-----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, V83+Lapc2jhOBSMQYvi/cMvWdBT1cW03rKgOx3/pJoHJoEqJQHgGSmC3dY5KowrK 0BMaM0z/Tm4Q0tV/Orcm1w== 0001047469-98-045052.txt : 19981228 0001047469-98-045052.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-045052 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19981210 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERIOR NATIONAL INSURANCE GROUP INC CENTRAL INDEX KEY: 0000810463 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 954610936 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-25984 FILM NUMBER: 98775462 BUSINESS ADDRESS: STREET 1: 26601 AGOURA RD STREET 2: ` CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188801600 MAIL ADDRESS: STREET 1: 26601 AGOURA ROAD CITY: CALABASAS STATE: CA ZIP: 91302 8-K 1 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K Current Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 December 24, 1998 (December 10, 1998) - ------------------------------------------------------------------------------- Date of Report (Date of earliest event reported) Superior National Insurance Group, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-25984 95-4610936 - ------------------------------------------------------------------------------- (State or other (Commission (I.R.S. Employer jurisdiction File Number) Identification No.) of incorporation) 26601 Agoura Road, Calabasas, California 91302 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (818) 880-1600 ---------------------- - ------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. (a) On December 10, 1998, Superior National Insurance Group, Inc. (the "Registrant") completed the acquisition of Business Insurance Group, Inc., a Delaware corporation ("BIG"), and its wholly-owned subsidiaries: California Compensation Insurance Company, a California corporation ("CalComp"), Business Insurance Company, a Delaware corporation ("BICO"), and Combined Benefits Insurance Company, a California corporation ("CBIC"), pursuant to the terms of a Purchase Agreement entered into on May 5, 1998 (the "Purchase Agreement") by and between Foundation Health Corporation, a Delaware corporation ("FHC"), and the Registrant. In accordance with the terms of the Purchase Agreement, BIG became a wholly owned subsidiary of the Registrant and CalComp, CBIC and BICO became indirect operating subsidiaries of the Registrant (the subsequent sale of BICO is discussed in Item 5 of this Report). Additionally, pursuant to the Purchase Agreement, on December 17, 1998, the Registrant acquired Commercial Compensation Insurance Company, a New York corporation ("CCIC"), from FHC, upon receipt of all required regulatory approvals. CalComp, CBIC, CCIC, and BICO are referred to herein as the "BIG Insurance Subsidiaries." For the sale of its shares of BIG, including the subsequent sale of CCIC (collectively, the "Acquisition"), FHC received total consideration consisting of $285.0 million in cash. ($36.0 million was paid by FHC to provide the Registrant with a $212.5 million Loss Reserves Guarantee obtained through the purchase of reinsurance on behalf of the BIG Insurance Subsidiaries.) Prior to the closing, FHC caused all of BIG's intercompany balances and real estate holdings related to FHC and its parent, Foundation Health Systems, Inc. ("FHS"), and their affiliates, to be settled in cash. FHC contributed an additional $12.6 million in capital to BIG prior to the closing. The Acquisition was funded with (a) senior debt financing in the amount of $110.0 million and (b) equity financing in the amount of $200.1 million. The senior debt financing was obtained pursuant to the terms of a Credit Agreement dated as of December 10, 1998, among the Registrant, The Chase Manhattan Bank, as Administrative Agent, and various lending institutions. In addition, the Registrant obtained a working capital credit facility under the terms of the Credit Agreement, and had $15.0 million in unused availability as of the date of this Report. Prior to incurring the indebtedness, the Registrant obtained the consent of holders of the outstanding 10 3/4% Trust Preferred Securities of the Registrant's subsidiary, Superior National Capital Trust I, a Delaware statutory trust (the "Trust"), authorizing the Preferred Trustee of the Trust to waive a provision of the covenant limiting the incurrence of indebtedness set forth in the Senior Subordinated Indenture dated as of December 3, 1997 between the Registrant, as issuer, and Wilmington Trust Company, as trustee. This waiver was effected pursuant to the First Supplemental Indenture, dated as of November 17, 1998, between the Registrant and the Wilmington Trust Company, as trustee. The equity financing was obtained pursuant to (a) the sale of 1,902,233 shares of the Registrant's Common Stock ("Common Stock") for $31.9 million, in connection with the 2 exercise of subscription rights ("Rights") to purchase Common Stock distributed to existing stockholders (other than Insurance Partners, L.P. ("IP Delaware") and Insurance Partners Offshore (Bermuda), L.P. ("IP Bermuda")) and warrant holders (the "Rights Offering"), (b) the sale of 620,610 shares of Common Stock for $10.4 million, all paid in the form of promissory notes in favor of the Registrant, in connection with the Rights Offering to holders of the Registrant's stock options and restricted Common Stock (the "Employee Participation") and (c) the private placement (the "IP Stock Issuance") pursuant to the Stock Purchase Agreement (as defined below) of (i) 5,276,960 shares of Common Stock for $88.4 million to Capital Z Financial Services Fund II, L.P. ("IP II"), (ii) 2,949,594 shares of Common Stock for $49.4 million to IP Delaware and (iii) 1,196,588 shares of Common Stock for $20.0 million to IP Bermuda. All of the shares were sold at $16.75 per share. Employees purchasing Common Stock included William L. Gentz and J. Chris Seaman, who are directors and executive officers of the Registrant. Prior to the consummation of the Acquisition, IP Delaware and IP Bermuda beneficially owned approximately 23% and 13%, respectively, of the then outstanding shares of Common Stock. IP II owned no shares of Common Stock prior to the consummation of the Acquisition. Robert A. Spass, Steven B. Gruber and Bradley E. Cooper, directors of the Registrant, own certain direct and indirect limited partnership interests in IP Delaware and IP Bermuda. Messrs. Gruber and Spass are officers of the ultimate general partners of IP Delaware and IP Bermuda and Messrs. Spass and Cooper are officers of Capital Z Partners, Ltd. ("Cap Z"), the ultimate general partner of IP II. Certain members of the Registrant's management are investors in an investment fund that is a limited partner of IP II. Pursuant to the terms of the Stock Purchase Agreement dated as of May 5, 1998 (the "Stock Purchase Agreement") among the Registrant and IP Delaware, IP Bermuda and Cap Z (Cap Z subsequently assigned its rights and obligations thereunder to IP II) (collectively, the "Purchasers"), the Registrant agreed to pay a commitment fee in the form of warrants to purchase an aggregate of 734,000 shares of Common Stock at $16.75 per share to the Purchasers or their designees (or, in the case of Cap Z, assignee) and Zurich Centre Investments Limited ("ZCIL") or its designee as compensation, in the case of the Purchasers, for agreeing to purchase that number of shares necessary to bring the total proceeds of the Rights Offering, Employee Participation and the IP Stock Issuance to $200.0 million, and, in the case of ZCIL, for ZCIL's providing certain financing commitments to the Purchasers under the Stock Purchase Agreement. The Registrant paid this commitment fee through the issuance of (a) 229,754 warrants to Insurance Partners Advisors, Inc., the designee of IP Delaware, (b) 93,206 warrants to Insurance Partners Advisors, Inc., the designee of IP Bermuda, (c) 205,520 warrants to Zurich Centre Group Holdings Limited ("Zurich"), the successor-in-interest to ZCIL, and (d) 205,520 warrants to various Cap Z employees as assigned by Cap Z. Robert A. Spass and Bradley E. Cooper, who are directors of the Registrant and officers of Cap Z, were designated to receive 32,825 warrants and 16,413 warrants, respectively, by Cap Z. Steven B. Gruber and Robert A. Spass, directors of the Registrant, are executive officers of Insurance Partners Advisors, Inc. In addition, the Registrant paid to designees of the Purchasers fees totaling $3.9 million in consideration of their 3 providing the Registrant with the opportunity to undertake the Acquisition, originating a portion of the financing for the Acquisition and assisting in negotiating the terms of the Acquisition. The purchase price and other terms of the Acquisition were negotiated by means of arm's length bargaining among the parties over a period of approximately four weeks by representatives of the Registrant and FHC and approved by the boards of directors of both parties. The GAAP book value of BIG was not a significant factor in the Registrant's proposal to purchase BIG, although the Registrant relied very heavily on the book value determined under statutory accounting principles to arrive at the purchase price it was willing to pay. The Registrant adopted this position because, in the insurance industry, statutory book value, or multiples thereof, have historically been the basis upon which acquisitions occur. The Registrant concluded that BIG, because it was operating at a loss in 1997, in a line of business generally viewed as unattractive, was worth 100 percent or less of statutory book value. The Registrant also concluded that FHC was a motivated seller, FHC's parent, FHS, had stated its intention to divest itself of risk bearing activities that were not part of FHS' core operations. FHS had, in fact, discontinued its workers' compensation insurance operations and announced its intention to sell those operations prior to engaging in sale negotiations with the Registrant. Based on published accounts of the sale of BIG, and news associated with FHS, it appeared to the Registrant that a prompt sale of BIG was a key issue for FHS. Under these circumstances, FHS was apparently motivated to accept a purchase price below GAAP book value, and approximating statutory book value, to assure the timely disposition of its discontinued operations. In addition, the Registrant believed the fundamentals of BIG's business deteriorated temporarily, but significantly after FHS announced its intention to discontinue its workers' compensation operations. The BIG Insurance Subsidiaries received a downgrade from a major rating agency, BIG's non-California operations received inquiries from certain state insurance regulators due to the failure of one of the BIG Insurance Subsidiaries to be within the usual range of six regulatory financial ratio tests run using the 1997 statutory annual statement, and there was a substantial amount of negative publicity associated with FHS' withdrawal from the workers' compensation insurance market. Furthermore, in early 1998, BIG adopted a premium pricing strategy that, in the Registrant's view, was resulting in a significant decline in BIG's direct premium written. All of the above contributed to a temporary, but nonetheless real, decline in the intangible value of the BIG franchise, which decline the Registrant took into account in the determination of the purchase price. Prior to the Acquisition, there was no material relationship between any of FHS, FHC, BIG, CalComp, CBIC, CCIC, BICO (including their officers, directors and stockholders) and the Registrant or any of its affiliates, any director or officer of the Registrant or any associate of any such officer or director. (b) BIG is a holding company that, through its subsidiaries, writes workers' compensation and group health insurance, principally in California, with branch operations throughout the continental United States. BIG operated 16 regional offices and 21 branch offices 4 which the Registrant expects to continue to operate in substantially the same manner as operated prior to the Acquisition under their existing names. 5 ITEM 5. OTHER EVENTS On December 10, 1998, immediately following the consummation of the Acquisition, the Registrant filed its Amended and Restated Certificate of Incorporation with the Delaware Secretary of State, which (i) increased the total number of authorized shares of Common Stock from 25 million to 40 million and (ii) removed transfer restrictions on Common Stock that related to the Registrant's net operating loss carryforwards for federal income tax purposes. On December 18, 1998, the Registrant completed the sale of BICO to Centre Solutions Holdings (Delaware) Limited ("Holdings") pursuant to a Purchase Agreement dated December 7, 1998 (the "BICO Purchase Agreement") between Holdings and the Registrant for a purchase price of approximately $11.7 million. An additional $600,000 was withheld by Holdings and, subject to possible downward adjustments specified in the BICO Purchase Agreement, will be paid to the Registrant on September 18, 1999 (or such sooner time as specified in the BICO Purchase Agreement). Prior to the sale of BICO, under the terms of the Loss Portfolio Transfer and 100% Quota Share Reinsurance Contract between BICO and CalComp, CalComp assumed BICO's insurance business (excluding BICO's licenses and statutory capital) and liabilities, and received assets with a fair market value equal to the liabilities assumed. The BICO purchase price was arrived at by means of arm's length bargaining among the parties to the BICO Purchase Agreement. Holdings is an affiliate Zurich and Zurich is the owner of CentreLine Reinsurance Limited and Centre Solutions (Bermuda) Limited, both of which have made investments in the Registrant. In addition, several affiliates of Zurich are significant investors in some of the IP partnerships. As discussed in Item 2 above, IP Delaware, IP Bermuda and IP II provided a portion of the equity financing for the Acquisition. Prior to the Acquisition, BIG and the BIG Insurance Subsidiaries completed the following transactions: (1) A sale leaseback agreement with BancBoston Leasing, Inc. pursuant to which BancBoston Leasing, Inc. acquired certain of the BIG Insurance Subsidiaries information systems and related assets for approximately $8.4 million, and BIG and the BIG Insurance Subsidiaries agreed to leaseback such assets. This lease agreement has a one year minimum term and is renewable from year to year thereafter. (2) A Receivables Purchase and Sale Agreement dated as of December 9, 1998 among the BIG Insurance Subsidiaries and Insurance Funding LLC pursuant to which the BIG Insurance Subsidiaries sold approximately $67.1 million in certain premium and reinsurance 6 receivables and received proceeds of approximately $62.8 million in cash with 5.5% or $3.7 million of the receivables sold held in reserve pending collection of the receivables. In addition, the Registrant entered into a Support Agreement and Receivables Purchase Agreement, each of which are dated as of December 9, 1998, pursuant to which the Registrant agreed to certain matters related to the sale of such receivables, including, among other things, the servicing and administering of those receivables. (3) On December 9, 1998, the BIG Insurance Subsidiaries agreed with General Re Insurance Corporation ("Gen Re") to commute outstanding reinsurance contracts, effective on that date. Upon the commutation, Gen Re paid $99.7 million to the BIG Insurance Subsidiaries, and the BIG Insurance Subsidiaries re-assumed loss and loss adjustment expense reserves of $119.4 million. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The financial statements of BIG required to be filed as part of this Report were filed with the Securities and Exchange Commission (the "SEC") on November 4, 1998 as part of the Registrant's Amendment No. 3 to Form S-1 on Form S-3 Registration Statement (Registration No. 333-58579) for the periods ended December 31, 1995, 1996 and 1997 and as of December 31, 1996 and 1997 located at pages F-53 to F-73, and as part of the Registrant's Form 10-Q filed with the SEC for the quarterly period ended September 30, 1998 and as of September 30, 1998 located at pages 22 to 30, and are incorporated herein by this reference. (b) PRO FORMA FINANCIAL INFORMATION. The pro forma financial information required to be filed as part of this Report will be filed, by amendment, within 60 days of the date of this report. 7 (c) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.3 Purchase Agreement dated as of May 5, 1998 by and between FHC and the Registrant. (1) 2.4 Purchase Agreement dated as of December 7, 1998 between Holdings and the Registrant. 3.1 Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. 4.7 First Supplemental Indenture dated as of November 17, 1998 between the Registrant and Wilmington Trust Company, as Trustee. 10.64 Stock Purchase Agreement dated as of May 5, 1998 among the Registrant, IP Delaware, IP Bermuda and Cap Z. (1) 10.65 Form of Common Stock Purchase Warrant dated as of December 10, 1998 held by those parties set forth on the schedule attached hereto, to purchase an aggregate of 734,000 shares of Common Stock. 10.66 Amended and Restated Registration Rights Agreement dated December 10, 1998 among the Registrant, IP Delaware, IP Bermuda and IP II. 10.67 Credit Agreement dated as of December 10, 1998 (the "Credit Agreement") among the Registrant, various lending institutions and The Chase Manhattan Bank. 10.68 Subsidiary Guaranty dated as of December 10, 1998 made by certain subsidiaries of the Registrant in connection with the Credit Agreement. 10.69 Pledge Agreement dated as of December 10, 1998 made by the Registrant and certain subsidiaries of the Registrant in connection with the Credit Agreement. 10.70 Receivables Purchase and Sale Agreement dated as of December 9, 1998 among CalComp, CBIC, CCIC, BICO and Insurance Funding LLC. 10.71 Support Agreement dated as of December 9, 1998 by the Registrant in favor of Insurance Funding LLC, EagleFunding Capital Corporation and BancBoston Robertson Stephens, Inc. 10.72 Receivables Purchase Agreement dated as of December 9, 1998 among Insurance Funding LLC, EagleFunding Capital Corporation, BancBoston Robertson Stephens, Inc. and the Regsitrant. 10.73 Loss Portfolio Transfer and 100% Quota Share Reinsurance Contract between BICO and CalComp. 10.74 Aggregate Excess of Loss Reinsurance Agreement, dated as of September 3, 1998, between Inter-Ocean Reinsurance Company Ltd. and BIG acting solely on behalf of the following subsidiaries: CalComp, BICO, CBIC and CCIC. 23.1 Consent of Deloitte & Touche LLP. 99.1 Press Release dated December 10, 1998. 99.2 Press Release dated December 18, 1998.
8 ____________________ (1) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as filed with the SEC on May 15, 1998. 9 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 hereunto duly authorized. Date: December 24, 1998 SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ J. CHRIS SEAMAN ---------------------------------------------------- J. Chris Seaman Executive Vice President and Chief Financial Officer 10 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------- ----------- 2.3 Purchase Agreement dated as of May 5, 1998 by and between FHC and the Registrant. (1) 2.4 Purchase Agreement dated as of December 7, 1998 between Holdings and the Registrant. 3.1 Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. 4.7 First Supplemental Indenture dated as of November 17, 1998 between the Registrant and Wilmington Trust Company, as Trustee. 10.64 Stock Purchase Agreement dated as of May 5, 1998 among the Registrant, IP Delaware, IP Bermuda and Cap Z. (1) 10.65 Form of Common Stock Purchase Warrant dated as of December 10, 1998 held by those parties set forth on the schedule attached hereto, to purchase an aggregate of 734,000 shares of Common Stock. 10.66 Amended and Restated Registration Rights Agreement dated December 10, 1998 among the Registrant, IP Delaware, IP Bermuda and IP II. 10.67 Credit Agreement dated as of December 10, 1998 (the "Credit Agreement") among the Registrant, various lending institutions and The Chase Manhattan Bank. 10.68 Subsidiary Guaranty dated as of December 10, 1998 made by certain subsidiaries of the Registrant in connection with the Credit Agreement. 10.69 Pledge Agreement dated as of December 10, 1998 made by the Registrant and certain subsidiaries of the Registrant in connection with the Credit Agreement. 10.70 Receivables Purchase and Sale Agreement dated as of December 9, 1998 among CalComp, CBIC, CCIC, BICO and Insurance Funding LLC. 10.71 Support Agreement dated as of December 9, 1998 by the Registrant in favor of Insurance Funding LLC, EagleFunding Capital Corporation and BancBoston Robertson Stephens, Inc. 10.72 Receivables Purchase Agreement dated as of December 9, 1998 among Insurance Funding LLC, EagleFunding Capital Corporation, BancBoston Robertson Stephens, Inc. and the Regsitrant. 10.73 Loss Portfolio Transfer and 100% Quota Share Reinsurance Contract between BICO and CalComp. 10.74 Aggregate Excess of Loss Reinsurance Agreement, dated as of September 3, 1998, between Inter-Ocean Reinsurance Company Ltd. and BIG acting solely on behalf of the following subsidiaries: CalComp, BICO, CBIC and CCIC. 23.1 Consent of Deloitte & Touche LLP. 99.1 Press Release dated December 10, 1998. 99.2 Press Release dated December 18, 1998.
___________________ (1) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as filed with the SEC on May 15, 1998. EX-2.4 2 EXHIBIT 2.4 PURCHASE AGREEMENT by and between CENTRE SOLUTIONS HOLDINGS (DELAWARE) LIMITED and SUPERIOR NATIONAL INSURANCE GROUP, INC. December 7, 1998 TABLE OF CONTENTS
PAGE ARTICLE I. PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 1.1 PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 1.2 PURCHASE PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 1.3 CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SELLER AND BIG . . . . . . . . . . . . . . 4 SECTION 2.1 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.2 AUTHORIZATION; VALIDITY OF AGREEMENT. . . . . . . . . . . . . . . . . . 5 SECTION 2.3 CONSENTS AND APPROVALS; NO VIOLATIONS . . . . . . . . . . . . . . . . . 5 SECTION 2.4 CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.5 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.6 NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS . . . . . . . . . . . . . . 6 SECTION 2.7 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.8 BROKERS OR FINDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.9 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2.10 EMPLOYMENT MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . .11 SECTION 2.11 NO LIABILITY FOR EMPLOYEE BENEFIT PLANS, ETC. . . . . . . . . . . . . .12 SECTION 2.12 INTELLECTUAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . .12 SECTION 2.13 NO UNDISCLOSED LIABILITIES. . . . . . . . . . . . . . . . . . . . . . .13 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . . . . . . . .13 SECTION 3.1 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 SECTION 3.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION. . . . . . . . .13 SECTION 3.3 CONSENTS AND APPROVALS; NO VIOLATIONS . . . . . . . . . . . . . . . . .13 SECTION 3.4 ACQUISITION FOR INVESTMENT. . . . . . . . . . . . . . . . . . . . . . .14 ARTICLE IV. COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 4.1 ACCESS TO INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 4.2 PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 4.3 TAX INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 4.4 APPROVALS AND CONSENTS; COOPERATION; NOTIFICATION . . . . . . . . . . .17 SECTION 4.5 NO SOLICITATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 4.6 TERMINATION AND RELEASE . . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 4.7 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 4.8 SELLER'S ENVIRONMENTAL INDEMNITIES. . . . . . . . . . . . . . . . . . .19 SECTION 4.9 CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . .19 SECTION 4.10 NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . .19 SECTION 4.11 NOTICE AND CURE . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 4.12 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 4.13 REINSURANCE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . .21 SECTION 4.14 BICO LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .21 SECTION 4.15 OPERATIONS INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . .21 SECTION 4.16 MANAGED CARE REPLACEMENT AGREEMENT. . . . . . . . . . . . . . . . . . .21 SECTION 4.17 INDEMNIFICATION FOR EMPLOYEE MATTERS LIABILITIES. . . . . . . . . . . .22 i ARTICLE V. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 5.1 INDEMNIFICATION BY SELLER . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 5.2 INDEMNIFICATION BY PURCHASER. . . . . . . . . . . . . . . . . . . . . .23 SECTION 5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . .23 SECTION 5.4 NOTICE AND OPPORTUNITY TO DEFEND. . . . . . . . . . . . . . . . . . . .24 SECTION 5.5 ADJUSTMENT FOR INSURANCE AND TAXES. . . . . . . . . . . . . . . . . . .24 SECTION 5.6 MITIGATION OF LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 5.7 SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 5.8 TAX INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 5.9 SET-OFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 5.10 EXCLUSIVE REMEDY. . . . . . . . . . . . . . . . . . . . . . . . . . . .25 ARTICLE VI. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE CLOSING . . . . . .26 SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. . . . . . . . . . . . . . .26 SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF SELLER . . . . . . . . . . . . . . . .29 ARTICLE VII. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 7.1 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 7.2 PROCEDURE AND EFFECT OF TERMINATION . . . . . . . . . . . . . . . . . .30 ARTICLE VIII. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 8.1 GOVERNING LAWS AND CONSENT TO JURISDICTION. . . . . . . . . . . . . . .31 SECTION 8.2 AMENDMENT AND MODIFICATION. . . . . . . . . . . . . . . . . . . . . . .32 SECTION 8.3 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 SECTION 8.4 INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 SECTION 8.5 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 8.6 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . .34 SECTION 8.7 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 8.8 SPECIFIC PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 8.9 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 8.10 EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 8.11 WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 SECTION 8.12 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
ii PURCHASE AGREEMENT PURCHASE AGREEMENT, dated as of December 7, 1998 (this "AGREEMENT"), by and between Centre Solutions Holdings (Delaware) Limited, a holding company incorporated in the State of Delaware ("PURCHASER") and Superior National Insurance Group, Inc., a Delaware corporation ("SELLER"). WHEREAS, Seller and Foundation Health Corporation ("FHC") have entered into that certain Purchase Agreement dated as of May 5, 1998 (the "ACQUISITION AGREEMENT"), pursuant to which Seller will indirectly acquire from FHC, among other things, all of the issued and outstanding shares of capital stock of Business Insurance Group, Inc., a Delaware corporation ("BIG") and BIG's insurance company subsidiaries, including by and between Centre Solutions Holdings (Delaware) Limited, a holding company incorporated in the State of Delaware ("PURCHASER") and Superior National Insurance Group, Inc., a Delaware corporation ("SELLER"). WHEREAS, Purchaser desires to purchase from Seller, and Seller desires to cause to be sold to Purchaser, all of the issued and outstanding shares of capital stock of BICO (the "SHARES") immediately after the closing of the transactions contemplated by the Acquisition Agreement; WHEREAS, Seller intends, immediately prior to the Closing (as hereinafter defined), to cause BICO to transfer all of its assets, liabilities, employees and business operations to one or more Affiliates (as hereinafter defined) of Seller so that upon the Closing, BICO will have only the Licenses (as hereinafter defined), the Surviving Contracts (as defined in Section 6.2(a)(iv)), and certain other assets and liabilities specified herein; and WHEREAS, prior to or simultaneous with the Closing, in furtherance of the foregoing and in order to assure continuity of the underwriting of certain non-California and non-Arizona business presently underwritten by BICO, the rights to which Seller will have acquired by its acquisition of BICO, the Underwriting Management Agreement, the Quota Share Reinsurance Agreement, the Loss Portfolio Transfer Agreement and the Claims Administration Services Agreement (each as hereinafter defined, each of which is sometimes hereinafter referred to as a "PROGRAM AGREEMENT" and collectively as the "PROGRAM AGREEMENTS") shall be executed and delivered. NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound hereby, agree as follows: ARTICLE I. PURCHASE AND SALE SECTION 1.1 PURCHASE AND SALE. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Seller shall sell, assign, transfer and deliver, or cause BIG to sell, assign, transfer and deliver to Purchaser, and Purchaser shall purchase from Seller or BIG, the Shares, free and clear of all options, pledges, mortgages, security interests, liens, claims, rights of first refusal, leases, transfer restrictions under any shareholder or similar agreement, or other encumbrances or restrictions on voting or transfer of any kind whatsoever ("ENCUMBRANCES"), other than restrictions imposed by federal or state securities laws, and free from any and all defects in title. SECTION 1.2 PURCHASE PRICE. (a) On the Closing Date (as hereinafter defined) and subject to the terms and conditions set forth in this Agreement, Seller shall deliver or cause to be delivered a certificate or certificates representing the Shares duly endorsed in blank or accompanied by a stock power or stock powers duly executed in blank and, in consideration of the sale, assignment, transfer and delivery of the Shares, Purchaser shall pay to Seller an amount (the "PURCHASE PRICE") equal to the sum of (i) Five million Dollars ($5,000,000), plus (ii) the Adjustment Amount, as defined below, plus (iii) an amount equal to the Net Statutory Amount. The term "NET STATUTORY AMOUNT" shall mean the amount resulting from the subtraction of the Excluded Statutory Amount, as hereinafter defined, from the BICO Statutory Amount, as hereinafter defined. The term "BICO STATUTORY AMOUNT" shall mean the amount of the statutory capital and surplus of BICO at and as of the Closing Date, which amount shall not materially exceed the minimum statutory or regulatory amount (the "MINIMUM STATUTORY AMOUNT") required to preserve and maintain in effect the Licenses (as hereinafter defined). The term "EXCLUDED STATUTORY AMOUNT" shall mean the amount equal to the statutory deposits (the "EXCLUDED DEPOSITS") that would be listed on Schedule E, Part 2 of BICO's Annual Statement, with respect to the States listed on EXHIBIT 1.2, attached hereto and hereby incorporated by reference, if such deposits were calculated as of the Closing Date. Seller and Purchaser shall use commercially reasonable efforts to obtain from the applicable state regulatory authorities' permission to release the Excluded Deposits as promptly as reasonably practicable on or following the Closing Date. Upon such release, Purchaser shall transfer to the Seller the Excluded Deposits. (b) The amount to be paid by Purchaser pursuant to clause (iii) above shall be determined in accordance with statutory accounting practices prescribed or permitted by the Department of Insurance of the State of Delaware, consistently applied. It is understood that at and as of the Closing Date, BICO shall have a statutory capital and surplus in an amount not less than the Minimum Statutory Amount. Notwithstanding the foregoing, and without limiting Purchaser's rights under Article V hereof, the Purchaser shall pay to Seller, as an adjustment to the Purchase Price, the Adjustment Amount, as defined below, on the date nine (9) months following the Closing, or such sooner time as the parties hereto may confirm that the Licenses (as defined in Section 2.1, below) are without lapse, suspension, termination, adverse modification and/or limitation (the "ADJUSTMENT PERIOD"). For purposes of this Agreement the 2 term "ADJUSTMENT AMOUNT" shall mean Six Hundred Thousand Dollars ($600,000), as such amount may be reduced pursuant to this Section 1.2(b). In the event that prior to the expiration of the Adjustment Period, any of the Licenses lapse or are suspended, adversely modified, limited and/or terminated, and are not reinstated in full prior to the expiration of the Adjustment Period (or, with respect to the limitations disclosed in Schedule 2.1(a) on the Licenses for the states of Minnesota and North Carolina, and notwithstanding any such disclosure in Schedule 2.1(a), any of such Licenses are not reinstated in full prior to the expiration of the Adjustment Period), then the Adjustment Amount shall be reduced by $100,000 per jurisdiction in which such lapse, suspension termination, adverse modification and/or limitation is effective (or, with respect to the Licenses for the states of Minnesota and North Carolina, per jurisdiction in which any of such Licenses are not reinstated in full). The parties understand and agree that Purchaser does not intend to acquire, and will not acquire, and that BICO will not continue to employ on or after the Closing Date, any of the employees or officers of BICO. As such, the Purchase Price does not contemplate Purchaser's acquisition of any employees or officers of BICO, nor does this Agreement obligate in any way whatsoever Purchaser or BICO to be responsible for any payroll, benefits, severance, pensions or other employee related costs or obligations with respect to any employees or officers of BICO. SECTION 1.3 CLOSING. (a) The sale and purchase of the Shares contemplated by this Agreement shall take place at a closing (the "CLOSING") to be held at the offices of Riordan & McKinzie in Los Angeles as promptly as possible after the consummation of the transactions contemplated by the Acquisition Agreement, but in no event later than December 31, 1998, or at such other place or at such other time or on such other date as Seller and Purchaser may mutually agree in writing (the day on which the Closing takes place being the "CLOSING DATE"). (b) At the Closing, Seller shall deliver or cause to be delivered to Purchaser (i) a stock certificate or stock certificates evidencing the Shares duly endorsed in blank or accompanied by a stock power or stock powers, duly executed in blank, (ii) an original Underwriting Management Agreement, as hereinafter defined, duly executed by SN Insurance Services, Inc. ("SNIS") and BICO, (iii) an original Quota Share Reinsurance Agreement, as hereinafter defined, duly executed by California Compensation Insurance Company ("CALCOMP") and BICO, (iv) an original Loss Portfolio Transfer Agreement, as hereinafter defined, duly executed by CalComp and BICO, (v) an original Claims Administration Services Agreement, as hereinafter defined, duly executed by a designee of Seller (reasonably acceptable to Purchaser), and BICO, (vi) evidence of termination or assumption by Seller and/or any Affiliates thereof of any and all Contracts by which BICO or any of its assets are bound (other than the Surviving Contracts), (vii) all books and records of BICO (it being understood and agreed that if, at any time after the Closing, Seller discovers in its possession or under its control any other books and records of BICO, Seller will forthwith deliver such books and records to Purchaser), (viii) certified copies of resolutions duly adopted by the Boards of Directors of Seller, BIG and/or BICO, as the case may be, authorizing and approving the execution, delivery and performance of this Agreement and each other agreement required to be executed and delivered by Seller, BIG and/or BICO pursuant to this Agreement, (ix) certified complete and correct copies of the Amended and Restated Certificate of Incorporation and bylaws of BICO, as in effect on the Closing Date, and (x) all other previously undelivered certificates and other 3 documents required to be delivered by Seller to Purchaser at or prior to the Closing Date in connection with the transactions contemplated hereby. (c) At the Closing, Purchaser shall deliver to Seller: (i) the Purchase Price (not including the Adjustment Amount, as defined below) by wire transfer in immediately available funds to an account or accounts designated by Seller, (ii) certified copies of resolutions duly adopted by the Board of Directors of Purchaser authorizing and approving the execution, delivery and performance of this Agreement, and each other agreement required to be executed and delivered by Purchaser pursuant to this Agreement, and (iii) all other previously undelivered certificates and other documents required to be delivered by Purchaser to Seller at or prior to the Closing Date in connection with the transactions contemplated hereby. (d) At the Closing, Seller shall assign, convey and transfer to the Purchaser, and Seller shall cause BIG to assign, convey and transfer to the Purchaser their respective entire right (including the right to seek remedies for past infringements and to retain any proceeds recovered in such suit), title and interest in and to all trade names, service marks and trademarks, whether registered or unregistered, of BICO, throughout the world (including all applications for registration, registrations, extensions, reissues and renewals thereof.) (e) Notwithstanding anything to the contrary in this Agreement, Seller and/or BIG, and not Purchaser or BICO, shall be responsible and shall retain any and all liability for (i) all compensation, benefits, and perquisites of any kind due any person on account of employment by BICO at any time or times prior to the Closing Date, or the termination of employment of any such person by Seller, BICO and/or BIG, including, but not limited to, medical or dental benefits either reported but not paid or incurred but not reported prior to the Closing Date and continuation of health care coverage pursuant to COBRA; and (ii) all notices, payments, fines, taxes or assessments due to any Governmental Entity pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of employees of BICO by Seller, BICO and/or BIG for any period prior to the Closing Date, including, but not limited to, the WARN Act and any applicable state severance pay law and any rules or regulations that have been issued in connection with any of the foregoing. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SELLER AND BIG Seller, on its own behalf and on behalf of BIG, represents and warrants to Purchaser as follows: SECTION 2.1 ORGANIZATION. Each of Seller and BICO is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller has delivered to Purchaser a complete and correct copy of the Amended and Restated Certificate of Incorporation and bylaws of BICO, as in effect on the date hereof. Except as set forth in Schedule 2.1(a), the licenses, certificates of authority, authorizations, government approvals, orders, registrations, qualifications, consents and permits and filings, all of which are described 4 in Schedule 2.1(b) (collectively, the "LICENSES") are valid, binding and in full force and effect and in good standing in all respects (it being acknowledged by the parties that certain notifications to regulatory authorities may be required following a change in control of BICO). Schedule 2.1(b) lists all jurisdictions in which BICO is currently authorized to transact the business of insurance and/or reinsurance and maintains a valid License from the applicable insurance department to transact insurance and/or reinsurance business, along with a description of the scope, by line of business, of BICO's Licenses in each such jurisdiction. Except as set forth in Schedule 2.1(a), no such License is the subject of a proceeding for suspension, revocation or limitation or any similar proceedings and, to the knowledge of Seller, there is no pending threat of such suspension, revocation or limitation or any similar proceedings by any Governmental Entity, as defined below. To the Seller's knowledge, except for compliance with periodic renewal procedures, no approvals or authorizations are required to permit BICO to continue to conduct its business as presently conducted following the Closing. SECTION 2.2 AUTHORIZATION; VALIDITY OF AGREEMENT. Seller has the power and authority to execute and deliver this Agreement and all of the agreements and documents contemplated hereby, to carry out its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Seller of this Agreement and all of the agreements and documents contemplated hereby, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by Seller by all necessary corporate action and no other corporate action on the part of Seller is necessary to authorize the execution and delivery by Seller of this Agreement and all agreements and documents contemplated hereby and thereby and the consummation by it of the transactions contemplated hereby and thereby. This Agreement and each of the agreements and documents contemplated hereby has been duly executed and delivered by Seller, and (assuming due and valid authorization, execution and delivery hereof and thereof by Purchaser and each other party thereto other than Seller) is a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect affecting creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. SECTION 2.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as contemplated by the Acquisition Agreement and except for (a) approvals or consents of any court, arbitration panel or tribunal, legislative, executive or regulatory authority or agency (each a "GOVERNMENTAL ENTITY" and collectively the "GOVERNMENTAL ENTITIES") under applicable insurance laws of each of the jurisdictions listed in Schedule 2.1(b) or as may be otherwise required by law, (b) applicable requirements under corporation or "blue sky" laws of various states and (c) matters specifically described in this Agreement, neither the execution, delivery or performance of this Agreement or any agreement or document contemplated hereby by Seller nor the consummation by Seller of the transactions contemplated hereby or thereby will (i) violate any provision of the certificate of incorporation, bylaws or other organizational documents of Seller or BICO, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, or result in the creation of any lien, security interest, charge or encumbrances upon any of the properties or assets of BICO under (or result in being declared void, voidable or without further binding 5 effect) any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, License, contract, agreement or other instrument, commitment or obligation to which BICO is a party or by which BICO or any of its properties or assets may be bound, (iii) violate any order, writ, judgment, injunction, decree, law, statute, rule or regulation applicable to Seller or BICO, (iv) require on the part of Seller or BICO any filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity or (v) result in a termination, loss or adverse modification or limitation of any License, except in the case of clauses (iii), (iv) and (v), for such violations, breaches, defaults or other events specified therein, which, or filings, registrations, notifications, authorizations, consents or approvals the failure of which to obtain, would not adversely affect the ability of Seller to consummate the transactions contemplated by this Agreement or become applicable as a result of the business or activities in which Purchaser is or proposes to be engaged (to the extent, and only to the extent, that such business or activities differ from the business or activities engaged in by BICO prior to the Closing Date), or as a result of any acts or omissions by Purchaser (other than acts or omissions resulting from a breach by Seller of any of the representations, warranties and/or covenants of Seller in this Agreement). SECTION 2.4 CAPITALIZATION. Schedule 2.4 sets forth the authorized, issued and outstanding capital stock of BICO. The Shares constitute all of the issued and outstanding shares of capital stock of BICO. All of the Shares are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights, with no defects of title. There are no existing (i) options, warrants, calls, subscriptions or other rights, convertible securities, agreements or commitments of any character obligating BICO to issue, transfer or sell any shares of capital stock or other equity interest in BICO or securities convertible into or exchangeable for such shares or equity interests, (ii) contractual or other obligations of BICO to repurchase, redeem or otherwise acquire any capital stock of BICO or (iii) voting trusts or similar agreements or understandings to which Seller or BICO is a party with respect to the voting of the capital stock of BICO. SECTION 2.5 LITIGATION. Except as disclosed in Schedule 2.5, there is no action, suit, proceeding (or, to the knowledge of Seller or BICO, investigation) pending, or to the knowledge of Seller or BICO, action, suit, proceeding or investigation threatened, involving Seller or BICO or any of their respective officers or directors as such, or any of BICO's assets, including without limitation, any of the Licenses, nor is there any action, suit, proceeding (or, to the knowledge of Seller or BICO, investigation) pending, or to the knowledge of Seller or BICO, action, suit, proceeding or investigation threatened, challenging the validity or propriety of the transactions contemplated by this Agreement, by or before any Governmental Entity or by any third party that is reasonably likely to adversely affect the ability of Seller to consummate the transactions contemplated by this Agreement or contemplated by the Acquisition Agreement that relate to this Agreement. Except as disclosed in Schedule 2.5, no material orders, decrees, awards, sanctions or judgments exist against Seller or BICO or any of their respective officers or directors, as such, other than those applicable to the industry as a whole in the jurisdiction where issued. SECTION 2.6 NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed in Schedule 2.6, neither Seller nor BICO is in default or violation of any term, condition or provision of its certificate of incorporation or bylaws, or, with respect to BICO only, (i) any License or (ii) statute, law, rule, regulation, judgment, decree, order or arbitration award 6 applicable to BICO, excluding from this clause (ii), defaults or violations which would not adversely affect the ability of Seller to consummate the transactions contemplated by this Agreement or which become applicable as a result of the business or activities in which Purchaser is or proposes to be engaged (to the extent, and only to the extent, that such business or activities differ from the business or activities engaged in by BICO prior to the Closing Date), or as a result of any acts or omissions by Purchaser (other than acts or omissions resulting from a breach by Seller of any of the representations, warranties and/or covenants of Seller in this Agreement), or the status of any facts pertaining to, Purchaser. Except as set forth on Schedule 2.6, neither Seller nor BICO has received any written notice since December 31, 1995 from any Governmental Entity alleging any violation described in clause (ii) (without giving effect to the exclusions referenced therein) or directing BICO to take any remedial action with respect to such law, ordinance or regulation which, in each case, would materially adversely affect the ability of Seller to consummate the transactions contemplated by this Agreement. SECTION 2.7 TAXES. To the knowledge of Seller and except as disclosed in Schedule 2.7 and the federal waiver given by BICO in connection with the federal income tax examination which is currently in process for the tax years disclosed on Schedule 2.7(c) and the related automatic extensions which result under state law from the execution of such federal waiver: (a) BICO is taxable as an insurance company. BICO has filed, within the time and manner prescribed by law, all material returns, material information statements and material reports (including schedules attached to any of the foregoing) required to be filed with or supplied to a Tax Authority (hereinafter defined) with respect to Taxes (hereinafter defined) (collectively, "TAX RETURNS"). All such Tax Returns were correct and complete in all material respects. All federal, state, local or foreign income, capital gains, profits, premium, gross receipts, payroll, capital stock, franchise, employment, withholding, social security, unemployment, disability, real property, personal property, stamp, excise, occupation, sales, use, transfer, mining, value added, investment credit recapture, alternative or add-on minimum, environmental, estimated or other taxes, duties or assessments of any kind, including any interest, penalty and additions imposed with respect to such amounts (collectively, "TAXES") owed by BICO (whether or not shown on any Tax Return) have been paid. BICO is not currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by any federal, national, foreign, state, municipal or other local government, any subdivision, agency, commission or authority thereof, or any quasi-governmental body or other authority exercising any taxing or tax regulatory authority (each, a "TAX AUTHORITY") in a jurisdiction where BICO does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Liens on any of the assets of BICO that arose in connection with any failure (or alleged failure) to pay any Tax. All written assessments of material Taxes due and payable by, on behalf of or with respect to BICO have been paid, or are being contested in good faith by appropriate proceedings and have been reserved against in accordance with GAAP and statutory accounting procedures and practices. (b) BICO has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing by it to each employee, independent contractor, creditor, stockholder, partner or other third party. 