Borrowing of the same or a different Type, subject to the conditions and limitations set forth in this Agreement. Any Borrowing or part thereof so refinanced shall be deemed to be repaid or prepaid in accordance with Section 2.04 or 2.10, as applicable, with the proceeds of a new Borrowing, and the proceeds of the new Borrowing, to the extent they do not exceed the principal amount of the Borrowing being refinanced, shall not be paid by the Lenders to the Administrative Agent or by the Administrative Agent to the Borrower pursuant to paragraph (c) above. SECTION 2.03. Notice of Borrowings. Except in the case of the Credit Event occurring on the Restatement Date (which shall consist solely of an ABR Borrowing), the Borrower shall give the Administrative Agent written or telecopy notice (or telephone notice promptly confirmed in writing or by telecopy) (a) in the case of a Eurodollar Borrowing, not later than 12:00 noon, New York City time, three Business Days before a proposed borrowing and (b) in the case of an ABR Borrowing, not later than 12:00 noon, New York City time, one Business Day before a proposed borrowing. Such notice shall be irrevocable and shall in each case refer to this Agreement and specify (a) whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing; (b) the date of such Borrowing (which shall be a Business Day) and the amount thereof; and (c) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. If the Borrower shall not have given notice in accordance with this Section 2.03 of its election to refinance a Borrowing prior to the end of the Interest Period in effect for such Borrowing, then the Borrower shall (unless such Borrowing is repaid at the end of such Interest Period) be deemed to have given notice of an election to refinance such Borrowing with an ABR Borrowing. The Administrative Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.03 and of each Lender's portion of the requested Borrowing. SECTION 2.04. Notes; Repayment of Loans. The Loans made by each Lender shall be evidenced by a Note, duly executed on behalf of the Borrower, dated the Restatement Date, in substantially the form attached hereto as Exhibit A, with the blanks appropriately filled, payable to the order of such Lender in a principal amount equal to such Lender's Commitment. 38 32 The outstanding principal balance of each Loan, as evidenced by such a Note, shall be payable on the last day of the Interest Period applicable to such Loan and on the Maturity Date. Each Note shall bear interest from and including the date of the first Borrowing hereunder on the outstanding principal balance thereof as set forth in Section 2.06. Each Lender shall, and is hereby authorized by the Borrower to, endorse on the schedule attached to each Note delivered to such Lender (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in such Lender's internal records, an appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such Loan, each payment of interest on any such Loan and the other information provided for on such schedule; provided, however, that the failure of any Lender to make such a notation or any error therein shall not affect the obligation of the Borrower to repay the Loans made by such Lender in accordance with the terms of this Agreement and the applicable Notes. Such a notation shall be conclusive absent manifest error. SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, the following fees (each, a "Commitment Fee") on the last day of March, June, September and December in each year, and on the date on which the Commitment of such Lender shall be terminated as provided herein, a Commitment Fee equal to the Applicable Commitment Fee Percentage on the average daily unused amount of the Commitment of such Lender during the preceding quarter (or shorter period commencing with the Restatement Date or ending with the Maturity Date or the date on which the Commitment of such Lender shall be terminated). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. (b) The Borrower agrees to pay to the Administrative Agent, for its own account, the fees set forth in the Fee Letter at the times set forth in the Fee Letter. (c) The Borrower agrees to pay to the Administrative Agent, for the account of the Lenders other than Chemical Bank, the participation fees (the "Participation Fees") set forth in the Fee Letter on the Restatement Date. (d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances, absent manifest error in the calculation thereof. 39 33 SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when such interest is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin at the time in effect. (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin in effect at the time of the making of such Loans. (c) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or LIBO Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. (d) Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. SECTION 2.07. Default Interest. If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount up to but excluding the date of actual payment (after as well as before judgment) at a rate per annum (computed on the same basis as an ABR Loan) equal to the rate that would at the time be applicable to an ABR Loan under Section 2.06 plus 2% per annum. SECTION 2.08. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to Lenders having at such time Commitments representing at least 20% of the total Commitments 40 34 at such time of making or maintaining their Eurodollar Loans during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrower and the Lenders. In the event of any such determination, any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 shall, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, be deemed to be a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.09. Termination and Reduction of Commitments. (a) The Commitments shall be automatically and permanently terminated on the Maturity Date. (b) The Commitments shall be automatically and permanently reduced on each of the following dates in the amounts corresponding to such dates as set forth below:
Date Commitment Reduction March 31, 1997 $6,250,000 September 30, 1997 $6,250,000 March 31, 1998 $7,000,000 September 30, 1998 $7,000,000 March 31, 1999 $7,500,000 September 30, 1999 $7,500,000 March 31, 2000 $8,500,000 September 30, 2000 $8,500,000 March 31, 2001 $8,500,000 September 30, 2001 $8,500,000 March 31, 2002 $8,500,000 September 30, 2002 $8,500,000 March 31, 2003 $7,500,000
(c) The Commitments shall be automatically and permanently reduced upon any sale or other disposition permitted hereunder of assets (other than sales or dispositions of Invested Assets) by Capsure, the Borrower or any Subsidiary Guarantor (other than sales or other dispositions of assets in an amount not exceeding $2,000,000 in the aggregate in any fiscal year), such reduction to be in an amount equal to 100% of the net proceeds (after sales commissions, other expenses incurred in connection with such sale or 41 35 disposition and a reasonable estimate of taxes payable in connection with such sale or disposition) of such sale or disposition. Commitment reductions pursuant to this paragraph (c) shall be applied pro rata against the reductions required under paragraph (b) above. (d) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided, however, that each partial reduction of the Commitments shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $5,000,000. Reductions pursuant to this paragraph (d) shall be applied, first, in any six-month period, against the next succeeding reduction required during such six-month period under paragraph (b) above and, thereafter, pro rata against the remaining reductions required under paragraph (b) above. (e) Each reduction in the Commitments hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrower shall pay to the Administrative Agent for the account of the Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to the date of such termination or reduction. SECTION 2.10. Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least two Business Days' prior written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent; provided, however, that each partial prepayment shall be in an amount that is an integral multiple of $1,000,000. (b) On the date of any termination or reduction of the Commitments pursuant to Section 2.09, the Borrower shall pay or prepay so much of the Borrowings as shall be necessary in order that the aggregate principal amount of the Loans outstanding on such date will not exceed the aggregate Commitments on such date (after giving effect to such termination or reduction). (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments 42 36 under this Section 2.10 shall be subject to Section 2.13 but otherwise without premium or penalty. All prepayments under this Section 2.10 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.11. Lender Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision herein, if after the date of this Agreement any change (other than any such change that is reflected in the applicable LIBO Rate) in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan made by such Lender, Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or by any political subdivision or state or taxing authority therein), or shall impose, modify or deem applicable any reserve, deposit insurance, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or to reduce the amount of any sum received or receivable by such Lender hereunder or under the Notes (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender shall have determined that the adoption after the date hereof of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the date hereof in any of the foregoing or in the interpretation or administration after the date hereof of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company 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 such Lender's capital or on the capital of such Lender's holding 43 37 company, if any, as a consequence of this Agreement or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of each Lender setting forth such amount or amounts as shall be necessary to compensate such Lender or its holding company as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period, provided that if such Lender shall not have notified the Borrower, within 90 days after the date on which such Lender shall have become aware of such increased costs or reductions, that such Lender will demand compensation for such increased costs or reductions, the Borrower's obligation to compensate such Lender for such increased costs or reductions shall be limited to increased costs or reductions accruing from and including the day that is 90 days prior to the date on which such Lender notifies the Borrower that such Lender will demand such compensation. The protection of this Section 2.11 shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition that shall have occurred or been imposed. (e) Each Lender will, at the request of the Borrower, designate a different lending office if such designation (i) will avoid the need for, or minimize the amount of, any compensation to which such Lender is entitled pursuant to this Section 2.11 and (ii) will not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. 44 38 SECTION 2.12. Change in Legality. (a) Notwithstanding any other provision herein, if any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written or telecopy notice to the Borrower and to the Administrative Agent, such Lender may: (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for a Eurodollar Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under subparagraph (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.12, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day of the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower. SECTION 2.13. Indemnity. The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the date of any borrowing hereunder the applicable conditions set forth in Article IV, (b) any failure by the Borrower to borrow or to refinance any Loan hereunder after irrevocable notice of such borrowing or refinancing has been given pursuant to Section 2.03, (c) any payment or prepayment of a Eurodollar Loan required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period applicable thereto or 45 39 (d) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise), including, in each such case, any loss or expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurodollar Loan. Such loss or expense shall be equal to the sum of (a) such Lender's actual costs and expenses incurred (other than any lost profits) in connection with, or by reason of, any of the foregoing events and (b) the excess, if any, as determined by such Lender, of (i) its cost of obtaining the funds for the Loan being paid, prepaid or not borrowed (assumed to be the LIBO Rate applicable thereto) for the period from the date of such payment, prepayment or failure to borrow to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date of such failure) over (ii) the amount of interest (as determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid or not borrowed for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section 2.13 shall be delivered to the Borrower and shall be conclusive absent manifest error. SECTION 2.14. Pro Rata Treatment. Except as required under Section 2.12, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees, each reduction of the Commitments and each refinancing of any Borrowing with a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing, computed in accordance with Section 2.01, to the next higher or lower whole dollar amount. SECTION 2.15. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable 46 40 bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans as a result of which the unpaid principal portion of its Loans shall be proportionately less than the unpaid principal portion of the Loans of any other Lender, such Lender shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans of such other Lender so that the aggregate unpaid principal amount of the Loans and participations in Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.15 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation. SECTION 2.16. Payments. (a) The Borrower shall make each payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 noon, New York City time, on the date when due in dollars to the Administrative Agent for the account of the Administrative Agent, or the Lenders, as the case may be, at the Administrative Agent's offices at 270 Park Avenue, New York, New York, in immediately available funds. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may 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, if applicable. 47 41 SECTION 2.17. Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.16, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) income taxes imposed on the net income of the Administrative Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity a "Transferee")) and (ii) franchise taxes imposed on the net income of the Administrative Agent or any Lender (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent or such Lender (or Transferee) is organized or any political subdivision thereof or state therein (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, "Taxes"). If the Borrower shall be required to deduct any Taxes from or in respect of any sum payable hereunder to any Lender (or any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount (an "additional amount") necessary so that after making all required deductions (including deductions applicable to additional amounts payable under this Section 2.17) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that 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 Document ("Other Taxes"). (c) The Borrower will indemnify each Lender (or Transferee) and the Administrative Agent for the full amount of Taxes and Other Taxes paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorney's fees and expenses)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate setting forth the amount of such payment or liability prepared by a Lender or the Administrative Agent on its behalf, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made 48 42 within 30 days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor. (d) If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrower, or with respect to which the Borrower has paid additional amounts, pursuant to this Section 2.17, it shall promptly notify the Borrower of the availability of such refund claim and shall make a claim to such Governmental Authority for such refund at the Borrower's expense. If a Lender (or Transferee) or the Administrative Agent receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.17, it shall within 30 days from the date of such receipt pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.17 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender (or Transferee) or the Administrative Agent and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that the Borrower, upon the request of such Lender (or Transferee) or the Administrative Agent, agrees to repay the amount paid over to the Borrower (plus penalties, interest or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund to such Governmental Authority. (e) As soon as practicable after the date of any payment of Taxes or Other Taxes by the Borrower to the relevant Governmental Authority, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 10.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (f) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.17 shall survive the payment in full of the principal of and interest on all Loans made hereunder and of all other Obligations. (g) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of 49 43 Columbia (a "Non-U.S. Lender") shall deliver to the Borrower and the Administrative Agent two copies of either United States Internal Revenue Service Form 1001 or Form 4224, or in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10 percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Under changes its applicable lending office by designating a different lending office (a "New Lending Office"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.17(g), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.17(g) that such Non-U.S. Lender is not legally able to deliver. (h) The Borrower shall not be required to indemnify any Non-U.S. Lender, or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided, however, that this clause (i) shall not apply to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of the Borrower; and provided further, however, that this clause (i) shall not apply to the extent the indemnity payment or additional amounts any Transferee, or Lender (or Transferee) 50 44 through a New Lending Office, would be entitled to receive (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (g) above. (i) Any Lender (or Transferee) claiming any indemnity payment or additional amounts payable pursuant to this Section 2.17 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested in writing by the Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such indemnity payment or additional amounts that may thereafter accrue and would not, in the sole determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). (j) Nothing contained in this Section 2.17 shall require any Lender (or Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). ARTICLE III REPRESENTATIONS AND WARRANTIES Each of the Borrower and Capsure represents and warrants to each Lender and the Administrative Agent that: SECTION 3.01. Organization; Powers. Each of Capsure, the Borrower and each of the Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in every jurisdiction where such qualification is required, except for those jurisdictions in which the failure to so qualify would not result in a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations 51 45 under each of the Loan Documents and each other agreement or instrument contemplated thereby to which it is or will be a party and, in the case of the Borrower, to borrow hereunder. SECTION 3.02. Authorization. The execution, delivery and performance by each of the Borrower, Capsure, each Subsidiary Guarantor and each other Subsidiary of each of the Loan Documents, the borrowings hereunder and the creation of the security interests contemplated by the Security Documents (collectively, the "Transactions") (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of any material law, statute, rule or regulation, or of the certificate of incorporation or other constitutive documents or by-laws of Capsure, the Borrower or any of the Subsidiaries, (B) any order of any Governmental Authority or (C) any provision of any indenture or other material agreement or instrument to which Capsure, the Borrower or any of the Subsidiaries is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture or other material agreement or instrument or (iii) except for the Liens created by the Security Documents, result in the creation or imposition of any Lien upon or with respect to any property or assets to be owned or hereafter acquired by Capsure, the Borrower or any of the Subsidiaries. SECTION 3.03. Enforceability. This Agreement has been duly executed and delivered by Capsure and the Borrower and constitutes, and each other Loan Document to which Capsure, the Borrower, any Subsidiary Guarantor or any other Subsidiary is a party, when executed and delivered by it will constitute, a legal, valid and binding obligation of Capsure, the Borrower, such Subsidiary Guarantor or such Subsidiary, as the case may be, enforceable against it in accordance with its terms. SECTION 3.04. Governmental Approvals. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except (a) such filings as are necessary to record and perfect the security interest created by the Security Documents and (b) such as have been made or obtained and are in full force and effect. SECTION 3.05. Financial Statements. Capsure has heretofore furnished to the Lenders (a) its consolidated and consolidating balance 52 46 sheets and statements of income and changes in financial condition as of and for the fiscal year ended December 31, 1995, prepared in accordance with GAAP and audited by and accompanied by the opinion of Capsure's independent public accountants on the date hereof or other independent public accountants reasonably satisfactory to the Required Lenders, (b) the Annual Statement of each of the Insurance Subsidiaries for the fiscal year ended December 31, 1995, prepared in accordance with SAP and filed with such Insurance Subsidiary's Applicable Insurance Regulatory Authority and (c) its pro forma consolidated balance sheet as of March 31, 1996 and related statement of income for the period April 1, 1995 to March 31, 1996, each after giving effect to the UC Sale and the other transactions contemplated hereby. All the foregoing financial statements that were prepared in accordance with GAAP present fairly the financial condition and results of Capsure and its subsidiaries and all the foregoing statements that were prepared in accordance with SAP present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of the applicable Insurance Subsidiary, in each case as of the relevant dates and for the relevant periods. All the balance sheets described in (a) and (b) above and the notes thereto disclose all material liabilities, direct or contingent, of Capsure and its subsidiaries or such Insurance Subsidiary, as the case may be, as of the dates thereof. The pro forma financial statements described in (c) above fairly present the pro forma consolidated financial condition of Capsure as of March 31, 1996. SECTION 3.06. No Material Adverse Change. There has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of Capsure and its subsidiaries, taken as a whole, since December 31, 1995 (it being understood that no such material adverse change shall be deemed to have occurred solely as a result of the UC Sale). SECTION 3.07. Title to Properties; Possession Under Leases. (a) Each of Capsure, the Borrower and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.02. (b) Each of Capsure, the Borrower and the Subsidiaries has complied in all material respects with all obligations under all material leases to which 53 47 it is a party and all such leases are in full force and effect. Each of Capsure, the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such leases. SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth as of the Restatement Date a list of all subsidiaries of each of Capsure and the Borrower and the percentage ownership interest of Capsure or the Borrower therein. All outstanding shares of the capital stock of each Subsidiary are fully paid and nonassessable and are owned beneficially and of record as set forth in Schedule 3.08, free and clear of all Liens and encumbrances whatsoever, except such as are created pursuant to the Security Documents. There are no outstanding subscriptions, options, warrants, calls, rights (including preemptive rights) or other agreements or commitments of any nature relating to any capital stock of any Subsidiary. SECTION 3.09. Litigation; Compliance with Laws. (a) There are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of Capsure or the Borrower, threatened against or affecting Capsure, the Borrower or any of the Subsidiaries or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, could individually or in the aggregate, result in a Material Adverse Effect, other than any litigation arising in the ordinary course of business of any Insurance Subsidiary in connection with which recourse is sought against insurance policies or bonds issued by such Insurance Subsidiary or obligations arising in connection with such insurance policies or bonds. (b) None of Capsure, the Borrower or any Subsidiary is in violation of any law, rule or regulation, nor is Capsure, the Borrower or any Subsidiary in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, including any Applicable Insurance Regulatory Authority of any Insurance Subsidiary, where such violation or default could reasonably be expected to result in a Material Adverse Effect. None of the Transactions will violate any judgment, writ, injunction or decree of any Governmental Authority, including any Applicable Insurance Regulatory Authority of any Insurance Subsidiary, where such violation or default could reasonably be expected to result in a Material Adverse Effect. 54 48 SECTION 3.10. Agreements. (a) None of Capsure, the Borrower or any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could reasonably be expected to result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document. (b) None of Capsure, the Borrower or any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document. SECTION 3.11. Federal Reserve Regulations. (a) None of Capsure, the Borrower or any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose or (ii) for any purpose that entails a violation of, or is inconsistent with, the provisions of the Regulations of the Board, including Regulation G, U or X. SECTION 3.12. Investment Company Act; Public Utility Holding Company Act. None of Capsure, the Borrower or any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.13. Use of Proceeds. The Borrower will use the proceeds of the Loans only for the purposes specified in the preamble to this Agreement. SECTION 3.14. Tax Returns. Each of Capsure and its subsidiaries has filed or caused to be filed all Federal, all state and all local tax returns 55 49 required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which Capsure or the applicable subsidiary shall have set aside on its books adequate reserves. SECTION 3.15. No Material Misstatements. The information, reports, financial statements, exhibits and schedules furnished by or on behalf of Capsure or any of its subsidiaries to the Administrative Agent or any Lender in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto, when taken as a whole, did not contain, does not contain and will not contain any material misstatement of fact and did not omit, does not omit and will not omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading. The projections and pro forma financial information contained in such materials are based on good faith estimates and assumptions believed by Capsure to be reasonable as of the date such projections and pro forma financial information were furnished by Capsure. Such pro forma financial information was prepared in accordance with GAAP or SAP, as applicable. SECTION 3.16. Employee Benefit Plans. Each of Capsure, the Borrower and each of their ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Code and the final effective regulations and published interpretation of general applicability thereunder. No Reportable Event has occurred in respect of any Plan of Capsure, the Borrower or any such ERISA Affiliate. The present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $250,000 the value of the assets of such Plan and the present value of all underfunded Plans (based on those assumptions used to fund each such Plan) did not, as of the last annual valuation dates applicable thereto, exceed by more than $250,000 the value of the assets of all such underfunded Plans. None of Capsure, the Borrower or any ERISA Affiliate has incurred any Withdrawal Liability that materially adversely affects the financial condition of Capsure, the Borrower and their ERISA Affiliates, taken as a whole. None of Capsure, the Borrower or any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated where such reorganization or termination has resulted or can 56 50 reasonably be expected to result in an increase in the contributions required to be made to such Plan that would materially and adversely affect the financial condition of Capsure, the Borrower and their ERISA Affiliates, taken as a whole. SECTION 3.17. Environmental and Safety Matters. Except as set forth on Schedule 3.17, Capsure and each of its subsidiaries is in compliance in all material respects with all applicable Environmental and Safety Laws. Except as set forth on Schedule 3.17, neither Capsure nor any of its subsidiaries has received notice of any material failure so to comply. Capsure's and each of its subsidiaries' facilities do not store, release or dispose of any Hazardous Substances in violation of any applicable Environmental and Safety Laws. Except as set forth on Schedule 3.17, neither Capsure nor the Borrower is aware, after reasonable inquiry, of any events, conditions or circumstances involving environmental pollution or contamination or employee health or safety that could reasonably be expected to result in a Material Adverse Effect. SECTION 3.18. Security Documents. (a) The Pledge Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Pledge Agreement) and the proceeds thereof and, when the stock that is to be pledged as Collateral is delivered to the Collateral Agent, the Pledge Agreement shall constitute a fully perfected first priority lien on, and security interest in, all right, title and interest of Capsure, the Borrower, each Subsidiary Guarantor and each other Subsidiary party thereto in such Collateral and the proceeds thereof, in each case prior and superior in right to any other person. (b) The Security Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement) and proceeds thereof, and when financing statements in appropriate form are filed in the offices specified on Schedule 3.18(b), the Lien created under the Security Agreement will constitute a fully perfected lien on, and security interest in, all right, title and interest of Capsure, the Borrower and each Subsidiary Guarantor party thereto in such Collateral and the proceeds thereof, in each case prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 6.02. 