-----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, NVDhciiG7ljdUtTV/5p7hA5/g21M9btDw8BiAbWsfkY8TPG6UEtJE6AhAZnqd48E 3xo91QfEySfgGgFlxnElPg== 0000950123-01-508412.txt : 20020410 0000950123-01-508412.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950123-01-508412 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHANY CORP /DE CENTRAL INDEX KEY: 0000775368 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 510283071 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09371 FILM NUMBER: 1786398 BUSINESS ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: SUITE 3201 CITY: NEW YORK STATE: NY ZIP: 10152 BUSINESS PHONE: 2127521356 MAIL ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: SUITE 3201 CITY: NEW YORK STATE: NY ZIP: 10152 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHANY FINANCIAL CORP DATE OF NAME CHANGE: 19870115 10-Q 1 y54975e10-q.txt ALLEGHANY CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 2001 COMMISSION FILE NUMBER 1-9371 ALLEGHANY CORPORATION EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER DELAWARE STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION 51-0283071 INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER 375 PARK AVENUE, NEW YORK, NEW YORK 10152 ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE 212 / 752-1356 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE NOT APPLICABLE FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE YES [X] NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF COMMON STOCK, AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT: 7,213,019 (AS OF SEPTEMBER 30, 2001) ITEM 1. FINANCIAL STATEMENTS ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (dollars in thousands, except share and per share amounts) (unaudited)
2001 2000 *** ---- -------- REVENUES Interest, dividend and other income $ 45,625 $ 49,579 Net mineral and filtration sales 55,725 54,199 Gain (loss) on sale of subsidiary (253,408) 0 Net gain (loss) on investment transactions 11,359 83 ----------- ----------- Total revenues (140,699) 103,861 ----------- ----------- COSTS AND EXPENSES Salaries, administrative and other operating expenses 41,299 42,764 Cost of mineral and filtration sales 39,500 37,415 Interest expense 3,482 5,208 Corporate administration 7,536 5,173 ----------- ----------- Total costs and expenses 91,817 90,560 ----------- ----------- (Loss) earnings from continuing operations, before income taxes (232,516) 13,301 Income tax (benefit) expense (195,708) 4,424 ----------- ----------- (Loss) earnings from continuing operations (36,808) 8,877 DISCONTINUED OPERATIONS (Loss) earnings from discontinued operations, net of tax (184,010) 7,973 ----------- ----------- Net (loss) earnings ($ 220,818) $ 16,850 =========== =========== BASIC (LOSS) EARNINGS PER SHARE OF COMMON STOCK ** Continuing operations ($ 5.09) $ 1.20 Discontinued operations (25.44) 1.08 ----------- ----------- Basic net (loss) earnings per share ($ 30.53) $ 2.28 =========== =========== DILUTED (LOSS) EARNINGS PER SHARE OF COMMON STOCK ** Continuing operations ($ 5.09) $ 1.19 Discontinued operations (25.44) 1.06 ----------- ----------- Diluted net (loss) earnings per share ($ 30.53) $ 2.25 =========== =========== Dividends per share of common stock * * =========== =========== Average number of outstanding shares of common stock ** 7,233,440 7,403,280 =========== ===========
- ---------- * In March 2001, Alleghany declared a dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. ** Adjusted to reflect the common stock dividend declared in March 2001. *** Amounts have been restated to reflect the elimination of the one-quarter lag in the reporting of Alleghany Insurance Holdings' results. ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (dollars in thousands, except share and per share amounts) (unaudited)
2001 2000 *** ---- -------- REVENUES Interest, dividend and other income $ 139,884 $ 130,337 Net mineral and filtration sales 163,906 154,395 Net gain on sale of subsidiary 522,402 158,521 Net gain on investment transactions 12,672 83 ----------- ----------- Total revenues 838,864 443,336 ----------- ----------- COSTS AND EXPENSES Salaries, administrative and other operating expenses 135,873 139,114 Cost of mineral and filtration sales 118,329 107,714 Interest expense 11,427 13,136 Corporate administration 40,243 16,010 ----------- ----------- Total costs and expenses 305,872 275,974 ----------- ----------- Earnings from continuing operations, before income taxes 532,992 167,362 Income tax expense 101,056 18,222 ----------- ----------- Earnings from continuing operations 431,936 149,140 DISCONTINUED OPERATIONS (Loss) from discontinued operations, net of tax (206,663) (40,940) ----------- ----------- Net earnings $ 225,273 $ 108,200 =========== =========== BASIC EARNINGS PER SHARE OF COMMON STOCK ** Continuing operations $ 59.72 $ 19.86 Discontinued operations (28.57) (5.45) ----------- ----------- Basic net earnings per share $ 31.15 $ 14.41 =========== =========== DILUTED EARNINGS PER SHARE OF COMMON STOCK ** Continuing operations $ 59.03 $ 19.67 Discontinued operations (28.12) (5.40) ----------- ----------- Diluted net earnings per share $ 30.91 $ 14.27 =========== =========== Dividends per share of common stock * * =========== =========== Average number of outstanding shares of common stock ** 7,232,597 7,509,391 =========== ===========
- ---------- * In March 2001, Alleghany declared a dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. ** Adjusted to reflect the common stock dividend declared in March 2001. *** Amounts have been restated to reflect the elimination of the one-quarter lag in the reporting of Alleghany Insurance Holdings' results. ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (dollars in thousands, except share and per share amounts)
(Unaudited) September 30, December 31, 2001 2000 ---- ---- ASSETS Available for sale securities: 9/30/01 12/31/00 ------- -------- Equity securities (cost $221,006 $222,101) $ 508,426 $ 535,377 Other (cost $ 7,972 $ 8,882) 7,972 8,882 Short-term investments 1,078,338 339,244 ---------- ---------- 1,594,736 883,503 Cash 7,937 10,247 Notes receivable 92,156 92,156 Funds held, accounts and other receivables 68,222 69,298 Property and equipment - at cost, less accumulated depreciation and amortization 169,955 165,103 Other assets 207,385 232,065 Net assets of discontinued operations 0 163,111 ---------- ---------- $2,140,391 $1,615,483 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Other liabilities $ 464,966 $ 115,000 Long-term debt of subsidiaries 205,588 228,178 Net deferred tax liability 100,180 107,231 ---------- ---------- Total liabilities 770,734 450,409 Common stockholders' equity 1,369,657 1,165,074 ---------- ---------- $2,140,391 $1,615,483 ========== ========== Shares of common stock outstanding 7,213,019 7,211,820* ========== ========== Common stockholders' equity per share $ 189.89 $ 161.55* ========== ==========
- ---------- * Adjusted to reflect the common stock dividend declared in March 2001. ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (dollars in thousands) (unaudited)
2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings from continuing operations $ 431,936 $ 149,140 Adjustments to reconcile net earnings to cash provided by (used in) operations: Depreciation and amortization 12,560 12,867 Net gain on investment transactions (233,975) (158,604) Tax benefit on stock options exercised 816 3,127 Other charges, net (8,128) (29,863) Increase in other receivables 1,076 (23,205) Decrease (increase) in other assets 24,680 (29,328) Increase in other liabilities (5,618) 102,902 --------- --------- Net adjustments (208,589) (122,104) --------- --------- Cash provided by operations 223,347 27,036 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (77,193) (109,241) Sales of investments 90,796 12,124 Purchases of property and equipment (8,660) (10,383) Net change in short-term investments (740,600) (350,446) Other, net 1,438 (91) Proceeds from sale of subsidiaries, net of cash disposed 531,477 463,900 --------- --------- Net cash (used in) provided by investing activities (202,742) 5,863 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (255,175) (36,484) Proceeds of long-term debt 233,093 13,347 Treasury stock acquisitions (11,234) (52,056) Net cash provided by discontinued operations 0 26,000 Other, net 10,401 5,499 --------- --------- Net cash used in by financing activities (22,915) (43,694) --------- --------- Net (decrease) increase in cash (2,310) (10,795) Cash at beginning of period 10,247 11,857 --------- --------- Cash at end of period $ 7,937 $ 1,062 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 11,831 $ 11,939 Income taxes $ 5,737 $ 34,695
Notes to the Consolidated Financial Statements This report should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K") and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001 of Alleghany Corporation (the "Company"). The information included in this report is unaudited but reflects all adjustments which, in the opinion of management, are necessary to a fair statement of the results of the interim periods covered thereby. All adjustments are of a normal and recurring nature except as described herein. Comprehensive Income The Company's total comprehensive (loss) income for the three months and nine months ended September 30, 2001 and 2000 was $(272,218) thousand and $(7,666) thousand, and $208,098 thousand and $132,988 thousand, respectively. Comprehensive income (loss) includes the Company's net earnings adjusted for changes in unrealized appreciation (depreciation) of investments, which was $(55,792) thousand and $(14,730) thousand, and $(18,483) thousand and $(10,011) thousand, and cumulative translation adjustments, which was $1,492 thousand and $(1,813) thousand, and $(1,592) thousand and $(6,141) thousand, for the three months and nine months ended September 30, 2001 and 2000, respectively. 6 Segment Information Information concerning the Company's continuing operations by industry segment is summarized below (in thousands):
For the three months ended For the nine months ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- REVENUES Mining and filtration $ 56,062 $ 53,756 $ 163,947 $ 154,577 Industrial fasteners 29,721 36,373 94,149 99,349 Corporate activities (226,482) 13,732 580,768 189,410 --------- --------- --------- --------- Total $(140,699) $ 103,861 $ 838,864 $ 443,336 ========= ========= ========= ========= EARNINGS (LOSS) FROM CONTINUING OPERATIONS Mining and filtration $ 5,369 $ 6,249 $ 13,468 $ (4,365) Industrial fasteners (1,481) 1,584 (14,150) 5,799 Corporate activities (236,404) 5,468 533,674 165,928 --------- --------- --------- --------- Total (232,516) 13,301 532,992 167,362 Income taxes (195,708) 4,424 101,056 18,222 --------- --------- --------- --------- (Loss) earnings from continuing operations $ (36,808) $ 8,877 $ 431,936 $ 149,140 ========= ========= ========= =========
September 30, December 31, 2001 2000 ---- ---- IDENTIFIABLE ASSETS Discontinued operations $ -- $ 163,111 Mining and filtration 316,482 301,390 Industrial fasteners 88,207 117,639 Corporate activities 1,735,702 1,033,343 ---------- ---------- Total $2,140,391 $1,615,483 ========== ==========