7 (c) BICO does not nor does any director or officer (or employee responsible for Tax matters) of BICO expect or have reason to expect any Tax Authority to assess any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax liability of BICO either (i) claimed or raised by any Tax Authority in writing or (ii) as to which any Seller or any director or officer (or employee responsible for Tax matters) of any Company has knowledge. Part (c) of Schedule 2.7 lists all income Tax Returns filed with respect to BICO for taxable periods ended after December 31, 1994, and indicates those Tax Returns that have been audited or are currently the subject of an audit. Sellers have delivered to the Purchaser correct and complete copies of all federal Tax Returns, examination reports and statements of deficiencies assessed against or agreed to by BICO for any period subsequent to December 31, 1994. (d) BICO has not waived or extended any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (e) BICO has not has filed a consent under Section 341(f) of the Internal Revenue Code of 1986, as amended from time to time, and any successor statute thereto (the "CODE") concerning collapsible corporations. (f) BICO has not made any payments, is not obligated to make any payments, or is not a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Section 280G of the Code. (g) BICO has not has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (h) BICO is not a party to any Tax allocation or sharing agreement which will require any payment by BICO for Taxes accruing after the Closing Date. (i) Part (i) of Schedule 2.7 sets forth the following information with respect to BICO on an estimated pro forma basis as of the Closing giving effect to the consummation of the transactions contemplated hereby: (i) the basis of BICO in its assets; (ii) the amount of any net operating loss, net capital loss, unused investment or other credit, unused foreign tax, or excess charitable contribution allocable to any such party; and (iii) the amount of any deferred gain or loss allocable to each party arising out of any deferred intercompany transaction. (j) The unpaid Taxes of BICO (i) did not, as of the most recent fiscal month end, exceed the reserve for Tax liabilities (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the Balance Sheet (rather than in any notes thereto) included in the financial statements and (ii) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of BICO in filing their Tax Returns. SECTION 2.8 BROKERS OR FINDERS. Seller represents, as to itself and BICO, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any brokers' or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. 8 SECTION 2.9 ENVIRONMENTAL MATTERS. (a) For the purpose of this Agreement, the following words and phrases shall have the following meanings: (i) "ENVIRONMENT" shall mean soil, surface waters, ground waters, land, stream sediments, surface or subsurface strata, ambient air, and any environmental medium. (ii) "ENVIRONMENTAL CONDITION" shall mean any condition with respect to the Environment on or off any property, owned, leased or otherwise occupied by BICO ("PREMISES"), whether or not yet discovered, which could or does result in any damage, loss, cost, expense, claim, demand, order, or liability to or against BICO by any third party (including, without limitation, any Governmental Entity), including, without limitation, any condition resulting from the operation of BICO's business and/or the operation of the business of any other property owner or operator in the vicinity of such Premises and/or any activity or operation formerly conducted by any person or entity on or off the Premises. (iii) "ENVIRONMENTAL LAWS" shall mean (a) any federal, state, or local law, regulation, ordinance, rule, guideline or by-law regulating or referring to the Environment, whether existing as of the date hereof or subsequently enacted; (b) any law, ordinance, regulation, rule, guideline or by-law of any Governmental Entity that asserts or may assert jurisdiction over the Seller, BICO or the Premises, or the operations or activities at the Premises, that regulates or refers to the presence, release, threat of release, use, handling, manufacturing, generation, production, storage, treatment, processing, transportation or disposal of any Hazardous Substances, including, but not limited to (i) requiring any permit, license, approval, consent or authorization, or the renewal thereof; (ii) regulating the amount, form, manner of storage, transport and/or disposal of Hazardous Substances; or (iii) requiring any reporting, inspection report, business plan, notification, or any other dissemination of or access to information regarding Hazardous Substances, including warnings or notices to tenants, subtenants, employees, occupants, invitees or consumers. (iv) "HAZARDOUS SUBSTANCES" shall mean (a) any pollutant, toxic substance, contaminant, chemical, hazardous waste, hazardous material, petroleum product, oil, radioactive material or energy; (whether such energy is radioactive or not) (b) any substance, gas material or chemical which is or may be defined as or included in the definition of "hazardous substances," "toxic substances," "hazardous materials," "hazardous wastes," or words of similar import under any Environmental Law; (c) radon gas, asbestos in any form which could or does become friable, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of federal, state or local safety guidelines, whichever are more stringent; (d) any other chemical, material, gas, or substance, 9 the exposure or release of which is or may be prohibited, limited or regulated by any Governmental Entity that asserts or may assert jurisdiction over the Premises, or the operations or activity at the Premises, or any chemical, material, gas or substance that does or may pose a hazard to health and/or safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises. (v) "PERMIT" shall mean any environmental permit, license, approval, consent, or authorization issued by a federal, state, or local Governmental Entity under any Environmental Law. (vi) "PREMISES" shall mean any property or location, whether owned, leased, or otherwise occupied at, from, or which BICO now or has heretofore conducted business. (vii) "RELEASE" shall mean any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing, or dumping into the Environment. (viii) "THREAT OF RELEASE" shall mean a substantial likelihood of a Release which requires action to prevent or mitigate damage to the Environment which may result from such Release. (b) Seller's Representations, Warranties, and Obligations. The Seller, on its own behalf and on behalf of BICO, represents and warrants to Purchaser, that the following are true and on the date hereof and as of the Closing Date: (i) the activities, operations and business by BICO, including, but not limited to, the business conducted by BICO at any Premises or any past or ongoing alterations or improvements by BICO at any Premises is, and has been at all times in compliance with all Environmental Laws and with all agreements with Governmental Entities, court and administrative orders regarding the Environment and binding on BICO, (ii) to the knowledge of Seller and/or BICO, Hazardous Substances have not been generated, used, treated, handled, stored, released or disposed of, on, at, under or about the Premises, and (iii) neither the Seller nor BICO has knowledge of the existence of any Environmental Condition at any of the Premises and that, with respect to those Premises where the Seller or BICO has knowledge of such an Environmental Condition, that no further action is required to remedy any condition. (ii) Neither the Seller nor BICO is aware of any pending or threatened litigation or proceedings before any administrative agency in which any person or entity alleges the violation by BICO of any Environmental Law or the presence, release, threat of release, placement, storage, disposal or use, generation or treatment of Hazardous Substances on, at, under or from any of the Premises, 10 including, without limitation, that Hazardous Substances used, generated, stored or treated at any Premises were released or treated to be released at any site other than the Premises ("OFF SITE CLAIMS"), nor has the Seller or BICO (A) received any notice of and has no actual or constructive knowledge that any third party, Governmental Entity or any employee or agent thereof, has determined, threatens to determine or requires an investigation to determine that there exists any violation by BICO of any Environmental Law or the presence, release, threat of release, or placement, use, gain, storage, disposal or treatment of Hazaradous Substances on, at, under or from the Premises, (B) received any notice of a claim against BICO under any citizen suit provision of any Environmental Law; or (C) received any request for inspection or request for information, notice, demand, administrative inquiry or any formal or informal complaint or claim with respect to or in connection with any Environmental Law relating to the busines of BICO or to any Premises. (iii) No lien has been imposed on any of BICO's assets by any Governmental Entity in connection with Environmental Law. (iv) BICO has all Permits necessary for its activities and operations of its business and for any past or ongoing alterations or improvements by BICO at any Premises. (v) That no storage tanks presently exist on, at, under or about any Premises or, to Seller's or BICO's knowledge, previously existed on, at, under or about any Premises, or to the best of Seller's and BICO's knowledge, are located on any adjoining property. (c) Seller, on its own behalf and on behalf of BICO, covenants to Purchaser, from the date hereof, that Seller shall provide to Purchaser, within five (5) business days of the date hereof, copies of all documents, records, and information in its possession or control or available to Seller concerning (A) BICO's compliance with Environmental Laws, (B) the presence, use, emission, generation, storage, treatment or disposal of Hazardous Substances at, or under or from any Premises and (C) Environmental Conditions relevant to BICO's business and/or any Premises, whether generated by BICO or others, including, without limitation, environmental audits, environmental risk assessments, or site assessments of the Premises and/or any adjacent property, documentation regarding offsite disposal of Hazardous Substances, reports and correspondence. Furthermore, Seller shall have an ongoing obligation to provide to Purchaser copies of any additional such documents which come into the possession or control of or become available to Seller and/or BICO subsequent to the date hereof and on or prior to the Closing Date, within two (2) business days of any such document becoming available to Seller or to BICO. SECTION 2.10 EMPLOYMENT MATTERS. BICO is in compliance in all material respects with all "Employment Practices Laws." BICO is not engaged in any unfair labor practice or discriminatory employment practice and, except as disclosed on Schedule 2.10, no complaint of any such practice against BICO, or any officer, director, employee or agent of BICO, has been 11 filed or, to Seller's, BIG's or BICO's knowledge, threatened to be filed with or by the National Labor Relations Board, the Equal Employment Opportunity Commission or any other administrative agency, federal, state or local, that regulates labor or employment practices, nor is any grievance filed or, to the knowledge of Seller, BIG or BICO, threatened to be filed, against BICO by any employee pursuant to any collective bargaining or other employment agreement to which BICO is a party or is bound. BICO is in compliance in all material respects with all applicable federal, state and local laws and regulations regarding occupational safety and health standards, and has received no complaints from any federal, state or local agency or regulatory body alleging violations of any such laws and regulations. For purposes of this Agreement, the term "EMPLOYMENT PRACTICES LAWS" shall mean any and all federal, state and/or local laws and/or regulations relating to the terms and conditions of employment, equal employment opportunity, non-discrimination, and/or collective bargaining and payment of social security and other taxes. SECTION 2.11 NO LIABILITY FOR EMPLOYEE BENEFIT PLANS, ETC. Neither BICO nor Purchaser, nor any of Purchaser's Affiliates, shall, on and after the Closing Date, have any liability for (i) any compensation, benefits, and perquisites of any kind with respect to any person on account of employment by BICO at any time or times prior to the Closing Date, or the termination of employment of any such person by Seller, BICO and/or BIG, including, but not limited to, medical or dental benefits either reported but not paid or incurred but not reported prior to the Closing Date, continuation of health care coverage pursuant to COBRA or any liabilities arising under, in connection with, or with respect to any employee benefit plan within the meaning of Section 3(3) of ERISA or bonus, deferred compensation, stock purchase, stock option, salary continuation, vacation, sick leave, fringe benefit, incentive, insurance, welfare or similar arrangement which at any time covered employees of BICO; and/or (ii) notices, payments, fines, taxes or assessments due to any Governmental Entity pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of employees of BICO by Seller, BICO and/or BIG for any period prior to the Closing Date, including, but not limited to, the WARN Act and any applicable state severance pay law and any rules or regulations that have been issued in connection with any of the foregoing. SECTION 2.12 INTELLECTUAL PROPERTY. Schedule 2.12 lists all material trademarks, copyrights and patents owned or used by BICO in the conduct of its business, and states all royalties or license fees BICO pays for intellectual property and/or other proprietary rights used in its business. Except as disclosed in Section 2.12 of the Disclosure Schedule, there are no pending or, to the knowledge of Seller and/or BIG, threatened claims of which Seller and/or BIG have been given written notice, by any person and neither Seller nor BIG has asserted a claim against any person with respect to any patents, patent rights, trademarks, trademark rights, service marks, service mark rights, trade names, trade name rights, copyrights, logos, assumed names and applications therefor and any know-how, technology, trade secrets or other proprietary information owned or used by BICO in its operations as currently conducted (collectively, the "BICO INTELLECTUAL PROPERTY"). BICO has such ownership of or such rights by license, lease or other agreement to BICO Intellectual Property as are necessary to permit it to conduct its operations as currently conducted. Except as set forth in Schedule 2.12, to the knowledge of the Seller and BIG, BICO has taken all appropriate actions and made all appropriate applications and filings pursuant to applicable laws to perfect or protect its interest in the BICO Intellectual Property. 12 SECTION 2.13 NO UNDISCLOSED LIABILITIES. Except as specifically reflected in the balance sheet included in BICO's Quarterly Statement as of September 30, 1998 (or in the notes relating thereto), there are no liabilities against, relating to or affecting BICO except liabilities incurred in the ordinary course of business. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller as follows: SECTION 3.1 ORGANIZATION. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. SECTION 3.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION. Purchaser has the corporate power and authority to execute and deliver this Agreement and all of the agreements and documents contemplated hereby, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Purchaser of this Agreement and all of the agreements and documents contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate proceedings and no other action on the part of Purchaser is necessary to authorize the execution and delivery by Purchaser of this Agreement and all of the agreements and documents contemplated hereby, and the consummation by it of the transactions contemplated hereby and thereby. This Agreement and all of the agreements and documents contemplated hereby have been duly executed and delivered by Purchaser (and assuming due and valid authorization, execution and delivery hereof and thereof by Seller and each other party thereto other than Purchaser) is a valid and binding obligation of Purchaser enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. SECTION 3.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as contemplated by the Acquisition Agreement and except for (a) approvals or consents of any Governmental Entity under applicable insurance laws of each of the jurisdictions listed in Schedule 2.1(b) or as may be otherwise required by law, (b) applicable requirements under corporation or "blue sky" laws of various states and (c) matters specifically described in this Agreement, neither the execution, delivery or performance of this Agreement or any agreement or document contemplated hereby by Purchaser nor the consummation by Purchaser of the transactions contemplated hereby or thereby will (i) violate any provision of the articles of incorporation or by-laws of Purchaser, (ii) violate any order, writ, judgment, injunction, decree, law, statute, rule or regulation applicable to Purchaser or (iii) require on the part of Purchaser any filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity, except in the case of clauses (ii) and (iii) for such violations, breaches or defaults which, or filings, 13 registrations, notifications, authorizations, consents xor approvals the failure of which to obtain, would not materially adversely affect the ability of Purchaser to consummate the transactions contemplated by this Agreement. SECTION 3.4 ACQUISITION FOR INVESTMENT. Purchaser is acquiring the Shares solely for its own account and not with a view to any distribution or other disposition of the Shares, and the Shares will not be transferred except in a transaction registered or exempt from registration under the Securities Act of 1933, as amended. ARTICLE IV. COVENANTS SECTION 4.1 ACCESS TO INFORMATION. To the extent Seller is permitted under the terms of the Acquisition Agreement, Seller shall cause BIG and/or BICO (and, to the extent deemed necessary by Purchaser, FHC) to afford Purchaser's officers, employees, accountants, counsel and other authorized representatives access at reasonable times and places throughout the period prior to the Closing Date or the date of termination of this Agreement, to all books, Contracts, facilities and personnel of BIG, BICO, FHC and Seller so that Purchaser may conduct due diligence with respect to BICO's and, to the extent deemed necessary by Purchaser, FHC's financial and legal condition, including, without limitation, financial statements, accounting methods, assets, liabilities, tax matters, regulatory requirements, insurance and reinsurance agreements and other contractual arrangements. Purchaser and all persons conducting such investigations on its behalf shall cooperate to minimize interference with the business operations of BICO, FHC and Seller. SECTION 4.2 PUBLICITY. Purchaser and Seller shall, subject to their respective legal obligations (including requirements of stock exchanges and other similar regulatory bodies), at all times at or before the Closing, consult with one another before issuing or making any reports, statements or releases to the public with respect to this Agreement and/or the transactions contemplated hereby, and will use good faith efforts to agree on the text of a joint public report, statement or release or will use good faith efforts to obtain the other party's approval of the text of any public report, statement or release to be made solely on behalf of a party. If Seller and Purchaser are unable to agree on or approve any such public report, statement or release, then such party may make or issue the legally required or appropriate report, statement or release. Any such report, statement or release approved or permitted to be made pursuant to this Section 4.2 may be disclosed or otherwise provided by Seller or Purchaser to any person or entity, including without limitation to any employee or customer of either party hereto and to any Governmental Entity. SECTION 4.3 TAX INDEMNITY. The following provisions shall govern the allocation of responsibility for certain tax matters and shall govern the tax indemnification between the parties following the Closing Date: (a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. Purchaser shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for BICO for all 14 periods ending on or prior to the Closing Date which are filed after the Closing Date other than income Tax Returns with respect to periods for which a consolidated, unitary or combined income Tax Return of Seller will include the operations of BICO. Purchaser shall permit Seller to review and comment on each such Tax Return described in the preceding sentence prior to filing. Sellers shall reimburse Purchaser for Taxes of BICO with respect to such periods (including taxes resulting from an election under Code Section 338(h)(10), if any, within fifteen (15) days after payment by Purchaser or BICO of such Taxes to the extent such Taxes are not reflected in the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) shown on the face of the Closing Balance Sheet. In all events, Seller shall be responsible for all taxes resulting from the election under Code Section 338(h)(10). (b) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE. Purchaser shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of BICO for Tax periods which begin before the Closing Date and end after the Closing Date. Sellers shall pay to Purchaser within fifteen (15) days after the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such Taxable period ending on the Closing Date to the extent such Taxes are not reflected in the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) shown on the face of the Closing Balance Sheet. For purposes of this Section, in the case of any Taxes that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of which relates to the portion of such Taxable period ending on the Closing Date (the "PRE-CLOSING PERIOD") shall (i) in the case of any Taxes other than Taxes based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of days in the Taxable period ending on the Closing Date and the denominator of which is the number of days in the entire Taxable period, and (ii) in the case of any Tax based upon or related to income or receipts be deemed equal to the amount which would be payable if the relevant Taxable period ended on the Closing Date. Any credits relating to a Taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant Taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practices of BICO. (c) REFUNDS OF CREDITS. At the reasonable request of Seller, Purchaser shall cooperate or cause BICO to cooperate with Seller in obtaining any refunds or credits (including interest thereon), other than any refunds or credits reflected in the reserve for Tax Liability or otherwise shown, on the face of the Closing Balance Sheet, relating to Taxes for which Seller may be liable under Section 4.3(i). Purchaser shall be entitled to all other refunds and credits of Taxes. For purposes of this Section, the terms "refund" and "credit" shall include a reduction in Taxes and the use of an overpayment of Taxes as an audit or other Tax offset. Receipt of a refund shall occur upon the filing of a return or adjustment thereto using such reduction, overpayment or offset, or upon the receipt of cash. (d) AMENDED RETURNS. Neither Purchaser nor Seller shall amend any Tax Returns for periods ending prior to the Closing Date without the prior written consent of the Purchaser and the Seller. If the Seller desires to amend or have amended a Tax Return for 15 periods ending prior to the Closing Date, and the Seller agrees to hold the Purchaser harmless from any additional Taxes that Purchaser may have to bear on account of such amended Tax Returns, Purchaser and Seller shall, at the Seller's cost, cooperate in such matter to the extent reasonable. (e) COOPERATION. From and after the Closing, the Seller and the Purchaser shall cooperate fully with each other and make available or cause to be made available to each other for consultation, inspection and copying (at such other party's expense) in a timely fashion such personnel, tax data, Tax Returns and filings, files, books, records, documents, financial, technical and operating data, computer records and other information as may be reasonably required (i) for the preparation by the Purchaser or the Seller of any Tax Returns, elections, consents or certificates required to be prepared and filed by the Purchaser or the Seller or any Subsidiary or (ii) in connection with any audit or proceeding relating to Taxes for which the Purchaser or the Seller is responsible. (f) TAX SHARING AGREEMENTS. All tax sharing agreements or similar agreements with respect to or involving the BICO shall be terminated as of the Closing Date and, after the Closing Date, BICO shall not be bound thereby or have any liability thereunder. (g) TRANSFER TAXES. The Seller shall be responsible for the payment of any and all sales, use, recordation, gains, transfer or similar Taxes or fees with respect to the transfer of the Assets hereunder (including any interest or penalties with respect thereto) and shall deliver copies of all Tax Returns and other documentation filed with respect thereto to the Purchaser promptly after filing. (h) CODE SECTION 338(h) (10) ELECTION. Seller covenants and agrees, at Purchaser's request, to join with Purchaser to make an election pursuant to Section 338(h)(10) of the Code and to file such forms as are necessary to effectuate such election in accordance with this Section 4.3. Purchaser and Seller shall allocate the purchase price under this Agreement among BICO's assets as set forth in Schedule 4.3(h) and shall file Tax Returns consistent with such allocation pursuant to Section 1060 of the Code. (i) INDEMNIFICATION - TAX MATTERS. (i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereby by the parties to this Agreement and their respective covenants, agreements and obligations to be performed pursuant to the terms of this Section 4.3 and Section 2.7 shall, unless waived in writing, survive the Closing until such time as all applicable statute of limitations in respect of claims or potential claims by any Tax Authority for Taxes in respect of all periods ended on or prior to the Closing Date has expired. (ii) BY THE SELLER. The Seller agrees to indemnify and hold harmless the Purchaser, and their respective directors, officers, employees, agents, successors and assigns (collectively, the "PURCHASER PARTIES") against, and to reimburse the Purchaser Parties with respect to, any and all losses, liabilities, obligations, suits, proceedings, demands, judgments, damages, claims, expenses and costs, including, without reasonable 16 fees, expenses and disbursements of counsel (collectively, "DAMAGES"), which each may suffer, incur or pay by reason of any liability or obligation for Taxes, levied by any foreign, Federal, state or local Tax Authority with respect to the ownership or use of the assets of BICO or the conduct of the business of BICO on or prior to the Closing Date, including, without limitation, any and all of the Seller's Tax liabilities (whether a direct liability or a joint and several liability pursuant to Treasury Regulation Section 1.1502-6 or any comparable provision under foreign, state or local laws by reason of Seller or BICO having been a member of any consolidated, combined, unitary or similar group). (iii) BY THE PURCHASER. The Purchaser agrees to indemnify and hold harmless the Seller and its agents, representatives, heirs, successors and assigns (collectively, the "SELLER PARTIES") against, and to reimburse the Seller Parties on demand with respect to, any and all Damages which each may suffer, incur or pay by reason of any liability of the Purchaser for Taxes with respect to the ownership or use of the assets of BICO or the conduct of the Business of BICO after the Closing Date, including, without limitation, any and all of Purchaser's tax liabilities. SECTION 4.4 APPROVALS AND CONSENTS; COOPERATION; NOTIFICATION. (a) The parties shall use their best efforts and good faith, and cooperate with each other, to obtain as promptly as practicable all approvals, consents and agreements of Governmental Entities and/or third parties necessary or advisable to consummate the transactions contemplated by this Agreement, and each party shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby. The party responsible for any such filing shall promptly deliver to the other party evidence of the filing of all applications, filings, registrations and notifications relating thereto, and any supplement, amendment or item of additional information in connection therewith. The party responsible for a filing shall, to the extent reasonably requested, also promptly deliver to the other party a copy of each material notice, order, opinion and other item or correspondence received by such filing party from any Governmental Entity in respect of any such application. (b) Seller and Purchaser shall use all reasonable efforts to file as soon as practicable all notifications, filings and other documents required to obtain all governmental authorizations, approvals, consents or waivers, and to respond as promptly as practicable to any inquiries received from any insurance regulatory authority or other Governmental Entity for additional information or documentation and to respond as promptly as practicable to all inquiries and requests received from any State Attorney General or other Governmental Entity in connection therewith. (c) Purchaser and Seller shall each promptly make any and all filings and submissions of information with the insurance departments of the states listed in Schedule 4.4(c) which are required or requested by such insurance departments to obtain the approvals required by such insurance departments to consummate the transactions contemplated hereby. Seller and Purchaser each agree to furnish the other party with such information and reasonable assistance as such other party may reasonably request in connection with its preparation of such Form A filings and other filings or submissions. Purchaser and Seller shall each use reasonable efforts to keep the other party fully apprised of its actions with respect to all such filings and submissions 17 and shall provide the other party with copies of such Form A filings and other filings or submissions in connection with the transactions contemplated by this Agreement. (d) Purchaser and Seller shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for consummation of the transactions contemplated by this Agreement which causes such party to believe that there is a reasonable likelihood that any requisite regulatory approval will not be obtained or that the receipt of any such approval will be materially delayed. (e) Each of Seller and Purchaser shall give prompt notice to the other of the occurrence or failure to occur of an event that would, or, with the lapse of time would, cause any condition to the consummation of the transactions contemplated hereby not to be satisfied. SECTION 4.5 NO SOLICITATION. Seller shall not, directly or indirectly, through any Affiliate, officer, director, employee, investment banker, attorney, representative or agent of Seller or BICO, solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, an Acquisition Proposal (as hereinafter defined). Seller will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. For purposes of this Agreement, "ACQUISITION PROPOSAL" means any offer or proposal for, or any indication of interest in, a merger or other business combination involving BICO or the acquisition of any equity interest in, or a substantial portion of the assets of, BICO, other than the transactions contemplated by this Agreement. SECTION 4.6 TERMINATION AND RELEASE. (a) Except as set forth on Schedule 4.6(a), Seller, BIG and/or BICO shall have terminated and/or Seller and/or any Affiliate(s) thereof shall have assumed, in each case effective on or prior to the Closing Date, any and all agreements, arrangements, instruments, bonds, indemnities, indentures, leases, licenses (not including the Licenses listed on Schedule 2.1(b)) and/or understandings (each a "CONTRACT" and collectively the "CONTRACTS") to which BICO is a party or to which any of its assets is subject, and Seller and/or any Affiliate(s) thereof shall retain all remaining obligations and/or liability, if any, arising out of or relating to such Contracts and/or the termination of or assumption by Seller and/or any Affiliate(s) thereof, BICO and/or BIG of any or all such Contracts. (b) Without limiting anything in Section 4.6(a), above, and except as set forth on Schedule 4.6(a), Seller shall, and Seller shall cause BIG and BICO and their respective Affiliates, including such Affiliates as are, or have been party to, any Contract to which BICO is a party or to which any of its assets is subject, to release BICO and Purchaser, effective as of the Closing Date, from any and all liabilities and obligations owing by BICO with respect to such Contracts. SECTION 4.7 FURTHER ASSURANCES. Each party agrees to use all reasonable efforts to take, or cause to be taken, all action, 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. 18 SECTION 4.8 SELLER'S ENVIRONMENTAL INDEMNITIES. (a) Seller agrees to indemnify and hold harmless Purchaser, its officers, directors, employees, agents, successors, and assigns (the "INDEMNITEES"), against and in respect of, any and all damages, claims, losses, liabilities, and expenses (including without limitation, reasonable legal, accounting, consulting, engineering, and other expenses), which may be imposed upon, incurred by, or asserted against any of the Indemnitees by any other party or parties (including, without limitation, a Governmental Entity), arising out of, in connection with, or relating to the subject matter of: (a) Seller's or BICO's breach of any of the representations and warranties set forth in Section 2.9; (b) any Environmental Condition or claimed Environmental Condition, existing as of and/or prior to the Closing Date, even if not discovered until after the Closing Date; or (c) any violation of any Environmental Laws or any claimed violation of any Environmental Laws with respect to the Premises, or the Seller's business activities or any facilities or operations thereon, existing as of and/or prior to the Closing Date. Such damages, claims, losses, liabilities, and expenses are hereinafter referred to as "ENVIRONMENTAL LIABILITIES". This indemnity shall survive the Closing and shall be in addition to Seller's obligations under Section 5.1. Anything to the contrary contained herein notwithstanding, no Indemnitee shall be entitled to recover from Seller pursuant to this Section 4.8 unless and until the total of all claims pursuant to this Section 4.8 by all Indemnitees exceeds $25,000 and then only for the amount by which such claims exceed $25,000. (b) Purchaser shall provide to Seller prompt written notice of any Environmental Liability, with respect to which indemnification is to be claimed hereunder. However, Seller shall not be relieved of its obligations under this agreement if Purchaser's failure to promptly notify Seller of an Environmental Liability does not prejudice Seller's rights or materially increase its liabilities and obligations hereunder. SECTION 4.9 CONDUCT OF BUSINESS. Except as contemplated by this Agreement and the Acquisition Agreement, Seller and/or BIG will cause BICO to, and BICO will, conduct its business only in the ordinary course and consistent with past practice, and neither the Seller, BIG nor BICO shall take any actions inconsistent with the transactions contemplated by this Agreement. Without limitation of the foregoing, BIG will cause BICO to, and BICO will: (i) comply in all material respects with all laws, ordinances and regulations of Governmental Entities applicable to BICO; (ii) perform in all material respects its obligations under all Surviving Contracts; (iii) conduct all underwriting of all new, renewal and existing insurance business in accordance with BICO's now existing underwriting guidelines applied consistent with Seller's past practice; and (iv) administer, investigate and otherwise handle all claims with respect to any and all insurance policies, binders, certificates, endorsements, annuities, and/or Contracts of insurance or reinsurance issued, renewed, reinsured, or underwritten by or on behalf of the Company (each an "INSURANCE POLICY" and collectively the "INSURANCE POLICIES") in accordance with BICO's now existing claims administration guidelines applied consistent with Seller's past practice. SECTION 4.10 NEGATIVE COVENANTS. Seller and/or BIG will cause BICO to, and BICO will, refrain from (unless otherwise consented to in writing by Purchaser, as respects each such action): 19 (a) Amending its Amended and Restated Certificate of Incorporation or bylaws and from taking any action with respect to any such amendment; (b) Authorizing or issuing any shares of BICO's capital stock or other equity securities or entering into any Contract or granting any option, warrant or right calling for the authorization or issuance of any such shares or other equity securities, or creating or issuing any securities directly or indirectly convertible into or exchangeable for any such shares or other equity securities, or issuing any option, warrant or right to purchase any such convertible securities or securities exchangeable for such shares or other equity securities; (c) Violating, breaching, defaulting, or, except as contemplated by this Agreement, terminating and from taking or failing to take any action that (with or without notice or lapse of time or both) would constitute a violation, breach, default, or termination in any way under any term of any of the Contracts to which BICO is a party or by which any of the assets of BICO is or may be bound; (d) (i) Merging, consolidating, or otherwise combining or agreeing to merge, consolidate, or otherwise combine with any other person or entity, (ii) acquiring or agreeing to acquire blocks of business or all or substantially all the assets or properties or capital stock or other equity securities of any other person or entity, or (iii) otherwise acquiring or agreeing to acquire control or ownership of any other person or entity; and (e) Except in the ordinary course of business and consistent with past practice, and/or except as set forth in any or all of the Program Agreements, creating, incurring, assuming, guaranteeing or otherwise becoming liable for, and from canceling, paying, agreeing to cancel or pay, or otherwise providing for a complete or partial discharge in advance of a scheduled payment date with respect to, any liability, and from waiving any right of BICO to receive any direct or indirect payment or other benefit under any liability owing to BICO. SECTION 4.11 NOTICE AND CURE. Seller will notify Purchaser promptly in writing of, and contemporaneously will provide Purchaser with true and complete copies of any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement of Seller (on its own behalf or on behalf of BIG or BICO) under this Agreement to be breached, or that renders or will render untrue any representation or warranty of Seller (on its own behalf or on behalf of BIG or BICO) contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. SECTION 4.12 CONFIDENTIALITY. Each of Purchaser and Seller will refrain, and will cause its respective officers, directors, employees, agents and other representatives to refrain, from disclosing to any other person or entity any confidential documents or confidential information disclosed by or on behalf of the other party hereto acquired by it in connection with this Agreement or the transactions contemplated hereby unless (i) such disclosure is compelled by judicial or administrative process or by other requirements of law and notice of such disclosure is furnished to such other party hereto; (ii) either party hereto deems it necessary (upon advice of such party's legal counsel) to disclose any such confidential documents or 20 information in connection with the requirements of any federal securities or state blue sky law; or (iii) such confidential documents or information can be shown to have been (A) previously known by the party hereto receiving such documents or information, (B) in the public domain through no fault of such receiving party, or (C) later acquired by such receiving party from other public sources. SECTION 4.13 REINSURANCE AGREEMENT. In the event CalComp shall at any time have an A.M. Best rating of B- or less (or in the event CalComp's A.M. Best rating shall have been downgraded two or more levels from its rating on the Closing Date), BICO shall have the right, in its discretion: (a) to cancel the Loss Portfolio Transfer and 100% Quota Share Reinsurance Contract between BICO and CalComp (the "REINSURANCE AGREEMENT") effective upon 30 days prior written notice to CalComp; and (b) to require Seller to arrange for a substitute reinsurer to enter into a reinsurance agreement with BICO on terms identical to the terms of the Reinsurance Agreement. SECTION 4.14 BICO LIABILITIES. (a) Schedule 4.14 lists all liabilities of BICO as of September 30, 1998. Seller guarantees that on the Closing Date, BICO shall have cash or cash equivalents in an amount equal to the sum of: (i) such liabilities of BICO remaining on the Closing Date, plus (ii) any and all liabilities of BICO arising subsequent to September 30, 1998 and on or prior to the Closing Date that remain outstanding on the Closing Date (other than pursuant to the Surviving Contracts), whether or not reflected on the books and records of BICO on the Closing Date. (b) Notwithstanding anything to the contrary in this Agreement, including, without limitation, any disclosure by Seller to Purchaser with respect to any Contracts, Seller agrees to indemnify and hold harmless the Indemnitees, against and in respect of, any and all damages, claims, losses, liabilities, and expenses (including without