57 51 SECTION 3.19. Absence of Certain Restrictions. Except as required by law, rule or regulation or by any Governmental Authority, including any Applicable Insurance Regulatory Authority, no indenture, certificate of designation for preferred stock, agreement or instrument to which any Subsidiary is a party will, directly or indirectly, prohibit or restrain the payment of dividends by such Subsidiary. As of the Restatement Date, no such indenture, certificate, agreement or instrument to which Capsure, the Borrower or any Subsidiary is a party will require the prepayment of any amounts owed by Capsure, the Borrower or such Subsidiary as a result of the consummation of the Transactions. SECTION 3.20. Reserves. All reserves and other liabilities with respect to insurance contracts reflected in each Annual Statement or Quarterly Statement of each Insurance Subsidiary filed with an Applicable Insurance Regulatory Authority since December 31, 1995 or delivered to any Lender or the Administrative Agent ("Reserve Liabilities"), (a) were determined in accordance with generally accepted actuarial standards consistently applied, (b) were fairly stated in accordance with sound actuarial principles, (c) were based on actuarial assumptions that were in accordance with or more conservative than those appropriate (in the reasonable determination of the applicable Insurance Subsidiary) for the related insurance policies, (d) met the requirements of the applicable insurance laws, rules and regulations of their respective states of domicile and met in all material respects the requirements of the applicable insurance laws, rules and regulations of each other jurisdiction in which they are licensed to write insurance contracts and (e) reflected (on a net basis) the related reinsurance, coinsurance and other similar agreement of such Insurance Subsidiary. Adequate provision for all such Reserve Liabilities has been made (under generally accepted actuarial principles consistently applied) to cover the total amount of matured and unmatured benefits, claims and other liabilities of such Insurance Subsidiary under all insurance policies under which such Insurance Subsidiary has any liability (including any liability arising under or as a result of any reinsurance, coinsurance or other similar agreement) on the respective dates of the Annual Statements or Quarterly Statements based on commonly accepted actuarial assumptions as to future contingencies that are reasonable and appropriate under the circumstances. 58 52 ARTICLE IV CONDITIONS OF LENDING The effectiveness of this Amended and Restated Credit Agreement and the obligations of the Lenders to make Loans hereunder (the effectiveness hereof and each making of a Loan, a "Credit Event") are subject to the satisfaction of the following conditions: SECTION 4.01. All Credit Events. On the date of each Credit Event, including each Borrowing in which Loans are refinanced with new Loans as contemplated by Section 2.02(e): (a) The Administrative Agent shall have received a notice of such Credit Event as required by Section 2.03. (b) The representations and warranties set forth in Article III hereof (except in the case of a refinancing that does not increase the aggregate principal amount of Loans outstanding) shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) Each of Capsure, the Borrower, each Subsidiary Guarantor and each other Subsidiary shall be in compliance in all material respects with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Borrowing no Event of Default or Default shall have occurred and be continuing. (d) In the case of any Borrowing other than a Borrowing the proceeds of which are to be used for general corporate purposes in the ordinary course of the Borrower's business (including funding the working capital requirements of the Borrower and the Subsidiaries), no person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) other than the Zell Entities shall own, directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Capsure. 59 53 Each Credit Event shall be deemed to constitute a representation and warranty by Capsure and the Borrower on the date of such Borrowing as to the matters specified in paragraphs (b) and (c) of this Section 4.01. SECTION 4.02. First Credit Event. On the Restatement Date: (a) Each Lender shall have received a duly executed Note complying with the provisions of Section 2.04. (b) The Administrative Agent shall have received a favorable written opinion of Rosenberg & Liebentritt, P.C., counsel for Capsure and the Borrower, to the effect set forth in Exhibit D hereto, dated the Restatement Date and addressed to the Administrative Agent and the Lenders, and Capsure and the Borrower hereby instruct such counsel to deliver such opinion to the Administrative Agent. (c) All legal matters incident to this Agreement and the Borrowings hereunder shall be satisfactory to the Lenders and their counsel and to Cravath, Swaine & Moore, counsel for the Administrative Agent. (d) The Administrative Agent shall have received (i) a certificate as to the good standing of each of Capsure, the Borrower and each Subsidiary Guarantor requested by the Administrative Agent as of a recent date from the Secretary of State of the state of its organization; (ii) a certificate of the Secretary or Assistant Secretary of Capsure, the Borrower and each Subsidiary Guarantor dated the Restatement Date and certifying (A) that attached thereto is a true and complete copy of the certificate or articles of incorporation and by-laws of Capsure, the Borrower or such Subsidiary Guarantor, as the case may be, as in effect on the Restatement Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of Capsure, the Borrower or such Subsidiary Guarantor, as the case may be (or a duly authorized committee thereof), authorizing the execution, delivery and performance of the Loan Documents and the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect as of the Restatement Date and (C) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection 60 54 herewith on behalf of Capsure, the Borrower or such Subsidiary Guarantor, as the case may be; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; and (iv) such other documents as the Lender or their counsel or Cravath, Swaine & Moore, counsel for the Administrative Agent, may reasonably request. (e) The Administrative Agent shall have received a certificate, dated the Restatement Date and signed by a Financial Officer of each of Capsure and the Borrower, confirming (i) compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01, (ii) pro forma compliance with the financial covenants set forth in Sections 6.13, 6.14, 6.15 and 6.16 hereof, as of the Restatement Date and after giving effect to the UC Sale, the payment of the Special Dividend and the other transactions contemplated hereby and (iii) that the actual sources and uses of the funds used to consummate the transactions contemplated hereby on or prior to the Restatement Date are consistent in all material respects with the proposed sources and uses previously provided to the Lenders. (f) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Restatement Date and the Administrative Agent shall have received, on behalf of the lenders under the Existing Credit Facility, all fees payable pursuant to Section 2.05 of the Existing Credit Facility for all periods ending on or prior to the Restatement Date. (g) The Collateral Agent shall have received an acknowledgment signed by Capsure, the Borrower and each of its Subsidiaries stating that: (i) The Pledge Agreement has been duly executed by the parties thereto and delivered to the Collateral Agent and is in full force and effect, and all the outstanding capital stock of the Borrower and each of Western Surety and the other Subsidiaries listed on Schedule 4.02(g) has been duly and validly pledged thereunder to the Collateral Agent for the ratable benefit of the Secured Parties and certificates representing such shares, accompanied by instruments of transfer and stock powers endorsed in blank, are in the actual possession of the Collateral Agent. 61 55 (ii) The Security Agreement has been duly executed by Capsure, the Borrower, the Subsidiary Guarantors and the Collateral Agent and is in full force and effect, and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and perfected first priority security interest in or lien on the Collateral described in such agreement has been delivered to the Collateral Agent. (iii) The Guarantee Agreement has been duly executed by the Subsidiary Guarantors and delivered to the Collateral Agent, and is in full force and effect. (iv) The Indemnity, Subrogation and Contribution Agreement has been duly executed by the Borrower and the Subsidiary Guarantors and delivered to the Collateral Agent, and is in full force and effect. (v) The Perfection Certificate with respect to each of Capsure, the Borrower and the Subsidiary Guarantors dated the Closing Date and duly executed by a Financial Officer of each of Capsure and the Borrower is accurate and complete in all respects. (h) All amounts due under the Existing Credit Facility shall have been repaid in full, the commitments thereunder shall have been assigned pursuant to the Amendment Agreement, and the Amendment Agreement shall be in full force and effect. (i) The Lenders shall be reasonably satisfied with the terms and conditions for Capsure's payment of the Special Dividend. (j) All requisite Governmental Authorities and third parties shall have approved or consented to (or, if applicable law or regulation provides that approval or consent of the requisite Governmental Authority shall be deemed to have been granted if no disapproval is issued within a specified period, such Governmental Authority did not disapprove within such specified period) the Transactions and the other transactions contemplated hereby to the extent required, all 62 56 applicable appeal periods shall have expired and there shall be no governmental or judicial action, actual or threatened, that has or would have a reasonable likelihood of restraining, preventing or imposing burdensome conditions on the Transactions or the other transactions contemplated hereby. (k) There shall be no litigation or administrative proceedings or other legal or regulatory developments with respect to Capsure or any of its subsidiaries (including any governmental policy or initiative relating to insurance), actual or overtly threatened, that, in the reasonable judgment of the Lenders, could reasonably be expected to result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document. (l) There shall have been no material adverse change with respect to the business, assets, financial condition, prospects or material agreements of Capsure and its subsidiaries, taken as a whole, since December 31, 1995 (it being understood that no such material adverse change shall be deemed to have occurred solely as a result of the UC Sale). (m) The Lenders shall have received a reasonably satisfactory consolidated balance sheet and income statement of Capsure and its subsidiaries as of and for the year ended December 31, 1995. (n) The Lenders shall be reasonably satisfied (i) that the transactions contemplated hereby (including, without limitation, any modification of the Tax Sharing Agreements upon the consummation of the UC Sale) will not materially adversely affect the tax position (including, without limitation, the amount of Available Net Operating Losses of the Borrower, Capsure and their respective subsidiaries) and (ii) with all other material legal, tax and accounting matters relating to this Agreement and the other transactions contemplated hereby. (o) The Lenders shall be reasonably satisfied with the nature and amount of any contingent liabilities of Capsure and its subsidiaries (including environmental, pension and tax liabilities) and the amount of reserves established by Capsure and its subsidiaries in connection therewith. 63 57 (p) The Lenders shall be reasonably satisfied with the amount, terms and provisions of all Indebtedness of Capsure and its subsidiaries that will be outstanding as of the Restatement Date. (q) The UC Sale shall have been consummated in accordance with applicable law, the Stock Purchase Agreement and related documentation reasonably satisfactory to the Lenders. (r) The sum of (i) the net cash proceeds of the UC Sale and (ii) the amount of excess capital and surplus of United Capitol that are released and paid to the Borrower as a cash dividend prior to or simultaneously with the UC Sale, shall be at least $65,000,000. (s) The conditions to closing set forth in the Stock Purchase Agreement shall have been satisfied without giving effect to any waiver or amendment adverse to the Lenders not approved by the Lenders. ARTICLE V AFFIRMATIVE COVENANTS Each of the Borrower and Capsure covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, each of the Borrower and Capsure will, and will cause each of its subsidiaries to: SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.05. (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is currently conducted and operated (or, in the case of any business acquired in a Permitted Acquisition, in substantially the manner in which it is conducted and operated on the date on 64 58 which such Permitted Acquisition is consummated), which, in the case of any Insurance Subsidiary, may include the underwriting of property and casualty lines of business not currently underwritten by such person; comply in all material respects with all applicable laws, rules, regulations and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.02. Insurance. Keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; maintain sufficient insurance so that neither any Insurance Subsidiary nor any other Subsidiary will be considered a co-insurer or co-insurers; maintain such other insurance as may be required by law; and cause each insurance policy that is required by this Section 5.02 and insures any of the Collateral to be endorsed or otherwise amended to include a lender's loss payable endorsement (except in the case of liability policies) in form and substance reasonably satisfactory to the Collateral Agent and to name the Collateral Agent as an additional insured. SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and other obligations promptly and in accordance with its terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and Capsure or the applicable subsidiary thereof shall have set aside on its books, in accordance with GAAP, adequate reserves with respect thereto. 