7 Contingencies The Company"s subsidiaries are parties to pending claims and litigation in the ordinary course of their businesses. Each such operating unit makes provisions on its books in accordance with generally accepted accounting principles for estimated losses to be incurred as a result of such claims and litigation, including related legal costs. In the opinion of management, such provisions are adequate as of September 30, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The Company reported net losses from continuing operations in the third quarter of 2001 of $36.8 million on revenues of $(140.7) million compared with net earnings of $8.9 million on revenues of $103.9 million in the third quarter of 2000. The 2001 results include an after-tax loss of $50.2 million on the disposition of Alleghany Underwriting Holdings Ltd ("Alleghany Underwriting"), which was sold on November 5, 2001. Net losses including discontinued operations were $220.8 million in the third quarter of 2001 compared with net earnings of $16.9 million in the third quarter of 2000. Such discontinued operations for the third quarter of 2001 consist of the operations of Alleghany Underwriting, and for the third quarter of 2000 consist of the operations of Alleghany Underwriting and Alleghany Asset Management, Inc. ("Alleghany Asset Management"). In the first nine months of 2001, the Company's net earnings from continuing operations were $431.9 million on revenues of $838.9 million compared with $149.1 million on revenues of $443.3 million in the first nine months of 2000. Net earnings including discontinued operations were $225.3 million in the first nine months of 2001, compared with $108.2 million in the 2000 period. Such discontinued operations for the first nine months of 2001 consist of the operations of Alleghany Underwriting and Alleghany Asset Management prior to its disposition in February 2001, and for the first nine months of 2000 consist of the operations of Alleghany Underwriting, Alleghany Asset Management and the operations of Underwriters Re Group Inc. ("Underwriters Re Group") prior to its disposition in May 2000. The first nine months 2001 results include an after-tax gain of about $474.8 million on the disposition of Alleghany Asset Management, which was merged with a wholly owned subsidiary of ABN AMRO North America Holding Company on February 1, 2001, the after-tax loss of $50.2 million on the disposition of Alleghany Underwriting, and after-tax losses of $201.6 million on the operations of Alleghany Underwriting. The first nine months 2000 results include an after-tax gain of $143.8 million on the sale of Underwriters Re Group, and pre-tax losses of $44.6 million on the operations of 8 Underwriters Re Group (excluding Alleghany Underwriting) through the close of the sale in May 2000. On November 5, 2001, Alleghany Insurance Holdings LLC completed the sale of Alleghany Underwriting to Talbot Holdings Ltd., a new Bermuda-based insurance holding company formed by the senior management of Alleghany Underwriting and an investor group led by Heidi Hutter (former President and CEO of Swiss Re America). Consideration for the sale includes a warrant which will entitle Alleghany Insurance Holdings LLC to recover a portion of any residual capital of Alleghany Underwriting as determined upon the closure of the 2001 Lloyd's year of account. The Company has ascribed a nominal value to the warrant in computing the loss on the sale of Alleghany Underwriting. The sale of Alleghany Underwriting reflects a strategic decision by the Company to reduce the risk profile of its insurance operations. Talbot Holdings intends to continue the business on a new capital base, which it will seek to raise from investors who wish to participate in the current hardening insurance market. In order to bridge Talbot Holdings' capital needs while it seeks new capital, the Company has agreed to provide a $25 million loan or letter of credit facility to support business written for the 2002 Lloyd's year of account. Alleghany Underwriting recorded after-tax losses of $184.0 million in the 2001 third quarter, compared with after-tax losses of $348 thousand in the corresponding 2000 period, and after-tax losses of $201.6 million in the first nine months of 2001, compared with after-tax losses of $15.4 million in the first nine months of 2000. The 2001 losses reflect $112.4 million of losses from the September 11th terrorist attacks, $33 million for estimated costs of closing its property treaty line of business as a result of the September 11th losses and reserve strengthening of $23 million in respect of the 2000 and prior years of account. The 2000 losses reflect reserve strengthening of $44 million in respect of the 2000 and prior years of account following the completion of a reserve study. These losses are reported in earnings (losses) from discontinued operations. World Minerals Inc. ("World Minerals") recorded pre-tax earnings of $5.4 million on revenues of $56.1 million in the 2001 third quarter, compared with pre-tax earnings of $6.2 million on revenues of $53.8 million in the 2000 third quarter, and pre-tax earnings of $13.5 million on revenues of $163.9 million in the first nine months of 2001, compared with pre-tax losses of $4.4 million on revenues of $154.6 million in the first nine months of 2000. The 2001 results reflect an increase in net sales, primarily from World Minerals' European operations, offset by the continued high North American energy costs, particularly in California, and a lower level of production due to the softening of the U.S. economy. The 2000 results include non-recurring charges of $20.2 million pre-tax for the write-off of certain joint venture investments and assets no longer used in production, and expenses relating to changes in World Minerals' senior 9 management. Excluding such non-recurring charges, World Minerals would have contributed pre-tax earnings of $15.8 million in the first nine months of 2000. Heads & Threads International LLC ("Heads & Threads") recorded pre-tax losses of $1.5 million on revenues of $29.7 million in the 2001 third quarter, compared with pre-tax earnings of $1.6 million on revenues of $36.4 million in the 2000 third quarter, and pre-tax losses of $14.2 million on revenues of $94.1 million in the first nine months of 2001, compared with pre-tax earnings of $5.8 million on revenues of $99.4 million in the first nine months of 2000. The 2001 periods reflect a material slowdown in the markets for its products, a strengthening of its inventory reserves, costs of assimilating acquisitions made in 2000, $2.5 million of pre-tax charges for write-offs relating to its computer system and the closure of certain branches and sales offices, and expenses relating to changes in Heads & Threads' senior management. The 2000 results include the gain on the sale of a warehouse property. Net gains on investment transactions from continuing operations after taxes in the third quarter of 2001 totalled $7.4 million compared with a gain of $54 thousand in the 2000 period. As of September 30, 2001, the Company beneficially owned approximately 17.95 million shares, or 4.6 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of approximately $480.1 million, or $26.75 per share, compared with a market value on December 31, 2000 of $508.2 million, or $28.3125 per share. The aggregate cost of such shares is approximately $201.3 million, or $11.21 per share. The Company has previously announced that it may purchase shares of its common stock in open market transactions from time to time. In the third quarter of 2001, the Company purchased an aggregate of 28,977 shares of its common stock for about $5.3 million, for an average cost of about $181.60 per share. As of September 30, 2001, the Company had 7,213,019 shares of its common stock outstanding. The Company's common stockholders' equity per share at September 30, 2001 was $189.89 per share, an 18 percent increase from common stockholders' equity per share of $161.55 as of December 31, 2000 (adjusted for the March 2001 stock dividend). As previously reported, on July 20, 2001, the Company announced the signing of a definitive merger agreement under which the Company will acquire Capitol Transamerica Corporation ("Capitol Transamerica"), an insurance holding company based in Madison, Wisconsin (Nasdaq: CATA), at an aggregate price of about $182 million in cash. Capitol Transamerica writes specialty lines of property and casualty insurance as well as fidelity and surety coverages, primarily through its subsidiary Capitol Indemnity Corporation. The Capitol Transamerica Group is rated A+ (Superior) 10 by A.M. Best Company, Inc., an independent organization that analyzes the insurance industry. A closing is expected to occur around the end of the year. The Company's results in the first nine months of 2001 are not indicative of operating results in future periods. The Company and its subsidiaries have adequate internally generated funds and unused credit facilities to provide for the currently foreseeable needs of its and their businesses. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to the Company's non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. The Company's 2000 Form 10-K provides a more detailed discussion of the market risks affecting its operations. Based on the Company's estimates as of September 30, 2001, no material change has occurred in its market risks, as compared to amounts disclosed in its 2000 Form 10-K. Forward-Looking Statements The "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk" contain disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based upon the Company's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. The uncertainties and risks include, but are not limited to, those relating to conducting operations in a competitive environment; acquisition and disposition activities; and general economic conditions. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
Exhibit Number Description -------------- ----------- 10.1 Purchase Agreement dated as of October 31, 2001 by and between Alleghany Insurance Holdings LLC and Talbot Holdings Ltd. 10.2 Fourth Amendment to Credit Agreement dated as of August 14, 2001, and Waiver by and between Heads & Threads International LLC, various lending institutions, and American National Bank and Trust Company of Chicago, as Agent.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the third quarter of 2001. 13 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. ALLEGHANY CORPORATION Registrant Date: November 14, 2001 /s/ David B. Cuming -------------------- David B. Cuming Senior Vice President (and principal financial officer) 14 EX-10.1 3 y54975ex10-1.txt PURCHASE AGREEMENT Exhibit 10.1 PURCHASE AGREEMENT By and Between ALLEGHANY INSURANCE HOLDINGS LLC and TALBOT HOLDINGS LTD. DATED AS OF OCTOBER 31, 2001 TABLE OF CONTENTS
Page ---- ARTICLE I PURCHASE OF SHARES AND ENTITLEMENTS.......................................................................2 1.1. Purchase of the Shares and the Entitlements................................................................2 ------------------------------------------- 1.2. Consideration..............................................................................................2 ------------- 1.3. Closing....................................................................................................2 ------- 1.4. Intentionally Left Blank...................................................................................2 ------------------------ 1.5. Stamp Duties...............................................................................................2 ------------ ARTICLE II REPRESENTATIONS AND WARRANTIES OF AIHL...................................................................3 2.1. Organization...............................................................................................3 ------------ 2.2. Authority..................................................................................................3 --------- 2.3. The Shares.................................................................................................3 ---------- ARTICLE III REPRESENTATIONS AND WARRANTIES OF TALBOT HOLDINGS.......................................................3 3.1. Organization and Standing..................................................................................3 ------------------------- 3.2. Authority..................................................................................................3 --------- ARTICLE IV COVENANTS................................................................................................4 4.1. Cooperation and Reasonable Best Efforts....................................................................4 --------------------------------------- 4.2. Letter Agreement re Post-Closing Covenants.................................................................4 ------------------------------------------ 4.3. No Election................................................................................................4 ----------- 4.4. No Liquidation of Talbot Capital...........................................................................4 -------------------------------- 4.5. Option Stock Purchase Agreement............................................................................5 ------------------------------- 4.6. Bermuda Approvals..........................................................................................5 ----------------- ARTICLE V RELEASE AND COVENANT NOT TO SUE...........................................................................5 5.1. Talbot Holdings Release....................................................................................5 ----------------------- 5.2. Other Releases.............................................................................................5 -------------- ARTICLE VI MISCELLANEOUS PROVISIONS.................................................................................6 6.1. Expenses...............................................................................................6 -------- 6.2. Notices................................................................................................6 ------- 6.3. Entire Agreement; Amendments and Waivers...............................................................7 ---------------------------------------- 6.4. Assignment.............................................................................................7 ---------- 6.5. Survival of Representations, Warranties and Covenants..................................................7 ----------------------------------------------------- 6.6. Governing Law..........................................................................................8 ------------- 6.7. Consent To Jurisdiction................................................................................8 ----------------------- 6.8. Waiver of Jury Trial...................................................................................8 -------------------- 6.9. Remedies...............................................................................................8 -------- 6.10. Interpretation.........................................................................................9 -------------- 6.11. No Benefit to Others...................................................................................9 -------------------- 6.12. Public Announcements...................................................................................9 -------------------- 6.13. Counterparts...........................................................................................9 ------------ 6.14. Headings...............................................................................................9 -------- 6.15. Severability...........................................................................................9 ------------
-i- EXHIBITS Exhibit A Warrant Exhibit B Assignment Exhibit C Letter Agreement re Post-Closing Covenants Exhibit D Releases Exhibit E Letter Agreement re Option Stock Purchase Agreement -ii- PURCHASE AGREEMENT PURCHASE AGREEMENT (this "Agreement"), dated as of October 31, 2001, by and between ALLEGHANY INSURANCE HOLDINGS LLC, a Delaware limited liability company ("AIHL"), and Talbot Holdings LTD., a Bermuda exempted limited liability company ("Talbot Holdings"). W I T N E S S E T H : WHEREAS, AIHL is the owner of 116,635,100 ordinary shares (the "Shares"), constituting all of the issued and outstanding shares in the capital of Alleghany Underwriting Holdings Ltd ("AUHL"), a company registered in England and Wales under company number 02180028 and having its registered office at Gracechurch House, 55 Gracechurch Street, London EC3V 0JP; WHEREAS, AIHL is the depositor of (a) a deposit in the amount of $244,915,000 with Lloyd's in satisfaction of the funds at Lloyd's requirements of Alleghany Underwriting Capital Ltd, Alleghany Underwriting Capital (Bermuda) Ltd. and Talbot Underwriting Limited, which are the corporate members of Lloyd's wholly owned by AUHL; and (b) a deposit in the amount of $10,000,000 with Citibank, N.A. as trustee of the U.S. surplus lines trust fund in satisfaction of the U.S. surplus lines trust fund requirements of such corporate members (AIHL's right, title and interest in and to all of such deposits are hereinafter collectively referred to as the "Entitlements"); WHEREAS, all of the issued and outstanding shares of capital stock of Talbot Holdings are owned by certain members of the executive management of AUHL and its subsidiaries; WHEREAS, Talbot Holdings is the owner of all of the issued and outstanding shares of capital stock of Talbot Capital Ltd., a Bermuda exempted limited liability company and wholly owned subsidiary of Talbot Holdings ("Talbot Capital"); WHEREAS, AIHL desires to sell and Talbot Holdings desires to purchase the Shares, and AIHL desires to assign and Talbot Capital desires to take an assignment of the Entitlements, all upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, The Society of Lloyd's has approved the change of controller of Alleghany Underwriting Capital Ltd, Alleghany Underwriting Capital (Bermuda) Ltd, Talbot Underwriting Ltd, Alleghany Underwriting Ltd and has been notified of the proposed change of controller of Alleghany Underwriting Risk Services Ltd; NOW, THEREFORE, in consideration of the premises and the mutual covenants, agreements and provisions contained herein, the parties hereto agree as follows: ARTICLE I PURCHASE OF SHARES AND ENTITLEMENTS 1.1. Purchase of the Shares and the Entitlements. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (as hereinafter defined), (a) AIHL shall sell, convey, assign, transfer and deliver the Shares to Talbot Holdings, and Talbot Holdings shall acquire the Shares from AIHL, and (b) AIHL shall sell, convey, assign, transfer and deliver (at the direction, and for the benefit, of Talbot Holdings) the Entitlements to Talbot Capital, and Talbot Capital shall acquire the Entitlements from AIHL. 1.2. Consideration. At the Closing (as hereinafter defined), Talbot Holdings shall pay to AIHL the sum of ten dollars ($10.00) in cash (the "Cash Consideration"), and shall procure the issue to AIHL of a warrant (the "Warrant") in the name of AIHL to subscribe for 100 Class A Redeemable Non-Voting Preferred Shares, par value $0.01 per share, of Talbot Capital ("Talbot Capital Preferred Shares"). A copy of the Warrant is attached hereto as Exhibit A. 1.3. Closing. Subject to receipt by AIHL of an opinion from Swidler Berlin Shereff Friedman, LLP, tax counsel for AIHL, in form and substance satisfactory to AIHL, the purchase and sale of the Shares and the Entitlements pursuant to this Agreement (the "Closing") shall take place at the offices of Dewey Ballantine in London, England at 5:00 p.m. local time on November 5, 2001, or at such other place or time as the parties hereto agree in writing (the "Closing Date"). At the Closing: (a) AIHL shall cause AUHL to convene a meeting of its board of directors to approve and direct the registration of the transfer of the Shares to Talbot Holdings (pending only the share transfer form being stamped), and to accept the resignations of Russell J.D. Willmer, Russell T. John, Robert M. Hart, Richard P. Toft and Dorothea C. Gilliam as directors of AUHL and its subsidiaries; (b) AIHL shall deliver (i) to Talbot Holdings, a stock transfer form in respect of the Shares duly executed in favor of Talbot Holdings together with the share certificates representing the Shares, and (ii) to Talbot Capital, an assignment evidencing the transfer of the Entitlements to Talbot Capital in the form attached hereto as Exhibit B (the "Assignment"); and (c) Talbot Holdings shall deliver to AIHL the Cash Consideration and the Warrant. 1.4. Intentionally Left Blank 1.5. Stamp Duties. Talbot Holdings shall be responsible for the payment of any and all stamp duties arising out of transactions contemplated by this Agreement, including, without limitation, any related fines, penalties and interest. -2- ARTICLE II REPRESENTATIONS AND WARRANTIES OF AIHL AIHL represents and warrants to Talbot Holdings as follows: 2.1. Organization. AIHL is a limited liability company duly organized, validly existing and in good standing under the laws of Delaware, and has all requisite power and authority to own its properties and to conduct its business as now being conducted. 2.2. Authority. AIHL has all requisite power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of AIHL and this Agreement constitutes a legal, valid and binding obligation of AIHL, enforceable against AIHL in accordance with its terms. 2.3. The Shares. The Shares have been duly authorized and validly issued and are fully paid, constitute all of the issued and outstanding shares of capital stock of AUHL, and are owned by AIHL. ARTICLE III REPRESENTATIONS AND WARRANTIES OF TALBOT HOLDINGS Talbot Holdings represents and warrants to AIHL as follows: 3.1. Organization and Standing. Talbot Holdings is an exempt limited liability company duly organized, validly existing and in good standing under the laws of Bermuda, and has all requisite corporate power and authority to own its properties and to conduct its business as now being conducted. 3.2. Authority. All of the permits, approvals, qualifications or consents of third parties and regulatory authorities which are required for the consummation of the transactions contemplated by this Agreement have been obtained. Talbot Holdings has all requisite power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Talbot Holdings and Talbot Capital and this Agreement constitutes a legal, valid and binding obligation of Talbot Holdings enforceable against Talbot Holdings in accordance with its terms. -3- ARTICLE IV COVENANTS 4.1. Cooperation and Reasonable Best Efforts. Subject to the terms and conditions hereof, (a) each of the parties hereto shall cooperate with the other in connection with consummating the transactions contemplated by this Agreement, and (b) each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. (For purposes of this Agreement, the covenant of the parties to use their "reasonable best efforts" shall not require any party to incur any unreasonable expenses.) 4.2. Letter Agreement re Post-Closing Covenants. At the Closing, AIHL and AUHL shall enter into a letter agreement in the form set forth as Exhibit C hereto. 4.3. No Election. Neither Talbot Holdings nor Talbot Capital has made the election permitted to be made by U.S. Treasury Regulation Section 301.7701-3(c), and Talbot Holdings will not make, and will not allow Talbot Capital to make, the election permitted to be made by U.S. Treasury Regulation Section 301.7701-3(c) to be effective as of any date in the taxable year of Talbot Holdings in which the Closing occurs or in the following taxable year. 4.4. No Liquidation of Talbot Capital. Talbot Holdings shall not, and shall not permit Talbot Capital to, take any action that would result in the voluntary liquidation, dissolution or winding up of Talbot Capital, a sale of all or substantially all of the assets of Talbot Capital (whether in a single transaction or series of related transactions), or any amalgamation or consolidation (and Talbot Capital is not a surviving entity in any form) of Talbot Capital, prior to the determination of Residual FAL (as defined in the Certificate of Designation of the Talbot Capital Preferred Shares). 4.5. Option Stock Purchase Agreement. At the Closing, Alleghany Corporation and AUHL shall enter into a letter agreement in the form set forth as Exhibit D hereto. 