limitation, reasonable legal, accounting, consulting and other expenses), which may be imposed upon, incurred by, or asserted against any of the Indemnitees by any other party or parties (including, without limitation, any Governmental Entity), arising out of, in connection with, or relating to (i) any breach by Seller of the representations, warranties and/or covenants in Section 4.14(a), and/or (ii) any Contracts (other than the Surviving Contracts). This indemnity shall survive the Closing, shall be in addition to Seller's obligations under Section 5.1 and shall be consistent with Sections 5.3, 5.4, 5.5, 5.6, 5.7 and 5.9. SECTION 4.15 OPERATIONS INSURANCE. Seller shall, on or before the Closing Date, cause BICO, BIG and/or FHS to enter into such liability, property and casualty, automobile, workers' compensation, errors and omissions, directors and officers liability, and other similar insurance policies and/or Contracts of insurance with respect to the ownership, use and/or operations of the businesses or property of BICO (collectively the "OPERATIONS INSURANCE POLICIES"), which Operations Insurance Policies shall in form and substance be satisfactory to Purchaser, will be in effect on the Closing Date, and will be in the amounts and provide such coverages as are described in Schedule 4.15. SECTION 4.16 MANAGED CARE REPLACEMENT AGREEMENT. Seller shall, on or before the Closing Date or as soon thereafter as possible: (i) cause BICO to terminate, effective on or 21 before the Closing Date or as soon thereafter as possible, the agreement between Healthcare Compare Corp. and BICO, entered into as of October 1, 1995, as amended, including, without limitation, all supplements, appendices and exhibits thereto (collectively, the "HEALTHCARE COMPARE CORP. CONTRACT"), and (ii) cause BICO to enter into with Healthcare Compare Corp. (or another managed-care provider acceptable to Purchaser in Purchaser's discretion), an agreement to replace the Healthcare Compare Corp. Contract (the "MANAGED CARE REPLACEMENT AGREEMENT"), containing such terms and conditions as are satisfactory to Purchaser in its sole discretion, and in form and substance satisfactory to Purchaser, in its sole discretion. Notwithstanding anything to the contrary in this Agreement, including, without limitation, any disclosure by Seller to Purchaser, Seller agrees to indemnify and hold harmless the Indemnitees against and in respect of, any and all damages, claims, losses, liabilities, and expenses (including without limitation, reasonable legal, accounting, consulting and other expenses), which may be imposed upon, incurred by, or asserted against any of the Indemnitees by any other party or parties (including, without limitation, any Governmental Entity), arising out of, in connection with, or relating to the Healthcare Compare Corp. Contract (whether arising prior to or subsequent to the Closing Date) and/or arising out of, in connection with, or relating to the Managed Care Replacement Agreement prior to the Closing Date. This indemnity shall survive the Closing, shall be in addition to Seller's obligations under Section 5.1 and shall be consistent with Sections 5.3, 5.4, 5.5, 5.6, 5.7 and 5.9. SECTION 4.17 INDEMNIFICATION FOR EMPLOYEE MATTERS LIABILITIES. Notwithstanding anything to the contrary in this Agreement, including, without limitation, any disclosure in Schedule 2.5 or Schedule 2.10, Seller agrees to indemnify and hold harmless the Indemnitees against and in respect of, any and all "Employee Matters Liabilities". For purposes of this Agreement, the term "EMPLOYEE MATTERS LIABILITIES" shall mean any and all damages, claims, losses, liabilities, and expenses (including without limitation, reasonable legal, accounting, consulting and other expenses), which may be imposed upon, incurred by, or asserted against any of the Indemnitees by any other party or parties (including, without limitation, any Governmental Entity), arising out of, in connection with, or relating to: (i) Seller's, BIG's or BICO's breach of any of the representations, warranties and/or covenants by or on behalf of Seller, BIG and/or BICO set forth in Section 2.10, Section 2.11 and/or Section 6.2(b)(v), and (ii) any "Employment Practices Litigation". For purposes of this Agreement, the term "EMPLOYMENT PRACTICES LITIGATION" shall mean any and all actions and/or proceedings of any kind whatsoever arising out of, relating to or in connection with the breach or violation, or alleged breach or violation, on or prior to the Closing Date, by Seller, BIG and/or BICO and/or any officer, director, employee or agent of Seller, BIG and/or BICO, of any or all Employment Practices Laws. This indemnity shall survive the Closing, shall be in addition to Seller's obligations under Section 5.1 and shall be consistent with Sections 5.3, 5.4, 5.5, 5.6, 5.7 and 5.9. ARTICLE V. INDEMNIFICATION SECTION 5.1 INDEMNIFICATION BY SELLER. Subject to the conditions set forth in this Article V, Seller agrees to indemnify, defend and hold Purchaser, its officers, directors, agents, 22 employees, successors, assigns and Affiliates (the "PURCHASER INDEMNIFIED PARTIES"), harmless from and in respect of any and all losses, damages, costs and reasonable expenses (including, without limitation, reasonable expenses of investigation and defense fees and disbursements of counsel and other professionals) (collectively, "LOSSES"), that they may incur (i) arising out of or due to any inaccuracy of any representation or the breach of any warranty, covenant, undertaking or other agreement of Seller contained in this Agreement or described in any Schedule hereto or (ii) that relate to or arise out of or in connection with the assets, businesses, operations, conduct, products or employees (including former employees) of BICO relating to or arising out of or in connection with occurrences existing prior to the Closing Date. SECTION 5.2 INDEMNIFICATION BY PURCHASER. Subject to the limits set forth in this Article V, Purchaser agrees to indemnify, defend and hold Seller, its officers, directors, agents, employees, successors, assigns and Affiliates (the "Seller Indemnified Parties"), harmless from and in respect of any and all Losses that they may incur (i) arising out of or due to any inaccuracy of any representation or the breach of any warranty, covenant, undertaking or other agreement of Purchaser contained in this Agreement or (ii) arising out of any and all actions, suits, claims and administrative or other proceedings of every kind and nature instituted or pending against Seller or any of its Affiliates at any time after the Closing Date to the extent that such Losses (x) relate to or arise out of or in connection with the assets, businesses, operations, conduct, products, environmental conditions or violations of Environmental Laws and/or employees (including former employees) of BICO relating to or arising out of or in connection with occurrences after the Closing Date and (y) do not arise out of a breach of Seller's representations and warranties in, or a default in the performance of any of Seller's covenants under, this Agreement and/or the Acquisition Agreement. SECTION 5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the parties contained in this Agreement or in any instrument delivered pursuant to this Agreement and the indemnification obligations of Seller under Section 5.1 will survive the Closing Date and will remain in full force and effect thereafter for a period of three (3) years from the Closing Date; PROVIDED, HOWEVER, that (i) the representations and warranties contained in Section 2.7 shall be governed by Section 4.3, (ii) the representations and warranties contained in Section 2.9 shall be governed by Section 4.8, and (iii) the representations and warranties contained in Section 2.10 and 2.11 shall be governed by Section 4.17; PROVIDED, FURTHER, that such representations, warranties and indemnification obligations shall survive (if at all) beyond such period with respect to any inaccuracy therein, breach thereof or obligation thereunder, provided notice of such shall have been duly given within the applicable time period, in accordance with Section 5.4. Anything to the contrary contained in this Article V notwithstanding, no Purchaser Indemnified Party shall be entitled to recover from Seller with respect to any Losses that may be incurred arising out of or relating to any inaccuracy or breach of any representation or warranty or any breach of any covenant, undertaking or other agreement unless and until the total of all claims for such Losses, whether such claims are brought under this Article V or otherwise, exceeds $25,000 and then only for the amount by which such claims exceed $25,000. Anything to the contrary contained in this Article V notwithstanding, no Seller Indemnified Party shall be entitled to recover from Purchaser with respect to any Losses that may be incurred arising out of or relating to any inaccuracy or breach of any representation or warranty or any breach of any covenant, undertaking or other agreement unless and until the total of all claims for such Losses, whether such claims are brought under this Article V or otherwise, 23 exceeds $25,000 and then only for the amount by which such claims exceed $25,000. In addition, anything to the contrary contained herein notwithstanding, Seller shall not be entitled to recover from Purchaser more than the Purchase Price in the aggregate pursuant to this Article V. SECTION 5.4 NOTICE AND OPPORTUNITY TO DEFEND. If an event occurs which a party asserts is an indemnifiable event pursuant to Section 5.1 or 5.2, the party seeking indemnification shall promptly notify the other party obligated to provide indemnification (the "INDEMNIFYING PARTY"). If such event involves (i) any claim or (ii) the commencement of any action or proceeding by a third person, the party seeking indemnification will give such Indemnifying Party prompt written notice of such claim or the commencement of such action or proceeding; PROVIDED, HOWEVER, that the failure to provide prompt notice as provided herein will relieve the Indemnifying Party of its obligations hereunder only to the extent that such failure prejudices the Indemnifying Party hereunder. If any such action is brought against any party seeking indemnification and it notifies the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate therein and, to the extent that it wishes, at its cost, risk and expense to assume the defense thereof, with counsel reasonably satisfactory to the party seeking indemnification, unless the named party to such action or proceeding includes both an Indemnifying Party and a party seeking indemnification and the party seeking indemnification has been advised in writing by counsel that there may be one or more legal defenses available to such party that are different from or additional to those available to the Indemnifying Party, in which event the party seeking indemnification shall be entitled, at the Indemnifying Party's reasonable cost and expense, to separate counsel of its own choosing reasonably acceptable to the Indemnifying Party. After notice from the Indemnifying Party to the party seeking indemnification of such election to so assume the defense thereof, the Indemnifying Party shall not be liable to the party seeking indemnification for any legal expenses of other counsel or any other expenses subsequently incurred by such party in connection with the defense thereof. The party seeking indemnification agrees to cooperate in all reasonable respects with the Indemnifying Party and its counsel in the defense against any such asserted liability. The party seeking indemnification shall have the right to participate at its own expense in the defense of such asserted liability. The Indemnifying Party shall be entitled to compromise or settle any claim as to which it is providing indemnification, which compromise or settlement shall be made only with the written consent of the party being indemnified, such consent not to be unreasonably withheld. If an Indemnifying Party fails to assume the defense of a claim within 30 calendar days after receipt of the notice of claim by the Indemnifying Party, the party seeking indemnification, against which such claim has been asserted, will, upon delivering notice to such effect to the Indemnifying Party, have the right to undertake, at the Indemnifying Party's reasonable cost and expense subject to the limitations set forth in this Article V, the defense, compromise or settlement of such claim on behalf of and for the account of the Indemnifying Party subject to the limitations set forth in this Article V; PROVIDED, HOWEVER, that such claim shall not be compromised or settled without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld. If the party seeking indemnity assumes the defense of the claim, it shall keep the Indemnifying Party reasonably informed of the progress of any such defense, compromise or settlement. In no event shall an Indemnifying Party be liable for any settlement effected without its consent, which will not be unreasonably withheld. SECTION 5.5 ADJUSTMENT FOR INSURANCE AND TAXES. The amount which an Indemnifying Party is required to pay to, for or on behalf of the other party (hereinafter referred 24 to as an "INDEMNITEE") pursuant to this Article V and Section 4.3 shall be adjusted (including, without limitation, retroactively) (i) by any insurance proceeds actually recovered by or on behalf of such Indemnitee in reduction of the related indemnifiable loss (the "INDEMNIFIABLE LOSS") and (ii) to take account of any tax benefit actually realized as a result of any Indemnifiable Loss, less the cost of procuring such insurance proceeds or tax benefit. Amounts required to be paid, as so reduced, are hereinafter sometimes called an "INDEMNITY PAYMENT." If an Indemnitee has received or has had paid on its behalf an Indemnity Payment for an Indemnifiable Loss and subsequently receives insurance proceeds for such Indemnifiable Loss, or realizes any tax benefit as a result of such Indemnifiable Loss, then the Indemnitee shall (i) promptly notify the Indemnifying Party of the amount and nature of such proceeds and benefits, together with the cost of procuring them, and (ii) pay to the Indemnifying Party the amount of such insurance proceeds or tax benefit (reduced by such procurement cost), or, if lesser, the amount of the Indemnity Payment. SECTION 5.6 MITIGATION OF LOSS. Each Indemnitee is obligated to use its reasonable efforts to mitigate the amount of any Loss for which it is entitled to seek indemnification hereunder, and the Indemnifying Party shall not be required to make any payment to an Indemnitee in respect of such Loss to the extent such Indemnitee failed to comply with the foregoing obligation. SECTION 5.7 SUBROGATION. Upon making any Indemnity Payment, the Indemnifying Party will, to the extent of such payment, be subrogated to all rights of the Indemnitee against any third party in respect of the Loss to which the payment relates; PROVIDED, HOWEVER, that until the Indemnitee recovers full payment of its Loss, any and all claims of the Indemnifying Party against any such third party on account of such payment are hereby made expressly subordinated and subjected in right of payment of the Indemnitee's rights against such third party. Without limiting the generality of any other provision hereof, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights. SECTION 5.8 TAX INDEMNIFICATION. None of the provisions of this Article V, with the exception of Section 5.5, shall apply to the claims, obligations, liabilities, covenants and representations under Section 4.3, which shall be governed solely by the terms thereof. SECTION 5.9 SET-OFF. Neither Seller nor Purchaser shall have any right to set-off any Losses against any payments to be made by such party or parties pursuant to this Agreement, except as otherwise expressly provided herein or therein. SECTION 5.10 EXCLUSIVE REMEDY. Following the Closing, the indemnities provided for in this Article V shall be the sole and exclusive remedies (other than the indemnities provided in Sections 4.3, 4.8, 4.14, 4.16, and/or 4.17) of the parties and their respective officers, directors, employees, Affiliates, agents, representatives, successors and assigns for any breach of or inaccuracy in any representation or warranty or any breach, nonfulfillment or default in the performance of any of the covenants or agreements contained in this Agreement (but not any such covenants or agreements to the extent they are by their terms to be performed after the Closing Date). The parties shall not be entitled to a recission of this Agreement or to any further indemnification rights or claims of any nature whatsoever in respect thereof (whether by 25 contract, common law, statute, law, regulation or otherwise, including, without limitation, under the Racketeer Influence and Corrupt Organizations Act of 1970, as amended), all of which the parties hereby waive; PROVIDED, HOWEVER, that nothing herein is intended to waive any claims for intentional fraud. ARTICLE VI. CONDITIONS SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE CLOSING. The obligations of Seller, on the one hand, and Purchaser, on the other hand, to consummate the Closing are subject to the satisfaction (or, if permissible, waiver by the party for whose benefit such conditions exist) of the following conditions: (a) no arbitrator or Governmental Entity shall have issued any preliminary restraining order, injunction, writ, decree, order or ruling of any nature, and there shall not be any statute, rule or regulation, restraining, enjoining or prohibiting the consummation of any of the material transactions contemplated by this Agreement; PROVIDED, that the parties shall have used all reasonable efforts to cause any such order, decree, ruling, statute, rule or regulation to be vacated or lifted; (b) the required insurance regulatory approvals of the consummation of the transactions contemplated hereunder (the "STATE INSURANCE REGULATORY APPROVAL"), which are set forth in Schedule 6.1(b), shall have been obtained; (c) except as permitted under Section 1.2, above, with respect to no more than ten (10) Licenses, as more fully described in Section 1.2, above, all appropriate consents, approvals, authorizations, licenses and orders of any applicable federal, state, local and foreign regulatory authority having or asserting jurisdiction over the subject matter of this Agreement or as otherwise required in connection with the consummation of the transactions contemplated hereby, and otherwise as may be required to permit the change or transfer in control of BICO to occur while preserving in full force and effect in all respects any and all of the Licenses; and (d) to the extent required or so structured, approval by the board of directors of FHC. SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of Purchaser to consummate the transactions contemplated hereby are subject to the satisfaction (or waiver by Purchaser) of the following further conditions: (a) the representations and warranties of Seller and/or by or on behalf of BIG and/or BICO shall be true and accurate as of the Closing Date as if made at and as of such time (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need to be true and accurate only as of such date or with respect to such period); 26 (b) the Seller shall have made the following additional representations and warranties, which shall be true and accurate as of the Closing Date: (i) OWNERSHIP OF STOCK. The Shares are owned by Seller free and clear of all Encumbrances, other than restrictions imposed by federal and state securities laws. Upon the consummation of the transactions contemplated hereby, Purchaser will acquire title to the Shares, free and clear of all Encumbrances, other than restrictions imposed by federal and state securities laws; (ii) ASSETS. BICO has no subsidiaries and its assets consist solely of the Licenses listed on Schedule 2.1(b), and the U.S. Treasury securities, cash and other securities or assets on deposit with insurance regulatory authorities in accordance with applicable law that are described on Schedule 6.2(b)(ii), a copy of which shall be delivered on the Closing Date and which Schedule shall be satisfactory to Purchaser, in form and substance, in its sole judgment; (iii) NO UNDISCLOSED LIABILITIES. Except as set forth in Schedule 6.2(b)(iii), BICO has no liabilities, contingent or otherwise, of any kind or nature; (iv) SURVIVING CONTRACTS. Except for the Program Agreements, the Managed Care Replacement Agreement, and the Operations Insurance Policies (collectively, the "SURVIVING CONTRACTS"), BICO is not party to any Contracts of any kind or nature. Each Surviving Contract is in full force and effect and, to the knowledge of Seller or BICO, is valid and enforceable by BICO in accordance with its terms. BICO is not in default in the observance or the performance of any term or obligation to be performed by it under any Surviving Contract; to the knowledge of Seller there does not exist any event that, with the giving of notice or the lapse of time or both, would constitute a breach of or a default under any Surviving Contract; and to the knowledge of Seller, there have been no intentional waivers or releases of any rights or remedies of BICO under any Surviving Contract except for such breaches, defaults or waivers the effect of which, individually or in the aggregate, would not materially adversely affect the ability of Seller to consummate the transactions contemplated hereby. To the knowledge of Seller and/or BICO, no other person is in default in the observance or the performance of any term or obligation to be performed by it under any Surviving Contract; and (v) EMPLOYEES. BICO shall, on and after the Closing Date, have no officers or employees, and neither BICO nor Purchaser, nor any of Purchaser's Affiliates, shall have, on or after the Closing Date, any liability for (A) any compensation, benefits, and perquisites of any kind with respect to any person on account of employment by BICO at any time or times prior to the Closing Date, or the termination of employment of any such person by Seller, BICO and/or BIG, including, but not limited to, medical or dental benefits either reported but not paid or incurred but not reported prior to the Closing Date, continuation of health care coverage pursuant to COBRA or any liabilities arising under, in connection with, or with respect to any employee benefit plan within the meaning of Section 3(3) of ERISA or bonus, deferred compensation, stock purchase, stock option, salary continuation, vacation, sick leave, fringe benefit, incentive, insurance, welfare or similar arrangement which at any time covered employees of BICO; and/or (B) notices, payments, fines, taxes or assessments due to any Governmental Entity pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of employees of BICO by Seller, BICO and/or 27 BIG for any period prior to the Closing Date, including, but not limited to, the WARN Act and any applicable state severance pay law and any rules or regulations that have been issued in connection with any of the foregoing; (c) Seller, BIG and BICO shall have performed in all material respects the obligations hereunder required to be performed by them at or prior to the Closing Date; (d) Purchaser shall have received an incumbency certificate and a certificate signed by two executive officers of Seller, dated as of the Closing Date, to the effect that the conditions set forth in Section 6.2(a), Section 6.2(b) and Section 6.2(c) have been satisfied; (e) Purchaser shall have received an original of the "UNDERWRITING MANAGEMENT AGREEMENT," in the form of EXHIBIT A hereto, duly executed by SNIS and BICO; (f) Purchaser shall have received an original of the "QUOTA SHARE REINSURANCE AGREEMENT," in the form of EXHIBIT B hereto; duly executed by CalComp and BICO; (g) Purchaser shall have received an original of the LOSS PORTFOLIO TRANSFER AGREEMENT, in the form of EXHIBIT C hereto, duly executed by CalComp and BICO; (h) Purchaser shall have received an original of the CLAIMS ADMINISTRATION SERVICES AGREEMENT, in the form of EXHIBIT D hereto, duly executed by Seller's designee (reasonably acceptable to Purchaser) and BICO; (i) Purchaser shall have received originals of the Operations Insurance Policies, in form and substance be satisfactory to Purchaser in its sole discretion, in the amounts and providing such coverages as are described in Schedule 4.15. (j) Purchaser shall have received letters of resignation from each member of the board of directors of BICO, which resignations shall be effective as of the Closing Date; (k) Purchaser shall have received certified copies of resolutions duly adopted by the Boards of Directors of Seller, BIG and/or BICO, as the case may be, authorizing and approving the execution, delivery and performance of this Agreement and each other agreement required to be executed and delivered by Seller, BIG and/or BICO pursuant to this Agreement; (l) Purchaser shall have completed its due diligence investigation of BICO, and, to the extent deemed necessary by Purchaser, FHC and BIG and their respective financial and legal condition, including, without limitation, financial statements, accounting methods, assets, liabilities, tax matters, regulatory requirements, insurance and reinsurance agreements and other contractual arrangements, it being understood and agreed that the completion by Purchaser of such due diligence shall not limit in any respect any of Purchaser's rights with respect to any breach by Seller, BIG and/or BICO of any of their respective representations, warranties and/or covenants in this Agreement (made by them or on their behalf); (m) Seller shall have delivered copies to Purchaser of all certificates of good standing, certificates of qualification and certificates of authority for BICO, consistent with the 28 disclosure provided in Schedule 2.1(b); and (n) Purchaser shall have received such other documents and instruments in connection with the Closing as are reasonably requested by it. SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF SELLER. The obligations of Seller to consummate the transactions contemplated hereby are subject to the satisfaction (or waiver by Seller) of the following conditions: (a) the representations and warranties of Purchaser shall be true and accurate as of the Closing Date as if made at and as of such time (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need to be true and accurate only as of such date or with respect to such period), except where the failure of such representations and warranties to be so true and accurate (without giving effect to any limitation as to "materiality" or "material adverse effect" set forth therein) would not materially adversely affect the ability of Purchaser to consummate the transactions contemplated by this Agreement; (b) Purchaser shall have performed in all material respects all of the obligations hereunder required to be performed by Purchaser, at or prior to the Closing Date; (c) Seller shall have received an incumbency certificate and a certificate signed by two executive officers of Purchaser, dated as of the Closing Date, to the effect that the conditions set forth in Section 6.3(a) and Section 6.3(b) have been satisfied; (d) The transactions contemplated by the Acquisition Agreement shall have been consummated; (e) Seller shall have received a duly executed copy of the Underwriting Management Agreement; (f) Seller shall have received a duly executed copy of the Quota Share Reinsurance Agreement; and (g) Seller shall have received certified copies of resolutions duly adopted by the Board of Directors of Purchaser authorizing and approving the execution, delivery and performance of this Agreement and each other agreement required to be executed and delivered by Purchaser pursuant to this Agreement; (h) Seller shall have received such other documents and instruments in connection with the Closing as are reasonably requested by it. 29 ARTICLE VII. TERMINATION SECTION 7.1 TERMINATION. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated and the transactions contemplated herein may be abandoned at any time prior to the Closing Date: (a) by the mutual consent of Seller and Purchaser; (b) by Seller or Purchaser: (i) upon the termination of the Acquisition Agreement; (ii) if the Closing shall not have occurred on or prior to December 31, 1998; PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 7.1(b)(ii) shall not be available to any party whose failure to fulfill any obligation under this Agreement (or, with respect to Seller, whose failure to fulfill any obligation under the Acquisition Agreement) has been the cause of, or resulted in, the failure of the Closing to occur on or prior to such date; or (iii) if any Governmental Entity shall have issued an order, decree or ruling or taken any other action (which order, decree, ruling or other action the parties hereto shall use all reasonable efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the material transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and non-appealable; (c) by Seller if Purchaser (x) breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained herein or (y) breaches its representations and warranties in any material respect, in each case such that the conditions set forth in Section 6.1 or Section 6.3 would not be satisfied; PROVIDED, HOWEVER, that if any such breach is curable within a reasonable period of time by Purchaser through the exercise of Purchaser's best efforts and for so long as Purchaser shall be so using its best efforts to cure such breach, Seller may not terminate this Agreement pursuant to this Section 7.1(c); or (d) by Purchaser if Seller (x) breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained herein or (y) breaches its representations and warranties in any material respect, in each case such that the conditions set forth in Section 6.1 or Section 6.2 would not be satisfied; PROVIDED, HOWEVER, that if any such breach is curable within a reasonable period of time by Seller through the exercise of Seller's best efforts and for so long as Seller shall be so using its best efforts to cure such breach, Purchaser may not terminate this Agreement pursuant to this Section 7.1(d). SECTION 7.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of the termination and abandonment of this Agreement by Seller or Purchaser pursuant to Section 7.1, written 30 notice thereof shall forthwith be given to the other party. If the transactions contemplated by this Agreement are terminated as provided herein: (a) each party will return all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same; (b) all confidential information received by either party with respect to the business of any other party or its subsidiaries or Affiliates shall be treated in accordance with the provisions of the Section 4.12, which shall survive the termination of this Agreement; and (c) neither party will have any liability under this Agreement to the other except (i) as stated in subparagraphs (a) and (b) of this Section 7.2, and (ii) for any willful breach of any provision of this Agreement. ARTICLE VIII. MISCELLANEOUS SECTION 8.1 GOVERNING LAWS AND CONSENT TO JURISDICTION. (a) The laws of the State of New York (irrespective of its choice of law principles) shall govern all issues concerning the validity of this Agreement, the construction of its terms and the interpretation and enforcement of the rights and duties of the parties. (b) To the extent permitted by law, Seller and Purchaser each hereby irrevocably: (i) consent to any suit, action or other proceeding with respect to this Agreement being brought in any federal court of competent jurisdiction; and (ii) waive any objection that they may have now or hereafter to the venue of any such suit, action or other proceeding in any such court and any claim that any of the foregoing have been brought in an inconvenient forum; and (iii) acknowledge the competence of any such court; and agree that the final judgment in any such suit, action or other proceeding brought in any such court, after expiration of all rights of appeal, shall be conclusive and binding upon them and may be enforced in any court to the jurisdiction of which they are or may be subject by a suit upon such judgment, a certified copy of which shall be conclusive evidence of their liability; and (iv) agree that service of process in any suit, action or other proceeding brought in any such court may be made upon them by notice sent by certified mail to the address set forth in this Agreement, or to such other address of which they shall have given written notice to the other sent by overnight courier or certified mail to the address set forth in this Agreement; and 31 (v) waive all claims of error by reason of any service effected in accordance with the provisions of subparagraph (iv) above and agree that such service shall be deemed in every respect effective service upon them in any suit, action or other proceeding and shall be taken and held to be valid personal service upon or personal delivery to them, to the fullest extent permitted by law. SECTION 8.2 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement may be amended, modified and supplemented in any and all respects by written agreement of the parties at any time prior to the Closing Date with respect to any of the terms contained herein. SECTION 8.3 NOTICES. All notices, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon actual receipt or when delivered by hand or by Federal Express or a similar overnight courier, (ii) five days after being deposited in any United States Post Office enclosed in a postage prepaid, registered or certified envelope addressed or (iii) when successfully transmitted by facsimile (with a confirming copy of such communication to be sent as provided in clause (i) or (ii) above), to the receiving party during regular business hours at the address or facsimile number set forth below (or at such other address or facsimile number for a party as shall be specified by like notice); PROVIDED, HOWEVER, that any notice of change of address or facsimile number shall be effective only upon receipt: (a) if to Purchaser, to: Centre Solutions Holdings (Delaware) Limited c/o Zurich Centre Group, LLC Telephone No.: (212) 898-5300 Facsimile No.: (212) 898-5400 Attention: President 32 with a copy to: Rosenman & Colin LLP 575 Madison Ave. New York, New York 10022 Telephone No.: (212) - 940-7003 Facsimile No.: (212) 940-8776 Attention: Richard H. Fortmann (b) if Seller, to: Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, California 91302 Telephone No.: (818) 880-1600 Facsimile No.: (818) 880-8615 Attention: Chief Financial Officer with a copy to: Riordan & McKinzie 300 South Grand Avenue, Suite 2900 Los Angeles, CA 90071 Telephone No.: (213) 229-8509 Facsimile No.: (213) 229-8550 Attention: Dana M. Warren, Esq. SECTION 8.4 INTERPRETATION. (a) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, Section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. The words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. As used in this Agreement, the term "AFFILIATE(S)" shall have the meaning set forth in Rule l2b-2 of the Securities Exchange Act of 1934, as amended. The phrases "to the knowledge of," "to a party's best knowledge," or any similar phrase shall mean such facts and other information which as of the date of determination are known to the referenced party. The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement," "the date hereof" and terms of similar import, unless the context otherwise requires, shall be deemed to refer to December 7, 1998. As used in this Agreement, the term "business day" means a day, other than a Saturday or a Sunday, on which banking institutions in the city of New York are open. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this 33 Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. (b) The Schedules and Exhibits hereto shall be construed with and as an integral part of this Agreement as if the same had been set forth verbatim herein. Any matter disclosed pursuant to such Schedules and Exhibits shall be deemed to be disclosed for all purposes under this Agreement, but such disclosure shall not be deemed to be an admission or representation as to the materiality of the item so disclosed. (c) Headings are for convenience of the parties only and shall be given no substantive or interpretative effect whatsoever. SECTION 8.5 COUNTERPARTS. This Agreement may be executed in multiple counterparts, all of which shall together be considered one and the same agreement. SECTION 8.6 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement, including the Exhibits, Schedules and other documents and instruments referred to herein, (i) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, including the letter of intent dated June 2, 1998, as amended, between the parties with respect to the subject matter hereof and (ii) except as provided herein, are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION 8.7 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. SECTION 8.8 SPECIFIC PERFORMANCE. Each party acknowledges and agrees that in the event of any breach of this Agreement, the non-breaching party would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties will (a) waive, in any action for specific performance, the defense of adequacy of a remedy at law and (b) be entitled, in addition to any other remedy to which they may be entitled at law or in equity, to compel specific performance of this Agreement in any action instituted in accordance with Section 8.1. SECTION 8.9 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either party (whether by operation of law or otherwise) without the prior written consent of the other party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective permitted successors and assigns. SECTION 8.10 EXPENSES. Except as otherwise provided herein, all costs and expenses incurred in connection with the transactions contemplated hereby, this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the transactions contemplated hereby are consummated. 34 SECTION 8.11 WAIVERS. Except as otherwise provided in this Agreement, any failure of either party to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. SECTION 8.12 SURVIVAL. The indemnification agreements set forth in Sections 4.3, 4.8, 4.14, 4.16, 4.17 and Article V hereof, shall survive the Closing in accordance with their respective terms, and any and all covenants and agreements in this Agreement to be performed after the Closing shall survive the Closing in accordance with their terms, including, without limitation, the covenants and agreements of Seller set forth in Sections 1.2 and/or 4.13 of this Agreement. 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. PURCHASER: CENTRE SOLUTIONS HOLDINGS (DELAWARE) LIMITED By: /s/ DAVID L. WASSERMAN -------------------------------------------------- Name: David L. Wasserman Title: President SELLER: SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ J. CHRIS SEAMAN -------------------------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer 36 SCHEDULE NO. GENERAL DESCRIPTION OF SCHEDULE Exhibit 1.2: States whose statutory deposits will be used to calculate the "Excluded Statutory Amount" Schedule 2.1(a): exceptions to valid licenses Schedule 2.1(b): licenses in all jurisdictions in which BICO is currently authorized to transact the business of insurance Schedule 2.4: the authorized, issued and outstanding capital stock of BICO Schedule 2.5: actions, suits, or proceedings involving Seller or BICO or any of their respective officers or directors as such, or any of BICO's assets Schedule 2.6: default or violation of any term, condition or provision of its certificate of incorporation or bylaws, by Seller or BICO Schedule 2.7: Exceptions to BICO tax information represented by Seller. Schedule 2.7 Part (c): all income Tax Returns filed with respect to BICO for taxable periods ended after December 31, 1994, and indicates those Tax Returns that have been audited or are currently the subject of an audit Schedule 2.7 Part (i): the basis of BICO in its assets; the amount of any net operating loss, net capital loss, and the amount of any deferred gain or loss allocable to each party Schedule 2.10: complaints of any unfair labor practice or discriminatory employment practice against BICO filed or threatened to be filed by the NLRB, the EEOC or any other administrative agency Schedule 2.12: Intellectual Property -- listing of all material trademarks, copyrights and patents owned or used by BICO in the conduct of its business Schedule 4.3(h): Code Section 338(h)(10) Election - allocation by Purchaser and Seller of the purchase price among BICO's assets Schedule 4.4(c): list of states which require Purchaser and Seller to make filings and submissions of information with the insurance departments of those states Schedule 4.6(a): contracts not terminated and released by Seller, BIG and/or BICO as of the Closing Date Schedule 4.14: all liabilities of BICO as of September 30, 1998. Schedule 4.15: operations insurance provided by Seller in favor of BICO. Schedule 6.1(b): required insurance regulatory approvals of the consummation of the transactions contemplated in SPA Schedule 6.2(b)(ii): BICO assets on deposit with insurance regulatory authorities Schedule 6.2(b)(iii): BICO's liabilities as of Closing The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request. EX-3.1 3 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SUPERIOR NATIONAL INSURANCE GROUP, INC. Superior National Insurance Group, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY THAT: FIRST: The name of the corporation is Superior National Insurance Group, Inc. (the "Corporation"), and that the corporation was incorporated on December 3, 1996 pursuant to the General Corporation Law. SECOND: This Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors at a meeting held on July 16, 1998 and was duly adopted by the stockholders of the Corporation at a stockholders meeting held on November 3, 1998 in accordance with the provisions of Sections 242 and 245 of the General Corporation Law. THIRD: The Certificate of Incorporation of the Corporation is hereby amended and restated in its entirety as follows: I, the undersigned, for the purposes of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, do execute this Certificate of Incorporation and do hereby certify as follows: FIRST. The name of the corporation is Superior National Insurance Group, Inc. (the "Corporation"). SECOND. The address of the Corporation's registered office in the State of Delaware is One Rodney Square, 10th Floor, Tenth and King Streets, in the City of Wilmington, County of New Castle, 19801. The name of its registered agent at such address is RL&F Service Corp. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The total number of shares of stock which the Corporation shall have authority to issue is forty million (40,000,000.00). All such shares are to be common stock, par value of $.01 per share (the "Common Stock"), and are to be of one class. FIFTH. (a) Each holder of the Corporation's 14.5% Senior Subordinated Voting Notes due April 1, 2002 (the "Special Voting Notes") issued pursuant to the Note Purchase Agreement dated March 31, 1992 (the "Note Purchase Agreement") shall be entitled to vote only for the election or removal of directors to (or from) the board of directors of the Corporation (the "Board"), and shall have that number of votes arrived at by the following calculations: (i) dividing the principal amount of the Special Voting Note held by a particular holder by the total principal amount of all outstanding Special Voting Notes; and (ii) multiplying the result of (i) by the total number of shares of this Corporation's Common Stock issuable upon exercise of all the warrants issued pursuant to the Note Purchase Agreement and outstanding on the record date for any vote of this Corporation's shareholders for the election or removal of directors. To the extent of this limited right to vote granted to holders of the Special Voting Notes, the holders of the Common Stock and of the Special Voting Notes shall vote together and not as separate classes. (b) The terms of paragraph (a) of article FIFTH may not be amended without the approval of the holders of the Special Voting Notes then outstanding, voting as a separate class. (c) The Board of Directors shall consist of eleven (11) members unless changed by an amendment to the Certificate of Incorporation. Any change in the authorized number of directors or the provisions regarding the election of directors shall require the affirmative vote of the majority of the outstanding Special Voting Notes, voting as a separate class. SIXTH. The holders of the Special Voting Notes and the Common Stock, voting together as a single class, shall be entitled at all elections of directors to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected, and such holder may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them as he or she may see fit. The holders of the Common Stock shall be entitled to one vote for each share upon all other matters. SEVENTH. The incorporator of the Corporation is C. Stephen Bigler, P.O. Box 551, Wilmington, DE 19899. EIGHTH. Unless and except to the extent that the by-laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. 2 NINTH. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board is expressly authorized to make, alter and repeal the by-laws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any by-law whether adopted by them or otherwise. TENTH. A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any amendment, modification or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the Corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal. ELEVENTH. The Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this article. IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been signed by the Executive Vice President and Secretary of the Corporation this 7th day of December, 1998. SUPERIOR NATIONAL INSURANCE GROUP, INC., a Delaware corporation /s/ J. CHRIS SEAMAN ---------------------------------- Name: J. Chris Seaman Title: Executive Vice President ATTEST: /s/ ROBERT E. NAGLE - ----------------------------- Name: Robert E. Nagle Title: Secretary 3 EX-4.7 4 EXHIBIT 4.7 ---------------------------------------- SUPERIOR NATIONAL INSURANCE GROUP, INC. AS ISSUER WILMINGTON TRUST COMPANY AS TRUSTEE ---------------------- FIRST SUPPLEMENTAL INDENTURE Dated as of November 17, 1998 ---------------------- To The Senior Subordinated Indenture Dated as of December 3, 1997 Between Superior National Insurance Group, Inc., as Issuer, and Wilmington Trust Company, as Trustee, Relating to $108,325,000 Aggregate Principal Amount of 10 3/4% Senior Subordinated Notes due 2017 ---------------------------------------- FIRST SUPPLEMENTAL INDENTURE, dated as of November 17, 1998 (this "Supplemental Indenture"), between Superior National Insurance Group, Inc., a corporation organized under the law of the State of Delaware (the "Company"), and Wilmington Trust Company, a Delaware banking corporation (the "Trustee"), as Trustee under the Indenture (as defined below). Capitalized terms used and not defined herein shall have the same meanings given to them in the Indenture unless otherwise indicated. WHEREAS, the Company and the Trustee are parties to that certain Senior Subordinated Indenture, dated as of December 3, 1997 (the "Indenture"), pursuant to which the Company issued its 10 3/4% Senior Subordinated Notes due 2017; WHEREAS, pursuant to Section 9.2 of the Indenture, the Company and the Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities affected thereby, may modify the Indenture to, among other things, modify the rights of the Holders under the Indenture in the manner set forth herein; WHEREAS, pursuant to Section 9.2 of the Indenture, no such modification to the Indenture may be made without the additional prior consent of the holders of at least a majority of the outstanding aggregate liquidation preference of the 10 3/4% Trust Preferred Securities (the "Preferred Securities") of Superior National Capital Trust I (the "Trust"); WHEREAS, pursuant to a Consent Solicitation Statement, dated October 30, 1998, of the Company and the Trust, the requisite prior consent of the holders of the Preferred Securities has been obtained to effect the modification of the Indenture in the manner described herein (the "Waiver") by way of this Supplemental Indenture; WHEREAS, Holders of not less than a majority in outstanding aggregate principal amount of the Outstanding Securities have consented to the Waiver; and WHEREAS, by entering into this Supplemental Indenture, the Company and the Trustee have consented to modify the Indenture in accordance with the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Trustee hereby agree for the benefit of each other and the equal and ratable benefit of the holders of the Securities as follows: 1. MODIFICATION TO THE INDENTURE. On the Effective Date (as hereinafter defined) the Indenture is modified as follows: (a) Section 10.8(a) of the Indenture is hereby waived to the extent required to permit the Company to Incur, for purposes of the Company's acquisition of Business Insurance Group, Inc., 1 up to $110,000,000 in aggregate principal amount of Senior Indebtedness through a public or private offering of senior notes or through a credit facility or other borrowing arrangement with a lender or lenders, or a combination thereof (the "Senior Debt Financing"). (b) After giving effect to the Incurrence of the Indebtedness pursuant to the Senior Debt Financing, the Company will be deemed, for all purposes of the Indenture, as having Incurred such Indebtedness pursuant to Section 10.8(a) of the Indenture. 2. COMPLIANCE WITH AND FULFILLMENT OF CONDITIONS PRECEDENT. All conditions precedent to the execution and delivery of this Supplemental Indenture have been met, including, but not limited to (a) an Opinion of Counsel and/or an Officers' Certificate (i) as to the due authorization, execution and delivery of the Supplemental Indenture by the Company, (ii) as to the enforceability of the Supplemental Indenture, (iii) as to the due authorization of the Supplemental Indenture by the Indenture, and (iv) as to the satisfaction of all conditions precedent to the execution, delivery and performance of the Supplemental Indenture; (b) that Holders of not less than a majority in principal amount of the Outstanding Securities affected by this Supplemental Indenture have consented (in accordance with the terms of the Indenture) and that such consent has been delivered to the Company and the Trustees; and (c) the adoption of a Board Resolution of the Company authorizing this Supplemental Indenture. 3. EFFECTIVE DATE. This Supplemental Indenture shall become effective on the date (the "Effective Date") on which the Company and the Trustee execute and deliver this Supplemental Indenture. 4. CONSTRUCTION. For all purposes of this Supplemental Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (i) the terms and expressions used herein shall have the same meanings as corresponding terms and expressions used in the Indenture; and (ii) the words "herein," "hereof" and "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular Section hereof. 5. TRUSTEE ACCEPTANCE. The Trustee accepts the modification of the Indenture effected by this Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture, as hereby amended, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee in the performance of its duties and obligations under the Indenture, as hereby amended. Without limiting the generality of the foregoing, the Trustee has no responsibility for the correctness of the recitals of fact herein contained which shall be taken as the statements of the Company, and makes no representations as to the validity or enforceability against the Company. 6. INDENTURE RATIFIED. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in 2 full force and effect. All protection afforded the Trustee by the Indenture shall also be afforded to the Trustee in connection with its execution, delivery and performance of this Supplemental Indenture. 7. HOLDERS BOUND. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of the Securities heretofore or hereafter authenticated and delivered shall be bound hereby. 8. CONFLICT WITH TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required or deemed under the Trust Indenture Act to be part of and govern this Supplemental Indenture, the latter provision shall control. If any provision of this Supplemental Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Supplemental Indenture as so modified or to be excluded, as the case may be. 9. HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 10. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Supplemental Indenture by the Company shall bind its respective successors and assigns, whether so expressed or not. 11. SEPARABILITY CLAUSE. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 12. GOVERNING LAW. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 13. DUPLICATE ORIGINALS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 14. NO RECOURSE AGAINST OTHERS. A Director, officer, employee, stockholder or incorporator as such, of the Company shall not have any liability for any obligations of the Company under this Supplemental Indenture for any claims based on, in respect of or by reason of such obligations or their creation. 15. COUNTERPARTS. This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument. 3 4 IN WITNESS WHEREOF, the Company and the Trustee have caused this Supplemental Indenture to be duly executed as of the date first above written. COMPANY: SUPERIOR NATIONAL INSURANCE GROUP, INC., a Delaware corporation By /s/ J. CHRIS SEAMAN ---------------------------------------- Name: J. Chris Seaman Title: Executive Vice President and Chief Financial Officer TRUSTEE: WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Trustee By /s/ ANNE ROBERTS ---------------------------------------- Name: Anne Roberts Title: Sr. Financial Svc. Officer 5 EX-10.65 5 EXHIBIT 10.65 The attached form of warrant was issued on December 10, 1998 as follows: Holder Warrant Allocation ------ ------------------ Insurance Partners Advisors, Inc 229,754 Insurance Partners Advisors, Inc. 93,206 Zurich Centre Group Holdings Limited 205,520 Robert Spass 32,825 Steven Gluckstern 32,825 Laurence Cheng 82,825 Mark Gormley 21,336 Brad Cooper 16,413 Paul Warren 16,413 Adam Mizel 16,413 Scott Delman 10,504 Philip Larson 3,138 Sharissa Jones 3,138 Eric Rahe 3,138 Susan Fleming 3,138 Julian Allen 3,138 Elizabeth Danes 2,092 David Spuria 1,395 Jon Kelly 4,184 Roland Bernardon 523 Eric Leathers 694 Avi Kalichstein 694 Justin Cohen 694 COMMON STOCK PURCHASE WARRANT Issued By SUPERIOR NATIONAL INSURANCE GROUP, INC. THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT, EXCEPT UNDER CIRCUMSTANCES WHERE NEITHER SUCH REGISTRATION NOR SUCH AN EXEMPTION IS REQUIRED BY LAW. THIS WARRANT AND SUCH SECURITIES MAY BE TRANSFERRED ONLY UPON THE FULFILLMENT OF THE CONDITIONS SPECIFIED IN THIS WARRANT. - -------------------------------------------------------------------------------- No. 1998 W-__ Dated as of December 10, 1998 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- SECTION 1. EXERCISE OF WARRANT. . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Manner of Exercise . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 When Exercise Effective. . . . . . . . . . . . . . . . . . . 2 Section 1.3 Delivery of Stock Certificate, etc.. . . . . . . . . . . . . 3 Section 1.4 Company to Reaffirm Obligations. . . . . . . . . . . . . . . 3 Section 1.5 Compliance with Law, etc.. . . . . . . . . . . . . . . . . . 3 SECTION 2. ADJUSTMENT OF COMMON STOCK ISSUABLEUPON EXERCISE OF WARRANT. . . . 3 Section 2.1 General; Warrant Price . . . . . . . . . . . . . . . . . . . 3 Section 2.2 Adjustment of Warrant Price. . . . . . . . . . . . . . . . . 4 Section 2.3 Options and Convertible Securities . . . . . . . . . . . . . 5 Section 2.4 Stock Dividends, Stock Splits. etc.. . . . . . . . . . . . . 7 Section 2.5 Computation of Consideration . . . . . . . . . . . . . . . . 7 Section 2.6 Dilution in Case of Other Securities . . . . . . . . . . . . 8 Section 2.7 Adjustments for Combinations, etc. . . . . . . . . . . . . . 9 Section 2.8 Other Adjustments. . . . . . . . . . . . . . . . . . . . . . 9 Section 2.9 Determinations by Board of Directors . . . . . . . . . . . . 9 SECTION 3. ADJUSTMENTS FOR CONSOLIDATION, MERGER, SALEOF ASSETS, REORGANIZATION, ETC. . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4. OTHER DILUTIVE EVENTS. . . . . . . . . . . . . . . . . . . . . . .10 SECTION 5. NO DILUTION OR IMPAIRMENT. . . . . . . . . . . . . . . . . . . . .11 SECTION 6. ACCOUNTANTS' REPORT AS TO ADJUSTMENTS. . . . . . . . . . . . . . .11 SECTION 7. NOTICES OF CORPORATE ACTION. . . . . . . . . . . . . . . . . . . .12 SECTION 8. RESTRICTIONS ON TRANSFER; REGISTRATION . . . . . . . . . . . . . .13 Section 8.1 Restrictive Legends. . . . . . . . . . . . . . . . . . . . .13 Section 8.2 Notice of Proposed Transfer; Opinions of Counsel . . . . . .14 Section 8.3 Termination of Restrictions. . . . . . . . . . . . . . . . .15 SECTION 9. AVAILABILITY OF INFORMATION. . . . . . . . . . . . . . . . . . . .15
i SECTION 10. RESERVATION OF STOCK, ETC.. . . . . . . . . . . . . . . . . . . .16 SECTION 11. LISTING ON SECURITIES EXCHANGES . . . . . . . . . . . . . . . . .17 SECTION 12. MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . .17 SECTION 13. OWNERSHIP, REGISTRATION OF TRANSFER, EXCHANGEAND SUBSTITUTION OF WARRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Section 13.1 Ownership of Warrants. . . . . . . . . . . . . . . . . . . .17 Section 13.2 Transfer and Exchange of Warrants. . . . . . . . . . . . . .17 Section 13.3 Replacement of Warrants. . . . . . . . . . . . . . . . . . .18 Section 13.4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 14. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 15. REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 16. NO RIGHTS OR LIABILITIES AS STOCKHOLDER . . . . . . . . . . . . .22 SECTION 17. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 18. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 19. EXPIRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .23 SUBSCRIPTION NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
ii COMMON STOCK PURCHASE WARRANT Dated as of December 10, 1998 Superior National Insurance Group, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that ________ ("Holder"), is entitled to purchase from the Company _______ duly authorized, validly issued, fully paid and non-assessable shares of Common Stock (as defined in Section 14 herein) at the purchase price per share of $16.75, at any time or from time to time prior to 5:00 p.m. Pacific time, on December 10, 2003 (or such later date as may be determined pursuant to Section 19), all subject to the terms, conditions and adjustments set forth below in this Warrant, and is entitled to exercise the other rights, powers and privileges hereinafter specified. This Warrant constitutes (or has been issued in exchange or substitution for, or upon registration of transfer of one of) one of the Common Stock Purchase Warrants issued and delivered pursuant to the Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of May 5, 1998, among the Company, Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P. and Capital Z Partners, Ltd. The Stock Purchase Agreement is available for inspection by the holder of this Warrant during normal business hours at the office or agency maintained by the Company pursuant to Section 12 and at the principal office of the Company referred to in, or notice of which is given by the Company pursuant to, Section 17, and, upon request therefor, the Company will furnish to the holder of this Warrant a true and complete copy of the Stock Purchase Agreement as in effect at the time. All the Warrants, as originally so issued, evidenced the right to purchase an aggregate of 734,000 shares of Common Stock, subject to adjustment as provided herein. The term "Warrants," when used herein, means this Warrant and all Warrants issued in exchange or substitution therefor or upon registration of transfer hereof. The Warrants, although issued in connection with the issuance and sale of shares of Common Stock pursuant to the Stock Purchase Agreement (the "Purchase Shares") and although containing provisions that refer to the Stock Purchase Agreement, are detachable warrants and, accordingly, are exercisable and transferable (subject to compliance with Section 8, if applicable) without presentation of any of the Purchase Shares. Certain terms used in this Warrant are defined in Section 14. SECTION 1. EXERCISE OF WARRANT Section 1.1 MANNER OF EXERCISE. This Warrant may be exercised by the holder hereof, in whole or in part, during normal business hours on any Business Day by surrender of this Warrant, with the form of subscription at the end hereof or a reasonable facsimile thereto duly executed by such holder, to the Company at the office or agency maintained by the Company pursuant to Section 12, (a) accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount (the "Exercise Price") obtained by multiplying (i) the number of shares of Common Stock (without giving effect to any adjustment therein) designated in such form of subscription (or such reasonable facsimile) by (ii) $16.75, and such holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully paid and non-assessable shares of Common Stock (or Other Securities) determined as provided in Section 2; or (b) accompanied by a notice to exercise its Cashless Exercise Right (as defined herein). The holder hereof shall have the right to require the Company to reduce the number of shares of Common Stock to be received by such holder in lieu of paying the Exercise Price (the "Cashless Exercise Right"). If the Cashless Exercise Right is exercised, the holder shall not be obligated to pay the Exercise Price and the Company shall deliver to such holder (without payment by such holder of any of the Exercise Price) the number of duly authorized, validly issued, fully paid and non-assessable shares of Common Stock (or Other Securities) determined by Section 2 reduced by that number of shares of Common Stock (or Other Securities) equal to the quotient obtained by dividing (i) the Exercise Price by (ii) the Market Price of one share of Common Stock (or Other Securities) on the Business Day next preceding the date of exercise of the Cashless Exercise Right; or (c) accompanied by a notice to exercise its In-Kind Exercise Right (as defined herein). The holder shall have the right to pay the Exercise Price with shares of Common Stock (the "In-Kind Exercise Right") that either accompany the notice or are acquired concurrently therewith pursuant to paragraph (a), (b) or this paragraph (c). For purposes of this paragraph, any share of Common Stock used to pay the Exercise Price shall be deemed to have a value equal to the Market Price of one share of Common Stock on the Business Day next preceding the date of exercise of the In-Kind Exercise Right. Section 1.2 WHEN EXERCISE EFFECTIVE. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered as provided in Section 1.1, and immediately prior to the close of business on such Business Day the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities) shall be issuable upon such exercise as provided in Section 1.3 shall be deemed to have become the holder or holders of record thereof. 2 Section 1.3 DELIVERY OF STOCK CERTIFICATE, ETC. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within five Business Days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof or, subject to Section 8, as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction (calculated to the nearest 1/100th of a share) of the Market Price of one full share on the Business Day next preceding the date of such exercise, and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder upon such exercise as provided in Section 1.1. Section 1.4 COMPANY TO REAFFIRM OBLIGATIONS. The Company will, at the time of each exercise of this Warrant, acknowledge in writing its continuing obligation to afford to such holder all rights to which such holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant; PROVIDED, HOWEVER, that if the Company shall fail to make any such written acknowledgment, such failure shall not affect the continuing obligation of the Company to afford such rights to such holder. Section 1.5 COMPLIANCE WITH LAW, ETC. Each exercise of this Warrant shall at all times be subject to the provisions of any applicable law relating to the rights of non-citizens of the United States of America or other classes of Persons to own shares of the Company. SECTION 2. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANT 3 Section 2.1 GENERAL; WARRANT PRICE. The number of shares of Common Stock which the holder of this Warrant shall be entitled to receive upon the exercise hereof shall be determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Section 2) be issuable upon such exercise, as designated by the holder hereof pursuant to Section 1.1, by the fraction of which (a) the numerator is $16.75 and (b) the denominator is the Warrant Price (as defined below in this Section 2.1) in effect on the date of such exercise. If a holder exercises a Cashless Exercise Right, the number of shares of Common Stock such holder shall be entitled to receive upon exercise of the warrant shall be reduced in accordance with Section 1.1(b). The "Warrant Price" per share of Common Stock shall initially be $16.75, shall be adjusted and readjusted from time to time as provided in this Section 2 and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Section 2. Section 2.2 ADJUSTMENT OF WARRANT PRICE. Section 2.2.1 In case the Company, at any time or from time to time after the Closing Date shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Sections 2.3 or 2.4) without consideration or for a consideration per share less than the Current Market Price in effect immediately prior to such issue or sale, then, and in each such case, such Warrant Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest cent) determined by multiplying such Warrant Price by a fraction: (a) the numerator of which shall be the number of shares of Common Stock outstanding, which number shall for purposes of this Section 2.2.l(a) include the Common Stock Deemed to be Outstanding, immediately prior to such issue or sale, plus the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued or sold would purchase at the greater of such Current Market Price and such Warrant Price; and (b) the denominator of which shall be the number of shares of Common Stock outstanding, which number shall for purposes of this Section 2.2. l(b) include the Common Stock Deemed to be Outstanding, immediately after such issue or scale; PROVIDED, HOWEVER, that for the purposes of this Section 2.2.1, treasury shares shall not be deemed to be outstanding; and PROVIDED, FURTHER, that if any such Additional Shares of Common Stock are issued pursuant to a binding agreement entered into prior to the date of issuance of such shares and the per share consideration to be paid by the purchaser 4 for each such Additional Share of Common Stock under such agreement is at least eighty-five percent (85%) of the Market Price per share of Common Stock on the Business Day next preceding the date such agreement is entered into by the parties thereto, then no adjustment shall be made to the Warrant Price pursuant to this Section 2.2.1. Section 2.2.2 In case the Company, at any time or from time to time after the Closing Date, shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization, merger or consolidation in which the Company is the continuing or resulting corporation, or similar corporate rearrangement) on the Common Stock, other than (a) a dividend payable in Additional Shares of Common Stock for which an adjustment has been made pursuant to Section 2.2.1 hereof and (b) regular periodic cash dividends declared out of earned surplus of the Company in an aggregate amount not greater than fifty cents ($.50) per share of Common Stock per annum (as adjusted for any stock split, combination, reclassification or similar events with respect to the Common Stock), then, and in each such case, the Warrant Price in effect immediately prior to the close of business on the record date fixed for the determination of the Persons entitled to receive such dividend or distribution shall be adjusted, effective as of the close of business on such record date, to a price (calculated to the nearest cent) determined by multiplying such Warrant Price by a fraction: (i) the numerator of which shall be the Current Market Price in effect on such record date less the amount of such dividend or distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock; and (ii) the denominator of which shall be such Current Market Price. Section 2.3 OPTIONS AND CONVERTIBLE SECURITIES. In case the Company, at any time or from time to time after the Closing Date, shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities entitled to receive, any Options (other than those provided for and reserved pursuant to the Stock Option Plan as of the date of the original issuance of this Warrant) or Convertible Securities, then, and in each such case, the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of 5 business on such record date; PROVIDED, HOWEVER, that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined in accordance with Section 2.5) of such shares would be less than the Current Market Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date, as the case may be, and PROVIDED, FURTHER, that in any such case in which Additional Shares of Common Stock are deemed to be issued: (a) no further adjustment of the Warrant Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Company, or any increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Warrant Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration (or purchase by the Company and cancellation) of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Warrant Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation, as the case may be), be recomputed as if: (i) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued or sold were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were 6 actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange; and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise thereof were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (in accordance with Section 2.5) upon the issue or sale of the Convertible Securities in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and (d) no readjustment pursuant to clause (b) or (c) above shall have the effect of increasing the Warrant Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities. Section 2.4 STOCK DIVIDENDS, STOCK SPLITS. ETC. In case the Company, at any time or from time to time after the Closing Date, shall declare or pay any dividend on the Common Stock or any other security, payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, the Warrant Price in effect immediately prior to the payment of such dividend or effectiveness of such subdivision shall be proportionately reduced (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. Section 2.5 COMPUTATION OF CONSIDERATION. For the purposes of this Section 2: (a) the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration: 7 (i) insofar as it consists of cash, be computed at the net amount of cash received by the Company, before deducting any expenses paid or incurred by the Company and all commissions and compensation paid and concessions and discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale; (ii) insofar as it consists of property (including securities) other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company; and (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, by the applicable proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined in good faith by the Board of Directors of the Company. (b) Additional Shares of Common Stock deemed to have been issued pursuant to Section 2.3, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing: (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subdivision (a), by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable 8 upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and (c) Additional Shares of Common Stock deemed to have been issued pursuant to Section 2.4, relating to stock dividends and stock splits, shall be deemed to have been issued for no consideration. Section 2.6 DILUTION IN CASE OF OTHER SECURITIES. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company (or any issuer of Other Securities or any other Person referred to in Section 3) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by the Company (or any other issuer or Person), the computations, adjustments and readjustments provided for in this Section 2 with respect to the Warrant Price shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of the Warrants, so as to protect the holders of the Warrants against the effect of the dilution of the purchase rights granted by the Warrants. Section 2.7 ADJUSTMENTS FOR COMBINATIONS, ETC. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then, and in each such case, the Warrant Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. Section 2.8 OTHER ADJUSTMENTS. Adjustments shall also be made at the times and under the circumstances specified in Sections 3 and 4. Section 2.9 DETERMINATIONS BY BOARD OF DIRECTORS. All determinations by the Board of Directors of the Company under the provisions of this Warrant shall be made in good faith with due regard to the interests of the holder of this Warrant, and in accordance with good financial practice. SECTION 3. ADJUSTMENTS FOR CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. 9 In case the Company, after the Closing Date, (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation in such consolidation or merger, (b) shall permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Stock or Other Securities shall be changed into or exchanged for stock of other securities of any other Person or cash or any other property, (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the Common Stock or Other Securities (other than a capital reorganization or reclassification resulting in the issue of Additional Shares of Common Stock for which adjustment in the Warrant Price is provided in Section 2.2), then, and in each such case, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Section 3, the holder of this Warrant, upon the exercise hereof at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive (at the aggregate Warrant Price in effect at the time of such consummation for all Common Stock or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock or Other Securities issuable upon such exercise prior to such consummation, the stock and other securities, cash and property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for in Section 2 and this Section 3; PROVIDED, HOWEVER (and the Company covenants), that (1) the Company shall not effect any of the transactions described in clauses (a) through (c) above with any Person other than a corporation, and that (2) the Company shall not effect any of the transactions described in clauses (a) through (d) above unless, immediately after the date of the consummation of such transaction, the Acquiring Corporation or its Parent is required to file, and in each of its three fiscal years immediately preceding the date of the consummation of such transaction has filed, reports with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. In the event that the Acquiring Corporation fulfills the requirements contained in the immediately preceding proviso, then, if the holder of this Warrant shall elect (or shall be deemed to elect) to receive common stock pursuant to clause (b) above, such holder shall be entitled to receive, upon the basis stated in such clause (b), the common stock of the Acquiring Corporation and not of its Parent. Notwithstanding anything contained herein to the contrary, the Company will not effect any of the transactions described in clauses (a) through (d) above unless, prior to the consummation thereof, each Person (other than the Company) which may be required to deliver any stock, securities, cash or property upon the exercise hereof shall assume, by written instrument delivered and satisfactory to the holder of this Warrant, the obligation to deliver to such holder such shares of stock, securities, cash or property as in accordance with the foregoing provisions, such holder may be entitled to purchase, and such Person shall have furnished to the holder 10 hereof an opinion of counsel for such Person, which counsel shall be satisfactory to such holder, stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of Section 2 and this Section 3) shall be applicable to the stock, securities, cash or property which such Person may be required to deliver upon the exercise hereof. SECTION 4. OTHER DILUTIVE EVENTS In case any event shall occur as to which the provisions of Section 2 or Section 3 are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles of such Sections, then, in each such case, the Company shall appoint a firm of independent certified public accountants of recognized national standing (which may be the regular independent auditors of the Company), which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in Sections 2 and 3, necessary to preserve, without dilution, the purchase rights represented by this Warrant. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the holder of this Warrant and shall make the adjustments described therein. SECTION 5. NO DILUTION OR IMPAIRMENT The Company will not, by amendment of its charter or through any consolidation, merger, reorganization, transfer of assets, 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 of the Warrants, but will at all times in good faith carry out all such terms and take all such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of stock receivable upon the exercise of the Warrants to exceed the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue, free from preemptive rights, fully paid and non-assessable shares of stock upon the exercise of all Warrants from time to time outstanding, (c) will not take any action which results in any adjustment of the Warrant Price if the total number of shares of Common Stock (or Other Securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or Other Securities) then authorized by the Company's charter and available for the purpose of issue upon such exercise, and (d) will not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, 11 liquidation or winding-up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par value in respect of participation in dividends and in any such distribution of assets. SECTION 6. ACCOUNTANTS' REPORT AS TO ADJUSTMENTS In the case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrants, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms of the Warrants and cause independent public accountants of recognized national standing selected by the Company to verify such computation and prepare a report setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock issued or sold or deemed to have been issued, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Warrant Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by Section 2) on account thereof. The Company will forthwith mail a copy of each such report to each holder of a Warrant, and will, upon the written request at any time of any holder of a Warrant, furnish to such holder a like report setting forth the Warrant Price at the time in effect and showing how it was calculated. The Company will also keep copies of all such reports at its principal office and at the office or agency maintained by the Company pursuant to Section 12, and will cause the same to be available for inspection at such offices during normal business hours by any holder of a Warrant or any prospective purchaser of a Warrant designated by the holder thereof. SECTION 7. NOTICES OF CORPORATE ACTION In the event of a proposal by the Company (or of which the Company shall have knowledge) for: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the rate most recently established by the Board of Directors of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or 12 (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation, merger or exchange of shares involving the Company and any other Person or any transfer of all or substantially all the assets of the Company to any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will mail to each holder of a Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, exchange of shares, transfer, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, exchange of shares, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least 30 days prior to the date therein specified. SECTION 8. RESTRICTIONS ON TRANSFER; REGISTRATION Section 8.1 RESTRICTIVE LEGENDS. Except as otherwise permitted by this Section 8, the Warrant originally issued pursuant to the Stock Purchase Agreement, each Warrant issued in exchange or substitution for any Warrant pursuant to Section 13, and each Warrant issued upon the registration of transfer of any Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and any securities acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933 and may not be transferred in the absence of such registration or an exemption therefrom under such Act, except under circumstances where neither such registration nor such an exemption is required by law. This Warrant and such securities may be transferred only upon the fulfillment of the conditions specified in this Warrant." Except as otherwise permitted by this Section 8, each certificate representing shares of Common Stock (or Other Securities) issued upon the exercise of any Warrant, and each 13 certificate issued upon the registration of transfer of any shares of such Common Stock (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933 and may not be transferred in the absence of such registration or an exemption therefrom under such Act, except under circumstances where neither such registration nor such an exemption is required by law. Such securities may be transferred only upon the fulfillment of the conditions specified in certain Common Stock Purchase Warrants issued pursuant to the Stock Purchase Agreement, dated as of May 5, 1998, between Superior National Insurance Group, Inc. (the "Company"), Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., and Capital Z Partners, Ltd. and in the Stock Purchase Agreement. A complete and correct copy of the form of such warrants and the Stock Purchase Agreement are available for inspection at the principal office of the Company and will be furnished to the holder of such securities upon written request and without charge." Section 8.2 NOTICE OF PROPOSED TRANSFER; OPINIONS OF COUNSEL. Prior to any transfer of any Restricted Securities, the holder thereof will give written notice to the Company of such holder's intention to effect such transfer and to comply in all other respects with this Section 8.2. Each such notice (a) shall describe the manner and circumstances of the proposed transfer in sufficient detail to enable counsel to render the opinions referred to below, and (b) shall designate counsel for the holder giving such notice (who may be in-house counsel for such holder). The holder giving such notice will submit a copy thereof to the counsel designated in such notice and the Company will promptly submit a copy thereof to its counsel. The following provisions shall then apply: (i) If in the opinion of each such counsel the proposed transfer may be effected without registration of such Restricted Securities under the Securities Act, the Company will promptly notify the holder thereof and such holder shall thereupon be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by such holder to the Company. Each Warrant or certificate, if any, issued upon or in connection with such transfer shall bear the applicable restrictive legend set forth in Section 8.1, unless in the opinion of 14 each such counsel such legend is no longer required to ensure compliance with the Securities Act. If for any reason counsel for the Company (after having been furnished with the information required to be furnished by clause (a) of this Section 8.2) shall fail to deliver an opinion to the Company, or the Company shall fail to notify such holder thereof as aforesaid, within 15 days after counsel for such holder shall have delivered its opinion to such holder (with a copy to the Company), then for all purposes of this Warrant the opinion of counsel for such holder shall be sufficient to authorize the proposed transfer and the opinion of counsel for the Company shall not be required in connection with such proposed transfer; and (ii) If in the opinion of either or both of such counsel the proposed transfer may not be effected without registration of such Restricted Securities under the Securities Act, the Company will promptly so notify the holder thereof and such holder shall not be entitled to transfer such Restricted Securities until receipt of a further notice from the Company under clause (i) above or until registration of such Restricted Securities under the Securities Act has become effective. Notwithstanding the foregoing provisions of this Section 8.2 but subject to the provisions of the Stock Purchase Agreement, the Holder shall be permitted at any time or from time to time to transfer any Restricted Securities to a limited number of institutional investors; PROVIDED, HOWEVER, that (w) each such investor represents in writing that it is acquiring such Restricted Securities for investment and not with a view to the distribution thereof (subject, however, to any requirement of law to the effect that the disposition thereof shall at all times be within the control of such transferee), (x) each such investor agrees in writing to be bound by all the restrictions on transfer of such Restricted Securities contained in this Section 8.2, (y) the Holder delivers to the Company an opinion of Paul, Weiss, Rifkind, Wharton & Garrison or in-house counsel for the Holder, or other counsel satisfactory to the Company, stating that such transfer may be effected without registration under the Securities Act, and (z) the Holder delivers to the Company, at least 10 days prior to such transfer, the name of the counsel who will deliver the opinion referred to in clause (y) above. The Company will pay the reasonable fees and disbursements of counsel (other than in-house counsel) for any holder of Restricted Securities and of counsel for the Company in connection with all opinions rendered by them pursuant to this Section 8.2 and pursuant to Section 8.3. Section 8.3 TERMINATION OF RESTRICTIONS. The restrictions imposed by this Section 8 upon the transferability of Warrants and Common Stock (or Other Securities) shall cease and terminate as to any particular Warrants or Common Stock (or Other Securities) (a) when such securities shall have been effectively registered under the 15 Securities Act and disposed of in accordance with the registration statement covering such securities, or (b) when, in the opinions of both counsel for the holder thereof and counsel for the Company, or when, on the basis of a pertinent Commission rule or regulation promulgated under the Securities Act, or a pertinent "no-action" position taken by the staff of the Commission, such restrictions are no longer required in order to ensure compliance with the Securities Act. Whenever such restrictions shall terminate as to any Warrants or Common Stock (or Other Securities), the holder thereof shall be entitled to receive from the Company, without expense (other than transfer taxes, if any), new securities of like tenor not bearing the applicable legend set forth in Section 8.1. SECTION 9. AVAILABILITY OF INFORMATION If and so long as the Company is a Public Company, the Company will comply with the reporting requirements of Sections 13 and 15(d) of the Securities Exchange Act and will comply with all other public information reporting requirements of the Commission (including the requirements of Rule 144 promulgated by the Commission under the Securities Act) from time to time in effect and relating to the availability of an exemption from the Securities Act for the sale of any Restricted Securities or the sale of securities by affiliates. The Company will also cooperate with each holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Restricted Securities or the sale of securities by affiliates. The Company will deliver to each holder of a Warrant, promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Company to its stockholders, and copies of all regular and periodic reports and all registration statements and prospectuses filed by the Company with any securities exchange, or with the Commission. SECTION 10. RESERVATION OF STOCK, ETC. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants and free from preemptive rights, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants at the time outstanding. All such shares (and any such Other Securities consisting of shares of capital stock) shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable with no liability on the part of the holders thereof. Any such Other Securities (other than shares of capital stock) shall be duly authorized and, when issued upon such exercise, shall be validly issued and legally binding obligations, enforceable in 16 accordance with their terms, with no liability on the part of the holders thereof. Without limiting the generality of the foregoing, if any shares of Common Stock (or Other Securities) required to be reserved for the purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal law (other than the Securities Act) or under any state law before such shares (or Other Securities) may be issued upon exercise of this Warrant, the Company will at its expense, as expeditiously as possible, cause such shares (or Other Securities) to be duly registered or approved, as the case may be. The Company, in addition, will review its stock ledgers, stock transfer books and other corporate records periodically (and not less often than once in each calendar quarter) in order to determine whether, as a result of any action taken by the Company or any officer of the Company, any holder of a Warrant is or shall have become, directly or indirectly, the beneficial owner of more than such percentage of any class of its equity securities (as defined in the Securities Exchange Act) as shall cause such holder to be required to make any filings or declarations to the Company, the Commission or any national securities exchange pursuant to the proviions of the Securities Exchange Act or any comparable federal statute, and the Company will give prompt written notice to such holder whenever it shall have determined, upon the basis of the information disclosed by any such review, that such holder is or has become such a holder because of such action, which notice shall also specify the information upon which the Company bases such determination; PROVIDED, HOWEVER, that the Company need give such notice only once in each fiscal year to any holder whose percentage of beneficial ownership of any class of the Company's equity securities has not changed since the date of the giving of the immediately preceding notice. SECTION 11. LISTING ON SECURITIES EXCHANGES The Company will list on each national securities exchange (or the Nasdaq National Market System) on which any Common Stock may at any time be listed, subject to official notice of issuance upon the exercise of the Warrants, and will maintain such listing of, all shares of Common Stock from time to time issuable upon the exercise of the Warrants; and the Company will so list on each national securities exchange (or the Nasdaq National Market System), and will maintain such listing of, any Other Securities if at the time any securities of the same class shall be listed on such national securities exchange (or the Nasdaq National Market System) by the Company. SECTION 12. MAINTENANCE OF OFFICE OR AGENCY The Company will maintain an office or agency in Los Angeles County, California where books for the registration and registration of transfer of the Warrants 17 will be kept and where the Warrants may be presented for exercise, registration of transfer, exchange and replacement pursuant to the provisions hereof. The principal office of the Company shall be such office or agency unless the Company, by at least 10 days' prior written notice to each holder of any Warrants, shall designate the principal office of a law firm or a bank or trust company in such city or area as such office or agency, in which case the principal office of such other law firm or bank or trust company shall thereafter be such office or agency. SECTION 13. OWNERSHIP, REGISTRATION OF TRANSFER, EXCHANGE AND SUBSTITUTION OF WARRANTS Section 13.1 OWNERSHIP OF WARRANTS. Until due presentment for registration of transfer as permitted by Section 8, the Company may treat the Person in whose name any Warrant is registered on the register kept at the office or agency of the Company maintained pursuant to Section 12 as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary. Subject to the foregoing provisions and to Section 8, a Warrant, if properly assigned, may be exercised by the assignee without first having a new Warrant issued. Section 13.2 TRANSFER AND EXCHANGE OF WARRANTS. Upon the surrender of any Warrant, properly endorsed, for registration of transfer or for exchange (for the purpose of combination of Warrants, split-up of Warrants or any other purpose) at the office or agency maintained by the Company pursuant to Section 12, the Company at its expense will (subject to compliance with Section 8, if applicable) promptly execute and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered, and thereupon the old Warrant shall be canceled. Section 13.3 REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant held by a Person other than the Holder or any institutional investor, upon delivery of indemnity reasonably satisfactory to the Company in form and amount, or, in the case of any such mutilation, surrender of such Warrant for cancellation at the office or agency maintained by the Company pursuant to Section 12, the Company at its expense will promptly execute and deliver, in lieu thereof, a new Warrant of like tenor. 