65 59 SECTION 5.04. Financial Statements, Reports, Etc. Furnish to the Administrative Agent and each Lender: (a) within 105 days after the end of each fiscal year, its consolidated and consolidating balance sheets and related statements of income and changes in financial position, showing the financial condition of Capsure and its subsidiaries as of the close of such fiscal year and the results of their operations during such year, all audited by Coopers & Lybrand or other independent public accountants of recognized national standing acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present the financial condition and results of operations of Capsure on a consolidated basis in accordance with GAAP consistently applied; (b) within 50 days after the end of each of the first three fiscal quarters of each fiscal year, the consolidated and consolidating balance sheets and related statements of income and changes in financial position, showing the financial condition of Capsure and its subsidiaries as of the close of such fiscal quarter and the results of their operations during such fiscal quarter and the then elapsed portion of the fiscal year, all certified by a Financial Officer of each of Capsure and the Borrower as fairly presenting the financial condition and results of operations of Capsure on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of the accounting firm or Financial Officers opining on or certifying such statements (which certificate, when furnished by an accounting firm, may be limited to accounting matters and disclaim responsibility for legal interpretations) (i) certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in detail reasonably satisfactory to the Administrative Agent demonstrating compliance with the covenants contained in Sections 5.13, 6.13, 6.14, 6.15 and 6.16; 66 60 (d) as soon as available and in any event within 105 days after the end of each fiscal year, (i) the Statement of Actuarial Opinion of each Insurance Subsidiary for such fiscal year and as filed with the Applicable Insurance Regulatory Authority and (ii) the Annual Statement of each Insurance Subsidiary for such fiscal year and as filed with the Applicable Insurance Regulatory Authority, together with, in the case of the statements delivered pursuant to clause (ii) above, a certificate of a Responsible Officer of the Borrower to the effect that such statements present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of such Insurance Subsidiary in accordance with SAP; (e) as soon as available and in any event within 50 days after the end of each of the first three fiscal quarters of each fiscal year, the Quarterly Statement of each Insurance Subsidiary for such fiscal quarter and as filed with the Applicable Insurance Regulatory Authority, certified by a Responsible Officer of the Borrower as fairly presenting the statutory assets, liabilities, capital and surplus, results of operations and cash flows of such Insurance Subsidiary; (f) as soon as available and in any event at least once each fiscal year and no later than 30 days after the completion thereof, an actuarial report of each Insurance Subsidiary, prepared by any independent actuarial or accounting firm of nationally recognized standing acceptable to the Required Lenders; (g) promptly after delivery to an Insurance Subsidiary, final copies of all regular and periodic reports of examinations of such Insurance Subsidiary, delivered to such Insurance Subsidiary by the Applicable Insurance Regulatory Authority; (h) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by it (and any filing on Schedule 13D or Schedule 13G with respect to the ownership of Capsure's equity securities) with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be; 67 61 (i) upon the request of the Administrative Agent or the Required Lenders, and promptly following the preparation thereof, copies of each management letter prepared by Capsure's auditors (together with any response thereto prepared by Capsure); (j) as soon as available, and in any event no later than 105 days after the end of each fiscal year, a revised Schedule 3.20 as of such date, and, upon the request of the Administrative Agent or the Required Lenders, copies of any Reinsurance Agreement of any Insurance Subsidiary; (k) as soon as available, and in any event no later than 105 days after the end of each fiscal year, forecasted financial projections and summary data through the end of the then-current fiscal year, including a specification of the underlying assumptions, all certified by a Financial Officer of each of Capsure and the Borrower to be a fair summary of results and a good faith estimate of the forecasted financial projections and results of operations for such year; (l) at least ten Business Days prior to any Permitted Acquisition, financial projections covering the period from the date of such Permitted Acquisition through the Maturity Date giving effect to such Permitted Acquisition and demonstrating compliance by Capsure and its subsidiaries on a pro forma basis with the covenants in Article VI from and after the date of, and after giving effect to, such Permitted Acquisition through the Maturity Date; (m) promptly after receipt thereof, copies of any notices or other communications received by it with respect to the Pledged Securities (as defined in the Pledge Agreement); (n) at least 10 days' prior written notice of the payment of any dividend, distribution or other payment by the Borrower to Capsure or by Capsure to any holder of its capital stock if such dividend, distribution or payment will result in a reduction in the Commitments under Section 2.09(c); (o) no later than 105 days after the end of each fiscal year and within 10 days after any filing on Schedule 13D or Schedule 13G with respect to the ownership of Capsure's equity securities, a certificate of a Financial Officer and the chief legal officer of Capsure certifying that 68 62 since the Restatement Date there has been no "ownership change" within the meaning of Section 382(g) of the Code; (p) no later than 50 days after the end of each of the first three fiscal quarters of each fiscal year and 105 days after the end of the last fiscal quarter of each fiscal year, a certificate of a Responsible Officer of each of Capsure and the Borrower setting forth the aggregate amount of dividends, distributions and other payments paid by Capsure and the Borrower during such fiscal quarter and the aggregate cost basis of the Excluded Investment as of the last day of such fiscal quarter; and (q) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of Capsure or its subsidiaries, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request. SECTION 5.05. Litigation and Other Notices. Furnish to the Administrative Agent and each Lender written notice of the following promptly after any Responsible Officer of Capsure or the Borrower obtains knowledge thereof: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (b) the filing or commencement of any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against Capsure, the Borrower or any Subsidiary that, if adversely determined, could result in a Material Adverse Effect (other than any litigation arising in the ordinary course of business of any Insurance Subsidiary in connection with which recourse is sought against insurance policies or bonds issued by such Insurance Subsidiary or obligations arising in connection with such insurance policies or bonds); (c) any development that has resulted in, or could reasonably be anticipated to result in, a Material Adverse Effect; and (d) any "ownership change" within the meaning of Section 382(g) of the Code. 69 63 SECTION 5.06. Employee Benefits. (a) Comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent and each Lender (i) as soon as possible after, and in any event within 30 days after any Responsible Officer of Capsure, the Borrower or any of their ERISA Affiliates knows or has reason to know that, any Reportable Event has occurred that alone or together with any other Reportable Event could reasonably be expected to result in liability of Capsure, the Borrower or any Subsidiary Guarantor to the PBGC in an aggregate amount exceeding $250,000, a statement of a Financial Officer of the Borrower setting forth details as to such Reportable Event and the action that Capsure, the Borrower or such Subsidiary Guarantor proposes to take with respect thereto, together with a copy of the notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any notice that Capsure, the Borrower or any of their ERISA Affiliates may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414) or to appoint a trustee to administer any such Plan, (iii) within 10 days after the due date for filing with the PBGC pursuant to Section 412(n) of the Code a notice of failure to make a required installment or other payment with respect to a Plan, a statement of a Financial Officer of the Borrower setting forth details as to such failure and the action that Capsure, the Borrower or any ERISA Affiliate proposes to take with respect thereto, together with a copy of any such notice given to the PBGC and (iv) promptly and in any event within 30 days after receipt thereof by Capsure, the Borrower or such ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by Capsure, the Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability or (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, both within the meaning of Title IV of ERISA. SECTION 5.07. Maintaining Records; Access to Properties and Inspections. Maintain all financial records in accordance with GAAP and, with respect to any Insurance Subsidiary, SAP, and, upon reasonable notice, permit any representatives designated by any Lender to visit and inspect the financial records and the properties of Capsure or any of its subsidiaries at reasonable times and as often as requested and to make extracts from and copies of such financial records, and permit any representatives designated by any Lender to discuss the affairs, finances and condition of Capsure or any of its subsidiaries with the officers thereof and, in the presence of 70 64 representatives of Capsure if requested by Capsure, independent accountants therefor. SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans only for the purposes set forth in the preamble to this Agreement. SECTION 5.09. Further Assurances. (a) Execute and cause to be executed any and all further documents, financing statements, agreements and instruments, and take all further action (including (i) filing Uniform Commercial Code and other financing statements, (ii) executing and delivering a Mortgage and (iii) executing and delivering a Pledgeholder Agreement) that may be required under applicable law, or which the Required Lenders, the Administrative Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests or liens created or intended to be created by the Security Documents. Each of Capsure and the Borrower agrees to provide such evidence as the Required Lenders shall reasonably request as to the perfection and priority status of such security interests and Lien. (b) Cause each subsidiary created, and (to the extent required by Section 6.05(c)(ii)) each subsidiary acquired, by the Borrower or its subsidiaries from time to time in accordance with the terms of this Agreement and each existing Subsidiary (to the extent required by Section 6.05(c)(ii) and to the extent not a party thereto at such time) that acquires stock or assets in a Permitted Acquisition (A) to undertake the obligation of and to become a Subsidiary Guarantor under the Guarantee Agreement pursuant to one or more instruments or agreements substantially in the form of Annex 1 to the Guarantee Agreement, (B) to undertake the obligation of and to become a Subsidiary Guarantor under the Indemnity, Subrogation and Contribution Agreement pursuant to one or more instruments or agreements substantially in the form of Annex 1 thereto, (C) to undertake the obligation of and to become a Grantor under the Security Agreement pursuant to one or more instruments or agreements substantially in the form of Annex 1 to the Security Agreement, (D) to undertake the obligation of and to become a Pledgor under the Pledge Agreement pursuant to one or more instruments or agreements substantially in the form of Annex 1 to the Pledge Agreement, (E) to undertake the obligation of and become a Mortgagor under a Mortgage if such subsidiary acquires real property in such Permitted Acquisition and (F) to undertake the obligation of and become a Pledgor under a Pledgeholder 71 65 Agreement to the extent required by Section 5.14 and allege or cause to be pledged the shares of capital stock of any such created or acquired subsidiary (other than the capital stock of any acquired subsidiary, the stock of which may not be pledged due to any applicable insurance regulatory prohibition on such a pledge) to the Collateral Agent for the benefit of the Lenders pursuant to the Pledge Agreement or one or more agreements substantially in the form of Annex I to the Pledge Agreement. (c) Use its best efforts to obtain (as soon as the same practicably may be obtained) any approvals required in order for any subsidiary of an Insurance Subsidiary to grant any security interest or lien contemplated by Section 6.05(c)(ii)(E). SECTION 5.10. Environmental and Safety Laws. (a) Comply with all Environmental and Safety Laws and obtain and comply with and maintain any and all licenses, approvals, registrations or permits required by Environmental and Safety Laws, except to the extent that failure so to comply or to obtain and comply with and maintain such licenses, approvals, registrations and permits does not have, and could not reasonably be expected to result in, a Material Adverse Effect. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions, required under Environmental and Safety Laws and promptly comply with all lawful orders and directives of all Governmental Authorities in respect of Environmental and Safety Laws, except to the extent that the same are being contested in good faith by appropriate proceedings, the pendency of which would not have a Material Adverse Effect. (c) Notify the Administrative Agent and the Lenders of any of the following that is reasonably likely to have a Material Adverse Effect: (i) any Environmental Claim received by Capsure or any of its subsidiaries, including any such Environmental Claim seeking to cause Capsure of any of its subsidiaries to take or pay for any remedial, removal, response or cleanup or other action with respect to any Hazardous Substance contained on any property owned or leased by Capsure or any of its subsidiaries; 72 66 (ii) any notice of any alleged violation of or knowledge by Capsure or any of its subsidiaries of a condition that might reasonably result in a violation of any Environmental and Safety Law; and (iii) any commencement or threatened commencement of any judicial or administrative proceeding or investigation alleging a violation or potential violation of any requirement of any Environmental and Safety Law by Capsure or any of its subsidiaries. SECTION 5.11. Risk-Based Capital. Cause each Insurance Subsidiary to maintain at all times Risk-Based Capital in an amount in excess of the level at which the Applicable Insurance Regulatory Authority may issue a corrective order or take any other action the effect of which is substantially equivalent to the issuance of a corrective order. SECTION 5.12. Insurance Regulatory Information System. Cause each Insurance Subsidiary to comply in all material respects with the requirements of the Insurance Regulatory Information System. SECTION 5.13. Investment Ratios. (a) Cause all Invested Assets (other than (i) Excluded Investments and (ii) investments in the capital stock of any subsidiary, so long as such person owns, directly, beneficially and of record, shares representing at least 80% of the shares of each class of capital stock of such subsidiary before giving effect to such investment) owned by it or any of its subsidiaries (other than the Insurance Subsidiaries) to be in the form of cash, Cash Equivalents and Permitted Investments. (b) Cause at any time at least 90% of the Invested Assets of each Insurance Subsidiary (excluding investments in the capital stock of subsidiaries of such Insurance Subsidiary) to constitute Investment Grade Securities, cash and Cash Equivalents. (c) Cause each Insurance Subsidiary to own at any time Invested Assets (excluding investments in United States Government Securities), of which no single Invested Asset equals or exceeds 5% (or, in the case of any Invested Asset that is in the form of a Cash Equivalent, 6%) of the value of all Invested Assets owned by such Insurance Subsidiary at such time. SECTION 5.14. Deposit and Investment Accounts. (a) In the case of the Borrower, establish not later than 30 days after the Restatement Date and thereafter maintain, and, in the case of the Borrower and its subsidiaries, 73 67 cause each Subsidiary Guarantor (other than any Subsidiary Guarantor that is a subsidiary of any Insurance Subsidiary) to establish not later than 30 days after the Restatement Date and thereafter maintain, all its collection or deposit accounts with the Collateral Agent. (b) (i) In the case of the Borrower, execute and deliver, and, in the case of the Borrower and its subsidiaries, cause each of Pin Oak Petroleum, Inc. and NI Acquisition Corp. to execute and deliver, to the Collateral Agent an effective Pledgeholder Agreement not later than 30 days after the Restatement Date and (ii) in the case of the Borrower, execute and deliver, and, in the case of the Borrower and its subsidiaries, cause each Subsidiary Guarantor (other than any Subsidiary Guarantor that is an Insurance Subsidiary or a subsidiary of any Insurance Subsidiary) to execute and deliver, to the Collateral Agent an effective Pledgeholder Agreement substantially contemporaneously with the establishment by any such person after the date hereof of any brokerage, investment, money market or similar account with any person other than the Collateral Agent. SECTION 5.15. Fiscal Year. Cause its fiscal year to end on December 31 of each year. ARTICLE VI NEGATIVE COVENANTS Each of the Borrower and Capsure covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, the Borrower and Capsure will not, and will not cause or permit any of their respective subsidiaries to: SECTION 6.01. Indebtedness. Incur, create, issue, assume, guarantee or permit to exist any Indebtedness, except: (a) Indebtedness existing on the date hereof and set forth on Schedule 6.01, but not any extensions, renewals, replacements or refinancings of such Indebtedness; 74 68 (b) in the case of the Borrower, Indebtedness consisting of the Borrowings hereunder; (c) in the case of the Borrower or any of its wholly owned Subsidiaries, Indebtedness assumed or incurred in connection with any Permitted Acquisition, so long as such Indebtedness is permitted to be so assumed or incurred under Section 6.05(c)(ii); (d) in the case of Capsure, its guarantee of the Obligations pursuant to Article VIII; (e) in the case of each Subsidiary Guarantor, its guarantee of the Obligations pursuant to the Guarantee Agreement; and (f) in the case of Capsure, the Borrower or any Subsidiary of the Borrower (other than any Insurance Subsidiary), Indebtedness incurred in connection with Rate Protection Agreements entered into by Capsure, the Borrower or any Subsidiary of the Borrower (other than any Insurance Subsidiary) to provide protection to the Borrower or Capsure against fluctuations in interest rates in respect of Loans under this Agreement. SECTION 6.02. Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any person, including any subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect thereof, except: (a) Liens on property or assets existing on the date hereof and set forth on Schedule 6.02, provided that such Liens shall secure only those obligations that they secure on the date hereof; (b) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any wholly owned Subsidiary, provided that (i) it is not created in contemplation of or in connection with such acquisition, (ii) such Lien does not apply to any other property or assets of Capsure or its subsidiaries and (iii) such Lien secures Indebtedness permitted by Section 6.01(c); (c) Liens for taxes not yet due or that are being contested in compliance with Section 5.03; 75 69 (d) carriers', warehousemen's, mechanic's, materialmen's or other like Liens arising in the ordinary course of business and securing obligations that are not due or that are being contested in compliance with Section 5.03; (e) pledges and deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations other than in respect of employee benefit plans subject to ERISA; (f) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations (including reserves held by or deposited with regulatory agencies or guaranty funds), surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) zoning restrictions, easements, servitudes, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business that, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of Capsure or any of its subsidiaries; (h) Liens contemplated by the Security Documents; and (i) extensions, renewals and replacements of Liens referred to in clauses (a) and (b) above; provided that any such extension, renewal or replacement Lien is limited to the property or assets covered by the Lien extended, renewed or replaced and does not secure any Indebtedness in addition to that secured immediately prior to such extension, renewal or replacement. SECTION 6.03. Sale and Leaseback Transactions. Enter into any arrangement (a "Sale and Leaseback Transaction"), directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred, provided that the Borrower or any Subsidiary may, in the ordinary course of business, enter into any Sale and 76 70 Leaseback Transaction involving automobiles or office equipment if, after giving effect to such Sale and Leaseback Transaction, the aggregate purchase price of all property subject to Sale and Leaseback Transactions does not exceed $1,000,000. SECTION 6.04. Investments, Loans and Advances. Purchase, hold or acquire any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, except: (a) investments existing on the date hereof; (b) investments by the Borrower, any Subsidiary Guarantor or any Insurance Subsidiary in the capital stock of any Insurance Subsidiary, so long as such capital stock has been pledged to the Collateral Agent under the Pledge Agreement; (c) investments permitted under Section 5.13; (d) in the case of any Guarantor, any Guarantee permitted by Section 6.01 hereof, (e) investments by the Borrower or any of its wholly owned Subsidiaries in capital stock in connection with Permitted Acquisitions so long as the Borrower, such wholly owned Subsidiary and any subsidiary formed or acquired in connection with such Permitted Acquisition shall have complied with Section 5.09; (f) in the case of Capsure, the Borrower and the Subsidiaries (other than any Insurance Subsidiary), investments ("Excluded Investments") having a cost basis not in excess of $15,000,000 in the aggregate at any time less the sum, without duplication, of (i) the amount of dividends, distributions or other payments made by Capsure or the Borrower to any holder of its capital stock (other than the Special Dividend, Tax Sharing Payments or dividends made to enable Capsure to pay expenses pursuant to Section 6.06(c)(i)) since the Restatement Date and (ii) the amount expended by Capsure to repurchase, retire, redeem or otherwise acquire shares of its capital stock since the Restatement Date; and 77 71 (g) investments arising or acquired in connection with Rate Protection Agreements to the extent permitted under Section 6.01(f). SECTION 6.05. Mergers, Consolidations and Acquisitions. Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) or any capital stock of any subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the capital stock or assets of any other person, except that (a) the Borrower and any Subsidiary may purchase and sell, transfer, lease or otherwise dispose of assets (including Invested Assets to the extent permitted hereunder) in the ordinary course of business on an arm's-length basis, (b) Capsure may purchase and sell, transfer, lease or otherwise dispose of Invested Assets to the extent permitted hereunder and (c) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing: (i) (A) any wholly owned Subsidiary of the Borrower may merge into the Borrower in a transaction in which the Borrower is the surviving corporation and (B) any wholly owned Subsidiary (other than any Insurance Subsidiary) may merge into or consolidate with any other wholly owned Subsidiary (other than any Insurance Subsidiary) in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration; and (ii) the Borrower or any of its wholly owned Subsidiaries (other than, except as contemplated by clause (C)(II) below, any Insurance Subsidiary) may make acquisitions of assets or capital stock, so long as (A) such acquisition shall not have been preceded by an unsolicited tender offer for such capital stock by Capsure or any of its Affiliates (it being understood that an unsolicited bid letter or other unsolicited expression of interest in an acquisition shall not constitute an unsolicited tender offer); (B) such acquisition and all transactions related thereto shall be consummated in accordance with applicable laws, including insurance laws and regulations and Regulations of the Board; (C) such acquisition shall constitute an acquisition of all or a portion of the assets of, or 100% of the common stock of, a corporation engaged in the Insurance Business (other than (I) acquisitions of all or a portion of the assets of, or 100% of the common stock of, 78 72 corporations primarily engaged in the financial services business, the aggregate consideration paid in connection with which does not (when added together with all other acquisitions since the Restatement Date of all or a portion of the assets of, or 100% of the common stock of, corporations primarily engaged in the financial services business) exceed $10,000,000 and (II) acquisitions by any Insurance Subsidiary of all or a portion of the assets of, or 100% of the common stock of, an insurance agency of such Insurance Subsidiary); (D) simultaneously with the acquisition thereof, all capital stock acquired in connection with such acquisition shall be duly and validly pledged to the Collateral Agent for the ratable benefit of the Secured Parties (other than the capital stock of any acquired Subsidiary, the stock of which may not be pledged due to an applicable insurance regulatory prohibition on such a pledge); (E)(I) a valid and perfected first priority security interest or lien in favor of the Collateral Agent for the ratable benefit of the Secured Parties shall be created in all assets acquired in connection with such acquisition, (x) in the case of any acquisition by the Borrower or any Subsidiary (other than any Insurance Subsidiary and any subsidiary of an Insurance Subsidiary), simultaneously with the acquisition thereof or (y) in the case of any acquisition by an Insurance Subsidiary or by a subsidiary of an Insurance Subsidiary, to the extent permitted by, and as soon as practicable after receipt of any approval required under, applicable law, ordinance or regulation and (II) a valid and perfected first priority security interest or lien in favor of the Collateral Agent for the ratable benefit of the Secured Parties shall be created in all the assets of any Subsidiary (other than any Insurance Subsidiary or any subsidiary of an Insurance Subsidiary, in each case except to the extent permitted by and as soon as practicable after receipt of any approval required under, applicable law, ordinance or regulation), the capital stock of which is acquired in connection with such acquisition, and any acquiring subsidiary or acquired or created Subsidiary that is required to grant a security interest or lien under this clause (E) shall become (to the extent not a party thereto at such time) a Grantor under the Security Agreement, a Pledgor under the Pledge Agreement and a Subsidiary Guarantor under the Guarantee Agreement and the Indemnity, Subrogation and Contribution Agreement, in each case in accordance with Section 5.09, and the Borrower and any subsidiary shall execute and/or deliver any documents, financing statements, agreements and instruments (including a Mortgage, a Pledgeholder Agreement and, if requested by the Collateral Agent, an appraisal of any real property acquired in such 79 73 acquisition) and take all action (including filing Uniform Commercial Code and other financing statements) that may be required under applicable law, or that the Collateral Agent may request, in order to grant, preserve, protect and perfect any security interest or lien contemplated by this clause (E); (F) no capital stock or assets acquired in connection with such acquisition shall be subject to any Lien (other than Liens permitted by Section 6.02(b), (d) or (g)); (G) neither the Borrower nor any Subsidiary may assume or incur, directly or indirectly, any Indebtedness or other liability (including any contingent liability) in connection with such acquisition (other than (I) the Borrowings hereunder used to finance all or part of the purchase price of such acquisition, (II) liabilities in the ordinary course of business of the acquired business in an amount not in excess of $2,000,000, provided that the aggregate amount of liabilities assumed by the Borrower and the Subsidiaries, collectively, under this clause (G) (II) shall not exceed $10,000,000 since the Restatement Date and (III) Insurance Liabilities incurred in the ordinary course of business of the acquired business), (H) Capsure and its subsidiaries shall satisfy, on a pro forma basis as of the date on which such acquisition is consummated, after giving effect to such acquisition as if it had occurred on the first day of the most recently completed period of four consecutive fiscal quarters preceding the date on which such acquisition is consummated, the covenants set forth in Sections 5.11, 5.13, 6.13, 6.14, 6.15 and 6.16; (I) after giving effect to such acquisition, there shall not have occurred any Material Adverse Effect; and (J) the person to be acquired, or from which any assets are acquired, shall have had taxable income for (I) at least one of its preceding two fiscal years and (II) at least three of its preceding five fiscal years, in each case after giving effect to pro forma adjustments (including adjustments attributable to purchasing only a portion of the assets of such person) such that such taxable income will be increased or decreased, as the case may be, by (A) extraordinary compensation paid during the applicable period, (B) to the extent that there are Available Net Operating Losses at the determination date, the amount of income lost by such person during the applicable period as a result of investing in tax-exempt securities as opposed to taxable securities, (C) amounts paid pursuant to reinsurance arrangements during the applicable period, (D) management fees or other payments to Affiliates during the applicable period, (E) Interest Expense during the applicable period related to Indebtedness discharged prior to or concurrently with the acquisition of such person by the Borrower or 80 74 any of its wholly owned Subsidiaries and (F) income lost during the applicable period due to the tax treatment of purchased intangibles (but only if such tax treatment will not result in an increase in the tax liability of Capsure or its subsidiaries after the acquisition of such person or from such person is consummated) (any acquisition satisfying each of the criteria set forth in this sentence is referred to herein as a "Permitted Acquisition"). SECTION 6.06. Dividends and Distributions. Declare or pay, directly or indirectly, any dividend or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities (other than additional capital stock of the Borrower, as long as such capital stock is pledged to the Collateral Agent under the Pledge Agreement) or a combination thereof, with respect to any shares of the Borrower's capital stock or, in the case of the Borrower and its subsidiaries, directly or indirectly redeem, purchase, retire or otherwise acquire for value (or permit any Subsidiary to purchase or acquire for value) any shares of any class of capital stock of Capsure or any of its subsidiaries or set aside any amount for any such purpose; provided, however, that (a) any Subsidiary may declare and pay dividends or make other distributions to any other Subsidiary that is its parent and to the Borrower, (b) Capsure may declare and pay, and the Borrower may declare and pay dividends to Capsure to the extent necessary to enable Capsure to pay, the Special Dividend and (c) if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, the Borrower may declare and pay dividends or make other distributions to Capsure (and Capsure may declare and pay dividends or make other distributions to its stockholders to the extent such dividends or other distributions are not used for the purposes specified in clauses (i) or (ii) below), provided that the aggregate amount of such dividends and distributions made by the Borrower to Capsure (i) to enable Capsure to pay reasonable and customary accounting, legal and other administrative expenses shall not exceed $3,600,000 in any calendar year and (ii) in respect of taxes shall not exceed the amount required to be paid by the Borrower under the Tax Sharing Agreement between Capsure and the Borrower. SECTION 6.07. Transactions with Affiliates. Sell or transfer any property, assets or services to, or purchase or acquire any property, assets or services from, or otherwise engage