4.6. Bermuda Approvals. Application has been made to (a) the Bermuda Monetary Authority for the approval of (i) the transfer of the ultimate beneficial ownership of Alleghany Underwriting Capital (Bermuda) Ltd. from Alleghany Corporation to Talbot Holdings, and (ii) the issue by Talbot Capital of the Warrant to AIHL; and (b) the Bermuda Supervisor of Insurance for the approval of the transfer of the ultimate beneficial ownership of Alleghany Underwriting Capital (Bermuda) Ltd. from Alleghany Corporation to Talbot Holdings. In the event that these approvals have not been obtained by 5:00 p.m. local time in London, England on November 5, 2001, the parties hereto hereby agree to take, or cause to be taken, such action as is necessary or advisable to allow the Closing to occur no later than November 30, 2001. -4- ARTICLE V RELEASE AND COVENANT NOT TO SUE 5.1. Talbot Holdings Release Effective as of the Closing, Talbot Holdings, for itself as well as its subsidiaries (including, without limitation, after the Closing Date, AUHL and its subsidiaries) and their respective successors, agents and assigns, does hereby forever, finally, fully, and unconditionally release and discharge AIHL and its parent Alleghany Corporation and their respective subsidiaries, affiliates, parents, successors, predecessors and assigns, and all of their respective past and present members, managers, employees, officers, directors, agents, representatives, attorneys, insurers, accountants and shareholders, in their individual, official and representative capacities, from and against any and all claims, debts, liabilities, demands, obligations, promises, agreements, contracts, covenants, liens, losses, costs and expenses, damages, suits, actions and causes of action whatsoever, at law or in equity, that any of them ever had, now have, or hereafter can, shall or may have, from the beginning of the world to the Closing Date, whether known or unknown, suspected or unsuspected, matured or unmatured, liquidated or unliquidated, jointly or severally, directly or indirectly, accrued or unaccrued, contingent or fixed (collectively, "Claims") for, upon, or by reason of any matter, cause or thing whatsoever, including, without limitation, any and all Claims arising out of, or relating to, any act or omission in connection with the management or conduct of the business or affairs of AUHL or any of its subsidiaries, and further covenants not to sue upon any such Claims. Notwithstanding the foregoing, AIHL shall not be released from any Claims arising out of or relating to any breach by AIHL of its obligations under this Agreement or any documents delivered pursuant hereto. 5.2. Other Releases. At the Closing, releases in the forms set forth in Exhibit E hereto shall be executed and delivered by the parties thereto. ARTICLE VI MISCELLANEOUS PROVISIONS 6.1. Expenses. Whether or not the Closing takes place and regardless of whether this Agreement is terminated, each party hereto shall pay all of the costs and expenses incurred by it in connection with this Agreement or in consummating the transactions contemplated hereby (including, without limitation, disbursements and expenses of its attorneys, accountants and advisors). Except for the services provided by Lexicon Partners, whose fees and expenses will be paid by AIHL, no agent, broker, investment banker, person or firm acting on behalf of Talbot Holdings or under Talbot Holdings' authority is or will be entitled to any broker's, finder's or investment banker's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with the negotiation or consummation of any of the transactions contemplated hereby. 6.2. Notices. All notices or other communications required or permitted under this Agreement shall be in writing and shall be effective upon delivery by hand or upon receipt if sent certified or registered mail (postage prepaid and return receipt requested) or by a nationally -5- recognized overnight courier service (appropriately marked for overnight delivery) or upon transmission if sent by telex or facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type and with physical delivery of the communication being made by one of the other means specified in this Section 6.2 as promptly as practicable thereafter). Notices are to be addressed as follows: If to AIHL, to Alleghany Insurance Holdings LLC 375 Park Avenue New York, New York 10152 Attention: Robert M. Hart, Esq. Manager Facsimile: 212-759-3295 with a copy to Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attention: Linda E. Ransom, Esq. Facsimile: 212-259-6333 If to Talbot Holdings, to Talbot Holdings Ltd. Clarendon House 2 Church Street Hamilton HM 11 Bermuda Attention: Secretary Facsimile: 441-292-4720 with a copy to Denton Wilde Sapte One Fleet Place London EC4M 7WS United Kingdom Attention: George Sandars, Esq. Facsimile: 44-207-246-7777 Any party may change the person and addresses to which notices or other communications are to be sent to it by giving written notice of any such change in the manner provided herein for giving notice. -6- 6.3. Entire Agreement; Amendments and Waivers. This Agreement, together with the exhibits delivered pursuant hereto, sets forth the entire agreement and understanding of the parties hereto in respect of the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. No party hereto has relied upon any oral or written statement, representation, warranty, covenant, condition, understanding or agreement made by any other party or any representative, agent or employee thereof, except for those expressly set forth in this Agreement or in the exhibits or schedules delivered pursuant hereto. This Agreement may be amended or modified, and the terms hereof may be waived, only by a writing signed by each of the parties hereto or, in the case of a waiver, by the party entitled to the benefit of the terms being waived. 6.4. Assignment. This Agreement shall be binding upon, and inure to the benefit of, the respective successors and assigns of the parties hereto; provided, however, that no assignment of any rights or delegation of any obligations provided for herein shall be made by a party hereto without the express prior written consent of the other party hereto, which consent shall not be unreasonably withheld. 6.5. Survival of Representations, Warranties and Covenants. All representations, warranties and covenants, of the parties hereto which are contained in this Agreement, together with the exhibits delivered pursuant hereto, shall survive the Closing and remain operative and in full force and effect, regardless of any investigation heretofore or hereafter made by or on behalf of any of the parties hereto. 6.6. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. 6.7. Consent To Jurisdiction. The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement, any documents delivered pursuant hereto or the transactions contemplated hereby or thereby shall be brought in the United States District Court for the Southern District of New York or any New York State court sitting in Manhattan, and each of the parties hereby consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Each party agrees that service of process on such party by hand delivery, or by certified or registered mail (postage prepaid and return receipt requested) or by a nationally recognized overnight courier service (appropriately marked for overnight delivery), addressed as provided in Section 6.2, shall be deemed effective service of process on such party. 6.8. Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY -7- DOCUMENTS DELIVERED PURSUANT HERETO OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 6.9. Remedies. Without intending to limit the remedies available to any party hereto, each party (i) acknowledges that breach of this Agreement or any documents delivered pursuant hereto will result in irreparable harm for which there is no adequate remedy at law, (ii) agrees that any party seeking to enforce this Agreement or any documents delivered pursuant hereto shall be entitled to injunctive relief, including specific performance, or other equitable remedies upon any such breach, and (iii) the prevailing party in any action brought pursuant to, or related to or referenced in any way in this Agreement or any documents delivered pursuant hereto shall be entitled to recover its attorneys' fees from the losing party. 6.10. Interpretation. This Agreement and any documents delivered pursuant hereto are the result of arm's-length negotiations between the parties hereto and have been prepared jointly by the parties. In applying and interpreting the provisions of this Agreement and any documents delivered pursuant hereto, there shall be no presumption that this Agreement and such documents were prepared by any one party or that this Agreement or such documents shall be construed in favor of or against any one party. 6.11. No Benefit to Others. The representations, warranties, covenants and agreements contained in this Agreement and in any documents delivered pursuant hereto are for the sole benefit of the parties hereto and their respective successors and permitted assigns and they shall not be construed as conferring and are not intended to confer any rights on any other persons, except as provided in Article V hereof and Exhibit E hereto. 6.12. Public Announcements. A press release in a form mutually agreed will be issued upon execution of this Agreement. Each party hereto agrees that it will not issue any other press release or otherwise make any public announcement with respect to this Agreement and the transactions contemplated hereby without the prior consent of the other party hereto (such consent not to be unreasonably withheld or delayed), unless such party determines in good faith that it is so obligated by applicable law, in which case such party shall consult, to the extent practicable, with the other party prior to issuing such press release or making such public announcement. 6.13. Counterparts. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. 6.14. Headings. The section headings contained in this Agreement are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. 6.15. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. -8- IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly executed as of the date first above written. ALLEGHANY INSURANCE HOLDINGS LLC By: /s/ Robert M. Hart ---------------------------- Name: Robert M. Hart Title: Manager Witness: By: /s/ Benson J. Chapman -------------------------------------- Name: Benson J. Chapman TALBOT HOLDINGS LTD. By: /s/ Michael A E Carpenter ---------------------------- Name: Michael A E Carpenter Title: Vice President Attest: By: /s/ Jane S Clouting -------------------------------------- Name: Jane S Clouting Title: Assistant Secretary -9- Exhibit A WARRANT TO PURCHASE CLASS A REDEEMABLE NON-VOTING PREFERRED SHARES OF TALBOT CAPITAL LTD. Date of Issuance: November 5, 2001 Number of Shares: 100 Talbot Capital Ltd., a Bermuda exempted limited liability company (the "Company"), for value received, hereby certifies that Alleghany Insurance Holdings LLC, a Delaware limited liability company (the "Holder"), or registered assigns, is entitled, subject to the terms set forth herein, at any time after November 5, 2001 and on or before November 5, 2011 (the "Subscription Period"), to subscribe for 100 Class A Redeemable Non-Voting Preferred Shares, par value $0.01 per share, of the Company (the "Preferred Shares"), at the subscription price of Ten Million United States Dollars (US$10,000,000) (the "Subscription Price"). The Preferred Shares constitute all of the authorized Class A Redeemable Non-Voting Preferred Shares of the Company, and, in accordance with the rights of the Preferred Shares set forth in the Certificate of Designation of the Preferred Shares appended to the Company's Bye-laws (the "Rights"), entitle the Holder to the greater of (a) the Stated Value of the Preferred Shares (as defined in the Rights), and (b) one-third of the sum of the Residual FAL (as defined in the Rights) and the Stated Value of the Preferred Shares, plus in either case unpaid cumulative dividends on the Preferred Shares. 1. Exercise of Warrant. (a) Exercise of this Warrant by the Holder shall be made at any time during the Subscription Period by the surrender of this Warrant, along with a duly executed notice of exercise in the form attached hereto as Exhibit 1, at the Company's principal offices, together with payment in full of the Subscription Price by certified or official bank check payable to the order of the Company, or such other form of payment as shall be acceptable to the Company and the Holder. (b) The exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in Section 1(a) above. At such time, the person or persons in whose name or names any certificates for Preferred Shares shall be issuable upon such exercise shall be deemed to have become the holder or holders of record of the Preferred Shares represented by such certificates. (c) As soon as practicable after the exercise of this Warrant, and in any event within ten (10) days thereafter, the Company at its expense shall cause to be issued in the name of, and delivered to, the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of full shares of Preferred Shares to which such Holder shall be entitled upon such exercise. The Company shall not be required upon exercise of this Warrant to issue any fractional Preferred Shares, but shall make adjustment therefor in cash as determined in good faith by the Board of Directors of the Company. 2. Reservation of Preferred Shares. The Company agrees that, at all times during the Subscription Period, the Company will have duly authorized and in reserve, and will keep available solely for issuance and delivery upon the exercise of this Warrant, such number of Preferred Shares as shall be issuable upon the exercise of this Warrant. The Company represents that the Preferred Shares have been duly authorized and constitute all of the authorized Class A Non-Voting Preferred Shares of the Company; none of the Preferred Shares have been issued and are outstanding; and, when issued and delivered upon exercise of the Warrant, the Preferred Shares will be validly issued, fully paid and nonassessable, free and clear of all restrictions on sale or transfer and free and clear of all preemptive rights and rights of first refusal. The Company further covenants and agrees that it will pay, when due and payable, any and all foreign, federal and state stamp, original issue or similar taxes which may be payable in respect of the issuance of any Preferred Shares or certificates therefor. 3. Reporting Requirements. For so long as this Warrant and any Preferred Shares issuable upon exercise thereof are outstanding, the Company will furnish to the Holder such reports as are furnished to Lloyd's (or succeeding regulatory authority) in respect of the Corporate Members (as defined in the Rights) and syndicates on which such Corporate Members have written for the 2001 year of account and prior years of account. 4. Transfer. Title to this Warrant may be transferred by the due endorsement (with signature guaranteed) by the Holder of an assignment in the form attached hereto as Exhibit 2. On surrender of this Warrant and said duly endorsed assignment to the Company, the Company at its expense will issue and deliver to or on the order of the Holder a new Warrant of like tenor, in such name as the Holder (on payment by such Holder or any applicable transfer taxes) may direct. 5. Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 6. No Impairment. The Company will not, without the Holder's written consent, amend its Bye-laws to alter the Rights. In addition, the Company will not, without the Holder's written consent, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but it will at all times in good faith assist in the carrying out of all of the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. A change of control of the -2- Corporate Members (as defined in the Rights) shall not be deemed to be an impairment provided that the Residual FAL (as defined in the Rights) continues to include the funds at Lloyd's of such Corporate Members. 7. No Rights as a Stockholder. This Warrant does not confer upon the Holder any rights or liabilities as a shareholder of the Company prior to the exercise of this Warrant. 8. Amendment. This Warrant may not be modified or amended except by an instrument in writing signed by the Company and the Holder. 9. Notices. All notices and other communications required or permitted to be given to the Company or the Holder shall be delivered by hand, or sent by first class registered or certified mail, postage prepaid, or sent by telecopy, to the Company at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda, or to the Holder at such address and telecopy number as may have been furnished to the Company in writing by the Holder. 10. Remedies. The Company acknowledges and agrees that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 11. Miscellaneous. This Warrant shall be binding upon the Company's successors. This Warrant shall be construed and enforced in accordance with and governed by the laws of the State of New York applicable to agreements made and to be performed entirely within such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. TALBOT CAPITAL LTD. By: ---------------------------- Name: Michael A E Carpenter Title: Vice President Attest: By: ------------------------------- Name: Jane S Clouting Title: Assistant Secretary -3- Exhibit 1 NOTICE OF EXERCISE OF WARRANT To: Talbot Capital Ltd. Date: ---------------- The undersigned, pursuant to the provisions set forth in the Warrant dated November 5, 2001, hereby irrevocably elects to exercise the Warrant to subscribe for 100 Class A Redeemable Non-Voting Preferred Shares, par value $.01 per share, of Talbot Capital Ltd. subject to the Memorandum of Association and Bye-laws of Talbot Capital Ltd., and tenders herewith payment of the Subscription Price in full in the amount of Ten Million United States Dollars (US$10,000,000). Please issue a certificate or certificates for such Class A Redeemable Non-Voting Preferred Shares in the name of, and pay any cash for any fractional share to: Alleghany Insurance Holdings LLC 375 Park Avenue New York, New York 10152 By: ---------------------------- Name: Title: Manager Exhibit 2 ASSIGNMENT OF WARRANT FOR VALUE RECEIVED, the undersigned Holder of the Warrant dated November 5, 2001 hereby sells, assigns and transfers unto ____________, whose address is _____________________, all of the right, title and interest of the undersigned in and to such Warrant, and does hereby irrevocably constitute and appoint _____________________ as its attorney-in-fact to register such transfer on the books of Talbot Capital Ltd. maintained for the purpose, with full power of substitution in the premises. Date: Holder: ----------------------------- By: ---------------------------- Name: Title: [Signature Guaranteed] Exhibit B ASSIGNMENT FOR VALUE RECEIVED, ALLEGHANY INSURANCE HOLDINGS LLC, a Delaware limited liability company ("Assignor"), hereby assigns, conveys, grants, sets over and transfers to TALBOT CAPITAL LTD., a Bermuda exempted limited liability company ("Assignee"), all of Assignor's right, title and interest in and to the following: (a) (i) the deposit with Lloyd's of US$70,978,000 on behalf of Alleghany Underwriting Capital Ltd ("AUCL") in satisfaction of its funds at Lloyd's requirements, which deposit is evidenced by a Lloyd's Deposit Trust Deed made the 17th day of October, 2001 (Lloyd's of London Member Code 053561C); (ii) the deposit with Lloyd's of US$172,989,000 on behalf of Alleghany Underwriting Capital (Bermuda) Ltd ("AUC(B)L") in satisfaction of its funds at Lloyd's requirements, which deposit is evidenced by a Lloyd's Deposit Trust Deed made the 17th day of October, 2001 (Lloyd's of London Member Code 053562K); (iii) the deposit with Lloyd's of US$948,000 on behalf of Talbot Underwriting Ltd ("Talbot Underwriting") in satisfaction of its funds at Lloyd's requirements, which deposit is evidenced by a Lloyd's Deposit Trust Deed made the 17th day of October, 2001 (Lloyd's of London Member Code 054159J); and (iv) the deposit with Citibank, N.A. of US$10,000,000 in satisfaction of the U.S. Surplus Lines Trust Fund requirements of Syndicate 376 (account no. 437602-00); (all of the foregoing deposits being collectively referred to herein as the "Deposits"), (b) any and all agreements, contracts, documents or instruments evidencing Assignor's right, title and interest in and to the Deposits, including without limitation the Lloyd's Deposit Trust Deeds referred to in clauses (a)(i), (a)(ii) and (a)(iii) above, subject to the terms and conditions of such agreements, contracts, documents and instruments; and (c) all of Assignor's right, title and interest in and to any or all of the proceeds of any or all of the foregoing; to have and to hold unto Assignee and its successors and assigns forever. Assignee acknowledges and agrees that the Deposits were made in compliance with the requirements of Lloyd's or the U.S. Surplus Lines Trust Fund in support of the underwriting activities of AUCL, AUC(B)L and Talbot Underwriting, and are under the direct control of Lloyd's or Citibank, as the case may be. Accordingly, Assignee agrees that it will not seek recourse to any of the Deposits or take any action in respect of the Deposits under circumstances that would render AUCL, AUC(B)L or Talbot Underwriting insolvent. This Assignment is made without any representation or warranty, express or implied, by Assignor. This Assignment will be binding upon, and inure to the benefit of, Assignor and Assignee and their respective successors and assigns. This Assignment shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. This Assignment may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, but all of which taken together shall constitute but one and the same instrument. Dated as of the 5th day of November, 2001. ALLEGHANY INSURANCE HOLDINGS LLC By: ---------------------------- Name: David B. Cuming Title: Manager TALBOT CAPITAL LTD. By: ---------------------------- Name: Michael A E Carpenter Title: Vice President -2- EXHIBIT C Alleghany Insurance Holdings LLC 375 Park Avenue New York, NY 10152 November 5, 2001 Alleghany Underwriting Holdings Ltd Gracechurch House 55 Gracechurch Street London EC3V 0JP United Kingdom Gentlemen: Reference is made to that certain Purchase Agreement dated as of October 31, 2001 (the "Agreement") by and between Alleghany Insurance Holdings LLC ("AIHL") and Talbot Holdings Ltd. ("Talbot Holdings"), which provides for the sale by AIHL to Talbot Holdings of all of the issued and outstanding shares in the capital of Alleghany Underwriting Holdings Ltd ("AUHL"). Defined terms used but not defined herein shall have the meanings ascribed thereto in the Agreement. For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, AIHL and AUHL hereby agree that, in the event that the Closing takes place under the Agreement: 1. Access to, and Retention of, Books and Records. For so long as AIHL is required to include information about AUHL and its subsidiaries (hereinafter collectively referred to as the "AUHL Group") in its financial reports, tax returns and other documents, or for such period as the accuracy or correctness of any financial reports, tax returns, tax information and other documents furnished to, or at the request of, AIHL may be examined or audited by any government, regulatory authority or other body (whether or not governmental) with jurisdiction over AIHL, AUHL will, and will cause each of its subsidiaries to, allow AIHL (and AIHL's attorneys, accountants and agents) access to all of the properties, personnel, corporate books and financial records of such company, and to examine and make copies of the books of accounts and other financial records of such company, all at such reasonable times and such intervals as AIHL shall reasonably determine. AUHL will also keep or cause to be kept, and will cause each of its subsidiaries to keep, appropriate records and books of account in which complete entries are to be made reflecting its and their business and financial transactions, such entries to be made in accordance with past practices consistently applied. Further, prior to discarding or destroying any copies of the AUHL Group's corporate books and financial records, AUHL will notify AIHL in writing of the proposed discarding or destruction of any such corporate books and financial records (describing the records or documents to be discarded or destroyed in reasonable Alleghany Underwriting Holdings Ltd November 5, 2001 Page 2 detail) and will afford AIHL the reasonable opportunity to copy or take possession of all or any of such corporate books and financial records prior to their being discarded or destroyed. 2. Preparation of Financial Statements. Promptly following the Closing, AUHL will promptly, but in no event later than November 14, 2001, prepare and furnish to AIHL financial statements which fairly present in all material respects the consolidated financial position and results of operations of the AUHL Group for the fiscal period through October 31, 2001, which statements shall be consistent with, and of the type and in the form customarily furnished by, AUHL to AIHL prior to the Closing. Thereafter, AUHL will provide AIHL's auditors, KPMG LLP ("KPMG"), with access to all of the AUHL Group's corporate books and financial records, at such reasonable times and intervals as KPMG shall reasonably request, to permit KPMG to audit and otherwise express an opinion with respect to such financial statements. 