in any other transaction or series of transactions with, any of its Affiliates, except that, so long as no Default or Event of Default shall have occurred and be continuing, Capsure or any of its subsidiaries may engage in any of the foregoing transactions in the ordinary 81 75 course of business at prices and on terms and conditions not less favorable to such person than could be obtained on an arm's-length basis from unrelated third parties. SECTION 6.08. Nature of Business. (a) In the case of the Borrower and the Subsidiaries, engage or permit any Subsidiary to engage at any time in any business or business activity other than the property and casualty Insurance Business and business activities reasonably incidental thereto; and (b) in the case of Capsure, engage at any time in any business or business activity other than owning (i) all the capital stock of the Borrower and (ii) other investments to the extent permitted by Section 6.04(f), and business activities reasonably incidental thereto. SECTION 6.09. Net Operating Losses. Take any action that could result in a reduction of the Available Net Operating Losses to an amount less than $147,000,000 minus the amount of such Available Net Operating Losses utilized in taxable years since the Restatement Date to offset the taxable income for Federal income tax purposes of Capsure and its subsidiaries. SECTION 6.10. Debt Payments. Directly or indirectly make any optional payment, prepayment, redemption, retirement or defeasance, whether in cash, property, securities or a combination thereof, on account of the principal amount of any Indebtedness (other than the Obligations), except payments by any Subsidiary of Insurance Liabilities in the ordinary course of the Insurance Business. SECTION 6.11. Limitation on Surplus Relief Reinsurance Agreements. Permit any Insurance Subsidiary to enter into any Surplus Relief Reinsurance Agreement. SECTION 6.12. Reinsurance. Permit any Insurance Subsidiary to (a) enter into any Reinsurance Agreement with any reinsurer except (i) insurance companies (other than any other Insurance Subsidiary) rated A- or better by A.M. Best & Co. or A or better by Standard & Poor's, (ii) other insurance companies (including any other Insurance Subsidiary), but only if the obligations of such other insurance companies under such Reinsurance Agreements are secured by letters of credit, trust funds, withheld funds or other security such that such Insurance Subsidiary would be permitted to take credit for substantially all the ceded reinsurance in accordance with 82 76 SAP for financial statement reporting purposes, even if such reinsurer was admitted in a state other than the state in which such Insurance Subsidiary is domiciled, and (iii) insurance companies not admitted in South Dakota, Wisconsin or any other state in which any Insurance Subsidiary is domiciled, but only if the obligations of such insurance companies under such Reinsurance Agreements are secured by letters of credit, trust funds, withheld funds or other security in a form such that such Insurance Subsidiary is permitted to take credit for substantially all the ceded reinsurance in accordance with SAP for financial statement reporting purposes or (b) modify in any respect adverse to the interests of the Lenders, its policies with respect to reinsurance from those in effect at December 31, 1995. SECTION 6.13. Total Debt to Adjusted Capital Ratio. Permit the ratio of Total Debt to Adjusted Capital on the last day of any fiscal quarter ending on the last day of or during any period indicated below to be in excess of the ratio set forth opposite such period:
From and Including: To and Including: Ratio: Restatement Date September 30, 1996 0.65 to 1.00 October 1, 1996 September 30, 1997 0.60 to 1.00 October 1, 1997 September 30, 1998 0.525 to 1.00 October 1, 1998 September 30, 1999 0.45 to 1.00 October 1, 1999 March 31, 2000 0.35 to 1.00 April 1, 2000 thereafter 0.25 to 1.00
SECTION 6.14. Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio on the last day of any period of four consecutive fiscal quarters, commencing with the period of four consecutive fiscal quarters ending on the Restatement Date (which for purposes of any determination made under this Section 6.14 prior to June 30, 1996, shall be presumed to be the end of the fiscal quarter that began on April 1, 1996) to be less than the 83 77 ratio set forth below opposite the period containing the last day of such period of four consecutive fiscal quarters:
From and Including: To and Including: Ratio: Restatement Date December 31, 1996 2.25 to 1.00 January 1, 1997 December 31, 2000 1.75 to 1.00 January 1, 2001 thereafter 1.25 to 1.00
SECTION 6.15. Total Debt to Total Cash Flow Sources Ratio. Permit the ratio of Total Debt to Total Cash Flow Sources on the last day of any period of four consecutive fiscal quarters ending on the last day of or during any period indicated below to be greater than the ratio set forth opposite such period (provided that for purposes of any determination made under this Section 6.15 prior to June 30, 1996, the Restatement Date shall be presumed to be the end of the fiscal quarter that began on April 1, 1996):
From and Including: To and Including: Ratio: Restatement Date December 31, 1996 4.50 to 1.00 January 1, 1997 December 31, 1997 4.00 to 1.00 January 1, 1998 December 31, 1998 3.50 to 1.00 January 1, 1999 December 31, 1999 2.50 to 1.00 January 1, 2000 thereafter 2.00 to 1.00
SECTION 6.16. Operating Leverage Ratio. Permit, at any time, the Operating Leverage Ratio to be greater than (a) in the case of each of Universal Surety and Western Surety, 3.00 to 1.00, and (b) in the case of any Insurance Subsidiary hereafter acquired by the Borrower or any of its wholly owned Subsidiaries, (i) 2.00 to 1.00 with respect to any such Insurance 84 78 Subsidiary for which 50% or more of its Net Written Premiums are in respect of Long Tail Insurance Lines of Business and (ii) 3.00 to 1.00 with respect to any such Insurance Subsidiary for which less than 50% of its Net Written Premiums are in respect of Long Tail Insurance Lines of Business. SECTION 6.17. Amendment of Certain Documents. Permit or agree to, or permit any Subsidiary to agree to, (a) any amendment or modification that is adverse in any material respect to the Lenders (or, in the case of any Reinsurance Agreement, that could reasonably be expected to result in a Material Adverse Effect) to its certificate of incorporation or by-laws, any Reinsurance Agreement, any agreement evidencing Indebtedness or any other material agreement to which it is a party or (b) any amendment to, or modification or termination of, the Tax Sharing Agreements (which shall be maintained in full force and effect at all times). ARTICLE VII EVENTS OF DEFAULT In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in paragraph (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days; (d) default shall be made in the due observance or performance by Capsure or the Borrower of any covenant, condition or agreement 85 79 contained in Section 5.01(a) or 5.05 or in Article VI (other than Sections 6.04 and 6.12); (e) default shall be made in the due observance or performance by Capsure or the Borrower of any covenant, condition or agreement contained in Section 6.04 or 6.12 and such default shall continue unremedied for a period of (i) in the case of any covenant, condition or agreement contained in Section 6.04, ten days, or (ii) in the case of any covenant, condition or agreement contained in Section 6.12, thirty days, in either case after any Responsible Officer of Capsure or the Borrower obtains knowledge of such default; (f) default shall be made in the due observance or performance by Capsure or any of its subsidiaries of any covenant, condition or agreement contained in any Loan Document (other than those specified in paragraph (b), (c), (d) or (e) above) and such default shall continue unremedied for a period of five days after notice thereof from the Administrative Agent or any Lender to the Borrower; (g) Capsure or any of its subsidiaries shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $2,000,000, when and as the same shall become due and payable, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Capsure or any of its subsidiaries, or of a substantial part of the property or assets of Capsure or any of its subsidiaries, under Title II of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Capsure or any of its subsidiaries or for a substantial part of the property or assets of Capsure or any of its subsidiaries or (iii) the winding-up or liquidation of Capsure or any of its subsidiaries; and such proceeding or petition shall continue 86 80 undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) Capsure or any of its subsidiaries shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title II of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (h) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Capsure or any of its subsidiaries or for a substantial part of the property or assets of Capsure or any of its subsidiaries, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (j) one or more judgments (other than judgments or such portion thereof for which there is full insurance or reinsurance and with respect to which a creditworthy insurer or reinsurers as applicable, has assumed responsibility in writing) for the payment of money in an aggregate amount (after giving effect to the existence of such insurance or reinsurance) in excess of $4,000,000 shall be rendered against Capsure or any of its subsidiaries or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of Capsure or any of its subsidiaries to enforce any such judgment; (k) (i) a Reportable Event or Reportable Events, or a failure to make a required installment or other payment (within the meaning of Section 412(n)(l) of the Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in liability of Capsure, the Borrower or any Subsidiary Guarantor to be PBGC or to a Plan in an aggregate amount exceeding $250,000 and, within 30 days after the reporting of any such Reportable Event to the Administrative Agent or after the receipt by the Administrative Agent of the statement required pursuant to Section 5.06, the Administrative Agent shall have notified Capsure or the Borrower in writing that (A) the Required Lenders have made a determination that, on the basis of such Reportable Event or Reportable Events or the failure to make a 87 81 required payment, there are reasonable grounds for the termination of such Plan or Plans by the PBGC, the appointment by the appropriate United States district court of a trustee to administer such Plan or Plan, or the imposition of a Lien in favor of a Plan and (B) as a result thereof an Event of Default exists hereunder; (ii) a trustee shall be appointed by a United States district court to administer any such Plan or Plans; or (iii) the PBGC shall institute proceedings (including giving notice of intent thereof) to terminate any Plan or Plans; (l) (i) Capsure, the Borrower or any of their ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) Capsure, the Borrower or such ERISA Affiliate does not have reasonable grounds for contesting such Withdrawal Liability or is not contesting such Withdrawal Liability in a timely and appropriate manner and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date or days of such notification), either (A) exceeds $250,000 or requires payments exceeding $100,000 in any year or (B) is less than $250,000 but any Withdrawal Liability payment remains unpaid 30 days after such payment is due; (m) Capsure, the Borrower or any of their ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if solely as a result of such reorganization or termination the aggregate annual contributions of Capsure, the Borrower and their ERISA Affiliates to all Multiemployer Plans that are then in reorganization or have been or are being terminated have been or will be increased over the amounts required to be contributed to such Multiemployer Plans for their most recently completed plan years by an amount exceeding $250,000; (n) there shall have occurred a Change in Control; (o) any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by Capsure or any of its subsidiaries not to be, a valid, perfected, first priority security interest in the securities or assets covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Collateral Agent (i) to maintain possession of certificates representing securities pledged under the Pledge Agreement or (ii) to 88 82 file any continuation statement required to be filed under the Uniform Commercial Code; (p) any Loan Document shall cease to be, or shall be asserted by Capsure or any of its subsidiaries not to be, in full force and effect and enforceable in accordance with its terms; (q) any Applicable Insurance Regulatory Authority shall issue with respect to any Insurance Subsidiary (i) any order of conservation, supervision or any other order of like effect or (ii) any other order that could result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document; (r)(i) any party to any Reinsurance Agreement (whether entered into as of the date hereof or hereafter entered into) to which any Insurance Subsidiary is a party shall fail to comply with any material provision thereof or (ii) any reinsurer under any Reinsurance Agreement shall become or shall be declared insolvent or any order of liquidation, rehabilitation, conservation or supervision shall be entered against any such reinsurers or any other kind of delinquency proceeding shall be commenced against any such reinsurers if any event contemplated by clause (i) or (ii) could reasonably be expected to result in a Material Adverse Effect; (s) the amount of Available Net Operating Losses at any time shall be less than $147,000,000 minus the amount of such Available Net Operating Losses utilized in taxable years since the Restatement Date to offset the taxable income for Federal income tax purposes of Capsure and its subsidiaries; (t) any person that shall (i) become a direct or indirect 'parent' (as such term is used in the Tax Sharing Agreements) of Capsure and (ii) enter into any tax sharing arrangement with Capsure, shall fail to enter into, substantially contemporaneously with becoming such a parent, an agreement (on terms satisfactory to the Required Lenders) pursuant to which such parent shall guarantee the Obligations; or (u) Capsure shall at any time fail to, or be unable to, file a Federal consolidated income tax return with each of its subsidiaries; then, and in every such event (other than an event with respect to Capsure and its subsidiaries described in paragraph (h) or (i) above), and at any time thereafter during the continuance of such event, the Administrative Agent 89 83 may, and at the request of the Required Lenders shall, by notice to the Borrower, take any or all of the following actions, at the same or different times: (i) terminate forthwith the Commitments, (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding and (iii) exercise any remedies available under any Loan Document or otherwise; and in any event with respect to Capsure and its subsidiaries described in paragraph (h) or (i) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding. ARTICLE VIII GUARANTEE Capsure unconditionally and irrevocably guarantees, jointly with the other Guarantors and severally, as a principal obligor and not merely as a surety, the due and punctual payment and performance of all the Obligations. Capsure further agrees that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from it, and that it will remain bound upon the provisions of this Article VIII notwithstanding any extension or renewal of any Obligation. Capsure waives presentment to, demand of, payment from and protest to the Borrower of any of the Obligations, and also waives notice of acceptance of the guarantee set forth in this Article VIII and notice of protest for nonpayment. The obligations of Capsure hereunder shall not be affected by (a) the failure of the Administrative Agent (which term, for purposes of this Article VIII, shall be deemed to refer to the Administrative Agent and the Collateral Agent) or any Lender to assert any claim or demand or to enforce any right or remedy against the Borrower under the provisions of any guarantee or any Loan Document; (b) any rescission, waiver, amendment or 90 84 modification of, or any release from any of the terms or provisions of this Agreement, any other Loan Document, any guarantee or any other agreement, including with respect to any other Guarantor under the Guarantee Agreement; (c) the release of any security held by the Collateral Agent or any other Secured Party for the Obligations or any of them; or (d) the failure of the Administrative Agent or any other Secured Party to exercise any right or remedy against any other Guarantor or guarantor of the Obligations. Capsure hereby authorizes the Collateral Agent and each of the other Secured Parties, in accordance with the terms and subject to the conditions set forth in the Security Documents to which Capsure is a party, to (a) take and hold security for the payment of this guarantee or the Obligations and exchange, enforce, waive and release any such security, (b) apply such security and direct the order or manner of sale thereof as they in their sole discretion may determine and (c) release or substitute any one or more endorsees, other guarantors or other obligors. Capsure further agrees that the guarantee set forth in this Article VIII constitutes a guarantee of payment when due and not of collection and waives any right to require that any resort be had by the Administrative Agent or any Lender to the balance of any deposit account or credit on the books of the Administrative Agent or such Lender, as applicable, in favor of the Borrower or any other person. The obligations of Capsure hereunder shall be absolute and unconditional and shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim or waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, deduction, diminution, abatement, suspension, deferment, reduction, recoupment, termination or defense whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the Obligations shall not be released, discharged or impaired or otherwise affected by the failure of the Administrative Agent or any Lender to assert any claim or demand or to enforce any remedy under this Agreement or any other Loan Document, by any waiver or modification of any thereof, by any default, failure or delay, wilful or otherwise, in the performance of the Obligations or by any other circumstance or condition whatsoever (whether or not Capsure, the Borrower, the Administrative Agent or any Lender has knowledge thereof) that may or might in any manner or to any extent vary the risk of Capsure or would otherwise operate as a discharge of Capsure as a matter of law or equity (other than the indefeasible payment in full of all the Obligations), including: 91 85 (a) any termination, amendment, modification, addition, deletion or supplement to or other change to any of the terms of any Loan Document or any other instrument or agreement applicable to any of the parties hereto or thereto, or any assignment or transfer of any thereof, or any furnishing or acceptance of security, or any release of any security, for any Obligations of the Borrower, Capsure or any other Guarantor hereunder or thereunder, or the failure of any security or the failure of any person to perfect any interest in any collateral; (b) any failure, forbearance, omission or delay on the part of the Borrower or any Guarantor or the Administrative Agent or any other Secured Party to conform or comply with any term of any Loan Document or any other instrument or agreement, or any failure to give notice to the Borrower or any Guarantor of the occurrence of an Event of Default or any Default occurring hereunder; (c) any waiver of the payment, performance or observance of any of the obligations, conditions, covenants or agreements contained in any Loan Document, or any other waiver, consent, extension, renewal, indulgence, compromise, release, settlement, refunding or other action or inaction under or in respect of any Loan Document or any other instrument or agreement, or under or in respect of any obligation or liability of the Borrower or any Guarantor or the Administrative Agent or any other Secured Party or any exercise or nonexercise of any right, remedy, power or privilege under or in respect of any such instrument of agreement or any such obligation or liability; (d) any extension of the time for payment of the principal of or interest on any Obligation, or of the time for performance of any other obligations, covenants or agreements under or arising out of any Loan Document, or the extension or the renewal of any thereof; (e) the exchange, surrender, substitution or modification of, or the furnishing of any additional, collateral security for the Obligations under any Loan Document; (f) any failure, omission or delay on the part of the Administrative Agent or any other Secured Party to enforce, assert or exercise any right, power or remedy conferred on it in any Loan Document, or any such failure, omission or delay on the part of the Administrative Agent or any other Secured Party in connection with any Loan Document or any other action or inaction on the part of the Administrative Agent or any other Secured Party; 92 86 (g) to the extent permitted by applicable law, any voluntary or involuntary bankruptcy, insolvency, reorganization, moratorium, arrangement, adjustment, readjustment, composition, assignment for the benefit of creditors, receivership, conservatorship, custodianship, liquidation, marshalling of assets and liabilities or similar proceedings with respect to the Borrower or any Guarantor or any other person or any of their respective properties or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding (including any automatic stay incident to any such proceeding); (h) any limitation on the liability or obligations of the Borrower or any Guarantor under any Loan Document or any other instrument or agreement that may now or hereafter be imposed by any statute, regulation, rule of law or otherwise, or any discharge, termination, cancellation, frustration, irregularity, invalidity or unenforceability, in whole or in part, of any thereof; (i) any merger, consolidation or amalgamation of the Borrower or any Guarantor into or with any other person, or any sale, lease or transfer of any of the assets of the Borrower or any Guarantor to any other person; (j) any change in the ownership of any shares of capital stock of the Borrower or any Guarantor; (k) to the extent permitted by applicable law, any release or discharge, by operation of law, of the Borrower, Capsure or any other Guarantor from the performance or observance of any obligation, covenant or agreement contained in any Loan Document; or (l) any other occurrence, circumstance, happening or event whatsoever, whether similar or dissimilar to the foregoing, whether foreseen or unforeseen, and any other circumstance that might otherwise constitute a legal or equitable defense, release or discharge (including the release or discharge of the liabilities of a guarantor or surety or that might otherwise limit recourse against the Borrower or any Guarantor, whether or not the Borrower of any Guarantor shall have notice or knowledge of the foregoing). Capsure hereby waives any claim, right or remedy that it may now have or hereafter acquire against the Borrower or any other Guarantor that arises under any Loan Document and/or from the performance of such Guarantor under any Loan Document, including any claim, right or remedy of the Administrative Agent or any Secured Party or any security that the 93 87 Administrative Agent or any Secured Party now has or hereafter acquires, regardless of whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. Capsure agrees that, as between Capsure, on the one hand, and the Administrative Agent and the other Secured Parties, on the other hand, (a) the maturity of the Obligations guaranteed hereby may be accelerated as provided herein for the purposes of Capsure's guarantee herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby and (b) in the event of any declaration of acceleration of such Obligations as provided herein, such Obligations (whether or not due and payable) shall forthwith become due and payable in full by Capsure for purposes of this Agreement. Upon the occurrence and during the continuance of an Event of Default, the Collateral Agent may elect to nonjudicially or judicially foreclose against any real or personal property security it holds for the Obligations or any part thereof, or accept an assignment of any such security in lieu of foreclosure or compromise or adjust any part of the Obligations, or make any other accommodation with the Borrower or any Guarantor, or exercise any other remedy against the Borrower or any Guarantor or any security, in accordance with and subject to the provisions of the Security Documents. No such action by the Collateral Agent will release or limit the liability of Capsure to the Administrative Agent, even if the effect of that action is to deprive Capsure of the right to collect reimbursement from the Borrower for any sums paid to the Administrative Agent. To the extent permitted by applicable law, Capsure waives any defense based on or arising out of any defense of the Borrower or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower, other than the indefeasible payment in full of the Obligations. The Collateral Agent and the other Secured Parties may, at their election, in accordance with the terms and subject to the conditions set forth in the Security Documents to which Capsure is a party, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales, or exercise any other right or remedy available to them against the Borrower or any Guarantor, or any security, without affecting or impairing in any way the liability of Capsure hereunder except to the extent the Obligations have been indefeasibly paid in full. Capsure waives any defense arising out of any such election even though such election operates to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of Capsure against the Borrower or any other Guarantor, as the case may be, or any security. 94 88 Capsure further agrees that this guarantee shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation is rescinded, invalidated, declared to be fraudulent or preferential, or must otherwise be returned, refunded, renamed or restored by the Administrative Agent or any Lender upon the bankruptcy or reorganization of the Borrower, any Guarantor or otherwise. In furtherance of the foregoing and not in limitation of any other right that the Administrative Agent or any Lender may have at law or in equity against Capsure by virtue hereof, upon the failure of the Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Capsure hereby promises to and will, upon receipt of written demand by the Administrative Agent, promptly pay, or cause to be paid, to the Administrative Agent in cash the amount of such unpaid Obligation. The guarantee made hereunder shall terminate when all the Obligations have been indefeasibly paid in full and the Lenders have no further commitment to lend under the Credit Agreement. Without limiting the generality of the foregoing, (a) Capsure assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks Capsure assumes and incurs hereunder, and agrees that none of the Administrative Agent and the other Secured Parties will have any duty to advise Capsure of information known to it or any of them regarding such circumstances or risks, and (b) the execution and delivery of any instrument adding a Subsidiary Guarantor as a party to the Guarantee Agreement pursuant to Section 5.09 shall not require the consent of Capsure hereunder. The rights and obligations of Capsure hereunder shall remain in full force and effect notwithstanding the addition of any new Subsidiary Guarantor as a party to the Guarantee Agreement. ARTICLE IX THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, Chemical Bank is hereby appointed to act as Administrative Agent (which term, for purposes of this Article IX, shall be deemed to refer to the Administrative Agent and the Collateral Agent) on behalf of the Lenders. Each of the Lenders and each subsequent holder of any Note, by its 95 89 acceptance thereof, hereby irrevocably authorizes the Administrative Agent to take such actions on their behalf and to exercise such powers as are specifically delegated to the Administrative Agent by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) promptly to give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) promptly to distribute to each Lender copies of all notices, financial statements and other materials delivered by Capsure, the Borrower or any Subsidiary pursuant to this Agreement as received by the Administrative Agent. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its, his or her own gross negligence or wilful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by Capsure or any of its subsidiaries of any of the terms, conditions, covenants or agreements contained in any Loan Document. The Administrative Agent shall not be responsible to the Lenders or the holders of the Notes for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement, the Notes or any other Loan Documents or other instruments or agreements. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof until it shall have received from the payee of such Note notice, given as provided herein, of the transfer thereof in compliance with Section 10.04. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders and each subsequent holder of any Note. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall have any responsibility to the Borrower or any other person on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender or 96 90 any other person on account of the failure of or delay in performance or breach by any other Lender or by Capsure, the Borrower or any Subsidiary of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. The Administrative Agent may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor, subject to the Borrower's approval, which shall not be unreasonably withheld. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a bank with an office in the United States of America having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 10.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder and the Notes issued to it, the Administrative Agent in its individual capacity and not as Administrative Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Administrative Agent, and the Administrative Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Capsure or any of its subsidiaries or other Affiliates as if it were not the Administrative Agent. 97 91 Each Lender agrees (a) to reimburse the Administrative Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder) of any expenses incurred for the benefit of the Lenders by the Administrative Agent, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, that shall not have been reimbursed by the Borrower and (b) to indemnify and hold harmless the Administrative Agent and its Affiliates and each of their respective directors, officers, employees and agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, whatsoever that are imposed on, incurred by or asserted expenses or disbursements of any kind or nature against the Administrative Agent in its capacity as the Administrative Agent or any of them in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by it or any of them under this Agreement or any other Loan Document, to the extent the same shall not have been reimbursed by the Borrower, provided that no Lender shall be liable to any such indemnified person for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are determined to have resulted from the gross negligence or wilful misconduct of such indemnified person. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE X MISCELLANEOUS SECTION 10.