3. Preparation of U.S. Tax Return Information. Following the Closing, AUHL will promptly, but in no event later than July 31, 2002, prepare and furnish to AIHL all information, statements, and returns relating to, or arising out of the ownership by AIHL of, the AUHL Group (including without limitation the U.S. income tax information returns on IRS Form(s) 5471, and the schedules required by the instructions thereto, required under Sections 6038, 6046 or 6046A of the Internal Revenue Code of 1986, as amended (the "Code") and necessary for the preparation of the U.S. income tax returns of AIHL (or the U.S. income tax returns of the "affiliated group" (as that term is defined in Section 1504 of the Code) that includes AIHL) for any taxable period ending prior to or including the Closing. 4. Change of Names. On the Closing Date or as soon as practicable thereafter, AUHL shall, and shall cause each of its subsidiaries whose name includes the word "Alleghany" to, change its name so that none of such companies has the word "Alleghany" in its name, and AUHL shall, and shall cause each of its subsidiaries to, cease using the word Alleghany in any of their business dealings. 5. Miscellaneous. (a) Notices. All notices or other communications required or permitted under this letter agreement shall be in writing and shall be effective upon delivery by hand or upon receipt if sent certified or registered mail (postage prepaid and return receipt requested) or by a nationally recognized overnight courier service (appropriately marked for overnight delivery) or upon transmission if sent by telex or facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type and with physical delivery of the communication being made by one of the other means specified in this Section 5(a) as promptly as practicable thereafter). Notices are to be addressed as follows: Alleghany Underwriting Holdings Ltd November 5, 2001 Page 3 If to AIHL, to Alleghany Insurance Holdings LLC 375 Park Avenue New York, New York 10152 Attention: Robert M. Hart, Esq. Manager Facsimile: 212-759-3295 with a copy to Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attention: Linda E. Ransom, Esq. Facsimile: 212-259-6333 If to AUHL, to Alleghany Underwriting Holdings Ltd Gracechurch House 55 Gracechurch Street London EC3V 0JP United Kingdom Attention: Mr. Michael E A Carpenter President Facsimile: 44-207-550-3555 with a copy to Denton Wilde Sapte One Fleet Place London EC4M 7WS United Kingdom Attention: George Sandars, Esq. Facsimile: 44-207-246-7777 Any party may change the person and addresses to which notices or other communications are to be sent to it by giving written notice of any such change in the manner provided herein for giving notice. (b) Amendments and Waivers. This letter agreement may be amended or modified, and the terms hereof may be waived, only by a writing signed by each of the parties hereto or, in the case of a waiver, by the party entitled to the benefit of the terms being waived. Alleghany Underwriting Holdings Ltd November 5, 2001 Page 4 (c) Assignment. This letter agreement shall be binding upon, and inure to the benefit of, the respective successors and assigns of the parties hereto; provided, however, that no assignment of any rights or delegation of any obligations provided for herein shall be made by a party hereto without the express prior written consent of the other party hereto, which consent shall not be unreasonably withheld. (d) Governing Law. This letter agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. (e) Counterparts. This letter agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. (f) Headings. The section headings contained in this letter agreement are inserted for convenience of reference only and shall not affect the meaning or interpretation of this letter agreement. (g) Severability. Any provision of this letter agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Alleghany Underwriting Holdings Ltd November 5, 2001 Page 5 Please indicate your agreement with the foregoing by signing in the space provided below. Very truly yours, Alleghany Insurance Holdings LLC By: ---------------------------- Name: David B. Cuming Title: Manager Agreed and accepted: Alleghany Underwriting Holdings Ltd By: -------------------------------------- Name: Michael A E Carpenter Title: Chief Executive Exhibit D Alleghany Corporation 375 Park Avenue New York, NY 10152 November 5, 2001 Alleghany Underwriting Holdings Ltd Gracechurch House 55 Gracechurch Street London EC3V 0JP United Kingdom Gentlemen: Reference is made to that certain Purchase Agreement dated as of October 31, 2001 (the "Agreement") by and between Alleghany Insurance Holdings LLC ("AIHL") and Talbot Holdings Ltd. ("Talbot Holdings"), which provides for the sale by AIHL to Talbot Holdings of all of the issued and outstanding shares in the capital of Alleghany Underwriting Holdings Ltd ("AUHL"). Defined terms used but not defined herein shall have the meanings ascribed thereto in the Agreement. For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Alleghany Corporation ("Alleghany") and AUHL hereby agree that, the Option Stock Purchase Agreement dated as of June 26, 2000 between Alleghany and AUHL shall be terminated, effective as of the Closing Date, and Alleghany hereby assumes and agrees to perform the obligations of AUHL in respect of options granted to Todd J Hess to purchase shares of Alleghany Common Stock ("Hess Options") and options granted, under the Underwriters Re Group, Inc. 1998 Stock Option Plan, to Rupert Atkin to purchase shares of Alleghany Common Stock ("Atkin Options"). Alleghany shall be entitled to all proceeds of exercise of the Hess Options and the Atkin Options and AUHL shall pay over to Alleghany any such proceeds recovered by it. AUHL and Alleghany will cooperate reasonably with each other to facilitate exercise of Hess Options and Atkin Options which occur after the Closing, including, without limitation, any applicable tax or other withholding requirements. This letter agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. Please indicate your agreement with the foregoing by signing in the space provided below. Very truly yours, Alleghany Corporation Alleghany Underwriting Holdings Ltd November 5, 2001 Page 2 By: ---------------------------- Name: David B. Cuming Title: Senior Vice President Agreed and accepted: Alleghany Underwriting Holdings Ltd By: -------------------------------------- Name: Michael A E Carpenter Title: Chief Executive Exhibit E RELEASE AND COVENANT NOT TO SUE by Alleghany Insurance Holdings LLC RELEASE AND COVENANT NOT TO SUE (this "Release"), made as of November 5, 2001 by Alleghany Insurance Holdings LLC ("AIHL") for the benefit of the Releasees (as defined below). IN CONSIDERATION of the sum of $1.00 and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, effective as of the date hereof, AIHL does hereby forever, finally, fully, and unconditionally release and discharge Alleghany Underwriting Holdings Ltd and its subsidiaries and all of their respective past and present members, managers, employees, officers and directors, in their individual, official and representative capacities (collectively, the "Releasees"), from and against any and all claims, debts, liabilities, demands, obligations, promises, agreements, contracts, covenants, liens, losses, costs and expenses, damages, suits, actions and causes of action whatsoever, at law or in equity, that any of them ever had, now have, or hereafter can, shall or may have, from the beginning of the world to the date hereof, whether known or unknown, suspected or unsuspected, matured or unmatured, liquidated or unliquidated, jointly or severally, directly or indirectly, accrued or unaccrued, contingent or fixed (collectively, "Claims"), for, upon, or by reason of any matter, cause or thing whatsoever, and further covenants not to sue upon any such Claims. Notwithstanding the foregoing, (a) the Releasees shall not be released from any Claims in the event that any of the Releasees commences any suit or action against AIHL or its parent Alleghany Corporation or any of their respective past or present members, managers, employees, officers or directors, and (b) the Releasees shall not be released from any Claims arising out of or relating to any breach by the Releasees of their obligations under the Purchase Agreement dated as of October 31, 2001 by and between AIHL and Talbot Holdings Ltd. or any agreements delivered pursuant thereto. This Release shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. IN WITNESS WHEREOF, AIHL has caused this Release to be duly executed as of the date first above written. Attest: ALLEGHANY INSURANCE HOLDINGS LLC By: By: -------------------------- ---------------------------- Name: Robert M. Hart Name: David B. Cuming Title: Manager Title: Manager RELEASE AND COVENANT NOT TO SUE by Alleghany Underwriting Holdings Ltd, Alleghany Underwriting Ltd, Alleghany Underwriting Capital Ltd, Alleghany Underwriting Capital (Bermuda) Ltd., Talbot Underwriting Ltd, Alleghany Underwriting Risk Services Ltd, Alleghany Underwriting Services Ltd, Yachtsure Ltd, Underwriting Risk Services Ltd, Marinasure Ltd, Venton Underwriting Agencies Ltd and Venton Insurance & Risk Management Services Ltd. RELEASE AND COVENANT NOT TO SUE (this "Release"), made as of November 5, 2001 by Alleghany Underwriting Holdings Ltd, Alleghany Underwriting Ltd, Alleghany Underwriting Capital Ltd, Alleghany Underwriting Capital (Bermuda) Ltd., Talbot Underwriting Ltd, Alleghany Underwriting Risk Services Ltd, Alleghany Underwriting Services Ltd, Yachtsure Ltd, Underwriting Risk Services Ltd, Marinasure Ltd, Venton Underwriting Agencies Ltd and Venton Insurance & Risk Management Services Ltd (collectively, the "Releasors"), for the benefit of the Releasees (as defined below). IN CONSIDERATION of the sum of $1.00 and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, effective as of the date hereof, the Releasors do hereby forever, finally, fully, and unconditionally release and discharge Alleghany Insurance Holdings LLC and its parent Alleghany Corporation and all of their respective past and present members, managers, employees, officers and directors, in their individual, official and representative capacities (collectively, the "Releasees"), from and against any and all claims, debts, liabilities, demands, obligations, promises, agreements, contracts, covenants, liens, losses, costs and expenses, damages, suits, actions and causes of action whatsoever, at law or in equity, that any of them ever had, now have, or hereafter can, shall or may have, from the beginning of the world to the date hereof, whether known or unknown, suspected or unsuspected, matured or unmatured, liquidated or unliquidated, jointly or severally, directly or indirectly, accrued or unaccrued, contingent or fixed (collectively, "Claims"), for, upon, or by reason of any matter, cause or thing whatsoever, and further covenants not to sue upon any such Claims. Notwithstanding the foregoing, (a) the Releasees shall not be released from any Claims in the event that any of the Releasees commences any suit or action against any of the Releasors, and (b) the Releasees shall not be released from any Claims arising out of or relating to any breach by the Releasees of their obligations under the Purchase Agreement dated as of October 31, 2001 by and between AIHL and Talbot Holdings Ltd. or any agreements delivered pursuant thereto. This Release shall be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. -2- IN WITNESS WHEREOF, the Releasors have caused this Release to be duly executed as of the date first above written. Attest: ALLEGHANY UNDERWRITING HOLDINGS LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Chief Executive Attest: ALLEGHANY UNDERWRITING LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Chief Executive Attest: ALLEGHANY UNDERWRITING CAPITAL LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Director Attest: ALLEGHANY UNDERWRITING CAPITAL (BERMUDA) LTD. By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Assistant Secretary