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy as follows: 98 92 (a) if to Capsure, the Borrower or any Subsidiary Guarantor, to it at: Capsure Holdings Corp., 400 Perimeter Center Terrace, Suite 345, Atlanta, Georgia 30346, Attention of Mary Jane Robertson (Telecopy No. (770) 399-0779) with a copy to Rosenberg & Liebentritt, P.C., Two North Riverside Plaza, Suite 1600, Chicago, Illinois 60606, Attention of Sheli Z. Rosenberg (Telecopy No. (312) 454-0335); (b) if to the Administrative Agent, to; Chemical Bank Agency Services Corporation, Grand Central Tower, 140 East 45th Street, New York, New York 10017, Attention of Maxeen Francis (Telecopy No. (212) 622-0002) with a copy to Chemical Bank, at 270 Park Avenue, New York, New York 10017, Attention of Heather Lindstrom (Telecopy No. (212) 270-5222); or (c) if to a Lender, to it at its address (or telecopy number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy with confirmation of receipt from the sending telecopy machine or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 10.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 10.01. SECTION 10.02. Survival of Agreement. Unless a longer period is provided herein, all covenants, agreements, representations and warranties made by Capsure and the Borrower herein and by Capsure, the Borrower or any Subsidiary Guarantor in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Administrative Agent and the Lenders and shall survive the making by the Lenders of the Loans and the execution and delivery to the Lenders of the Notes evidencing such Loans, regardless of any investigation made by the Lenders or on any of their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated, provided that, without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in Sections 2.11 99 93 and 2.13 shall survive the payment in full of the principal of and interest on all Loans made hereunder. SECTION 10.03. Binding Effect. This Agreement shall become effective when it shall have been executed by Capsure, the Borrower and the Administrative Agent and when the Administrative Agent shall have received copies hereof that, when taken together, bear the signatures of each Lender, and thereafter shall be binding upon and inure to the benefit of Capsure, the Borrower, the Administrative Agent and each Lender and their respective successors and assigns, except that neither Capsure nor the Borrower shall have the right to assign its rights hereunder or any interest herein without the prior consent of all the Lenders. SECTION 10.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, and all covenants, promises and agreements by or on behalf of Capsure, the Borrower, the Administrative Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the loans at the time owing to it and the Notes held by it); provided, however, that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender (in which case the assigning Lender shall give prior notice to the Borrower and the Administrative Agent), the Borrower and the Administrative Agent must each give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning lender's rights and obligations under this Agreement, (iii) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or the Commitment of the assigning Lender immediately prior to the assignment, if such Commitment is less than $5,000,000), (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with the Note or Notes subject to such assignment and a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire and any certificates or other instruments required to be delivered pursuant thereto. Upon acceptance and recording pursuant to paragraph (e) of this Section 10.04, from and after the effective date specified 100 94 in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (ii) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.11, 2.13, 2.15, 2.17 and 10.05, as well as to any Fees accrued for its account and not yet paid). (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment and the outstanding balances of its Loans, in each case without giving effect to assignments thereof that have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in clause (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of Capsure or any of its subsidiaries or the performance or observance by Capsure or any of its subsidiaries or any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are 101 95 reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Administrative Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee together with the Note or Notes subject to such assignment, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and the written consent of the Borrower and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders. Within five Business Days after receipt of notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the order of such assignee in a principal amount equal to the applicable Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment, a new Note to the order of such assigning Lender in a principal amount equal to the applicable Commitment retained by it. Such new Note or Notes that shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note; such new Notes shall be dated the date of the surrendered Notes that they replace and shall otherwise be in substantially the form of Exhibit A, as appropriate. Canceled Notes shall be returned to the Borrower. (f) Each Lender may without the consent of the Borrower or the Administrative Agent (but with prior notice to the Borrower and the Administrative Agent) sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it and the Notes held by it); provided, however, that (i) such Lender's obligations under 102 96 this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.11, 2.13 and 2.17 to the same extent as if they were Lenders, provided that the Borrower shall not be required to reimburse a participating tender or other entity pursuant to Section 2.11, 2.13 or 2.17 in an amount in excess of the amount that would have been payable thereunder to the Lender granting such participation had such Lender not sold such participation and (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or be amount of principal of or the rate at which interest is payable on the Loans, extending the final maturity date or date fixed for the payment of interest on the Loans or changing or extending the Commitments or releasing all or substantially all the Collateral). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.04, disclose to the assignee or participant or proposed assignee or participant any information relating to Capsure and its subsidiaries furnished to such Lender by or on behalf of the Borrower, provided that, prior to any disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information. (h) Any Lender may at any time assign to a Federal Reserve Bank all or any portion of its rights under this Agreement and the Notes issued to it, provided that no such assignment shall release a Lender from any of its obligations hereunder. (i) Neither Capsure nor the Borrower shall assign or delegate any of its rights or duties hereunder. SECTION 10.05. Expenses; Indemnity. (a) The Borrower agrees to pay all out-of-pocket expenses incurred by the Administrative Agent and the Collateral Agent in connection with the preparation of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the 103 97 transactions hereby contemplated shall be consummated) or incurred by the Administrative Agent, the Collateral Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement and the other Loan Documents or in connection with the Loans, made or the Notes issued hereunder, including the fees, other charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the fees, charges and disbursements of any other counsel for the Administrative Agent, the Collateral Agent or any Lender. The Borrower further agrees that it shall indemnify the Lenders and the Collateral Agent from and hold them harmless against any documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or any of the other Loan Documents. (b) The Borrower and Capsure agree, jointly and severally, to indemnify the Administrative Agent, each Lender and the Collateral Agent and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each indemnitee harmless from, any and all losses, claims, demands, damages, penalties, fines, liabilities, settlements, costs and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any lndemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated hereby, (ii) the use of the proceeds of the Loans, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) the violation of, noncompliance with or liability under any Environmental and Safety Laws applicable to the operations of Capsure and its subsidiaries, or any orders, requirements or demands of Governmental Authorities related thereto (including reasonable and documented attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses relating thereto), provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) The provisions of this Section 10.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the Transactions or the other transactions contemplated hereby, the repayment of any of the Loans, the invalidity or 104 98 unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent or any Lender. All amounts due under this Section 10.05 shall be payable on written demand therefor. SECTION 10.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower or Capsure against any of and all the obligations of the Borrower or Capsure now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 10.06 are in addition to other rights and remedies (including other rights of setoff) that such Lender may have. SECTION 10.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 10.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent, the Collateral Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by Capsure or any of its subsidiaries therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on Capsure or any of its subsidiaries in any case shall entitle such person to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement, the Guarantee Agreement or any of the Security Documents nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an 105 99 agreement or agreements in writing entered into by Capsure, the Borrower and the Required Lenders or, in the case of any of the Security Domain pursuant to an agreement or agreement in writing entered into by Capsure, the Borrower, the Subsidiary Guarantors and the Collateral Agent and consented to by the Required Lenders or, in the case of the Guarantee Agreement, pursuant to an agreement or agreements in writing entered into by the Guarantors and the Collateral Agent and consented to by the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the final maturity date of or date for the payment of any interest on any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, or amend or modify the provisions of Section 2.09(b), without the prior written consent of each Lender affected thereby, (ii) change or extend the Commitment of any Lender or decrease the Commitment Fees of any Lender without the prior written consent of such Lender, (iii) amend or modify the provisions of Section 2.14, the provisions of this Section 10.08 or the definition of the term "Required Lenders" without the prior written consent of each Lender or (iv) release any material part of the Collateral under any Security Document without the prior written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. Each Lender and each holder of a Note shall be bound by any waiver, amendment or modification authorized by this Section 10.08 regardless of whether its Note shall have been marked to make reference thereto, and any consent by any Lender or bolder of a Note pursuant to this Section 10.08 shall bind any person subsequently acquiring a Note from it, whether or not such Note shall have been so marked. SECTION 10.09. Interest Rate Limitation. Notwithstanding anything herein or in the Notes to the contrary, if at any time the applicable interest rate, together with all fees and charges that are treated as interest under applicable law (collectively, the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by any Lender, shall exceed the maximum lawful rate (the "Maximum Rate") that may be contracted for, charged, taken, received or reserved by such Lender in accordance with applicable law, the rate of interest payable under the Note held by such Lender, together with all Charges payable to such Lender, shall be limited to the Maximum Rate. SECTION 10.10. Entire Agreement. This Agreement and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof and thereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this 106 100 Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, express or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 10.11. Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with, this Agreement or any of the other Loan Documents. Each party 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 the foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this Agreement and the other Loan Documents, as applicable, by, among other things, the mutual waivers and certifications in this Section 10.11. SECTION 10.12. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 10.13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 10.03. SECTION 10.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 10.15. Jurisdiction; Consent to Service of Process. (a) Each of Capsure, the Borrower, the Administrative Agent and each Lender hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this 107 101 Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against Capsure or any of its subsidiaries or the properties of any of the foregoing in the courts of any jurisdiction. (b) Each of Capsure, the Borrower, the Administrative Agent and each Lender hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. IN WITNESS WHEREOF, the Borrower, Capsure, the Administrative Agent and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CAPSURE FINANCIAL GROUP, INC., by ---------------------------- Name: Title: 108 102 CAPSURE HOLDINGS CORP., by ---------------------------- Name: Title: CHEMICAL BANK, individually and as Administrative Agent, by ---------------------------- Name: Title: BANK ONE, TEXAS, N.A., by ---------------------------- Name: Title: BANQUE PARIBAS, by ---------------------------- Name: Title: by ---------------------------- Name: Title: THE BANK OF NEW YORK, by ---------------------------- Name: Title: 109 103 FIRST BANK NATIONAL ASSOCIATION, by ---------------------------- Name: Title: FIRST UNION NATIONAL BANK OF NORTH CAROLINA, by ---------------------------- Name: Title: NATIONSBANK OF GEORGIA, N.A., by ---------------------------- Name: Title: FLEET NATIONAL BANK., by ---------------------------- Name: Title: 110 104 UNION BANK, by ---------------------------- Name: Title: by ---------------------------- Name: Title: EX-99 4 PRESS RELEASE 1 EXHIBIT 99 [CAPSURE HOLDINGS LETTERHEAD] NEWS RELEASE CONTACT: Mary Jane Robertson FOR IMMEDIATE RELEASE (770) 677-0323 or Doreen Lubeck (312) 466-3444 CAPSURE HOLDINGS RETAINS SMITH BARNEY TO ASSESS STRATEGIC OPTIONS CHICAGO, ILLINOIS, MAY 28, 1996 -- Capsure Holdings Corp. (NYSE:CSH) today announced that it has retained Smith Barney Inc. to advise and assist Capsure's Board of Directors in an assessment of the strategic options available to Capsure to enhance long-term value for its stockholders. Options being explored include recapitalization of Capsure by means of the payment of a leveraged, special dividend to stockholders and a possible sale or merger of Capsure or its subsidiaries. The Board of Directors has not reached any decision regarding the course of action or combination of actions. Capsure Holdings Corp., through its subsidiaries, Western Surety Company and Universal Surety of America, provides surety and fidelity bonds in all 50 states through a combined network of 120,000 independent agents. # # # -----END PRIVACY-ENHANCED MESSAGE-----