Title: Director -3- Attest: TALBOT UNDERWRITING LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Director Attest: ALLEGHANY UNDERWRITING RISK SERVICES LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Chief Executive Attest: ALLEGHANY UNDERWRITING SERVICES LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Chief Executive Attest: YACHTSURE LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Director Attest: UNDERWRITING RISK SERVICES LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: Michael A E Carpenter Title: Secretary Title: Director -4- Attest: MARINASURE LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: D Martin Slade Title: Secretary Title: Sole Director Attest: VENTON UNDERWRITING AGENCIES LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: D Martin Slade Title: Secretary Title: Director Attest: VENTON INSURANCE & RISK MANAGEMENT SERVICES LTD By: By: ------------------------ ---------------------------- Name: Jane S Clouting Name: D Martin Slade Title: Secretary Title: Sole Director -5- EX-10.2 4 y54975ex10-2.txt 4H AMENDMENT TO CREDIT AGREEMENT Exhibit 10.2 FOURTH AMENDMENT TO CREDIT AGREEMENT DATED AS OF AUGUST 14, 2001 (AS AMENDED FROM TIME TO TIME, THE "AGREEMENT"), AND WAIVER BY AND BETWEEN HEADS & THREADS INTERNATIONAL LLC, A DELAWARE LIMITED LIABILITY COMPANY (THE "BORROWER"), AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, LASALLE BANK NATIONAL ASSOCIATION AND FLEET NATIONAL BANK, SUCCESSOR TO SUMMIT BANK, AS LENDERS (THE "LENDERS"), AND AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS AGENT (THE "AGENT") This Fourth Amendment to the Agreement ("Amendment" or "Fourth Amendment") is entered into as of August 14, 2001 by and among the Borrower, the Lenders and the Agent. All capitalized terms stated in this Amendment and not defined herein shall have the same meaning as set forth in the Agreement. WHEREAS, the Lenders have made Loans to the Borrower pursuant to the Agreement; and WHEREAS, Alleghany has agreed to make a $10,300,000 capital contribution to the Borrower (the "Capital Contribution"), $6,000,000 of which shall be contributed as cash equity and $4,300,000 of which shall be contributed as payment of an income tax receivable due from Alleghany; and WHEREAS, the Borrower and the Lenders have agreed to amend certain terms of the Agreement and waive past noncompliance with certain financial covenants as stated herein. Now, therefore, in consideration of the fulfillment of each of the terms and conditions set forth herein, the parties hereto agree as follows: Section 1. Amendments to Agreement. a. Upon execution of this Amendment, the Capital Contribution shall be immediately paid by the Borrower to the Agent and applied as follows: $3,666,666.67 to retire the Term Loan, and $6,633,333.33 to reduce the balance outstanding upon the Revolving Loan. b. Section 1.1 of the Agreement is amended as follows: (i) The definition of Borrowing Base is amended in its entirety to state the following: "Borrowing Base" means an amount equal to the lesser of (1) $42,000,000 or (2) an amount, adjusted as described below, equal to (a) 85% of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to the Account Debtor thereof in connection therewith) of all existing Eligible Accounts that are set forth in the Schedule of Accounts then most recently delivered by the Borrower to the Agent and all existing Eligible Accounts that are set forth in any Schedule of Accounts delivered by the Borrower to the Agent since the date of such Schedule of Accounts, which amount shall be reduced by 100% of the face amount of all payments which the Borrower has received on or in connection with its Eligible Accounts since the date of such Schedule of Accounts, plus (b) the lesser of (i) $32,000,000 prior to August 31, 2001, $31,000,000 from August 31, 2001 to September 29, 2001, $29,000,000 from September 30, 2001 through October 30, 2001, $28,000,000 from October 31, 2001 through November 29, 2001 and $27,500,000 thereafter, or (ii) 55% of Eligible Inventory, through September 14, 2001 and 50% of Eligible Inventory thereafter, all as set forth in the Schedule of Inventory then most recently delivered by the Borrower to the Agent and all existing Eligible Inventory set forth in any Schedule of Inventory delivered by the Borrower to the Agent since the date of such Schedule of Inventory; provided, however, that, notwithstanding any contrary provision contained herein, the Agent shall deduct inventory reserves in an amount not less than $6,817,000 and may elect at any time, if in its reasonable discretion, it is materially insecure, to change the foregoing method of calculating the Borrowing Base by reducing advances against Eligible Accounts and Eligible Inventory, or to deduct additional reserves from the Borrowing Base. For purposes hereof, unless otherwise notified by the Borrower, the Agent will assume that all monies collected in the Lock Box (as defined in the Security Agreement) are payments of Eligible Accounts. (ii) The definition of "Aggregate Revolving Commitment" is amended in its entirety to state the following: "Aggregate Revolving Commitment" means $42,000,000. (iii) The definition of "Term Commitment" is deleted from the Agreement and there shall cease to be a Term Commitment. (iv) "Free Cash Flow" is defined in Section 6.10.5 of the Agreement. (v) The new definition of "Pricing Schedule" is amended in its entirety to state the following: -2- "Pricing Schedule" means the Schedule attached to the Fourth Amendment identified as such. c. Sections 2.1.2 and 2.4.10 of the Agreement are deleted and all references in the Agreement to the "Term Loan" are deleted. d. Schedule 1 to the Agreement is amended in its entirety and replaced by the Schedule 1 attached to this Amendment and incorporated herein. e. Section 6.10.3 of the Agreement is amended in its entirety to state the following: 6.10.3 Debt Service Coverage Ratio. The Borrower will maintain a Debt Service Coverage Ratio, at all times of not less than (i) 1.00 to 1.00 on and before December 31, 2001 and (ii) 1.20:1.00 thereafter for each trailing twelve month period preceding the testing date, provided that the first test of such ratio shall be on June 30, 2001 at which time such ratio will be tested only for the Borrower's second fiscal quarter of 2001. The Debt Service Coverage Ratio will not be tested for the Borrower's fiscal quarters ending September 30, 2001 and December 31, 2001. Thereafter, the Debt Service Coverage Ratio will resume to be tested (i) on a calendar year to date basis at the end of the Borrower's fiscal quarters ending March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002 and (ii) on a trailing rolling four quarter basis for each of the Borrower's fiscal quarters ending after December 31, 2002. f. A new Section 6.10.5 is added to the Agreement stating the following: 6.10.5 Free Cash Flow. The Borrower will maintain Free Cash Flow for each of its fiscal quarters of Borrower's Fiscal Year measured at the end of each quarter ending September 30, 2001 and December 31, 2001 of not less than the following:
Minimum Free Cash Flow ---------------------- 9/30/01 $ 223,000 12/31/01 $ 334,800
"Free Cash Flow" is EBITDA minus gross Capital Expenditures. Only for Borrower's fiscal quarter ending September 30, 2001, to the extent that Free Cash Flow is less than $223,000 as of September 30, 2001, Alleghany may contribute equity in addition to the Capital Contribution on or before October 15, 2001 in an amount sufficient that when added to the Free Cash Flow as of September 30, 2001 will make the Free Cash Flow as of that date equal to or exceed $223,000. Notwithstanding the foregoing, the amount of equity contributed by Alleghany which will be counted by the Lenders toward compliance with the Free Cash Flow covenant as of September 30, 2001 shall not exceed $750,000. g. A new Section 6.25 is added to the Agreement stating the following: -3- 6.25 Management Consultant. Borrower shall within twenty-one days following the date of this Amendment at Borrower's expense engage the services of a management consultant acceptable to the Required Lenders whose work shall be limited to performance for Borrower of thirteen week cash flow projections and monthly balance sheet and income statements projections for the next twelve months after the date of this Amendment. Borrower shall cooperate with such management consultant and shall permit to the Lenders full access at all times to the consultant and the consultant's work product. h. Fleet National Bank substituted for Summit Bank as a Lender. Fleet National Bank acquired Summit Bank and Fleet National Bank is hereby substituted for Summit Bank as a Lender. Fleet National Bank agrees to be bound by the terms of the Credit Agreement as fully and to the same extent as Summit Bank. All references in the Credit Agreement to Summit Bank shall hereinafter mean Fleet National Bank. Section 2. Waiver. a. The Borrower has requested that the Agent and the Lenders waive the Default under the Agreement which has occurred and is continuing on account of Borrower's failure to comply with the financial covenants stated in Sections 6.10.2 and 6.10.3 of the Agreement as of June 30, 2001. b. In response to such request, the Agent, on behalf of the Lenders, hereby waives the Borrower's violation of Sections 6.10.2 and 6.10.3 of the Agreement as of June 30, 2001. c. The waiver set forth herein is effective solely for the purpose set forth herein and shall be limited precisely as written and shall not be deemed to be a consent to any amendment, waiver, modification of, or noncompliance with, any other term or condition of the Agreement, or otherwise prejudice any right or remedy which the Agent and the Lenders may now have or may have in the future in connection with the Agreement. Section 3. Representations and Warranties. The Borrower represents and warrants that: a. The representations and warranties contained in the Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent any such -4- representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty is true and correct in all material respects on and as of such earlier date); and b. The Borrower is in compliance with all the terms and provisions set forth in the Agreement and no Default or Unmatured Default has occurred and is continuing. Section 4. Conditions to Effectiveness. This Amendment is subject to the satisfaction in full of the following conditions precedent: a. The Agent shall have received executed originals of this Amendment; b. The Agent and each respective Lender shall have received an executed original of the Second Amended and Restated Promissory Note substantially in the form of Exhibit 1 attached hereto and incorporated herein. c. The Agent shall have received payment of the fees provided in Section 7 of this Amendment; d. The Agent shall have received payment of a $63,000 fee to be distributed to the Lenders in accordance with their Pro Rata Shares which fee Borrower agrees is nonrefundable and shall have been fully earned by each Lender on the date this Amendment is executed. e. The full Capital Contribution shall have been made by Alleghany and distributed as stated in Section 1a of this Amendment. f. The Agent shall have received board resolutions from the Borrower authorizing the execution of this Amendment; and g. All legal matters incident to this Amendment shall be reasonably satisfactory to Neal, Gerber & Eisenberg, counsel for the Agent. Section 5. Full Force and Effect. Except as expressly amended and waived herein, the Agreement and the Loan Documents are hereby ratified and confirmed, and shall continue in -5- full force and effect in accordance with the provisions thereof on the date hereof. As used in the Agreement and the Loan Documents, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise requires, mean the Agreement as amended prior to the date hereof and as amended by this Amendment, all references to "Lenders", "Commitment" and "Pro Rata Percentage" shall mean such terms as stated on Schedule 1 attached hereto, and all references to the "Note" or "Notes" shall mean the Second Amended and Restated Promissory Notes in the form attached hereto as Exhibit 1. Section 6. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. Section 7. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by Agent in connection with the preparation, execution and delivery of this Amendment and the other documents incident hereto, including, but not limited to, the reasonable fees and disbursements of Neal, Gerber & Eisenberg, counsel for the Agent. Section 8. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute one instrument. Section 9. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of this Amendment. -6- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized officers, all as of the date and year first above written. BORROWER: HEADS & THREADS INTERNATIONAL LLC, A DELAWARE LIMITED LIABILITY COMPANY BY: /S/MICHAEL T. WRENN --------------------------------- ITS: EXECUTIVE VICE PRESIDENT ---------------------------- LENDERS: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO BY: /S/ TERENCE LYNCH --------------------------------- ITS: FIRST VICE PRESIDENT --------------------------- LASALLE BANK NATIONAL ASSOCIATION BY: /S/ HENRY J. MUNEZ -------------------------------- ITS: VICE PRESIDENT --------------------------- FLEET NATIONAL BANK BY: /S/ RICHARD R. POWELL -------------------------------- ITS: AVP --------------------------- -7- AGENT: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO BY: /S/ TERENCE LYNCH --------------------------------- ITS: FIRST VICE PRESIDENT --------------------------- -8- SCHEDULE 1
Pro Rata Lenders Commitment Percentage - ------- ---------- ---------- American National Bank and $14,000,000.00 33.33333333% Trust Company of Chicago LaSalle Bank National $14,000,000.00 33.33333333% Association Fleet National Bank $14,000,000.00 33.33333333%
PRICING SCHEDULE
APPLICABLE MARGIN FOR REVOLVING LOANS ------------------------------------- Eurodollar Rate 3.50% Floating Rate 1.00%
APPLICABLE FEE MARGIN --------------------- Commitment Fee .50 bp Bankers Acceptances 2.00% Letters of Credit 1.00%
- ------------------------------------ "bp" means basis points. EXHIBIT 1 SECOND AMENDED AND RESTATED PROMISSORY NOTE $14,000,000 AUGUST 14, 2001 FOR VALUE RECEIVED, the undersigned, HEADS & THREADS INTERNATIONAL LLC, a Delaware limited liability company (the "Company"), hereby promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION (the "Lender"), the principal sum of Fourteen Million and 00/100 Dollars ($14,000,000) or, if less, the aggregate unpaid principal amount of all sums advanced by the Lender to the Company pursuant to the Credit Agreement, dated as of April 3, 2000 and amended by First Amendment dated April 3, 2000, a Second Amendment dated November 27, 2000, a Third Amendment dated March 19, 2001 and a Fourth Amendment dated August 14, 2001 (such Credit Agreement, as it may be further amended, restated, supplemented or otherwise modified from time to time, being hereinafter called the "Credit Agreement"), among the Company, the Lender, the other banks parties thereto, and AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as agent for the Lenders, on the dates and in the amounts provided in the Credit Agreement (except to the extent sums advanced with respect to Facility Letters of Credit are reimbursed to the Lender by any other Lender (as defined in the Credit Agreement) pursuant to the Credit Agreement). The Company further promises to pay interest on the unpaid principal amount of the Loans (except for the undrawn portions of any Facility Letters of Credit), evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Lender is authorized to endorse the amount and the date on which each Loan is made, the maturity date therefor and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Promissory Note (the "Note"). This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The portion of the principal amount of this Note evidencing outstanding Facility Letters of Credit is the Lender's Pro Rata Share of such amount, as set forth in Schedule 1 of the Credit Agreement, and shall be extinguished by either termination of such Facility Letters of Credit, reimbursement of all amounts paid by the Lender upon such Facility Letters of Credit or payment to the Lender of an amount equal to the amount of all outstanding Facility Letters of Credit pursuant to Section 2.3.9 of the Credit Agreement. This Note is a renewal and replacement of the Promissory Note in the original principal amount of $20,000,000 made and delivered by the Company to the Lender as of April 28, 2000, and the Amended and Restated Promissory Note in the original principal amount of $21,666,666.67 dated November 27, 2000 made and delivered by the Company to Lender, and nothing contained herein or in the Fourth Amendment to the Credit Agreement dated as of November 27, 2000, shall be construed (a) to deem paid or forgiven the unpaid principal balance of, or unpaid accrued interest on, said Promissory Note outstanding at the time of their renewal and replacement by this Note, or (b) to release, cancel, terminate or otherwise adversely affect all or any part of any lien, mortgage, deed of trust, assignment, security interest or other encumbrance heretofore granted to or for the benefit of the payee of said Promissory Note. Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. HEADS & THREADS INTERNATIONAL LLC BY: -------------------------------- ITS: --------------------------- EXHIBIT 1 SECOND AMENDED AND RESTATED PROMISSORY NOTE $14,000,000 AUGUST 14, 2001 FOR VALUE RECEIVED, the undersigned, HEADS & THREADS INTERNATIONAL LLC, a Delaware limited liability company (the "Company"), hereby promises to pay to the order of FLEET NATIONAL BANK (the "Lender"), the principal sum of Fourteen Million and 00/100 Dollars ($14,000,000) or, if less, the aggregate unpaid principal amount of all sums advanced by the Lender to the Company pursuant to the Credit Agreement, dated as of April 3, 2000, and amended by First Amendment dated April 3, 2000, a Second Amendment dated November 27, 2000, a Third Amendment dated March 19, 2001 and a Fourth Amendment dated August 14, 2001 (such Credit Agreement, as it may be further amended, restated, supplemented or otherwise modified from time to time, being hereinafter called the "Credit Agreement"), among the Company, the Lender, the other banks parties thereto, and AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as agent for the Lenders, on the dates and in the amounts provided in the Credit Agreement (except to the extent sums advanced with respect to Facility Letters of Credit are reimbursed to the Lender by any other Lender (as defined in the Credit Agreement) pursuant to the Credit Agreement). The Company further promises to pay interest on the unpaid principal amount of the Loans (except for the undrawn portions of any Facility Letters of Credit), evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Lender is authorized to endorse the amount and the date on which each Loan is made, the maturity date therefor and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Promissory Note (the "Note"). This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The portion of the principal amount of this Note evidencing outstanding Facility Letters of Credit is the Lender's Pro Rata Share of such amount, as set forth in Schedule 1 of the Credit Agreement, and shall be extinguished by either termination of such Facility Letters of Credit, reimbursement of all amounts paid by the Lender upon such Facility Letters of Credit or payment to the Lender of an amount equal to the amount of all outstanding Facility Letters of Credit pursuant to Section 2.3.9 of the Credit Agreement. This Note is a renewal and replacement of a portion of the Promissory Note in the original principal amount of $40,000,000 made and delivered by the Company to AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO as of April 3, 2000 which portion was assigned to Summit Bank pursuant to an Assignment and Assumption Agreement dated as of April 28, 2000, and the Amended and Restated Promissory Note in the original principal amount of $21,666,666.67 dated November 27, 2000 made and delivered by the Company to Summit Bank, and nothing contained herein or in the Fourth Amendment to the Credit Agreement dated as of August 14, 2001, shall be construed (a) to deem paid or forgiven the unpaid principal balance of, or unpaid accrued interest on, said Promissory Note outstanding at the time of their renewal and replacement by this Note, or (b) to release, cancel, terminate or otherwise adversely affect all or any part of any lien, mortgage, deed of trust, assignment, security interest or other encumbrance heretofore granted to or for the benefit of the payee of said Promissory Note. Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. HEADS & THREADS INTERNATIONAL LLC BY: -------------------------------- ITS: --------------------------- EXHIBIT 1 SECOND AMENDED AND RESTATED PROMISSORY NOTE $14,000,000 AUGUST 14, 2001 FOR VALUE RECEIVED, the undersigned, HEADS & THREADS INTERNATIONAL LLC, a Delaware limited liability company (the "Company"), hereby promises to pay to the order of AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO (the "Lender"), the principal sum of Fourteen Million and 00/100 Dollars ($14,000,000) or, if less, the aggregate unpaid principal amount of all sums advanced by the Lender to the Company pursuant to the Credit Agreement, dated as of April 3, 2000 and amended by First Amendment dated April 3, 2000, a Second Amendment dated November 27, 2000, a Third Amendment dated March 19, 2001 and a Fourth Amendment dated August 14, 2001 (such Credit Agreement, as it may be further amended, restated, supplemented or otherwise modified from time to time, being hereinafter called the "Credit Agreement"), among the Company, the Lender, the other banks parties thereto, and AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as agent for the Lenders, on the dates and in the amounts provided in the Credit Agreement (except to the extent sums advanced with respect to Facility Letters of Credit are reimbursed to the Lender by any other Lender (as defined in the Credit Agreement) pursuant to the Credit Agreement). The Company further promises to pay interest on the unpaid principal amount of the Loans (except for the undrawn portions of any Facility Letters of Credit), evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Lender is authorized to endorse the amount and the date on which each Loan is made, the maturity date therefor and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Promissory Note (the "Note"). This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The portion of the principal amount of this Note evidencing outstanding Facility Letters of Credit is the Lender's Pro Rata Share of such amount, as set forth in Schedule 1 of the Credit Agreement, and shall be extinguished by either termination of such Facility Letters of Credit, reimbursement of all amounts paid by the Lender upon such Facility Letters of Credit or payment to the Lender of an amount equal to the amount of all outstanding Facility Letters of Credit pursuant to Section 2.3.9 of the Credit Agreement. This Note is a renewal and replacement of a portion of the Promissory Note in the original principal amount of $40,000,000 made and delivered by the Company to the Lender as of April 3, 2000, a portion of which was assigned to Summit Bank pursuant to Assignment and Assumption Agreement dated as of April 28, 2000, and the Amended and Restated Promissory Note in the original principal amount of $21,666,666.67 dated November 27, 2000 made and delivered by the Company to Lender, and nothing contained herein or in the Fourth Amendment to the Credit Agreement dated as of August 14, 2001, shall be construed (a) to deem paid or forgiven the unpaid principal balance of, or unpaid accrued interest on, said Promissory Note outstanding at the time of their renewal and replacement by this Note, or (b) to release, cancel, terminate or otherwise adversely affect all or any part of any lien, mortgage, deed of trust, assignment, security interest or other encumbrance heretofore granted to or for the benefit of the payee of said Promissory Note. Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. HEADS & THREADS INTERNATIONAL LLC BY: -------------------------------- ITS: --------------------------- -----END PRIVACY-ENHANCED MESSAGE-----