18 Section 13.4 EXPENSES. The Company will pay all expenses, taxes (other than transfer taxes) and other charges payable in connection with the preparation, issuance and delivery from time to time of Warrants. SECTION 14. DEFINITIONS For all purposes of this Warrant, the following definitions shall apply (the definitions to be applicable to both the singular and the plural forms of the terms defined where either such form is used in this Warrant): "ACQUIRING CORPORATION" means the continuing or surviving corporation in a consolidation or merger with the Company (if other than the Company), the transferee of all or substantially all the properties or assets of the Company, the corporation consolidating with or merging into the Company in a consolidation or merger in connection with which the Common Stock (or Other Securities) is (or are) changed into or exchanged for stock or other Securities of any other Person or cash or any other property, or, in the case of a capital reorganization or reclassification, the Company. "ADDITIONAL SHARES OF COMMON STOCK" means all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Sections 2.3 or 2.4, deemed to be issued) by the Company after the Closing Date, whether subsequently reacquired or retired) by the Company, other than shares issued, upon the exercise of the Warrants. "BUSINESS DAY" means any day other than a Saturday, Sunday or day upon which banking institutions are authorized or required by law or executive order to be closed in Los Angeles, California or in the Borough of Manhattan in The City of New York, New York. "CASHLESS EXERCISE RIGHT" has the meaning set forth in Section 1.1 of this Warrant. "CLOSING DATE" means the date of original issuance and delivery of the Warrants being December 10, 1998. "COMMISSION" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "COMMON STOCK" means the Common Stock, $0.01 par value, of the Company as constituted on the Closing Date, any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such 19 Common Stock, and all other stock of any class or classes (however designated) of the Company, the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. "COMMON STOCK DEEMED TO BE OUTSTANDING" means all shares of Common Stock that (a) can be acquired upon the conversion of any then outstanding shares of Convertible Securities, (b) can be purchased upon the exercise of any then outstanding rights, Options or warrants including, but not limited to, these Warrants and all Options issued or available for issuance under the Stock Option Plan or (c) can be acquired upon the conversion of any Convertible Securities that can be purchased upon the exercise of any then outstanding rights, Options or warrants. "COMPANY" has the meaning set forth in the opening paragraph of this Warrant, and any corporation which shall succeed to or assume the obligations of the Company hereunder in compliance with Section 3. "CONVERTIBLE SECURITIES" means any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock. "CURRENT MARKET PRICE" on any date of determination means the average of the daily Market Price per share of Common Stock during the period of the 20 consecutive days on which national securities exchanges were open for trading, ending on the day immediately preceding such date of determination; PROVIDED, HOWEVER, that if and so long as there shall be no exchange or over-the-counter market for the Common Stock, the Current Market Price shall be deemed to be the greater of the Warrant Price on the date of determination or such price, if any, at which the most recent issue and sale by the Company of Common Stock in a good faith arm's-length transaction has been effected. "EXERCISE PRICE" has the meaning set forth in Section 1.1 of this Warrant. "EXPIRATION DATE" has the meaning set forth in Section 19 of this Warrant. "MARKET PRICE" per share of Common Stock on any date of determination means (a) the last sale price, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange on which the Common Stock is then listed or admitted to trading, or (b) if the Common Stock is not then listed or admitted to trading on any national securities exchange, the average of the reported 20 closing bid and asked prices on such date as shown by the Nasdaq National Market System, or, if such notices are not at the time so shown, as determined in good faith by any member of the National Association of Securities Dealers, Inc. selected by the Company and satisfactory to the holder of this Warrant; PROVIDED, HOWEVER, that if and so long as there shall be no exchange or over-the-counter market for the Common Stock, the Market Price shall be deemed to be the greater of the Warrant Price on the date of determination or such price, if any, at which the most recent issue and sale by the Company of Common Stock in a good faith arm's-length transaction has been effected. "OPTIONS" means rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. "OTHER SECURITIES" means any stock (other than Common Stock) and other securities of the Company or any other Person which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 3 or otherwise. "PARENT" means as to any Acquiring Corporation, any corporation which (a) controls the Acquiring Corporation directly or indirectly through one or more intermediaries, (b) is (or, if not required to file such reports, would, if so required, be) required to include the Acquiring Corporation in the consolidated financial statements contained in such Parent's Annual Report on Form 10-K under the Securities Exchange Act and (c) is not itself included in the consolidated financial statements of any other Person (other than its consolidated subsidiaries). "PERSONS" means individuals, corporations, partnerships (including "joint ventures"), trusts, estates, unincorporated organizations and governments (including political subdivisions), authorities and agencies. "PUBLIC COMPANY" means the Company, if and so long as the Common Stock is "held of record" (within the meaning of Rule 12g5-1, as promulgated by the Commission under the Securities Exchange Act and in effect on December 10, 1998) by 500 or more Persons, and a registration statement with respect thereto is effective under Section 12 of the Securities Exchange Act. "PURCHASE SHARES" has the meaning set forth in the second opening paragraph of this Warrant. 21 "RESTRICTED SECURITIES" means (a) any Warrants bearing the applicable legend set forth in Section 8.1, (b) any shares of Common Stock (or Other Securities) which have bean issued upon the exercise of Warrants and which are evidenced by a certificate or certificates bearing the applicable legend set forth in Section 8.1, and (c) unless the context otherwise requires, any shares of Common Stock (or Other Securities) which are at the time issuable upon the exercise of Warrants and which, when so issued, will be evidenced by a certificate or certificates bearing the applicable legend set forth in Section 8.1. "SECURITIES ACT" means the Securities Act of 1933, or any similar federal statute replacing said statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, or any similar federal statute replacing said statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "STOCK OPTION PLAN" means, collectively, all equity incentive plans or arrangements for employees, directors or consultants of the Company which, in each case, are approved by the Board of Directors of the Company. "STOCK PURCHASE AGREEMENT" has the meaning set forth in the second opening paragraph of this Warrant. "TRANSFER" means, with respect to any Restricted Securities, any sale, assignment, pledge or other disposition thereof, or of any interest therein, which could constitute a "sale" thereof, as that term is defined in Section 2(3) of the Securities Act. "WARRANT PRICE" shall have the meaning specified in Section 2.1. "WARRANTS" has the meaning set forth in the second opening paragraph of this Warrant. SECTION 15. REMEDIES The Company hereby expressly acknowledges and stipulates to the understanding of the holder of this Warrant that the remedies at law of the holder of this Warrant 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 agrees 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. 22 SECTION 16. NO RIGHTS OR LIABILITIES AS STOCKHOLDER Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Company, and nothing shall be construed as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. SECTION 17. NOTICES All notices and other communications provided for herein shall be mailed by first class mail, postage prepaid, addressed (a) if to any holder of any Warrant, at the registered address of holder as set forth in the register kept at the office or agency maintained by the Company pursuant to Section 12, or (b) if to the Company, at its principal office, being an that date of original issuance of this Warrant 26601 Agoura Road, Calabasas, California 91302, or at such other address of the principal office of the Company of which the Company shall have given notice to each holder of any Warrants in writing; PROVIDED, HOWEVER, that the exercise of any Warrant shall be effective if effected in the manner provided in Section 1. SECTION 18. MISCELLANEOUS The terms and provisions of Sections 2, 4 and 5 of this Warrant may be amended or waived only by an instrument in writing signed by the Company and the holders of a majority of the Common Stock Purchase Warrants originally issued pursuant to the terms of the Stock Purchase Agreement, without prior notice to the Holder; and notice of any such action shall be given to the Holder promptly thereafter. The terms and provisions of this Warrant other than the terms and provisions of Sections 2, 4 and 5 may be amended, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge, or termination is sought. THIS WARRANT AND THE STOCK PURCHASE AGREEMENT ARE TO BE GOVERNED BY AND TO BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN THE STATE OF DELAWARE. The headings in this Warrant are inserted for convenience only and shall not be deemed to constitute a part hereof. 23 SECTION 19. EXPIRATION The right to exercise this Warrant shall expire at 5:00 p.m. Pacific Time, on December 10, 2003 (or, if such date shall not be a Business Day, on the next day that is a Business Day) (the "Expiration Date"). On the 30th day prior to the Expiration Date, the Company shall give written notice of the expiration of this Warrant to the holder hereof. In the event the Company fails to give such written notice, the right to exercise this Warrant shall be extended to 5:00 p.m. Pacific time on the 30th day following the date on which such written notice is given (or, if such date shall not be a Business Day, on the next day that is a Business Day). SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ ROBERT E. NAGLE ------------------------------------------------ Name: Robert E. Nagle Title: Senior Vice President, General Counsel and Secretary 24 SUBSCRIPTION NOTICE SUPERIOR NATIONAL INSURANCE GROUP, INC. The undersigned, the registered holder of the foregoing Warrant, hereby elects to exercise purchase rights represented by said Warrant for, and to purchase thereunder, ___________________ shares of the Common Stock covered by said Warrant and [herewith makes payment in full therefor of $_______________ by certified or official bank check payable to the order of the Company] [hereby exercises its Cashless Exercise Right] [hereby exercises its In-Kind Exercise Right] and requests that (a) certificates for such shares (and any Other Securities issuable upon such exercise) be issued in the name of and delivered to __________________ ___________________, whose address is ___________________________________, and (b) if such shares (or Other Securities) shall not include all of the shares (or Other Securities) issuable as provided in said Warrant, then a new Warrant of like tenor and date for the balance of the shares (or Other Securities) issuable thereunder be delivered to the undersigned. Signature guaranteed: Dated: --------------------------------------- 25 ASSIGNMENT For Value Received, the undersigned registered owner hereby sells, assigns and transfers unto ________________________, the rights represented by the foregoing Warrant of Superior National Insurance Group, Inc., and appoints ___________________ attorney to transfer said rights on the books of said corporation, with full power of substitution in the premises. Signature guaranteed: Dated: --------------------------------------- 26 EX-10.66 6 EXHIBIT 10.66 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT among SUPERIOR NATIONAL INSURANCE GROUP, INC., INSURANCE PARTNERS, L.P., INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P., and CAPITAL Z FINANCIAL SERVICES FUND II, L.P., ------------------------ Dated: December 10, 1998 ------------------------ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. General; Securities Subject to this Agreement . . . . . . . . . . . . 5 (a) Grant of Rights . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) Registrable Securities . . . . . . . . . . . . . . . . . . . . . 5 (c) Holders of Registrable Securities . . . . . . . . . . . . . . . 6 3. Demand Registration . . . . . . . . . . . . . . . . . . . . . . . . . 6 (a) Request for Demand Registration . . . . . . . . . . . . . . . . 6 (b) Limitation on Demand Registrations . . . . . . . . . . . . . . . 7 (c) Effective Demand Registration . . . . . . . . . . . . . . . . . 7 (d) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (e) Underwriting Procedures . . . . . . . . . . . . . . . . . . . . 8 (f) Selection of Underwriters . . . . . . . . . . . . . . . . . . . 8 4. Incidental or "Piggy-Back" Registration . . . . . . . . . . . . . . . 8 (a) Request for Incidental Registration . . . . . . . . . . . . . . 8 (b) Reduction in Registrable Securities to be Registered . . . . . . 9 (c) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5. Holdback Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 10 (a) Restrictions on Public Sale by Designated Holders . . . . . . . 10 (b) Restrictions on Public Sale by the Company . . . . . . . . . . . 11 6. Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . 11 (a) Obligations of the Company . . . . . . . . . . . . . . . . . . . 11 (b) Seller Information . . . . . . . . . . . . . . . . . . . . . . . 13 (c) Preparation; Reasonable Investigation . . . . . . . . . . . . . 14 (d) Notice to Discontinue . . . . . . . . . . . . . . . . . . . . . 14 7. Indemnification; Contribution . . . . . . . . . . . . . . . . . . . . 14 (a) Indemnification by the Company . . . . . . . . . . . . . . . . . 14 (b) Indemnification by Designated Holders . . . . . . . . . . . . . 15 (c) Conduct of Indemnification Proceedings . . . . . . . . . . . . . 16 (d) Other Indemnification . . . . . . . . . . . . . . . . . . . . . 17 (e) Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (f) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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PAGE ---- 8. Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 9. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (a) Recapitalizations, Exchanges, etc. . . . . . . . . . . . . . . . 18 (b) No Inconsistent Agreements . . . . . . . . . . . . . . . . . . . 18 (c) Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (d) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . 19 (e) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (f) Successors and Assigns; Third Party Beneficiaries . . . . . . . 21 (g) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (h) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (i) GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 21 (j) Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (k) Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 22 (l) Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 22
ii AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated December 10, 1998 (this "Agreement"), among Superior National Insurance Group, Inc., a Delaware corporation (the "Company"), Insurance Partners, L.P., a Delaware limited partnership ("IP"), Insurance Partners Offshore (Bermuda), L.P., a Bermuda limited partnership ("IP Bermuda"), and Capital Z Financial Services Fund II, L.P., a Bermuda limited partnership ("Cap Z Fund II" and, together with IP and IP Bermuda, "Insurance Partners"). WHEREAS, pursuant to the Amended and Restated Stock Purchase Agreement, dated as of September 17, 1996, as amended and restated effective as of February 17, 1997 (the "Stock Purchase Agreement"), by and among the Company, IP, IP Bermuda and such other persons or entities that executed the form of subscription agreement attached thereto as Exhibit A, pursuant to which the Company agreed to, among other things, issue and sell to (a) IP, and IP agreed to purchase from the Company, an aggregate of 1,369,856 shares of Common Stock and (b) IP Bermuda, and IP Bermuda agreed to purchase from the Company, an aggregate of 754,978 shares of Common Stock; WHEREAS, pursuant to the Stock Purchase Agreement, dated as of May 5, 1998 (the "New Stock Purchase Agreement"), by and among the Company, IP, IP Bermuda and Capital Z Partners, Ltd., a Bermuda corporation ("Cap Z"), pursuant to which the Company has agreed to, among other things, issue and sell to (a) IP, and IP has agreed to purchase from the Company, up to an aggregate of 3,737,504 shares of Common Stock; (b) IP Bermuda, and IP Bermuda has agreed to purchase from the Company, up to an aggregate of 1,516,227 shares of Common Stock; and (c) Cap Z, and Cap Z has agreed to purchase from the Company, up to an aggregate of 6,686,567 shares of Common Stock; WHEREAS, pursuant to the certain letter, dated December 7, 1998, among Cap Z, Cap Z Fund II and the Company, Cap Z assigned all of its rights and obligations under the Stock Purchase Agreement to Cap Z Fund II; WHEREAS, in order to induce each of IP and IP Bermuda to purchase shares of Common Stock pursuant to the Stock Purchase Agreement (in the aggregate, the "Original Shares"), the Company granted certain registration rights as set forth in the Registration Rights Agreement, dated April 11, 1997 (the "Original Agreement"), among the Company, IP and IP Bermuda; and 2 WHEREAS, in order to induce each of IP, IP Bermuda and Cap Z Fund II (as the assignee of Cap Z) to purchase shares of Common Stock pursuant to the New Stock Purchase Agreement (in the aggregate, the "New Shares" and, together with the Original Shares, the "Shares"), the Company has agreed to grant registration rights with respect to the Registrable Securities (as hereinafter defined) and to modify the Original Agreement, in each case as set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and notwithstanding anything to the contrary contained in the Original Agreement, the Original Agreement is hereby amended and restated in its entirety as follows: 1. DEFINITIONS. As used in this Agreement the following terms have the meanings indicated: "AFFILIATE" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "APPROVED UNDERWRITER" has the meaning set forth in Section 3(f). "CAP Z" has the meaning assigned to such term in the recitals to this Agreement. "CAP Z FUND II" has the meaning assigned to such term in the recitals to this Agreement. "CENTRELINE" means CentreLine Reinsured Limited, a Bermuda corporation. "CENTRELINE WARRANT" means the Common Stock Purchase Warrant, dated as of June 30, 1994, issued by the Company to CentreLine pursuant to the Preferred Securities Purchase Agreement, dated as of June 30, 1994, by and between the Company, Superior National Capital Holding Corporation, Superior National Capital, L.P. and Centre Reinsurance Services (Bermuda) III Limited. "COMMISSION" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Company or any other equity securities of the Company into which such securities are converted, reclassified, reconstituted or exchanged. 3 "COMPANY" has the meaning assigned to such term in the recital to this Agreement. "COMPANY INDEMNIFIED PARTY" has the meaning set forth in Section 7(b). "DEMAND REGISTRATION" has the meaning set forth in Section 3(a). "DESIGNATED HOLDER" means each of the Insurance Partners Stockholders and any transferee thereof to whom Registrable Securities have been transferred in accordance with Section 9(f). "DESIGNATED INDEMNIFIED PARTY" has the meaning set forth in Section 7(a). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "IIA" means International Insurance Advisors, Inc., a Delaware corporation. "III" means International Insurance Investors, L.P., a Bermuda limited partnership. "INCIDENTAL REGISTRATION" has the meaning set forth in Section 4(a). "INDEMNIFIED PARTY" has the meaning set forth in Section 7(c). "INITIATING HOLDER" has the meaning set forth in Section 3(a). "INSURANCE PARTNERS" has the meaning assigned to such term in the recitals to this Agreement. "INSURANCE PARTNERS STOCKHOLDERS" means each of IP, IP Bermuda, Cap Z Fund II, ZCI, any Affiliate thereof to whom or which Registrable Securities are transferred. "IP" has the meaning assigned to such term in the recitals to this Agreement. "IP BERMUDA" has the meaning assigned to such term in the recitals to this Agreement. 4 "NEW SHARES" has the meaning assigned to such term in the recitals to this Agreement. "NEW STOCK PURCHASE AGREEMENT" has the meaning assigned to such term in the recitals to this Agreement. "1992 COMMON STOCK PURCHASE WARRANTS" means each of the Common Stock Purchase Warrants, dated as of March 31, 1992, issued by the Company pursuant to the Note Purchase Agreement, dated as of March 31, 1992, among the Company and the purchasers listed on Schedule I thereto. "1998 COMMON STOCK PURCHASE WARRANTS" means each of the Common Stock Purchase Warrants, dated as of December 10, 1998, issued by the Company pursuant to the New Stock Purchase Agreement. "ORIGINAL AGREEMENT" has the meaning assigned to such term in the recitals to this Agreement. "ORIGINAL SHARES" has the meaning assigned to such term in the recitals to this Agreement. "OTHER RIGHTHOLDERS" has the meaning set forth in Section 3(a). "PERSON" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "REGISTRABLE SECURITIES" means each of the following: (a) any and all Shares owned by the Designated Holders and (b) any shares of Common Stock issued or issuable to any of the Designated Holders (i) upon conversion, exercise or exchange of the 1998 Common Stock Purchase Warrants or (ii) with respect to the Shares by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise and shares of Common Stock issuable upon conversion, exercise or exchange thereof. "REGISTRATION EXPENSES" means all expenses arising from or incident to the Company's performance of, or compliance with, this Agreement, including, without limitation, all registration, filing and listing fees; all fees and expenses of complying with securities or "blue sky" laws (including reasonable fees and disbursements of counsel in connection with "blue sky" qualifications of Registrable Securities); all printing, messenger and delivery expenses; the fees and disbursements of counsel for the Company and its independent public accountants; the 5 fees and disbursements of one firm of counsel (other than in-house counsel) retained by the holders of Registrable Securities being registered; the expenses of any special audits required by or incident to such performance and compliance; and any liability insurance or other premiums for insurance obtained in connection with any registration pursuant to the terms of this Agreement; PROVIDED, HOWEVER, that Registration Expenses shall not include underwriting discounts and commissions and transfer taxes, if any; and PROVIDED FURTHER, that in any case where Registration Expenses are borne by the holders pursuant to Section 3(d), Registration Expenses shall not include general overhead expenses of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business. "REGISTRATION STATEMENT" means a registration statement filed pursuant to the Securities Act. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SHARES" has the meaning assigned to such term in the recitals to this Agreement. "STOCK PURCHASE AGREEMENT" has the meaning assigned to such term in the recitals to this Agreement. "SUBSIDIARY" has the meaning set forth in Section 6(c). "ZCI" means Zurich Centre Investments Ltd. 2. GENERAL; SECURITIES SUBJECT TO THIS AGREEMENT. (a) GRANT OF RIGHTS. The Company hereby grants registration rights to the Insurance Partners Stockholders upon the terms and conditions set forth in this Agreement. (b) REGISTRABLE SECURITIES. For the purposes of this Agreement, Registrable Securities will cease to be Registrable Securities when (i) a Registration Statement covering such Registrable Securities has been declared effective under the Securities Act by the Commission and such Registrable Securities have been disposed of pursuant to such effective Registration Statement, (ii) the entire amount of Registrable Securities proposed to be sold in a single sale by a Designated Holder, in the opinion of counsel satisfactory to the Company and the Designated Holder, each in their reasonable judgment, may be distributed to the public without any limitation as to volume pursuant to Rule 144 (or any successor provision then in effect) under the Securities Act and the Designated Holder is not then an Affiliate of the Company, or 6 (iii) the Registrable Securities are proposed to be sold or distributed by a Person not entitled to the registration rights granted by this Agreement. (c) HOLDERS OF REGISTRABLE SECURITIES. A Person is deemed to be a holder of Registrable Securities whenever such Person owns of record Registrable Securities, or holds an option to purchase, or a security convertible into or exercisable or exchangeable for, Registrable Securities whether or not such acquisition or conversion has actually been effected and disregarding any legal restrictions upon the exercise of such rights. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company may act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. Registrable Securities issuable upon exercise of an option or upon conversion of another security shall be deemed outstanding for the purposes of this Agreement. 3. DEMAND REGISTRATION. (a) REQUEST FOR DEMAND REGISTRATION. At any time any of the Insurance Partners Stockholders (the "Initiating Holders") shall be entitled to request in writing that the Company use its best efforts to effect the registration under the Securities Act, and under the securities or "blue sky" laws of any jurisdiction designated by such Initiating Holders, of all or part of such Initiating Holders' Registrable Securities in accordance with this Section 3 (a "Demand Registration"). Any such request for a Demand Registration shall specify the amount of Registrable Securities proposed to be sold and the intended method of disposition thereof. Upon receiving a request for a Demand Registration, the Company will promptly, but in no event more than 10 days after the receipt from the Initiating Holders of a request for a Demand Registration, give written notice of such Demand Registration to (i) all of the Insurance Partners Stockholders (other than the Initiating Holders), (ii) all holders of (x) the 1992 Common Stock Purchase Warrants, (y) the CentreLine Warrant and (z) the 1998 Common Stock Purchase Warrants, and (iii) in the event that any Insurance Partners Stockholder distributed Registrable Securities to its partners or members, all such partners and members (the Persons in clauses (i), (ii) and (iii) being referred to collectively as the "Other Rightholders"), and thereupon will, as provided in Section 6, use its best efforts to effect the registration under the Securities Act of (i) the Registrable Securities which the Company has been so requested by the Initiating Holders to register and (ii) all other shares of Common Stock which the Company has been requested in writing to register by such Insurance Partners Stockholders and Other Rightholders (which requests shall specify the number of shares of Common Stock proposed to be sold and the intended method of disposition thereof and shall be given to the Company within 30 days after the giving of such written notice of the Demand Registration by the Company). (b) LIMITATION ON DEMAND REGISTRATIONS. Notwithstanding anything to the contrary set forth in Section 3(a), the Company shall not be obligated to 7 file a Registration Statement with respect to a Demand Registration upon a request by the Initiating Holders under Section 3(a) if (i) the Company has any other Registration Statement on file but not yet declared effective, (ii) the Company has filed any other Registration Statement that has an effective date within a period of 180 days prior to the filing of the Registration Statement with respect to the Demand Registration, or (iii) Registrable Securities having an anticipated aggregate net offering price of less than $7,500,000 are to be registered in such Demand Registration. (c) EFFECTIVE DEMAND REGISTRATION. A registration shall not constitute a Demand Registration until it has become effective and remains continuously effective for the lesser of (i) the period during which all Registrable Securities registered in the Demand Registration are sold and (ii) 180 days; PROVIDED, HOWEVER, that a registration shall not constitute a Demand Registration if (x) after such Demand Registration has become effective, such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Initiating Holders and such interference is not thereafter eliminated or (y) the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived, other than by reason of a failure by the Initiating Holders. (d) EXPENSES. The Company will pay all Registration Expenses in connection with (i) two Demand Registrations of which IP or IP Bermuda were Initiating Holders and (ii) two Demand Registrations of which Cap Z Fund II was an Initiating Holder, under this Section 3 that either become effective under the Securities Act or are withdrawn prior to the effective date thereof; PROVIDED HOWEVER, that any withdrawal prior to the effective date of a Demand Registration as the result of the actions of any Person or Persons other than the Initiating Holders, or based upon material adverse information relating to the Company that is different from the information known by or available (upon request from the Company or otherwise) to the Initiating Holders at the time of their request for a Demand Registration under this Section 3, shall not diminish the number of registrations in connection with which the Company agrees to pay Registration Expenses; and PROVIDED FURTHER, that if such withdrawal is the result of the actions of the Initiating Holders, then such Initiating Holders may in their sole and unlimited discretion elect to bear the Registration Expenses of such Demand Registration, in which case such registration shall not be counted as a Demand Registration pursuant to this Section 3. In the event that the Initiating Holders elect to bear the Registration Expenses (and underwriting discounts and commissions and transfer taxes, if any) in connection with any Demand Registration requested under this Section 3, such Registration Expenses shall be apportioned among the holders whose shares of Common Stock are then being registered, on the basis of the respective amounts (by number of shares) of Common Stock then being registered by them or on their behalf. 8 (e) UNDERWRITING PROCEDURES. If the Initiating Holders so elect, the offering of Registrable Securities pursuant to a Demand Registration shall be in the form of a firm commitment underwritten offering and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter (as hereinafter defined) selected in accordance with Section 3(f). In connection with any Demand Registration under this Section 3 involving an underwriting, none of the Registrable Securities held by any of the Insurance Partners Stockholders (other than the Initiating Holders) or shares of Common Stock held by any Other Rightholders making a request for inclusion thereof pursuant to Section 3(a) shall be included in such underwriting unless such Insurance Partners Stockholders or Other Rightholders, as the case may be, accept the terms of the underwriting as agreed upon by the Company, the Initiating Holders and the Approved Underwriter, and then only in such quantity as will not, in the opinion of the Approved Underwriter, jeopardize the success of such offering. If the Approved Underwriter advises the Company in writing that in its opinion the aggregate amount of Common Stock requested to be included in such offering is sufficiently large to have a material adverse effect on the success of such offering, then the Company shall include in such registration only the aggregate amount of Common Stock that in the opinion of the Approved Underwriter may be sold without any such material adverse effect and shall reduce, as to the Initiating Holders, the Insurance Partners Stockholders (other than the Initiating Holders) and the Other Rightholders as a group, the amount of Common Stock to be included in such registration, pro rata within such group based on the number of Registrable Securities and other shares of Common Stock included in the request for registration pursuant to Section 3(a). (f) SELECTION OF UNDERWRITERS. If any Demand Registration of Registrable Securities is in the form of an underwritten offering, the Initiating Holders holding a majority of the Registrable Securities held by all such Initiating Holders shall select and obtain an investment banking firm of national reputation to act as the managing underwriter of the offering (the "Approved Underwriter"); PROVIDED, HOWEVER, that the Approved Underwriter shall, in any case, be acceptable to the Company in its reasonable judgment. 4. INCIDENTAL OR "PIGGY-BACK" REGISTRATION. (a) REQUEST FOR INCIDENTAL REGISTRATION. If the Company, at any time or from time to time, proposes to register any of its shares of Common Stock for its own account under the Securities Act (other than a registration of shares of Common Stock solely in connection with any plan for the acquisition of shares of Common Stock by employees of the Company or any dividend reinvestment plan, and other than a registration of shares of Common Stock, the Registration Statement pertaining to which does not permit secondary sales or include substantially the same information as would be required to be included in a Registration Statement covering 9 the sale of Registrable Securities), then it will at each such time give written notice (given at least 30 days prior to the proposed filing date) describing the proposed registration and distribution to each of the Designated Holders of its intention to do so and, upon the written request of each of the Designated Holders, made within 30 days after the receipt of any such notice (which request shall specify the amount of Registrable Securities proposed to be sold by such Designated Holder and the intended method of disposition thereof), the Company will, as provided in Section 6, use its best efforts to effect the registration under the Securities Act of all of the Registrable Securities that the Company has been so requested to register by the Designated Holders, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities to be registered (each, an "Incidental Registration"); PROVIDED, HOWEVER, that if, at any time after giving written notice of its intention to register any of its shares of Common Stock and prior to the effective date of the Registration Statement filed in connection with such Incidental Registration, the Company shall determine for any reason not to register such shares of Common Stock, the Company may, at its election, give written notice of such determination to each of the Designated Holders and, thereupon, shall be relieved from its obligation to register any Registrable Securities in connection with such Incidental Registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any Insurance Partners Stockholder to request that such registration be effected as a Demand Registration under Section 3. In connection with any Incidental Registration under this Section 4(a) involving an underwriter, or a distribution with the assistance of a selling agent, the right of any Designated Holder to participate in such Incidental Registration shall be conditioned upon such Designated Holder's participation in such underwriting or distribution. (b) REDUCTION IN REGISTRABLE SECURITIES TO BE REGISTERED. Notwithstanding anything to the contrary set forth in Section 4(a), if a proposed Incidental Registration is for a registered public offering involving an underwriting and the representative of the underwriters advises the Company in writing that the registration of all or part of the shares of Common Stock to be underwritten in such Incidental Registration would materially adversely effect such offering, then the Company shall so advise the Designated Holders and any other holders of shares of Common Stock requesting registration in such Incidental Registration, and the number of shares of Common Stock that are entitled to be included in the Incidental Registration shall be allocated (i) first, to the Company for shares of Common Stock being sold for its own account, (ii) second, among the Designated Holders and any other holders of shares of Common Stock entitled to "incidental" registration rights and requesting inclusion of shares of Common Stock in such Incidental Registration, pro rata on the basis of the number of shares of Common Stock requested to be included in such Incidental Registration, and (iii) third, any other shares of Common Stock requested to be included in such Incidental Registration; PROVIDED, HOWEVER, that if any Insurance Partners Stockholder or Other Rightholder does not request inclusion of the 10 maximum number of shares of Common Stock allocated to it pursuant to the foregoing procedure, then the remaining portion of its allocation shall be reallocated among those Insurance Partners Stockholders and Other Rightholders whose allocations were not satisfied on the basis of the number of shares of Common Stock requested to be included in such Incidental Registration, and this procedure shall be repeated until all of the shares of Common Stock that may be included in the registration on behalf of the Insurance Partners Stockholders and the Other Rightholders have been so allocated. The Company shall not limit the number of shares of Common Stock to be included in an Incidental Registration pursuant to this Agreement in order to include shares held by stockholders with no registration rights or to include any shares of stock issued to employees, officers, directors or consultants pursuant to any stock option plan, or in order to include in such registration securities registered for the Company's own account. If any shares of Common Stock are withdrawn from the Incidental Registration or if the number of shares of Common Stock to be included in such Incidental Registration was previously reduced as a result of marketing factors, then the Company shall then offer to all Persons who have retained the right to include Common Stock in the Incidental Registration the right to include additional shares of Common Stock in the registration in an aggregate amount equal to the number of shares of Common Stock so withdrawn, with such shares of Common Stock to be allocated among the Persons requesting additional inclusion pro rata in accordance with the terms of this Section 4(b). (c) EXPENSES. The Company shall pay all Registration Expenses in connection with any Incidental Registration pursuant to this Section 4, whether or not such Incidental Registration becomes effective. No Incidental Registration under this Section 4 shall relieve the Company of its obligations to effect a Demand Registration upon request under Section 3(a). 5. HOLDBACK AGREEMENTS. (a) RESTRICTIONS ON PUBLIC SALE BY DESIGNATED HOLDERS. Each of the Designated Holders agrees not to effect any public sale or distribution of any Registrable Securities being registered or of any securities convertible into or exchangeable or exercisable for such Registrable Securities, including a sale pursuant to Rule 144 under the Securities Act, during the 90 day period beginning on the effective date of such Registration Statement (except as part of such registration), (i) in the case of a non-underwritten public offering, if and to the extent requested by the Company or (ii) in the case of an underwritten public offering, if and to the extent requested by the Approved Underwriter (in the event of a Demand Registration pursuant to Section 3) or the Company's underwriters (in the event of an Incidental Registration pursuant to Section 4(a)), as the case may be. 11 (b) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company agrees not to effect any public sale or distribution of any of its securities, or any securities convertible into or exchangeable or exercisable for such securities (except pursuant to registrations on Form S-4 or Form S-8 or any successor thereto), during the period beginning on the effective date of any Registration Statement in which the Designated Holders of Registrable Securities are participating and ending on the earlier of (i) the date on which all Registrable Securities registered on such Registration Statement are sold and (ii) 180 days after the effective date of such Registration Statement. 6. REGISTRATION PROCEDURES. (a) OBLIGATIONS OF THE COMPANY. If and whenever the Company is requested to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 3 and 4, then the Company will promptly use its best efforts to: (i) prepare and (in any event within 90 days after the end of the period within which requests for registration may be given to the Company) file with the Commission a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective; (ii) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition thereof by the seller or sellers thereof set forth in such Registration Statement, but in no event for a period of more than six months (or, with respect to any Registration Statement covering Registrable Securities the distribution of which has been deferred pursuant to Section 4(c), nine months) after such Registration Statement becomes effective; (iii) as soon as reasonably possible, furnish to each seller of Registrable Securities, prior to filing a Registration Statement, such number of conformed copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits, except that the Company shall not be obligated to furnish any seller of Registrable Securities with more than two copies of such exhibits), such number of copies of the prospectus contained in such Registration Statement (including each preliminary prospectus and any summary prospectus), in conformity with the 12 requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (iv) register or qualify such Registrable Securities covered by such Registration Statement under such other securities or "blue sky" laws of such jurisdictions as each seller of Registrable Securities shall request, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (v) cause the Registrable Securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the seller or sellers of Registrable Securities to consummate the disposition of such Registrable Securities; (vi) notify each seller of any Registrable Securities covered by such Registration Statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make statements therein not misleading in the light of the circumstances then existing, and prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (vii) advise each seller of Registrable Securities as to the time when such Registration Statement becomes effective and as to the threat of or the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement or the institution of any proceedings for that purpose, and use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible the removal thereof, if issued; 13 (viii) comply with all applicable rules and regulations of the Commission, and make available to each seller of Registrable Securities, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (ix) list all the Registrable Securities on any securities exchange (or The Nasdaq Stock Market, Inc. or the over-the-counter market) on which similar securities are then listed, if such securities are not already so listed and such listing is then permitted under the rules of such exchange; (x) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; and (xi) furnish to each seller a signed counterpart, addressed to the sellers, of (x) an opinion of counsel representing the Company for purposes of such registration, dated the effective date of such Registration Statement, and (y) a "comfort letter" signed by the independent public accountants of the Company who have certified the Company's financial statements included in such Registration Statement, in each case, covering substantially the same matters with respect to such Registration Statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities; PROVIDED, HOWEVER, that the Company shall not be obligated to furnish such accountants' letter except in connection with an underwritten offering. (b) SELLER INFORMATION. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing and as shall be required by law in connection therewith. (c) PREPARATION; REASONABLE INVESTIGATION. In connection with the preparation and filing of each Registration Statement registering Registrable Securities under the Securities Act, the Company will give the holders of such Registrable Securities so registered and their underwriters, if any, and their respective counsel and financial advisors, the opportunity to participate in the preparation of such Registration Statement, each prospectus included therein or filed with the Commission, 14 and each amendment thereof or supplement thereto, and will give each of them such access to its books and records (including the books and records of its Subsidiaries (as hereinafter defined)) and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act; PROVIDED, HOWEVER, that the Company shall not be obligated to give such opportunities and access to any holder of Registrable Securities holding less than 150,000 Registrable Securities other than the Initiating Holders, as a group, requesting a Demand Registration pursuant to Section 3(a). A "Subsidiary" means, with respect to the Company, a corporation or other entity of which 50% or more of the voting power of the outstanding voting securities or 50% or more of the outstanding equity interests is held, directly or indirectly, by the Company. (d) NOTICE TO DISCONTINUE. Each Designated Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(a)(vi), such Designated Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Designated Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 6(a)(vi) and, if so directed by the Company, such Designated Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Designated Holder's possession, of the prospectus covering such Registrable Securities that is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period referred to in Section 6(a)(ii)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(a)(vi) to and including the date when the Designated Holder shall have received the copies of the supplemented or amended prospectus contemplated by and meeting the requirements of Section 6(a)(vi). 7. INDEMNIFICATION; CONTRIBUTION. 15 (a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any Registrable Securities pursuant to the terms of Section 3 or Section 4, (i) the Company will indemnify and hold harmless, to the fullest extent permitted by law, each of the Designated Holders and their respective directors, officers, partners, members, trustees, employees, legal counsel, accountants, financial advisors and agents, and each other Person, if any, who controls (within the meaning of the Securities Act and the Exchange Act) such Designated Holder or any such directors, officers, partners, trustees, employees, legal counsel, accountants, financial advisors and agents (each of the foregoing, a "designated indemnified party") against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation), joint or several, to which such designated indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (x) any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, any notification or offering circular, or any amendment or supplement thereto or (y) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and (ii) the Company will reimburse such designated indemnified party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, liability or action; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability (or actions or proceedings in respect thereof) arises out of or is based upon (x) any untrue statement or alleged untrue statement of any material fact made in such Registration Statement, any such preliminary prospectus, final prospectus, summary prospectus, notification or offering circular, or any amendment or supplement thereto or (y) any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, in reliance upon and in conformity with written information concerning such Designated Holder and furnished to the Company through an instrument duly executed by such Designated Holder specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such designated indemnified party and shall survive the transfer of such securities by any Designated Holder. (b) INDEMNIFICATION BY DESIGNATED HOLDERS. The Company may require, as a condition to including any Registrable Securities in any Registration Statement filed pursuant to Section 3 or Section 4, that the Company shall have received an undertaking from each Designated Holder selling such Registrable Securities to indemnify and hold harmless the Company, its directors, officers, legal counsel, accountants and financial advisors and each other Person, if any, who controls (within the meaning of the Securities Act and the Exchange Act) the Company or any such directors, officers, legal counsel, accountants and financial advisors (each of the 16 foregoing, a "Company indemnified party") against any losses, claims, damages, liabilities or expenses, joint or several, to which such Company indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon any statement of a material fact or omission to state a material fact in such Registration Statement, any preliminary prospectus or final prospectus contained therein, any notification or offering circular, or any amendment or supplement thereto, if such statement or omission was made in reliance upon and in conformity with written information concerning such Designated Holder and furnished to the Company through an instrument duly executed by such Designated Holder specifically stating that it is for use in the preparation of such Registration Statement, preliminary prospectus, final prospectus, summary prospectus, notification or offering circular, or amendment or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Company indemnified party and shall survive the transfer of such securities by any Designated Holder. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt by any designated indemnified party or Company indemnified party (each, an "indemnified party") of notice of the commencement of any action, suit, proceeding or investigation or threatened thereof in writing for which the indemnified party intends to claim indemnification or contribution pursuant to this Agreement, such indemnified party will give written notice thereof to the indemnifying party; PROVIDED, HOWEVER, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Agreement, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. If notice of commencement of any such action is brought against an indemnified party, the indemnifying party may (and, upon request by the indemnified party, will), at its expense, participate in and assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, that in the event of any failure by the indemnifying party diligently to assume and conduct such defense, the indemnifying party will pay all costs and expenses (including legal fees and expenses) incurred by such indemnified party in connection with such claim or litigation. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be paid by the indemnified party unless (i) the indemnifying party agrees to pay the same, (ii) the indemnifying party fails to assume the defense of such action with counsel satisfactory to the indemnified party in its reasonable judgment or (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel in writing that either (x) representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct or (y) there may be one or more legal defenses available to the indemnified party which are different from or additional to those available to the indemnifying party. In either of such cases, the indemnifying party shall not have the right to assume the defense of such action on behalf of such 17 indemnified party. No indemnifying party, in the defense of any such claim or litigation, shall, except with the written consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. (d) OTHER INDEMNIFICATION. Indemnification similar to that specified in this Section 7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any registration or other qualification of such Registrable Securities under any federal or state law or regulation of governmental authority other than the Securities Act. (e) CONTRIBUTION. If the indemnification provided for in this Section 7 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative faults of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Sections 7(a), 7(b) and 7(c), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(e) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person. (f) INSURANCE. In connection with any Demand Registration or Incidental Registration, the Company will provide at its expense a binder or binders of insurance in form satisfactory to the Designated Holders participating in such registration, and, as soon as practicable thereafter, a policy or policies of insurance, insuring each such Designated Holder, and each Person, if any, who controls such 18 Designated Holder within the meaning of the Securities Act and the Exchange Act, for the aggregate amount of the public offering price received for the Registrable Securities disposed of by such Designated Holder (subject to such deductible as is customarily contained in underwriting insurance policies at such time) against all losses, claims, damages, liabilities and expenses which arise out of or are based upon any untrue statement, alleged untrue statement, omission or alleged omission of the character described in this Section 7 in connection with such registration and disposition and which are customarily covered under underwriting insurance policies; PROVIDED, HOWEVER, that the Company shall not be obligated to provide such insurance if it determines in good faith that such insurance is not available on commercially reasonable terms at the time of such registration, and the holders of a majority of the Registrable Securities to be registered reasonably agree. 8. RULE 144. The Company covenants that it shall file (a) any reports required to be filed by it under the Exchange Act and (b) take such further action as each Designated Holder of Registrable Securities may reasonably request (including providing any information necessary to comply with Rule 144 under the Securities Act), all to the extent required from time to time to enable such Designated Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (ii) any similar rules or regulations hereafter adopted by the Commission. The Company shall, upon the request of any Designated Holder of Registrable Securities, deliver to such Designated Holder a written statement as to whether it has complied with such requirements. 9. MISCELLANEOUS. (a) RECAPITALIZATIONS, EXCHANGES, ETC. The provisions of this Agreement shall apply, to the full extent set forth herein, with respect to (i) the shares of Common Stock and (ii) any and all equity securities of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise), which may be issued in respect of, in conversion of, in exchange for or in substitution of, the shares of Common Stock, and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. The Company shall cause any successor or assign (whether by merger, consolidation, sale of assets or otherwise) to enter into a new registration rights agreement with the Designated Holders on terms substantially similar to this Agreement as a condition of any such transaction. (b) NO INCONSISTENT AGREEMENTS. The Company shall not enter into any agreement with respect to its securities that is inconsistent with the registration rights granted in this Agreement or grant any additional registration rights to any Person or with respect to any securities that are not Registrable Securities that are prior in right to or inconsistent with the rights granted in this Agreement. If at any 19 time after the date hereof, any Person other than an Other Rightholder shall advise or give notice to the Company of such Person's exercise of registration rights granted by the Company to such Person prior to the date hereof, the Company shall use its best efforts to cause such Person to acknowledge the registration rights granted pursuant to this Agreement and agree that such Person's registration rights shall not be prior in right to the rights granted in this Agreement. (c) REMEDIES. The Designated Holders, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of their rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive in any action for specific performance the defense that a remedy at law would be adequate. (d) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless consented to in writing by (i) the Company and (ii) the Insurance Partners Stockholders holding Registrable Securities representing (after giving effect to any adjustments) at least 60% of the aggregate number of Registrable Securities owned by all of the Insurance Partners Stockholders. Any such written consent shall be binding upon the Company, all of the Designated Holders and all other Persons party hereto. (e) NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be made by registered or certified first-class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (i) if to the Company: Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, California 91302 Telecopy: (818) 880-8615 Attention: Chief Financial Officer 20 with a copy to: Riordan & McKinzie 5743 Corsa Avenue, Suite 116 Westlake Village, California 91362 Telecopy: (818) 706-2956 Attention: Dana M. Warren, Esq. (ii) if to IP or IP Bermuda c/o Insurance Partners Advisors, L.P. One Chase Manhattan Plaza 44th Floor New York, New York 10005 Telecopy: (212) 898-8720 Attention: Steven B. Gruber with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy: (212) 757-3990 Attention: Marilyn Sobel, Esq. (iii) If to Cap Z Fund II: c/o Capital Z Partners, Ltd. One Chase Manhattan Plaza 44th Floor New York, New York 10005 Fax: (212) 898-8720 Attention: Bradley E. Cooper with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy: (212) 757-3990 Attention: Marilyn Sobel, Esq. (iv) if to any other Designated Holder or any other Person party hereto, at its address as it appears on the record books of the Company. 21 All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. (f) SUCCESSORS AND ASSIGNS; THIRD PARTY BENEFICIARIES. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. The Demand Registration rights of the Insurance Partners Stockholders contained in Section 3 and the other rights of each of the Insurance Partners Stockholders with respect thereto and the incidental or "piggy-back" registration rights of the Designated Holders contained in Section 4 and the other rights of each of the Designated Holders with respect thereto shall be, with respect to any Registrable Security, automatically transferred to any Person who is the transferee of such Registrable Security, provided that such transfer was made in compliance with applicable securities laws and such transferee is made a party to this Agreement and, after such transfer, is the holder of not less than 150,000 Registrable Securities. All of the obligations of the Company hereunder shall survive any such transfer. Subject to Section 7, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of any of the rights granted hereunder. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. (j) SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all of the rights and privileges of the Designated Holders shall be enforceable to the fullest extent permitted by law. (k) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and 22 exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings in respect of the subject matter contained herein, other than those set forth or referred to herein, in the Stock Purchase Agreement and in the New Stock Purchase Agreement. This Agreement supersedes the Original Agreement and all other prior agreements and understandings between the parties with respect to such subject matter. (l) FURTHER ASSURANCES. Each of the parties shall execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. 23 IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Agreement on the date first written above. SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ Robert E. Nagle -------------------------- Name: Robert E. Nagle Title: Secretary 24 INSURANCE PARTNERS, L.P. By: Insurance GenPar, L.P., its General Partner By: Insurance GenPar MGP, L.P., its General Partner By: Insurance GenPar MGP, Inc., its General Partner By: /s/ Daniel L. Doctoroff ------------------------------ Name: Daniel L. Doctoroff Title: Vice President 25 INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P. By: Insurance GenPar (Bermuda), L.P., its General Partner By: Insurance GenPar (Bermuda) MGP, L.P., its General Partner By: Insurance GenPar (Bermuda) MGP, Ltd., its General Partner By: /s/ Daniel L. Doctoroff ------------------------------ Name: Daniel L. Doctoroff Title: Vice President 26 CAPITAL Z FINANCIAL SERVICES FUND II, L.P., a Bermuda limited partnership By: Capital Z Partners, L.P., its General Partner By: Capital Z Partners, Ltd., its General Partner By: /s/ Bradley E. Cooper ------------------------------ Name: Bradley E. Cooper Title: Senior Vice President EX-10.67 7 EXHIBIT 10.67 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CREDIT AGREEMENT among SUPERIOR NATIONAL INSURANCE GROUP, INC., VARIOUS LENDING INSTITUTIONS, and THE CHASE MANHATTAN BANK, AS ADMINISTRATIVE AGENT ----------------------------- Dated as of December 10, 1998 ----------------------------- $125,000,000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CHASE SECURITIES INC., AS LEAD ARRANGER AND BOOK MANAGER TABLE OF CONTENTS
PAGE SECTION 1. Amount and Terms of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.01 Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Minimum Amount of Each Borrowing; Maximum Number of Borrowings. . . . . . . . 2 1.03 Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.04 Disbursement of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.05 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.06 Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.07 Pro Rata Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.08 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.09 Interest Periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.10 Increased Costs, Illegality, etc. . . . . . . . . . . . . . . . . . . . . . . 6 1.11 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.12 Change of Lending Office. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.13 Replacement of Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2. Fees; Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.01 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.02 Voluntary Reduction of Commitments. . . . . . . . . . . . . . . . . . . . . .10 2.03 Mandatory Reductions of Commitments . . . . . . . . . . . . . . . . . . . . .10 SECTION 3. Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 3.01 Voluntary Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 3.02 Mandatory Repayments and Prepayments. . . . . . . . . . . . . . . . . . . . .11 3.03 Method and Place of Payment . . . . . . . . . . . . . . . . . . . . . . . . .13 3.04 Net Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 4. Conditions Precedent. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 4.01 Effectiveness; Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 4.02 No Default; Representations and Warranties. . . . . . . . . . . . . . . . . .16 4.03 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.04 Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.05 Corporate Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.06 Existing Reinsurance Agreements . . . . . . . . . . . . . . . . . . . . . . .16 4.07 Adverse Change, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.08 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.09 Subsidiary Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.10 Pledge Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 -i- 4.11 Consummation of the Transaction . . . . . . . . . . . . . . . . . . . . . . .18 4.12 Transaction Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 4.13 Various Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 4.14 Financial Statements; Projections . . . . . . . . . . . . . . . . . . . . . .19 4.15 Approvals, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 4.16 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 4.17 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 4.18 Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 4.19 Insurance Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 4.20 Trust Preferred Note Documents. . . . . . . . . . . . . . . . . . . . . . . .21 4.21 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 4.22 Surplus Contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 SECTION 5. Representations, Warranties and Agreements. . . . . . . . . . . . . . . . . .22 5.01 Corporate Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 5.02 Corporate Power and Authority . . . . . . . . . . . . . . . . . . . . . . . .22 5.03 No Contravention of Laws, Agreements or Organizational Documents. . . . . . .22 5.04 Litigation and Contingent Liabilities . . . . . . . . . . . . . . . . . . . .23 5.05 Use of Proceeds; Margin Regulations . . . . . . . . . . . . . . . . . . . . .23 5.06 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.07 Investment Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.08 Public Utility Holding Company Act. . . . . . . . . . . . . . . . . . . . . .24 5.09 True and Complete Disclosure; Projections and Assumptions . . . . . . . . . .24 5.10 Consummation of Transaction . . . . . . . . . . . . . . . . . . . . . . . . .24 5.11 Financial Condition; Financial Statements . . . . . . . . . . . . . . . . . .24 5.12 Security Interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 5.13 Tax Returns and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . .25 5.14 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 5.15 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 5.16 Intellectual Property, etc. . . . . . . . . . . . . . . . . . . . . . . . . .27 5.17 Pollution and Other Regulations . . . . . . . . . . . . . . . . . . . . . . .27 5.18 Labor Relations; Collective Bargaining Agreements . . . . . . . . . . . . . .27 5.19 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 5.21 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 5.22 Compliance with Statutes, etc . . . . . . . . . . . . . . . . . . . . . . . .30 5.23 Insurance Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 5.24 Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 6. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 6.01 Information Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 6.02 Books, Records and Inspections. . . . . . . . . . . . . . . . . . . . . . . .34 6.03 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 6.04 Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 6.05 Corporate Franchises. . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 -ii- 6.06 Compliance with Statutes, etc . . . . . . . . . . . . . . . . . . . . . . . .34 6.07 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 6.08 Performance of Obligations. . . . . . . . . . . . . . . . . . . . . . . . . .35 6.09 Good Repair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 6.10 End of Fiscal Years; Fiscal Quarters. . . . . . . . . . . . . . . . . . . . .36 6.11 Loan Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 6.12 Maintenance of Licenses and Permits . . . . . . . . . . . . . . . . . . . . .36 6.13 Register. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 6.14 Foreign Subsidiaries Security . . . . . . . . . . . . . . . . . . . . . . . .37 6.15 Acquisition of CCIC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 SECTION 7. Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 7.01 Changes in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 7.02 Consolidation, Merger, Sale or Purchase of Assets, etc. . . . . . . . . . . .38 7.03 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 7.04 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 7.05 Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 7.06 Advances, Investments and Loans . . . . . . . . . . . . . . . . . . . . . . .42 7.07 Prepayments of Indebtedness, Modifications of Agreements, etc . . . . . . . .44 7.08 Dividends, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 7.09 Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . .45 7.10 Leverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 7.11 Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . .45 7.12 Minimum Combined Statutory Surplus. . . . . . . . . . . . . . . . . . . . . .46 7.13 Minimum Risk-Based Capital. . . . . . . . . . . . . . . . . . . . . . . . . .46 7.14 Issuance of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 7.15 Creation of Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . .46 7.16 Partnership Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . .47 SECTION 8. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 8.01 Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 8.02 Representations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 8.03 Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 8.04 Default Under Other Agreements. . . . . . . . . . . . . . . . . . . . . . . .47 8.05 Bankruptcy, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 8.06 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 8.07 Subsidiary Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 8.08 Pledge Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 8.09 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 8.10 A.M. Best Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 8.11 Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 -iii- SECTION 9. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 SECTION 10. The Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . .68 10.01 Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 10.02 Delegation of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 10.03 Exculpatory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . .68 10.04 Reliance by Administrative Agent . . . . . . . . . . . . . . . . . . . . . .69 10.05 Notice of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 10.06 Non-Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 10.07 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 10.08 The Administrative Agent in its Individual Capacity. . . . . . . . . . . . .70 10.09 Successor Administrative Agent . . . . . . . . . . . . . . . . . . . . . . .71 SECTION 11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 11.01 Payment of Expenses, etc . . . . . . . . . . . . . . . . . . . . . . . . . .71 11.02 Right of Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 11.03 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 11.04 Benefit of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 11.05 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . .74 11.06 Payments Pro Rata. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 11.07 Calculations; Computations . . . . . . . . . . . . . . . . . . . . . . . . .75 11.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE . . . . . . . . . . . . . .75 11.09 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76 11.10 Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76 11.11 Headings Descriptive . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 11.12 Amendment or Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 11.13 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 11.14 Domicile of Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 11.15 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 11.16 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .78 11.17 Trust Preferred Note Documents . . . . . . . . . . . . . . . . . . . . . . .78
-iv- ANNEX I -- List of Banks and Commitments ANNEX II -- Bank Addresses ANNEX III -- Existing Indebtedness ANNEX IV -- Plans ANNEX V -- Subsidiaries ANNEX VI -- Collective Bargaining Agreements ANNEX VII -- Existing Liens ANNEX VIII -- Existing Investment Commitments ANNEX IX -- Capitalization EXHIBIT A -- Form of Notice of Borrowing EXHIBIT B-1 -- Form of Term Note EXHIBIT B-2 -- Form of Revolving Note EXHIBIT C-1 -- Form of Opinion of Riordan & McKinzie EXHIBIT C-2 -- Form of Opinion of White & Case EXHIBIT D -- Form of Officer's Certificate EXHIBIT E -- Form of Section 3.04(b)(ii) Certificate EXHIBIT F -- Form of Subsidiary Guaranty EXHIBIT G -- Form of Pledge Agreement EXHIBIT H -- Form of Assignment and Assumption Agreement -v- CREDIT AGREEMENT, dated as of December 10, 1998, among SUPERIOR NATIONAL INSURANCE GROUP, INC., a Delaware corporation (the "Borrower"), the lending institutions listed from time to time on Annex I hereto (each a "Bank" and, collectively, the "Banks"), and THE CHASE MANHATTAN BANK, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 9 are used herein as so defined. W I T N E S S E T H : - - - - - - - - - - WHEREAS, subject to and upon the terms and conditions set forth herein, the Banks are willing to make available to the Borrower the credit facilities provided for herein. NOW, THEREFORE, IT IS AGREED: SECTION 1. AMOUNT AND TERMS OF CREDIT. 1.01 COMMITMENTS. Subject to and upon the terms and conditions herein set forth, each Bank severally agrees to make a loan or loans (each a "Loan" and, collectively, the "Loans") to the Borrower, which Loans shall be drawn, to the extent such Bank has a commitment under such Facility, under the Term Loan Facility and the Revolving Loan Facility, respectively, as set forth below: (a) Each Loan under the Term Loan Facility (each, a "Term Loan" and, collectively, the "Term Loans"): (i) shall be incurred by the Borrower on the Initial Borrowing Date; (ii) shall be denominated in U.S. Dollars; (iii) may, except as hereinafter provided, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, PROVIDED, that (x) all Term Loans made as part of the same Borrowing shall, unless otherwise specifically provided herein, consist of Term Loans of the same Type and (y) incurrences of, or conversions into, Eurodollar Loans may not be effected prior to the Syndication Date; (iv) shall not exceed for any Bank at the time of incurrence thereof that aggregate principal amount which equals the Term Loan Commitment, if any, of such Bank at such time; and (v) once repaid, may not be reborrowed. (b) Each Loan under the Revolving Loan Facility (each, a "Revolving Loan" and, collectively, the "Revolving Loans"): (i) may be incurred by the Borrower at any time and from time to time after the Initial Borrowing Date and prior to the Revolving Loan Maturity Date; (ii) shall be denominated in U.S. Dollars; (iii) may, except as hereinafter provided, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, PROVIDED, that (x) all Revolving Loans made as part of the same Borrowing shall, unless otherwise specifically provided herein, consist of Revolving Loans of the same Type and (y) incurrences of, or conversions into, Eurodollar Loans may not be effected prior to the Syndication Date; (iv) may be repaid and reborrowed in accordance with the provisions hereof; and (v) shall not exceed for any Bank at any time outstanding that aggregate principal amount which equals the Revolving Loan Commitment, if any, of such Bank at such time. 1.02 MINIMUM AMOUNT OF EACH BORROWING; MAXIMUM NUMBER OF BORROWINGS. The aggregate principal amount of each Borrowing hereunder shall not be less than $1,000,000 and, if in excess thereof, shall be in an integral multiple of $500,000. More than one Borrowing may be incurred on any day; PROVIDED that at no time shall there be outstanding more than five Borrowings of Eurodollar Loans. 1.03 NOTICE OF BORROWING. (a) Whenever the Borrower desires to incur Loans under any Facility, it shall give the Administrative Agent at its Notice Office, prior to 12:00 Noon (New York time), at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Eurodollar Loans and at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Base Rate Loans to be incurred hereunder. Each such notice (each, a "Notice of Borrowing") shall, except as expressly provided in Section 1.10, be irrevocable, and, in the case of each written notice and each written confirmation of telephonic notice, shall be in the form of Exhibit A hereto, appropriately completed to specify (i) the Facility pursuant to which such Borrowing is to be made, (ii) the aggregate principal amount of the Loans to be made pursuant to such Borrowing, (iii) the date of such Borrowing (which shall be a Business Day) and (iv) whether such Borrowing shall consist of Base Rate Loans or, to the extent permitted hereunder, Eurodollar Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall promptly give each Bank which is required to make Loans of the Facility specified in the respective Notice of Borrowing written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing, of such Bank's proportionate share thereof and of the other matters covered by the Notice of Borrowing. (b) Without in any way limiting the obligation of the Borrower to confirm in writing any notice it may give hereunder by telephone, the Administrative Agent may act prior to receipt of written confirmation without liability upon the basis of such telephonic notice, -2- believed by the Administrative Agent in good faith to be from an Authorized Officer of the Borrower. In each such case the Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of any such telephonic notice. 1.04 DISBURSEMENT OF FUNDS. (a) Subject to the terms and conditions herein set forth, no later than 11:00 A.M. (New York time) on the date specified in each Notice of Borrowing, each Bank with a Commitment under the respective Facility will make available its PRO RATA share of each Borrowing requested to be made on such date in the manner provided below. All amounts shall be made available to the Administrative Agent in immediately available funds, denominated in U.S. Dollars, at the Payment Office and the Administrative Agent will promptly make available to the Borrower by depositing to the Borrower's account at the Payment Office the aggregate of the amounts so made available in the type of funds received. Unless the Administrative Agent shall have been notified by any Bank prior to the date of Borrowing that such Bank does not intend to make available to the Administrative Agent its portion of the Borrowing or Borrowings to be made on such date, the Administrative Agent may assume that such Bank has made such amount available to the Administrative Agent on such date of Borrowing, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Bank and the Administrative Agent has made available same to the Borrower, the Administrative Agent shall be entitled to recover such corresponding amount from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from the Bank or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (x) if paid by such Bank, the overnight Federal Funds Effective Rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.08, for the respective Loans. (b) Nothing in this Section 1.04 shall be deemed to relieve any Bank from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any default by such Bank hereunder. 1.05 NOTES. (a) The Borrower's obligation to pay the principal of, and interest on, all the Loans made to it by each Bank shall be evidenced (i) if Term Loans, by a promissory note substantially in the form of Exhibit B-1 with blanks appropriately completed in conformity herewith (each, a "Term Note" and, collectively, the "Term Notes") and (ii) if Revolving Loans, by a promissory note substantially in the form of Exhibit B-2 with blanks appropriately completed in conformity herewith (each, a "Revolving Note" and, collectively, the "Revolving Notes"). -3- (b) The Term Note issued to each Bank that has a Term Loan Commitment or outstanding Term Loans shall (i) be executed by the Borrower, (ii) be payable to the order of such Bank or its registered assigns and be dated the Initial Borrowing Date (or if issued thereafter, the date of issuance thereof), (iii) be in a stated principal amount equal to the initial Term Loan Commitment of such Bank and be payable in the principal amount of Term Loans evidenced thereby (or in the case of a new Term Note issued pursuant to Section 11.04, the Term Loans evidenced thereby at the time of issuance), (iv) mature on the Term Loan Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 3.01, and mandatory repayment and prepayment as provided in Section 3.02, and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (c) The Revolving Note issued to each Bank that has a Revolving Loan Commitment shall (i) be executed by the Borrower, (ii) be payable to the order of such Bank or its registered assigns and be dated the Initial Borrowing Date (or if issued thereafter, the date of issuance thereof), (iii) be in a stated principal amount equal to the Revolving Loan Commitment of such Bank and be payable in the principal amount of the Revolving Loans evidenced thereby, (iv) mature on the Revolving Loan Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 3.01, and mandatory prepayment as provided in Section 3.02, and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (d) Each Bank will record on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of any of its Notes endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation or any error in any such notation shall not affect the Borrower's obligations in respect of such Loans. 1.06 CONVERSIONS. The Borrower shall have the option to convert on any Business Day occurring after the Syndication Date, all or a portion at least equal to $1,000,000 (and, if in excess thereof, an integral multiple of $500,000) of the outstanding principal amount of the Loans of one Type pursuant to a Facility into a Borrowing or Borrowings of the other Type of Loan under such Facility; PROVIDED that (i) no partial conversion of a Borrowing of Eurodollar Loans shall reduce the outstanding principal amount of the Eurodollar Loans pursuant to such Borrowing to less than $1,000,000, (ii) Base Rate Loans may only be converted into Eurodollar Loans if no Default or Event of Default is in existence on the date of the conversion, (iii) Borrowings of Eurodollar Loans resulting from this Section 1.06 shall be limited in number as provided in Section 1.02, (iv) Eurodollar Loans may only be converted into Base Rate Loans on the last day of the Interest Period applicable thereto and (v) each such conversion shall be made PRO RATA among the Loans of each Bank of the Type being converted. Each such conversion shall be effected by the Borrower by giving the Administrative Agent at its Notice Office, prior to 12:00 Noon (New York time), at least three Business Days' (or one Business Day's in the case of a conversion into Base Rate Loans) prior written notice (or telephonic notice -4- promptly confirmed in writing) (each a "Notice of Conversion") specifying the Loans to be so converted, the Type of Loans to be converted into and, if to be converted into a Borrowing of Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall give each Bank prompt notice of any such proposed conversion affecting any of its Loans. 1.07 PRO RATA BORROWINGS. All Loans under this Agreement shall be made by the Banks PRO RATA on the basis of their Term Loan Commitments and Revolving Loan Commitments, as the case may be. It is understood that no Bank shall be responsible for any default by any other Bank in its obligation to make Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to fulfill its commitments hereunder. 1.08 INTEREST. (a) The unpaid principal amount of each Base Rate Loan shall bear interest from the date of the Borrowing thereof until the earlier of (i) the maturity (whether by acceleration or otherwise) of such Base Rate Loan and (ii) the conversion of such Base Rate Loan to a Eurodollar Loan pursuant to Section 1.06, at a rate per annum which shall at all times be the Applicable Percentage then in effect for Base Rate Loans plus the Base Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until the earlier of (i) the maturity (whether by acceleration or otherwise) of such Eurodollar Loan or (ii) the conversion of such Eurodollar Loan to a Base Rate Loan pursuant to Section 1.06, at a rate per annum which shall at all times be the Applicable Percentage then in effect for Eurodollar Loans plus the relevant Eurodollar Rate for the Interest Period applicable to such Eurodollar Loan. (c) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan and any other overdue amount payable hereunder shall bear interest at a rate per annum equal to the greater of (x) the Base Rate in effect from time to time plus the sum of (i) 2% and (ii) the Applicable Percentage then in effect for Base Rate Loans and (y) the rate which is 2% in excess of the rate then borne by such Loan. (d) Interest shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable (i) in respect of each Base Rate Loan, quarterly in arrears on the last Business Day of each calendar quarter, (ii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period of six months, on the date occurring three months after the first day of such Interest Period and (iii) in respect of each Loan, on any conversion or prepayment (on the amount so converted or prepaid), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (e) All computations of interest hereunder shall be made in accordance with Section 11.07(b) and (c). -5- (f) The Administrative Agent, upon determining the interest rate for any Borrowing of Eurodollar Loans for any Interest Period, shall promptly notify the Borrower and the Banks thereof. 1.09 INTEREST PERIODS. At the time the Borrower gives a Notice of Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 12:00 Noon (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect by giving the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) of the Interest Period to be applicable to such Borrowing, which Interest Period shall, at the option of the Borrower, be a one, two, three or six month period. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Base Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) if any Interest Period begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, PROVIDED that if any Interest Period would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) no Interest Period for a Borrowing under a Facility may be elected if it would extend beyond the Maturity Date for such Facility; (v) no Interest Period may be elected at any time when a Default or Event of Default is then in existence; and (vi) no Interest Period with respect to any Borrowing of Term Loans may be elected that would extend beyond any date upon which a mandatory repayment of Term Loans is required to be made under Section 3.02(i)(a) if, after giving effect to the selection of such Interest Period, the aggregate principal amount of Term Loans maintained as Eurodollar Loans with Interest Periods ending after such date would exceed the aggregate principal amount of Term Loans permitted to be outstanding after such mandatory repayment. If upon the expiration of any Interest Period, the Borrower has failed, or is not permitted, to elect a new Interest Period to be applicable to the respective Borrowing of Eurodollar Loans as -6- provided above, the Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Base Rate Loans effective as of the expiration date of such current Interest Period. 1.10 INCREASED COSTS, ILLEGALITY, ETC. (a) In the event that (x) in the case of clause (i) below, the Administrative Agent or (y) in the case of clauses (ii) and (iii) below, any Bank shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period, that, by reason of any changes arising after the Effective Date affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii) at any time, that such Bank shall incur increased costs or reductions in the amounts received or receivable hereunder in an amount which such Bank deems material with respect to any Eurodollar Loans (other than any increased cost or reduction in the amount received or receivable resulting from the imposition of or a change in the rate of taxes or similar charges) because of (x) any change since the Effective Date in any applicable law, governmental rule, regulation, guideline, order or request (whether or not having the force of law), or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline, order or request (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Eurodollar Rate) and/or (y) other circumstances affecting the interbank Eurodollar market or the position of such Bank in such market; or (iii) at any time, that the making or continuance of any Eurodollar Loan has become unlawful by compliance by such Bank in good faith with any change since the Effective Date in any law, governmental rule, regulation, guideline or order, or the interpretation or application thereof, or would conflict with any thereof not having the force of law but with which such Bank customarily complies, or has become impracticable as a result of a contingency occurring after the Effective Date which materially adversely affects the interbank Eurodollar market; then, and in any such event, such Bank (or the Administrative Agent in the case of clause (i) above) shall (x) on such date and (y) within 10 Business Days of the date on which such event no longer exists give notice (by telephone confirmed in writing) to the Borrower and to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Banks). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Administrative Agent notifies the Borrower and the Banks that the circumstances giving rise to such notice by the Administrative Agent no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred shall be deemed rescinded by the Borrower or, in the case of a Notice of Borrowing, shall, at the option of the Borrower, be deemed converted into a Notice of Borrowing for Base Rate Loans to -7- be made on the date of Borrowing contained in such Notice of Borrowing, (y) in the case of clause (ii) above, the Borrower shall pay to such Bank, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank shall determine) as shall be required to compensate such Bank for such increased costs or reductions in amounts receivable hereunder (a written notice as to the additional amounts owed to such Bank, showing the basis for the calculation thereof, which basis shall be reasonable and consistently applied, submitted to the Borrower by such Bank shall, absent manifest error, be final and conclusive and binding upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.10(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan is affected by the circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and in the case of a Eurodollar Loan affected pursuant to Section 1.10(a)(iii) the Borrower shall) either (i) if the affected Eurodollar Loan is then being made pursuant to a Borrowing, by giving the Administrative Agent telephonic notice (confirmed promptly in writing) thereof on the same date that the Borrower was notified by a Bank pursuant to Section 1.10(a)(ii) or (iii), cancel said Borrowing, convert the related Notice of Borrowing into one requesting a Borrowing of Base Rate Loans or require the affected Bank to make its requested Loan as a Base Rate Loan, or (ii) if the affected Eurodollar Loan is then outstanding, upon at least one Business Day's notice to the Administrative Agent, require the affected Bank to convert each such affected Eurodollar Loan into a Base Rate Loan, PROVIDED that if more than one Bank is affected at any time, then all affected Banks must be treated the same pursuant to this Section 1.10(b). (c) If any Bank shall have determined that after the Effective Date the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged by law with the interpretation or administration thereof, or compliance by such Bank or its parent corporation with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, in each case made subsequent to the Effective Date, has or would have the effect of reducing the rate of return on such Bank's or its parent corporation's capital or assets as a consequence of such Bank's commitments or obligations hereunder to a level below that which such Bank or its parent corporation could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Bank's or its parent corporation's policies with respect to capital adequacy), then from time to time, upon demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank or its parent corporation for such reduction. Each Bank, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.10(c), will give prompt written notice thereof to the Borrower, which notice shall set forth the basis of the calculation of such additional amounts, which basis must be reasonable and consistently applied, although the failure to give any such notice shall not release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 1.10(c) upon the subsequent receipt of such notice. -8- (d) Notwithstanding anything in this Agreement to the contrary, to the extent any notice required by this Section 1.10 is given by any Bank more than 90 days after such Bank obtained, or reasonably should have obtained, knowledge of the occurrence of the event giving rise to the additional costs of the type described in this Section 1.10, such Bank shall not be entitled to compensation under this Section 1.10 for any amounts incurred or accruing more than 90 days prior to such notice to the Borrower. 1.11 COMPENSATION. The Borrower shall compensate each Bank, upon its written request (which request shall set forth the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Bank to fund its Eurodollar Loans but excluding any loss of anticipated profit with respect to such Loans) which such Bank may sustain: (i) if for any reason (other than a default by such Bank or the Administrative Agent) a Borrowing of Eurodollar Loans does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a)); (ii) if any repayment, prepayment or conversion of any of its Eurodollar Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any of its Eurodollar Loans is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other failure by the Borrower to repay its Loans when required by the terms of this Agreement or (y) an election made pursuant to Section 1.10(b). Calculation of all amounts payable to a Bank under this Section 1.11 shall be made as though that Bank had actually funded its relevant Eurodollar Loan through the purchase of a Eurodollar deposit bearing interest at the Eurodollar Rate in an amount equal to the amount of that Loan, having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Bank or other bank to a domestic office of that Bank in the United States of America; PROVIDED, HOWEVER, that each Bank may fund each of its Eurodollar Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 1.11. 1.12 CHANGE OF LENDING OFFICE. Each Bank agrees that, upon the occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii) or 3.04 with respect to such Bank, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans affected by such event; PROVIDED that such designation is made on such terms that, in the opinion of such Bank, such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 1.12 shall affect or postpone any of the obligations of the Borrower or the right of any Bank provided in Section 1.10 or 3.04. 1.13 REPLACEMENT OF BANKS. (x) If any Bank becomes a Defaulting Bank or (y) upon the occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c) or Section 3.04 with respect to any Bank which results in such Bank charging to the Borrower increased costs in excess of those being generally charged by the other Banks, the Borrower shall have the right, if no Default or Event of Default, then exists, to replace such Bank -9- (the "Replaced Bank") with one or more other banks or financial institutions, none of whom shall constitute a Defaulting Bank at the time of such replacement (collectively, the "Replacement Bank") reasonably acceptable to the Administrative Agent, PROVIDED that (i) at the time of any replacement pursuant to this Section 1.13, the Replacement Bank shall enter into one or more Assignment and Assumption Agreements pursuant to Section 11.04(b) (and with all fees payable pursuant to said Section 11.04(b) to be paid by the Replacement Bank) pursuant to which the Replacement Bank shall acquire all of the Commitments and outstanding Loans of the Replaced Bank and, in connection therewith, shall pay to the Replaced Bank in respect thereof an amount equal to (A) the principal of, and all accrued interest on, all outstanding Loans of the Replaced Bank, (B) all accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to Section 2.01, and (ii) all obligations (including, without limitation, all such amounts, if any, due and owing under Section 1.11) of the Borrower due and owing to the Replaced Bank (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Bank concurrently with such replacement. Upon the execution of the respective Assignment and Assumption Agreement, the payment of amounts referred to in clauses (i) and (ii) above, recordation of the assignment on the Register by the Administrative Agent pursuant to Section 6.13 and, if so requested by the Replacement Bank, delivery to the Replacement Bank of the appropriate Note or Notes executed by the Borrower, (x) the Replacement Bank shall become a Bank hereunder and the Replaced Bank shall cease to constitute a Bank hereunder, except with respect to indemnification provisions under this Agreement (including, without limitation, Sections 1.10, 1.11, 3.04, 10.07 and 11.01), which shall survive as to such Replaced Bank and (y) Annex I hereto shall be deemed modified to reflect the changed Commitments (and/or outstanding Term Loans, as the case may be) resulting from the assignment from the Replaced Bank to the Replacement Bank. SECTION 2. FEES; COMMITMENTS. 2.01 FEES. (a) The Borrower shall pay to the Administrative Agent for the account of each Bank a commitment fee (the "Commitment Fee") for the period from the Effective Date to but not including the date on which the Total Revolving Loan Commitment has been terminated, computed at a rate for each day equal to 1/2 of 1% per annum on the daily Unutilized Revolving Loan Commitment of each such Bank. Accrued Commitment Fees shall be due and payable in arrears on the last Business Day of each calendar quarter and the date upon which the Total Revolving Loan Commitment is terminated. (b) The Borrower shall pay to the Administrative Agent, for the account of the Administrative Agent, when and as due, such fees as have been, or are from time to time, separately agreed upon. (c) All computations of Fees shall be made in accordance with Section 11.07(b). 2.02 VOLUNTARY REDUCTION OF COMMITMENTS. Upon at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) given by the Borrower to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall -10- promptly transmit to each of the Banks), the Borrower shall have the right, without premium or penalty, to terminate or partially reduce the Total Unutilized Revolving Loan Commitment, PROVIDED that any such partial reductions shall be in the amount of at least $1,000,000. 2.03 MANDATORY REDUCTIONS OF COMMITMENTS. (a) The Total Commitment (and the Commitment of each Bank) shall terminate in its entirety at 5:00 p.m. (New York time) on the Expiration Date unless the Initial Borrowing Date has occurred on or before such date. (b) The Total Term Loan Commitment shall terminate on the Initial Borrowing Date, after giving effect to the incurrence of Term Loans on such date. (c) The Total Revolving Loan Commitment (and the Revolving Loan Commitment of each Bank) shall terminate on the earlier of (i) the Revolving Loan Maturity Date and (ii) the date on which a Change of Control occurs. (d) On each date upon which a mandatory prepayment of Term Loans pursuant to Section 3.02(i)(b), (c) or (d) is required and exceeds in amount the aggregate principal amount of Term Loans then outstanding or would be required if an unlimited amount of Term Loans were then outstanding, the Total Revolving Loan Commitment shall be permanently reduced by the amount by which the amount required to be applied pursuant to said Sections (determined as if an unlimited amount of Term Loans were actually outstanding) exceeds the aggregate principal amount of Term Loans then outstanding. (e) Each partial reduction of the Total Revolving Loan Commitment pursuant to this Section 2.03 shall apply proportionately to the Revolving Loan Commitment of each Bank with such a Commitment. SECTION 3. PAYMENTS. 3.01 VOLUNTARY PREPAYMENTS. The Borrower shall have the right to prepay Loans, without premium or penalty (except for amounts payable pursuant to Section 1.11), in whole or in part, from time to time on the following terms and conditions: (i) the Borrower shall give the Administrative Agent at its Notice Office written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay the Loans, whether such Loans are Term Loans or Revolving Loans, the amount of such prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which made, which notice shall be received by the Administrative Agent (x) in the case of Base Rate Loans, no later than 12:00 Noon (New York time) one Business Day prior to the date of such prepayment, or (y) in the case of Eurodollar Loans, three Business Days prior to the date of such prepayment, which notice shall promptly be transmitted by the Administrative Agent to each of the Banks; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $1,000,000, PROVIDED that no partial prepayment of Eurodollar Loans made pursuant to a Borrowing shall reduce the aggregate principal amount of the Loans outstanding pursuant to such Borrowing to an amount less than $1,000,000; (iii) each prepayment in respect of any Loans made pursuant to a Borrowing shall be applied PRO RATA among such Loans; and (iv) each prepayment of Term Loans pursuant to this -11- Section 3.01 shall reduce the then remaining Scheduled Repayments on a PRO RATA basis (based upon the then remaining principal amount of each such Scheduled Repayment). 3.02 MANDATORY REPAYMENTS AND PREPAYMENTS. (i) Requirements: (a) On each date set forth below, the Borrower shall be required to repay the principal amount of Term Loans as is set forth opposite such date (each such repayment, as the same may be reduced pursuant to Section 2.03, 3.01 and/or 3.02(ii)(a), a "Scheduled Repayment"):
Scheduled Repayment Date Amount ------------------------ ------ June 30, 2000 $10,000,000 December 31, 2000 $10,000,000 June 30, 2001 $10,000,000 December 31, 2001 $10,000,000 June 30, 2002 $10,000,000 December 31, 2002 $10,000,000 June 30, 2003 $12,500,000 December 31, 2003 $12,500,000 June 30, 2004 $12,500,000 Term Loan Maturity Date $12,500,000
(b) Subject to Section 3.02(i)(f), on the date of receipt thereof by the Borrower and/or any of its Subsidiaries of the proceeds of any Asset Sale (other than the sale of BIC to Centre Solutions Holdings (Delaware) Limited, but no later than December 31, 1998), an amount equal to 100% of the Net Available Proceeds of such Asset Sale shall be applied as a mandatory prepayment of principal of the then outstanding Term Loans. (c) On the date of the receipt thereof by the Borrower and/or any of its Subsidiaries, an amount equal to 100% of the proceeds (net of underwriting discounts and commissions and other reasonable fees and costs associated therewith) of the incurrence of Indebtedness by the Borrower and/or any of its Subsidiaries (other than Indebtedness permitted by Section 7.04 as in effect on the Effective Date) shall be applied to the prepayment of the outstanding principal amount of the Term Loans. -12- (d) On the date of the receipt thereof by the Borrower and/or any of its Subsidiaries, an amount equal to 100% of the proceeds (net of underwriting discounts and commissions and other reasonable fees and costs associated therewith) of the sale or issuance of equity by, or cash capital contributions to, the Borrower or any Subsidiary of the Borrower (other than (i) any issuance of common stock by the Borrower to the extent issued to the employees or claims consultants of the Borrower or its Subsidiaries and (ii) issuances of stock by Subsidiaries of the Borrower to the Borrower on to Wholly Owned Subsidiaries of the Borrower, and capital contributions by the Borrower to its Subsidiaries), shall be applied as a mandatory prepayment of the outstanding principal amount of the then outstanding Term Loans. (e) On the date on which any Change of Control occurs, the outstanding principal amount of all Term Loans shall be due and payable in full. (f) To the extent that (x) funds for any prepayment otherwise required to be made pursuant to the terms of Section 3.02(i)(b) are only available to the Borrower through dividend payments to the Borrower from one or more Regulated Insurance Companies, (y) such dividend payments cannot be made at such time within the ordinary dividend-paying capacity of such Regulated Insurance Company or Companies and, accordingly, require specific affirmative regulatory approval for the payment of extraordinary dividends and (z) the Borrower has used reasonable efforts (including without limitation due written application or request) to obtain such approval for the payment of extraordinary dividends and such approval cannot be obtained by such Regulated Insurance Company, upon certification by the Borrower to the Administrative Agent (which shall promptly deliver a copy of such certification to the Banks) to such effect (together with, in the case of an application or request for regulatory approval, copies of all documents submitted, and all written responses received, in connection therewith), the Borrower shall not, to such extent, be required to make such prepayment for so long as such dividend payments may not, for such reasons, be made. (g) If on any date the outstanding principal amount of Revolving Loans (after giving effect to all other repayments thereof on such date) exceeds the Total Revolving Loan Commitment as then in effect, the Borrower shall repay on such date the principal of the Revolving Loans in an amount equal to such excess. (ii) Application: (a) Each mandatory prepayment of Term Loans pursuant to Section 3.02(i)(b), (c) and (d) shall be applied to reduce the then remaining Scheduled Repayments on a PRO RATA basis (based upon the then remaining principal amount of each such Scheduled Repayment). (b) With respect to each prepayment of Loans required by this Section 3.02, the Borrower may designate the Types of Loans which are to be prepaid and the specific Borrowing(s) pursuant to which made; PROVIDED that (i) the Borrower shall first so designate all Base Rate Loans and Eurodollar Loans with Interest Periods ending on the date of repayment prior to designating any other Eurodollar Loans; (ii) if any prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Loans made pursuant to such Borrowing to an amount less than $1,000,000, such Borrowing shall be immediately converted -13- into Base Rate Loans; and (iii) each prepayment of any Loans made pursuant to a Borrowing shall be applied PRO RATA among such Loans. In the absence of a designation by the Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.11. 3.03 METHOD AND PLACE OF PAYMENT. Except as otherwise specifically provided herein, all payments under this Agreement and the Notes shall be made to the Administrative Agent for the ratable account of the Banks entitled thereto, not later than 1:00 P.M. (New York time) on the date when due and shall be made in immediately available funds and in lawful money of the United States of America at the Payment Office, it being understood that written, telex or facsimile notice by the Borrower to the Administrative Agent to make a payment from the funds in the Borrower's account at the Payment Office shall constitute the making of such payment to the extent of such funds held in such account. Any payments under this Agreement which are made later than 1:00 P.M. (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 3.04 NET PAYMENTS. (a) All payments made by the Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 3.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax imposed on or measured by the net income or net profits of a Bank pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Bank is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect to such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the Borrower agrees to reimburse each Bank, upon the written request of such Bank, for taxes imposed on or measured by the net income or net profits of such Bank pursuant to the laws of the jurisdiction in which such Bank is organized or in which the principal office or applicable lending office of such Bank is located or under the laws of any political subdivision or taxing authority of any such jurisdiction in which such Bank is organized or in which the principal office or applicable lending office of such Bank is located and for any withholding of taxes as such Bank shall determine are payable by, or withheld from, such Bank, in respect of such amounts so paid to or on behalf of such Bank pursuant to the preceding sentence and in respect -14- of any amounts paid to or on behalf of such Bank pursuant to this sentence. The Borrower will furnish to the Administrative Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Bank, and reimburse such Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank. (b) Each Bank that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes agrees to deliver to the Borrower and the Administrative Agent on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 11.04(b) (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Bank, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Bank is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit E (any such certificate, a "Section 3.04(b)(ii) Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note. In addition, each Bank agrees that from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower and the Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 3.04(b)(ii) Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Bank to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or it shall immediately notify the Borrower and the Administrative Agent of its inability to deliver any such Form or Certificate, in which case such Bank shall not be required to deliver any such Form or Certificate pursuant to this Section 3.04(b). Notwithstanding anything to the contrary contained in Section 3.04(a), but subject to Section 11.04(b) and the immediately succeeding sentence, (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, Fees or other amounts payable hereunder for the account of any Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that such Bank has not provided to the Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 3.04(a) hereof to gross-up payments to be made to a Bank in respect of income or similar taxes imposed by the United States if (I) such Bank has not provided to the Borrower the Internal Revenue Service Forms required to be provided to the Borrower pursuant to this Section 3.04(b) or (II) in the case of a payment, other than interest, to a Bank described in clause (ii) above, to the extent that such -15- Forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 3.04 and except as set forth in Section 11.04(b), the Borrower agrees to pay any additional amounts and to indemnify each Bank in the manner set forth in Section 3.04(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. SECTION 4. CONDITIONS PRECEDENT. The obligation of the Banks to make Loans to the Borrower hereunder is subject, at the time of the making of each such Loan (except as otherwise hereinafter indicated), to the satisfaction of each of the following conditions: 4.01 EFFECTIVENESS; NOTES. On or prior to the Initial Borrowing Date, (i) the Effective Date shall have occurred, and (ii) there shall have been delivered to the Administrative Agent for the account of each Bank the appropriate Term Note and Revolving Note executed by the Borrower in the amount, maturity and as otherwise provided herein. 4.02 NO DEFAULT; REPRESENTATIONS AND WARRANTIES. At the time of the making of each Loan and also after giving effect thereto, (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein or in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of such Loan, unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. 4.03 OFFICER'S CERTIFICATE. On the Initial Borrowing Date, the Administrative Agent shall have received an officer's certificate dated such date, signed by an appropriate officer of the Borrower, stating that all of the applicable conditions set forth in Sections 4.02, 4.06, 4.07, 4.08, 4.11, 4.15 and 4.22 exist as of such date. 4.04 OPINIONS OF COUNSEL. On the Initial Borrowing Date, the Administrative Agent shall have received an opinion, or opinions, in form and substance reasonably satisfactory to the Administrative Agent, addressed to each of the Banks and dated the Initial Borrowing Date, from (i) Riordan & McKinzie, counsel to the Borrower, which opinion shall cover the matters contained in Exhibit C-1 hereto, and (ii) White & Case, special counsel to the Banks, which opinion shall cover the matters contained in Exhibit C-2 hereto. 4.05 CORPORATE PROCEEDINGS. (a) On the Initial Borrowing Date, the Banks shall have received from each Credit Party an officer's certificate, dated the Initial Borrowing Date, signed by the President or any Vice President of such Credit Party, and attested to by the Secretary or any Assistant Secretary of such Credit Party, in the form of Exhibit D hereto with appropriate insertions, together with (x) copies of the Certificate of Incorporation and By-Laws of such Credit Party and (y) the resolutions of such Credit Party and the other documents referred -16- to in such certificate, and the foregoing shall be reasonably satisfactory to the Administrative Agent. (b) All corporate, tax and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement, the other Credit Documents and the Transaction Documents shall be reasonably satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received all information and copies of all certificates, documents and papers, including good standing certificates and any other records of corporate proceedings and governmental approvals, if any, which the Administrative Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. 4.06 EXISTING REINSURANCE AGREEMENTS. Each of the parties thereto shall have entered into the respective Existing Reinsurance Agreements, and all agreements evidencing, governing or relating to the Existing Reinsurance Agreements (the "Existing Reinsurance Agreement Documents") shall have been delivered to the Banks and shall be in form and substance satisfactory to the Banks. 4.07 ADVERSE CHANGE, ETC. Neither the Administrative Agent nor the Required Banks shall have become aware of any facts or conditions not previously known or disclosed, whether occurring prior to or after the Effective Date, and since December 31, 1997 nothing shall have occurred, which, when taken as a whole, the Administrative Agent shall reasonably determine (i) has, or is reasonably likely to have, a material adverse effect on the rights or remedies of the Banks or the Administrative Agent under this Agreement or any other Credit Document, or on the ability of any Credit Party to perform its obligations to them, or (ii) has or is reasonably likely to have a Material Adverse Effect. 4.08 LITIGATION. No actions, suits or proceedings shall be pending or, to the knowledge of the Borrower, threatened against the Borrower (i) with respect to this Agreement or any other Credit Document, the Transaction Documents or the transactions contemplated hereby or thereby (including the Acquisition) or (ii) which either the Administrative Agent or the Required Banks shall determine has, or is reasonably likely to have, (x) a Material Adverse Effect or (y) a material adverse effect on the rights or remedies of the Banks or the Administrative Agent hereunder or under any other Credit Document or on the ability of the any Credit Party to perform its obligations to them hereunder or under any other Credit Documents. 4.09 SUBSIDIARY GUARANTY. On the Initial Borrowing Date, each Subsidiary Guarantor shall have duly authorized, executed and delivered a Subsidiary Guaranty in the form of Exhibit F (as modified, amended or supplemented from time to time in accordance with the terms hereof and thereof, the "Subsidiary Guaranty"), and the Subsidiary Guaranty shall be in full force and effect. 4.10 PLEDGE AGREEMENT. On or prior to the Initial Borrowing Date, each Credit Party shall have duly authorized, executed and delivered a Pledge Agreement substantially in the form of Exhibit G hereto (as modified, amended or supplemented from time to time in accordance with the terms thereof and hereof, the "Pledge Agreement"), which Pledge -17- Agreement shall be in full force and effect, and shall have delivered to the Collateral Agent, as pledgee thereunder: (A) all of the Pledged Securities referred to therein, endorsed in blank or together with undated stock powers executed in blank, as appropriate; (B) executed copies of Financing Statements (Form UCC-1) in appropriate form for filing under the UCC of each jurisdiction as may be reasonably necessary to perfect the security interests purported to be created by the Pledge Agreement; (C) evidence of the completion of all recordings and filings of, or with respect to, the Pledge Agreement (other than the filing of the UCC-1 Financing Statements referred to in (B) above) as may be necessary or, in the reasonable opinion of the Collateral Agent, desirable to perfect the security interests intended to be created thereunder; and (D) evidence that all other actions necessary or, in the reasonable opinion of the Collateral Agent, desirable to perfect and protect the security interests purported to be created by the Pledge Agreement have been taken or will be taken promptly after the Initial Borrowing Date. 4.11 CONSUMMATION OF THE TRANSACTION. (a) On the Initial Borrowing Date, the Acquisition shall have been consummated in accordance with the Acquisition Documents, which Acquisition Documents shall be in form and substance reasonably satisfactory to the Administrative Agent, and all applicable laws, and each of the conditions precedent to the consummation of the Acquisition (including, without limitation, the accuracy in all material respects of the representations and warranties contained in the Acquisition Agreement) shall have been satisfied and not waived except with the consent of the Administrative Agent and the Required Banks to the satisfaction of the Administrative Agent and the Required Banks. Notwithstanding the foregoing, the Borrower shall not be required to acquire CCIC on or prior to the Initial Borrowing Date, but shall be required to purchase CCIC in accordance with Section 6.15. (b) The Borrower shall have received net cash proceeds (and shall have used such proceeds to make payments owing in connection with the Transaction) from the issuance by the Borrower of at least $200,000,000 of common stock (the "Equity Financing") consisting of (x) at least $94,000,000 to be issued to (i) Capital Z Financial Services Fund II, L.P., (ii) Capital Z Financial Services Private Fund II, L.P., (iii) Insurance Partners Offshore (Bermuda), L.P. and (iv) Insurance Partners, L.P. and (y) not more than $109,600,000 to be issued through a rights offering to existing shareholders, option holders and warrant holders, the terms and conditions of which shall be reasonably satisfactory to the Administrative Agent. 4.12 TRANSACTION DOCUMENTS. On or before the Initial Borrowing Date, there shall have been delivered to the Administrative Agent, with copies for the Banks, true and correct copies of the Transaction Documents and all terms of such Transaction Documents shall be reasonably satisfactory in form and substance to the Administrative Agent and the Required Banks. The representations and warranties set forth in the Transaction Documents shall be true -18- and correct in all material respects as if made on and as of the Initial Borrowing Date, unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. Concurrently with the incurrence of the Term Loans on the Initial Borrowing Date, the Transaction shall have been consummated in substantial compliance with the terms of the Transaction Documents and all Legal Requirements. Notwithstanding the foregoing, the Borrower shall not be required to acquire CCIC on or prior to the Initial Borrowing Date, but shall be required to purchase CCIC in accordance with Section 6.15. 4.13 VARIOUS AGREEMENTS. On or prior to the Initial Borrowing Date, there shall have been made available to the Administrative Agent (and copies thereof shall have been made available to the Banks requesting same) copies, certified as true and correct by an appropriate officer of the Borrower, of: (a) all Plans (and for each Plan that is required to file an annual report on Internal Revenue Service Form 5500-series, a copy of the most recent such report (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information), and for each Plan that is a "single employer plan," as defined in Section 4001(a)(15) of ERISA, the most recently prepared actuarial valuation therefor) and any other "employee benefit plans," as defined in Section 3(3) of ERISA, and any other material agreements, plans or arrangements, with or for the benefit of current or former employees of the Borrower or any of its Subsidiaries or any ERISA Affiliate (provided that the foregoing shall apply in the case of any multiemployer plan, as defined in 4001(a)(3) of ERISA, only to the extent that any document described therein is in the possession of the Borrower or any of its Subsidiaries or any ERISA Affiliate or reasonably available thereto from the sponsor or trustee of any such plan) (collectively, the "Plan Documents"); (b) all material employment agreements (or the forms thereof), if any, with respect to the senior management of the Borrower or any of its Subsidiaries including, without limitation, BIG and its Subsidiaries (collectively, the "Management Agreements"); (c) all agreements, if any, (or the forms thereof) entered or to be entered into by the Borrower or any of its Subsidiaries governing the terms and relative rights of its capital stock and any agreements (or the forms thereof) entered or to be entered into by stockholders relating to any such entity with respect to its capital stock, but excluding agreements with directors of any Subsidiaries of the Borrower relating to directors' qualifying shares held by such directors (collectively, the "Stockholders Agreements"); (d) all tax sharing, tax allocation and other similar agreements (or the forms thereof) entered or to be entered into by the Borrower and/or any of its Subsidiaries (collectively, the "Tax Sharing Agreements"); (e) all material agreements entered into between the Borrower and any of its Subsidiaries and/or among or between any of the Borrower's Subsidiaries relating to the allocation of expenses incurred by the Borrower or any such Subsidiary (collectively, the "Shared Expenses Agreements"); -19- (f) all material contracts of the Borrower or any of its Subsidiaries that are to remain in effect after giving effect to the consummation of the Transaction (collectively, the "Material Contracts"); and (g) all material Reinsurance Agreements of the Borrower and each of its Subsidiaries; all of which Plan Documents, Management Agreements, Stockholders Agreements, Tax Sharing Agreements, Shared Expenses Agreements, Material Contracts and Reinsurance Agreements shall be in form and substance reasonably satisfactory to the Administrative Agent and the Required Banks. 4.14 FINANCIAL STATEMENTS; PROJECTIONS. Prior to the Initial Borrowing Date, the Borrower shall have delivered or caused to be delivered to the Administrative Agent with copies for each Bank: (a)(i) the audited Annual Statement of each of SNIC, SPCC, CalComp, CBIC and CCIC for the fiscal year ended December 31, 1997, prepared in accordance with SAP and as filed with the respective Applicable Insurance Regulatory Authority, which Annual Statements shall be satisfactory in form and substance to the Administrative Agent and (ii) the unaudited Quarterly Statement of each of SNIC, SPCC, CalComp, CBIC and CCIC for the quarter ended September 30, 1998, prepared in accordance with SAP and as filed with the respective Applicable Insurance Regulatory Authority, which Quarterly Statements shall be satisfactory in form and substance to the Administrative Agent; (b)(i) the audited consolidated balance sheet of each of the Borrower and BIG for the fiscal year ended December 31, 1997, and the related consolidated statements of income, of stockholder's equity and of cash flows, in each case prepared in accordance with GAAP and (ii) the unaudited consolidated balance sheet of each of the Borrower and BIG for the fiscal quarter ended September 30, 1998, and the related consolidated statements of income, of stockholders' equity and of cash flows, in each case prepared in accordance with GAAP; (c) projected financial statements for the Borrower and its Subsidiaries reflecting the projected financial condition, income and expenses of the Borrower and its Subsidiaries after giving effect to the Transaction and the other transactions contemplated hereby, which projected financial statements shall be the same in all material respects as the projected financial statements set forth in Section 10 of the Confidential Information Memorandum dated November, 1998 delivered to the Banks in connection with this Agreement; (d) a closing funds flow statement in connection with the Transaction, in form and substance satisfactory to the Administrative Agent; and (e) a PRO FORMA balance sheet of Borrower, as of the Initial Borrowing Date, after giving effect to the Transaction and the other transactions contemplated hereby. -20- 4.15 APPROVALS, ETC. On the Initial Borrowing Date the following approvals shall have been obtained to the satisfaction of the Banks: (i) all necessary and material governmental and third party approvals, permits and licenses in connection with the Transaction and the transactions contemplated by the Transaction Documents and otherwise referred to herein or therein (including without limitation the approval of the respective Departments of Insurance of the States of California and Delaware), to the extent such approvals, consents, permits and licenses are required to be obtained or made prior to the Initial Borrowing Date, shall have been obtained and remain in full force and effect, and all applicable waiting periods shall have expired, in each case without any action being taken by any competent authority (including any court having jurisdiction) which restrains, prevents or imposes, in the reasonable judgment of the Required Banks or the Administrative Agent, materially adverse conditions upon the consummation of the Transaction or any such agreement or transaction; (ii) the Form A filed by the Borrower with the Insurance Department of the States of California and Delaware, together with the approval of such Insurance Departments of each such Form A (and all stipulations or conditions relating to such approval), which approvals (and stipulations and conditions, if any) shall be reasonably satisfactory to the Administrative Agent; (iii) all necessary shareholder approvals in connection with the Transaction shall have been obtained and remain in full force and effect; and (iv) all regulatory approvals in connection with the pledge of the stock of each Regulated Insurance Company shall have been obtained and remain in full force and effect. 4.16 INDEBTEDNESS. On the Initial Borrowing Date and after giving effect to the consummation of the Transaction, the only Indebtedness of the Borrower and its Subsidiaries shall consist of (a) the Indebtedness incurred pursuant to the Credit Documents and (b) Indebtedness listed on Annex III. 4.17 PAYMENT OF FEES. On the Initial Borrowing Date, all costs, fees and expenses (including, without limitation, legal fees and expenses), and all other compensation contemplated by this Agreement or the other Credit Documents, due to the Administrative Agent or any Banks shall have been paid to the extent due. 4.18 NOTICE OF BORROWING. The Administrative Agent shall have received a Notice of Borrowing satisfying the requirements of Section 1.03 with respect to all Borrowings of Loans. 4.19 INSURANCE POLICIES. On the Initial Borrowing Date, the Administrative Agent shall have received evidence of insurance complying with the requirements of Section 6.03 for -21- the business and properties of the Borrower and its Subsidiaries, in form and substance reasonably satisfactory to the Administrative Agent. 4.20 TRUST PREFERRED NOTE DOCUMENTS. The Trust Preferred Note Documents shall have been amended in a manner satisfactory to the Administrative Agent or a waiver in form and substance satisfactory to the Administrative Agent shall have been granted by the holders of the Trust Preferred Notes. 4.21 REPORTS. The Borrower shall have delivered, or shall have caused to be delivered, to the Administrative Agent and the Banks (a) a letter of Tillinghast, dated May 5, 1998, relating to the reserve position of BIG and (b) a Milliman and Robertson report, dated as of March 4, 1998, in respect of the reserve position of BIG and its Subsidiaries. 4.22 SURPLUS CONTRIBUTION. On the Initial Borrowing Date, an amount of at least $23,500,000 shall have been contributed to CalComp, CCIC (to the extent acquired on or prior to the Initial Borrowing Date) and/or CBIC. The acceptance of the benefits of the Loans on the Initial Borrowing Date and on the date of each Loan thereafter shall constitute a representation and warranty by the Borrower to each of the Banks that all of the applicable conditions specified in this Section 4 exist or have been satisfied as of such date. All of the certificates, legal opinions and other documents and papers referred to in this Section 4, unless otherwise specified, shall be delivered to the Administrative Agent at its Notice Office for the account of each of the Banks. SECTION 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In order to induce the Banks to enter into this Agreement and to make the Loans provided for herein, the Borrower makes the following representations and warranties to, and agreements with, the Banks, all of which shall survive the execution and delivery of this Agreement and the making of the Loans (with the making of the Loans being deemed to constitute a representation and warranty that the matters specified in this Section 5 are true and correct in all material respects on and as of the date of the making of the Loans (after giving effect to the consummation of the Transaction on such date) unless such representation and warranty expressly indicates that it is being made as of any other specific date in which case such representation and warranty shall be true and correct in all material respects as of such other specified date): 5.01 CORPORATE STATUS. The Borrower and each of its Subsidiaries (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization and has the corporate or other organizational power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (ii) has been duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified would have a Material Adverse Effect. 5.02 CORPORATE POWER AND AUTHORITY. Each Credit Party has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Transaction Documents to which it is a party and has taken all necessary corporate action to authorize the -22- execution, delivery and performance of the Transaction Documents to which it is a party. Each Credit Party and each of its Subsidiaries has duly executed and delivered each Transaction Document to which it is a party and each such Transaction Document constitutes the legal, valid and binding obligation of such Credit Party enforceable against such Credit Party in accordance with its terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law. 5.03 NO CONTRAVENTION OF LAWS, AGREEMENTS OR ORGANIZATIONAL DOCUMENTS. Neither the execution, delivery and performance by any Credit Party of the Transaction Documents to which it is a party nor compliance with the terms and provisions thereof, nor the consummation of the transactions contemplated therein (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Pledge Agreement) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material instrument to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets are bound or to which it may be subject or (iii) will violate any provision of the Certificate of Incorporation or By-Laws of the Borrower or any of its Subsidiaries. 5.04 LITIGATION AND CONTINGENT LIABILITIES. (a) There are no actions, suits or proceedings pending or threatened in writing involving the Borrower or any of its Subsidiaries (including, without limitation, with respect to the Transaction, this Agreement or any documentation executed in connection therewith or herewith) (i) which has or is likely to have a Material Adverse Effect or (ii) that could reasonably be expected to have a material adverse effect on the rights or remedies of the Banks or on the ability of any Credit Party to perform its respective obligations to the Banks hereunder and under the other Credit Documents to which it is, or will be, a party. Additionally, there does not exist any judgment, order or injunction prohibiting or imposing material adverse conditions upon the making of any Loan hereunder. (b) Except as fully reflected in the financial statements described in Section 5.11(b) (including the footnotes thereto), the Indebtedness incurred under this Agreement and all obligations incurred in the ordinary course of business since the date of the financial statements described in Section 5.11(b), there were as of the Initial Borrowing Date (and after giving effect to the Loans made on such date), no liabilities or obligations with respect to the Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due), and the Borrower does not know of any basis for the assertion against the Borrower or any of its Subsidiaries of any such liability or obligation, which, in the case of any of the foregoing referred to in this clause (b), either individually or in the aggregate, are or would be reasonably likely to have a Material Adverse Effect. -23- 5.05 USE OF PROCEEDS; MARGIN REGULATIONS. (a) The proceeds of all Term Loans shall be utilized solely to effect the Transaction and to pay costs and expenses in connection therewith. (b) The proceeds of all Revolving Loans shall be utilized for general corporate and working capital purposes. (c) Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System and no part of the proceeds of any Loan will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock. 5.06 APPROVALS. Except for filings and approvals made or obtained on or prior to the Initial Borrowing Date, no order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required prior to the Initial Borrowing Date in connection with (i) the execution, delivery and performance of any Transaction Document or (ii) the legality, validity, binding effect or enforceability of any Transaction Document. 5.07 INVESTMENT COMPANY ACT. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.08 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.09 TRUE AND COMPLETE DISCLOSURE; PROJECTIONS AND ASSUMPTIONS. All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or any Bank (including, without limitation, all information contained in the Transaction Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other factual information (taken as a whole) hereafter furnished by or on behalf of any such Persons in writing to the Administrative Agent will be, true and accurate in all material respects on the date as of which such information is dated and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. The Projections contained in such materials are based on good faith estimates and assumptions believed by the Borrower to be reasonable and attainable at the time made, it being recognized by the Banks that such Projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such Projections may differ from the projected results. -24- 5.10 CONSUMMATION OF TRANSACTION. As of the Initial Borrowing Date, (i) the Transaction has been consummated in accordance with, in all material respects, the terms and conditions of the Transaction Documents and all applicable laws and (ii) the Borrower is the direct or indirect owner of 100% of the outstanding capital stock of BIG, SNIC, SPCC, CalComp and CBIC, free and clear of all Liens (other than Liens created pursuant to the Pledge Agreement). All material consents and approvals of, and material filings and registrations with, and all other material actions in respect of, all governmental agencies, authorities or instrumentalities required in order to consummate the Transaction in accordance with the terms and conditions of the Transaction Documents and all applicable laws have been, or prior to the time required, will have been, obtained, given, filed or taken (with no concessions, agreements or understandings having been made or entered into by the Borrower or any of its Subsidiaries in connection therewith other than those disclosed to the Banks prior to the Effective Date and found reasonably acceptable by the Administrative Agent) and are or will be in full force and effect. All applicable waiting periods with respect thereto have, or, prior to the time when required, will have, expired without, in all such cases, any action being taken by any competent authority which restrains, prevents, or imposes material adverse conditions upon the consummation of the Transaction. Additionally, there does not exist any judgment, order, or injunction prohibiting or imposing material adverse conditions upon the Transaction or the making of the Loans or the performance by the Borrower and its Subsidiaries of their obligations under the Transaction Documents. 5.11 FINANCIAL CONDITION; FINANCIAL STATEMENTS. (a) On and as of the Initial Borrowing Date, on a PRO FORMA basis after giving effect to the Transaction and all Indebtedness incurred, and to be incurred, on or prior to the Initial Borrowing Date, and Liens created, and to be created, on or prior to the Initial Borrowing Date, in connection with this Agreement, with respect to each of the Borrower (on a stand-alone basis) and the Borrower and its Subsidiaries (on a consolidated basis) (x) the sum of the assets, at a fair valuation, of each of the Borrower (on a stand-alone basis) and the Borrower and its Subsidiaries (on a consolidated basis) will exceed their debts, (y) the Borrower (on a stand-alone basis) and the Borrower and its Subsidiaries (on a consolidated basis) will not have incurred nor intended to, or believe that they will, incur debts beyond their ability to pay such debts as such debts mature and (z) the Borrower (on a stand-alone basis), and the Borrower and its Subsidiaries (on a consolidated basis) will have sufficient capital with which to conduct their business. For purposes of this Section 5.11(a), "debt" means any liability on a claim, and "claim" means (i) right to payment whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. (b) The financial statements and PRO FORMA balance sheet (after giving effect to the Transaction and the other transactions contemplated hereby) delivered to the Administrative Agent pursuant to Section 4.14 present fairly in all material respects the financial position of the respective Persons referred to in such Sections at the dates of said statements and the results of operations for the periods covered thereby (or, in the case of the PRO FORMA balance sheet, present -25- a good faith estimate of the consolidated PRO FORMA financial condition of each of the Borrower and its Subsidiaries and the Borrower and its Subsidiaries at the date thereof). All such financial statements have been prepared in accordance with SAP or GAAP, as indicated in Section 4.14, consistently applied except to the extent provided in the notes to said financial statements. (c) Since December 31, 1997, nothing has occurred which, when taken as a whole, has or is reasonably likely to have a Material Adverse Effect. 5.12 SECURITY INTERESTS. On and after the Initial Borrowing Date, the Pledge Agreement creates, as security for the Obligations, valid and enforceable perfected security interests in and Liens on all of the Collateral subject thereto, superior to and prior to the rights of all third persons and subject to no other Liens other than Liens permitted pursuant to Sections 7.03(a), (b), (f), (g) and (h), in favor of the Collateral Agent for the benefit of the Banks. At all times on or after the Initial Borrowing Date, the Borrower has good and marketable title to all Collateral free and clear of all Liens (except as created pursuant to the Pledge Agreement). No filings or recordings are required in order to perfect the security interests created under the Pledge Agreement except for filings or recordings which shall have been made, or provided for to the reasonable satisfaction of the Administrative Agent, upon or prior to the Initial Borrowing Date. 5.13 TAX RETURNS AND PAYMENTS. The Borrower and each of its Subsidiaries has filed all federal income tax returns and all other tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith. The Borrower and each of its Subsidiaries has paid, or has provided adequate reserves (in the good faith judgment of the management of such Person) for the payment of, all federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. There is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Borrower or any of its Subsidiaries, threatened by any authority regarding any taxes relating to the Borrower or any of its Subsidiaries. Neither the Borrower nor any of its Subsidiaries has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of the Borrower or any of its Subsidiaries, or is aware of any circumstances that would cause the taxable years or other taxable periods of the Borrower or any of its Subsidiaries not to be subject to the normally applicable statute of limitations. 5.14 COMPLIANCE WITH ERISA. (a) Annex IV sets forth each Plan; each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including without limitation ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable Event has occurred; no Plan which is a multiemployer plan (as defined in Section 4001(a) (3) of ERISA) is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the -26- meaning of such sections of the Code or ERISA, in excess of $10,000, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of Section 412 of the Code or Section 303 of 304 of ERISA; all contributions required to be made with respect to a Plan have been timely made except to the extent of any such contribution which, if not timely made, would not result in a material liability to the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate; neither the Borrower nor any Subsidiary of the Borrower nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201, 4204, or 4212 of ERISA or Section 401(a) (29), 4971 or 4975 of the Code or expects to incur any material amount of such liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate of incurring a material amount of liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted by the PBGC to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA in a distress termination; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits or relating to qualified domestic relations orders) is pending, expected or threatened; no Plan is a multiemployer plan (as defined in Section 4001(a)(3) of ERISA); neither the Borrower nor any Subsidiary of the Borrower nor any ERISA Affiliate has incurred any material liability as a result of any group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) other than a multiemployer plan described in Section 3(37) of ERISA which covers or has covered employees or former employees of the Borrower, any Subsidiary of the Borrower, or any ERISA Affiliate having not been operated in compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate exists or is likely to arise on account of any Plan; and the Borrower and its Subsidiaries may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. 5.15 SUBSIDIARIES. (a) Annex V hereto lists each Subsidiary of the Borrower (and the direct and indirect ownership interest of the Borrower therein) and also identifies the owner thereof in each case existing on the Initial Borrowing Date (after giving effect to the Transaction). All such Subsidiaries are direct or indirect Wholly-Owned Subsidiaries of the Borrower. (b) There are no restrictions on the Borrower or any of its Subsidiaries which prohibit or otherwise restrict the transfer of cash or other assets from any Subsidiary of the Borrower to the Borrower, other than prohibitions or restrictions existing under or by reason of (i) this Agreement or the other Credit Documents, (ii) Legal Requirements, (iii) customary non-assignment provisions in contracts entered into in the ordinary course of business and consistent with past practices, and (iv) purchase money obligations for property acquired in the ordinary course of business, so long as such obligations are permitted under this Agreement. -27- 5.16 INTELLECTUAL PROPERTY, ETC. The Borrower and each of its Subsidiaries have obtained all material patents, trademarks, servicemarks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted. 5.17 POLLUTION AND OTHER REGULATIONS. The Borrower and each of its Subsidiaries are in compliance with all laws and regulations relating to pollution and environmental control, equal employment opportunity and employee safety in all domestic and foreign jurisdictions in which the Borrower and each of its Subsidiaries is presently doing business, and the Borrower will comply and cause each of its Subsidiaries to comply with all such laws and regulations which may be imposed in the future in jurisdictions in which the Borrower or such Subsidiary may then be doing business; in each case other than those the non-compliance with which would not have a Material Adverse Effect. 5.18 LABOR RELATIONS; COLLECTIVE BARGAINING AGREEMENTS. (a) Set forth on Annex VI is a list and description (including dates of termination) of all Collective Bargaining Agreements between or applicable to the Borrower or any of its Subsidiaries and any union, labor organization or other bargaining agent in respect of the employees of the Borrower and/or any Subsidiary on the Initial Borrowing Date. (b) Neither the Borrower nor any of its Subsidiaries is engaged in any unfair labor practice that is reasonably likely to have a Material Adverse Effect. There is (i) no significant unfair labor practice complaint pending against the Borrower or any of its Subsidiaries or threatened in writing against any of them, before the National Labor Relations Board, and no significant grievance or significant arbitration proceeding arising out of or under any Collective Bargaining Agreement is now pending against the Borrower or any of its Subsidiaries or threatened in writing against any of them, (ii) no significant strike, labor dispute, slowdown or stoppage is pending against the Borrower or any of its Subsidiaries or threatened in writing against the Borrower or any of its Subsidiaries and (iii) to the best knowledge of the Borrower and the Borrower, no union representation question exists with respect to the employees of the Borrower or any of its Subsidiaries, except (with respect to any matter specified in clause (i), (ii) or (iii) above, either individually or in the aggregate) such as is not reasonably likely to have a Material Adverse Effect. 5.19 CAPITALIZATION. (a) On the Initial Borrowing Date, and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of the Borrower consists of 40,000,000 shares of common stock, $.01 par value per share, 17,905,382 of which shall be issued and outstanding. As of the Initial Borrowing Date, all such outstanding shares of the Borrower have been duly and validly issued and are fully paid and nonassessable. Neither the Borrower nor any of its Subsidiaries has outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock except, in the case of the Borrower, for options, warrants and grants outstanding in the aggregate amounts set forth on Annex IX. -28- (b) On the Initial Borrowing Date and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of BIG shall consist of 10,000 shares of common stock, $0.01 par value per share, and all of the issued and outstanding shares of such common stock are owned by the Borrower. All such outstanding shares have been duly and validly issued, are fully paid and nonassessable. BIG does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. (c) On the Initial Borrowing Date, and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of SNIC consists of 40,000 shares of common stock, $75.00 par value per share, 40,000 of which shall be issued and outstanding. As of the Initial Borrowing Date, all such outstanding shares of SNIC have been duly and validly issued and are fully paid and nonassessable. SNIC does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. (d) On the Initial Borrowing Date, and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of SPCC consists of 1,000,000 shares of common stock, $50.00 par value, 31,000 of which shall be issued and outstanding. As of the Initial Borrowing Date, all such outstanding shares of SPCC have been duly and validly issued and are fully paid and nonassessable. SPCC does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. (e) On the Initial Borrowing Date and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of CalComp shall consist of 2,000,000 shares of common stock, $3.00 par value per share, and all of the issued and outstanding shares of such common stock are owned by BIG. All such outstanding shares have been duly and validly issued, are fully paid and nonassessable. CalComp does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. (f) On the Initial Borrowing Date and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of CBIC shall consist of 100,000 shares of common stock, $100.00 par value per share, and all of the issued and outstanding shares of such common stock are owned by BIG. All such outstanding shares have been duly and validly issued, are fully paid and nonassessable. CBIC does not have outstanding -29- any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. (g) On the date on which the closing of the Borrower's acquisition of CCIC is consummated pursuant to Section 6.15, and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of CCIC shall consist of 10,000 shares of common stock, $500 par value per share, and all of the issued and outstanding shares of such common stock shall be owned by BIG. All such outstanding shares have been duly and validly issued, are fully paid and nonassessable. CCIC does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. 5.20 REPRESENTATIONS AND WARRANTIES IN TRANSACTION DOCUMENTS. All representations and warranties set forth in the Transaction Documents were true and correct in all material respects as of the time such representations and warranties were made and shall be true and correct in all material respects as of the Initial Borrowing Date as if such representations and warranties were made on and as of such date, unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. 5.21 INDEBTEDNESS. Annex III sets forth a true and complete list of all Indebtedness of the Borrower and its Subsidiaries as of the Initial Borrowing Date (other than the Indebtedness incurred pursuant to the Credit Documents) which has been reviewed and approved by the Banks (after giving effect to the Transaction), in each case showing the aggregate principal amount thereof, the name of the lender in respect thereof and the name of the respective borrower and any other entity which has directly or indirectly guaranteed such Indebtedness. 5.22 COMPLIANCE WITH STATUTES, ETC. The Borrower and each of its Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including compliance with all applicable environmental laws), except such noncompliances as would not, in the aggregate, have a Material Adverse Effect. 5.23 INSURANCE LICENSES. Each Regulated Insurance Company has obtained and maintains in full force and effect all licenses and permits from all regulatory authorities necessary to operate in the jurisdictions in which such Regulated Insurance Company operates, in each case other than such licenses and permits the failure to obtain or maintain, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect. 5.24 YEAR 2000 COMPLIANCE. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the Borrower's and its Subsidiaries' computer -30- systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrower's or its Subsidiaries' systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be completed by March 31, 1999. The cost to the Borrower and its Subsidiaries of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrower and its Subsidiaries (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower and its Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower to conduct its business without a Material Adverse Effect. Notwithstanding anything to the contrary contained herein, no Bank shall have any claim against the Borrower for a breach of representation or warranty contained in this Section 5 after the date on which the Total Commitment has been terminated and all principal, interest and other amounts owing hereunder and under the other Credit Documents have been irrevocably repaid in full. SECTION 6. AFFIRMATIVE COVENANTS. The Borrower hereby covenants and agrees that on the Initial Borrowing Date and thereafter, for so long as this Agreement is in effect and until the Loans, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 6.01 INFORMATION COVENANTS. The Borrower will furnish or cause to be furnished to each Bank: (a) ANNUAL FINANCIAL STATEMENTS. (i) As soon as available and in any event within 100 days after the close of each fiscal year of the Borrower, (x) the consolidated balance sheet of the Borrower and its Subsidiaries, in each case, as at the end of such fiscal year and the related consolidated statements of income, of stockholder's equity and of cash flows for such fiscal year and (y) the consolidating balance sheet of the Borrower and each of its Subsidiaries as at the end of the fiscal year and the related consolidating statements of income, of stockholders' equity and of cash flows for such fiscal year; in each case prepared in accordance with GAAP and setting forth comparative figures for the preceding fiscal year, and, in the case of such consolidated statements, examined by independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit or as to the status of the Borrower and its Subsidiaries as a going concern, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted in accordance with GAAP, such accounting firm has obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof. -31- (ii) As soon as available and in any event within 100 days after the close of each fiscal year of each Regulated Insurance Company, the Annual Statement (prepared in accordance with SAP) for such fiscal year of such Regulated Insurance Company, each on a consolidated basis and, in addition, on a stand alone basis in the case of SNIC, SPCC, CalComp, CBIC and CCIC (to the extent acquired in accordance with Section 6.15), as filed with the Applicable Insurance Regulatory Authority in compliance with the requirements thereof (or a report containing equivalent information for any Regulated Insurance Company not so required to file the foregoing with the Applicable Insurance Regulatory Authority) together with the opinion thereon of the Chief Financial Officer or other Authorized Officer of such Regulated Insurance Company stating that such Annual Statement presents fairly in all material respects the financial condition and results of operations of such Regulated Insurance Company in accordance with SAP. (iii) As soon as available and in any event within 100 days after the close of each fiscal year of the Borrower, a copy of the "Statement of Actuarial Opinion" and "Management Discussion and Analysis" for each Regulated Insurance Company (prepared in accordance with SAP) for such fiscal year and as filed with the Applicable Regulatory Insurance Authority in compliance with the requirements thereof (or a report containing equivalent information for any Regulated Insurance Company not so required to file the foregoing with the Applicable Regulatory Insurance Authority). (b) QUARTERLY FINANCIAL STATEMENTS. (i) As soon as available and in any event within 45 days after the close of each of the first three quarterly accounting periods in each fiscal year of the Borrower, (x) the consolidated balance sheet of the Borrower and its Subsidiaries, each as at the end of such fiscal quarter and the related consolidated statements of income, of stockholder's equity and of cash flows for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period and (y) the consolidating balance sheet of the Borrower and each of its Subsidiaries as at the end of such fiscal quarter and the related consolidating statements of income, of stockholders' equity and of cash flows for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period; in each case setting forth comparative figures for the related periods in the prior fiscal year, and all of which shall be prepared in accordance with GAAP and certified by the Chief Financial Officer or other Authorized Officer of the Borrower, as the case may be, subject to changes resulting from normal year-end audit adjustments. (ii) As soon as available and in any event within 45 days after the close of each of the first three quarterly accounting periods in each fiscal year of each Regulated Insurance Company, quarterly financial statements (prepared in accordance with SAP) for such fiscal period of such Regulated Insurance Company, each on a consolidated basis and, in addition, on a stand alone basis in the case of SNIC, SPCC, CalComp, SBIC and CCIC (to the extent acquired in accordance with Section 6.15), as filed with the Applicable Insurance Regulatory Authority together with the opinion thereon of the Chief Financial Officer or other Authorized Officer of such Regulated Insurance Company stating that such financial statements present fairly in all material respects the financial -32- condition and results of operations of such Regulated Insurance Company in accordance with SAP. (c) FINANCIAL PLANS, ETC. No later than 60 days following the first day of each fiscal year of the Borrower, copies of the annual financial plan or budget for such fiscal year prepared by management of the Borrower for its internal use and distributed to the Board of Directors of the Borrower. Together with each delivery of financial statements pursuant to Section 6.01(a)(ii) and (b)(ii), a comparison of the current year to date financial results (other than in respect of the balance sheets included therein) against the plans required to be submitted pursuant to this clause (c) shall be presented. (d) OFFICER'S CERTIFICATES. At the time of the delivery of the financial statements provided for in Sections 6.01(a)(i) and (ii) and (b)(i) and (ii), a certificate of the Chief Financial Officer or other Authorized Officer of the Borrower to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate shall set forth (x) the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of Sections 6.11, 7.10, 7.11, 7.12 and 7.13 as at the end of such fiscal year or quarter, as the case may be, and (y) a summary of all outstanding litigation at the end of such fiscal year or quarter and of all litigation settled during the preceding fiscal quarter, in each case involving the Borrower or any of its Subsidiaries, but only to the extent that any such litigation (i) arises outside the ordinary course of business of the Borrower and its Subsidiaries or (ii) could have a Material Adverse Effect. (e) NOTICE OF DEFAULT OR LITIGATION. Promptly, and in any event within three Business Days after the Borrower or any of its Subsidiaries obtains knowledge thereof, (x) notice of the occurrence of any event which constitutes a Default or Event of Default, which notice shall specify the nature thereof, the period of existence thereof and what action the Borrower proposes to take with respect thereto and (y) promptly after the Borrower or any of its Subsidiaries obtains knowledge thereof, notice of any outstanding litigation or governmental or regulatory proceeding pending against the Borrower or any of its Subsidiaries which could have a Material Adverse Effect, or a material adverse effect on the ability of any Credit Party to perform its respective obligations hereunder or under any other Credit Document. (f) AUDITORS' REPORTS. Promptly upon receipt thereof, a copy of (x) each other report or "management letter" submitted to the Borrower or any of its Subsidiaries by their independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower or any of its Subsidiaries and (y) each report submitted to the Borrower or any of its Subsidiaries by any independent actuary to the extent that such report, in the good faith opinion of the Borrower, identifies a condition, situation or event that has or is reasonably likely to have a Material Adverse Effect. (g) RESERVE ADEQUACY REPORT. Promptly following a request from the Administrative Agent or the Required Banks (which request may only be made when an -33- Event of Default has occurred and is continuing), a report prepared by an independent actuarial consulting firm of recognized professional standing reasonably satisfactory to the Administrative Agent and the Required Banks reviewing the adequacy of reserves of each Regulated Insurance Company determined in accordance with SAP, which firm shall be provided access to or copies of all reserve analyses and valuations relating to the insurance business of each Regulated Insurance Company in the possession of or available to the Borrower or its Subsidiaries. (h) OTHER REGULATORY STATEMENTS AND REPORTS. Promptly (A) after receipt thereof, copies of all triennial examinations and risk adjusted capital reports of any Regulated Insurance Company, delivered to such Person by any Applicable Insurance Regulatory Authority, insurance commission or similar regulatory authority, (B) after receipt thereof, written notice of any assertion by any Applicable Insurance Regulatory Authority or any governmental agency or agencies substituted therefor, as to a violation of any Legal Requirement by any Regulated Insurance Company which is likely to have a Material Adverse Effect, (C) after receipt thereof, a copy of the final report to each Regulated Insurance Company from the NAIC for each fiscal year, as to such Regulated Insurance Company's compliance or noncompliance with each of the NAIC Tests, (D) after receipt thereof, a copy of any notice of termination, cancellation or recapture of any Reinsurance Agreement or Retrocession Agreement to which a Regulated Insurance Company is a party to the extent such termination or cancellation is likely to have a Material Adverse Effect, (E) and in any event within ten Business Days after receipt thereof, copies of any notice of actual suspension, termination or revocation of any license of any Regulated Insurance Company by any Applicable Insurance Regulatory Authority, including any request by an Applicable Insurance Regulatory Authority which commits a Regulated Insurance Company to take or refrain from taking any action or which otherwise affects the authority of such Regulated Insurance Company to conduct its business, and (F) and in any event within ten Business Days after the Borrower or any of its Subsidiaries obtains knowledge thereof, notice of any actual changes in the insurance laws enacted in any state in which any Regulated Insurance Company is domiciled which could have a Material Adverse Effect. (i) AGING REPORTS. Within 90 days following the Initial Borrowing Date, an aged accounts receivable report in respect of the assets transferred pursuant to the Asset Restructuring Transaction. (j) OTHER INFORMATION. Promptly upon transmission thereof, copies of any final filings and final registrations with, and reports to, the SEC by the Borrower or any of its Subsidiaries (other than any registration statement on Form S-8) and copies of all financial statements, proxy statements, notices and reports as the Borrower or any of its Subsidiaries shall send to analysts generally or the holders of their capital stock or of the Trust Preferred Notes in their capacity as such holders (in each case to the extent not theretofore delivered to the Banks pursuant to this Agreement) and, with reasonable promptness, such other information or existing documents (financial or otherwise) as the Administrative Agent or any Bank may reasonably request from time to time. -34- 6.02 BOOKS, RECORDS AND INSPECTIONS. The Borrower will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Administrative Agent or any Bank to visit and inspect any of the properties or assets of the Borrower and any of its Subsidiaries in whomsoever's possession (but only to the extent the Borrower or such Subsidiary has the right to do so to the extent in the possession of another Person), and to examine the books of account of the Borrower and any of its Subsidiaries and discuss the affairs, finances and accounts of the Borrower and of any of its Subsidiaries with, and be advised as to the same by, its and their officers and independent accountants and independent actuaries, if any, all at such reasonable times and intervals, upon reasonable prior notice and to such reasonable extent as the Administrative Agent or any Bank may request. 6.03 INSURANCE. The Borrower will, and will cause each of its Subsidiaries to, at all times maintain in full force and effect insurance in such amounts, covering such risks and liabilities and with such deductibles or self-insured retentions as are in accordance with normal industry practice. 6.04 PAYMENT OF TAXES. The Borrower will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims (other than claims relating to the adjustment or settling, in the ordinary course of business, of claims in respect of insurance policies or reinsurance contracts) which, if unpaid, might become a Lien or charge upon any properties of the Borrower or any of its Subsidiaries; PROVIDED that neither the Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves (in the good faith judgment of the management of the Borrower) with respect thereto in accordance with GAAP. 6.05 CORPORATE FRANCHISES. The Borrower will do, and will cause each Subsidiary to do, or cause to be done, all things reasonably necessary to preserve and keep in full force and effect its corporate existence, rights and authority; PROVIDED that any transaction permitted by Section 7.02 will not constitute a breach of this Section 6.05. 6.06 COMPLIANCE WITH STATUTES, ETC. The Borrower will, and will cause each Subsidiary to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls) other than those the non-compliance with which would not have a Material Adverse Effect. 6.07 ERISA. As soon as possible and, in any event, within 10 Business Days after the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following, the Borrower will deliver to each of the Banks a certificate of the chief financial officer of the Borrower setting forth the full details as to such occurrence and the action, if any, that the Borrower, such Subsidiary or such ERISA Affiliate is -35- required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Borrower, the Subsidiary, the ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator with respect thereto: that a Reportable Event has occurred; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, in excess of $10,000 has been incurred or an application may be or has been made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that any contribution required to be made with respect to a Plan has not been timely made except to the extent that any such untimely contribution would not result in a material liability to the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate; that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan which is subject to Title IV of ERISA; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate will or may incur any material amount of liability (including any indirect, contingent, or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409 or 502(i) or 502(1) of ERISA or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or that the Borrower or any Subsidiary of the Borrower may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides death, health or severance benefits to retired employees or other former employees (other than as required by Section 601 of ERISA or appicable state law) or any Plan. At the request of any Bank, the Borrower will promptly deliver to such Bank a complete copy of the annual report (on Internal Revenue Service Form 5500-series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Banks pursuant to the first sentence hereof, if requested by the Banks, copies of annual reports and any material notices received by the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate with respect to any Plan shall be delivered to the Banks no later than 10 Business Days after the date such notice has been received by the Borrower, the Subsidiary or the ERISA Affiliate, as applicable. 6.08 PERFORMANCE OF OBLIGATIONS. The Borrower will, and will cause each of its Subsidiaries to, perform in all material respects all of its obligations under the terms of each mortgage, indenture, security agreement, other debt instrument and material contract by which it is bound or to which it is a party. 6.09 GOOD REPAIR. The Borrower will, and will cause each of its Subsidiaries to, ensure that its material properties and equipment used or useful in its business in whomsoever's possession they may be, are kept in good repair, working order and condition, normal wear and tear excepted, and that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and -36- improvements thereto, to the extent and in the manner customary for companies in similar businesses. 6.10 END OF FISCAL YEARS; FISCAL QUARTERS. The Borrower will, for financial reporting purposes, cause (i) each of its, and each of its Subsidiaries', fiscal years to end on December 31 of each year and (ii) each of its, and each of its Subsidiaries', fiscal quarters to end on March 31, June 30, September 30 and December 31 of each year. 6.11 LOAN RATINGS. No later than 90 days following the Initial Borrowing Date, the Borrower will ensure that the Loans are rated by Moody's and S&P. 6.12 MAINTENANCE OF LICENSES AND PERMITS. The Borrower will, and will cause each of its Subsidiaries to, maintain all permits, licenses and consents as may be required for the conduct of its business by any state, federal or local government agency or instrumentality except where failure to maintain the same could not reasonably be expected to have a Material Adverse Effect. 6.13 REGISTER. The Borrower hereby designates the Administrative Agent to serve as its agent, solely for purposes of this Section 6.13, to maintain a register (the "Register") on which it will record the Commitments from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation shall not affect the obligations of the Borrower in respect of such Loans. With respect to any Bank, the transfer of the Commitments of such Bank and the rights to the principal of, and interest on, any Loan made pursuant to such Commitments shall not be effective until such transfer is recorded on the Register maintained by the Administrative Agent with respect to ownership of such Commitments and Loans and prior to such recordation all amounts owing to the transferor with respect to such Commitments and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitments and Loans shall be recorded by the Administrative Agent on the Register only upon the acceptance by the Administrative Agent of a properly executed and delivered Assignment and Assumption Agreement pursuant to Section 11.04(b). Coincident with the delivery of such an Assignment and Assumption Agreement to the Administrative Agent for acceptance and registration of assignment or transfer of all or part of a Loan, or as soon thereafter as practicable, the assigning or transferor Bank shall surrender the Note evidencing such Loan, and thereupon one or more new Notes in the same aggregate principal amount shall be issued to the assigning or transferor Bank and/or the new Bank. The Borrower agrees to indemnify the Administrative Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Administrative Agent in performing its duties under this Section 6.13 (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Administrative Agent). 6.14 FOREIGN SUBSIDIARIES SECURITY. If following a change in the relevant sections of the Code or the regulations, rules, rulings, notices or other official pronouncements issued or promulgated thereunder, counsel for the Borrower acceptable to the Administrative Agent and -37- the Required Banks does not within 30 days after a request from the Administrative Agent or the Required Banks deliver evidence, in form and substance mutually satisfactory to the Administrative Agent and the Borrower, with respect to any Foreign Subsidiary which has not already had all of its stock pledged pursuant to the Pledge Agreement that (i) a pledge (x) of 66-2/3% or more of the total combined voting power of all classes of capital stock of such Foreign Subsidiary entitled to vote, and (y) of any promissory note issued by such Foreign Subsidiary to the Borrower or any of its Domestic Subsidiaries and (ii) the entering into by such Foreign Subsidiary of a pledge agreement in substantially the form of the Pledge Agreement, in any such case would cause the undistributed earnings of such Foreign Subsidiary as determined for Federal income tax purposes to be treated as a deemed dividend to such Foreign Subsidiary's United States parent for Federal income tax purposes, then in the case of a failure to deliver the evidence described in clause (i) above, that portion of such Foreign Subsidiary's outstanding capital stock or any promissory notes so issued by such Foreign Subsidiary, in each case not theretofore pledged pursuant to the Pledge Agreement shall be pledged to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Pledge Agreement (or another pledge agreement in substantially similar form, if needed), and in the case of a failure to deliver the evidence described in clause (ii) above, such Foreign Subsidiary shall execute and deliver the Pledge Agreement (or another pledge agreement in substantially similar form, if needed), granting the Secured Creditors a security interest in all of such Foreign Subsidiary's assets and securing the Obligations of the Borrower under the Credit Documents and under any Interest Rate Agreement or Other Hedging Agreement, to the extent that the entering into such Pledge Agreement is permitted by the laws of the respective foreign jurisdiction and with all documents delivered pursuant to this Section 6.14 to be in form and substance reasonably satisfactory to the Administrative Agent and the Required Banks. 6.15 ACQUISITION OF CCIC. As soon as possible after obtaining the approval of the Department of Insurance of the State of New York, the Borrower shall become the direct or indirect owner of 100% of the outstanding capital stock of CCIC, free and clear of all Liens (other than Liens created pursuant to the Pledge Agreement). In the event that the Borrower has not acquired CCIC on or before December 31, 1999, then the Borrower shall acquire, or shall cause its Subsidiaries to acquire, such licenses, charters, approvals and other assets necessary so that the Borrower and its Subsidiaries can engage in the type business in which CCIC is currently engaged. SECTION 7. NEGATIVE COVENANTS. The Borrower hereby covenants and agrees that on the Initial Borrowing Date and thereafter, for so long as this Agreement is in effect and until the Loans together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 7.01 CHANGES IN BUSINESS. (a) The Borrower will not permit any of its Subsidiaries to engage in any business other than the business the Borrower's Subsidiaries are engaged in as of the Initial Borrowing Date (after giving effect to the Transaction) and activities related thereto. -38- (b) The Borrower will engage in no business other than (i) the ownership of the capital stock and other equity interests in its Subsidiaries, (ii) the incurrence of Indebtedness permitted to be incurred by it under Section 7.04, (iii) acquisitions permitted under Section 7.02(i), (iv) the entering into and performing of its obligations under the Transaction Documents and (v) the making of investments in accordance with the provisions of Section 7.06(b). 7.02 CONSOLIDATION, MERGER, SALE OR PURCHASE OF ASSETS, ETC. The Borrower will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of any of its property or assets (including the sale of capital stock of any of its Subsidiaries, but excluding any sale or disposition of property or assets in the ordinary course of business), or purchase, lease or otherwise acquire (in one transaction or a series of related transactions) all or any part of the property or assets of any Person (excluding any purchases, leases or other acquisitions of property or assets in, and for use in, the ordinary course of business) or agree to do any of the foregoing at any future time, except that the following shall be permitted: (a) The Transaction; (b) Capital Expenditures by the Borrower and its Subsidiaries to the extent permitted by Section 7.05; (c) The investments, acquisitions and transfers or dispositions of property permitted pursuant to Section 7.06; (d) The merger or consolidation or liquidation of any Wholly-Owned Subsidiary of the Borrower with or into another Wholly-Owned Subsidiary of the Borrower, PROVIDED that no Subsidiary may merge, consolidate or liquidate with or into SNCHC or any of its Subsidiaries; (e) Any Regulated Insurance Company may enter into any Insurance Contract, Reinsurance Agreement or Retrocession Agreement in the ordinary course of business in accordance with its normal underwriting, indemnity and retention policies, PROVIDED that, except as provided below, no Regulated Insurance Company shall enter into any Financial Reinsurance Agreements after the Initial Borrowing Date, PROVIDED FURTHER, that Regulated Insurance Companies may enter into Financial Reinsurance Agreements constituting loss portfolio transfers and/or retrospective aggregate excess of loss reinsurance contracts so long as (i) the aggregate annual premiums associated with such Financial Reinsurance Agreements entered into by all Regulated Insurance Companies shall not exceed $10,000,000 and (ii) such Financial Reinsurance Agreements do not meet the conditions for reinsurance accounting as provided in FASB 113 solely because they relate to losses incurred in prior years; (f) The Borrower or any of its Subsidiaries may enter into leases of property or assets in the ordinary course of business not otherwise in violation of this Agreement; -39- (g) each of the Borrower and its Subsidiaries may sell assets (including, without limitation, the capital stock of BIC acquired pursuant to the Acquisition), PROVIDED that (w) each such sale shall be for an amount at least equal to the fair market value thereof (as determined in good faith by senior management of the Borrower), (x) each such sale results in consideration in the form of cash, (y) the aggregate sale proceeds from all assets subject to such sales pursuant to this clause (g) in any fiscal year shall not exceed 10% of the Consolidated Net Worth of the Borrower as of the first day of such fiscal year provided that (i) on a PRO FORMA basis (the PRO FORMA adjustments made by the Borrower pursuant to this clause (i) shall be subject to the reasonable satisfaction of the Administrative Agent) determined as if such asset sale had been consummated on the date occurring twelve months prior to the last day of the most recently ended fiscal quarter of the Borrower with respect to any asset sale, the Borrower and its Subsidiaries would have been in compliance with Sections 7.10 through 7.13 of this Agreement as of, or for the relevant period ended on, the last day of such fiscal quarter and (ii) on a PRO FORMA basis (the PRO FORMA adjustments made by the Borrower pursuant to this clause (ii) shall be subject to the reasonable satisfaction of the Administrative Agent) determined as if such asset sale had been consummated, the covenants contained in Sections 7.10 through 7.13 will continue to be met for the twelve-month period following the last day of the fiscal quarter ended after the date of the consummation of such asset sale and (z) to the extent required by Section 3.02(i)(b), the Net Available Proceeds therefrom are applied to repay Loans as provided in Section 3.02(i)(b); (h) the Asset Restructuring Transaction; and (i) so long as no Default or Event of Default then exists or would result therefrom, the Borrower and its Subsidiaries may acquire assets or the capital stock of any Person (any such acquisitions permitted by this clause (i), a "Permitted Acquisition"), PROVIDED, that (i) such Person (or the assets so acquired) was, immediately prior to such acquisition, engaged (or used) primarily in the businesses permitted pursuant to Section 7.01(a), (ii) each such acquisition shall be for an amount not greater than the fair market value thereof (as determined in good faith by the Board of Directors of the Borrower), (iii) the aggregate amount expended by the Borrower and its Subsidiaries for Permitted Acquisitions shall not in any fiscal year exceed 10% of the Consolidated Net Worth of the Borrower and its Subsidiaries as of the first day of such fiscal year, (iv) on a PRO FORMA basis (the PRO FORMA adjustments made by the Borrower pursuant to this clause (iv) shall be subject to the reasonable satisfaction of the Administrative Agent) determined as if such acquisition had been consummated on the date occurring twelve months prior to the last day of the most recently ended fiscal quarter of the Borrower, the Borrower and its Subsidiaries would have been in compliance with Sections 7.10 through 7.13 of this Agreement as of, or for the relevant period ended on, the last day of such fiscal quarter, (v) on a PRO FORMA basis (the PRO FORMA adjustments made by the Borrower pursuant to this clause (v) shall be subject to the reasonable satisfaction of the Administrative Agent) determined as if such acquisition had been consummated, the covenants contained in Sections 7.10 through 7.13 will continue to be met for the twelve-month period following the last day of the fiscal quarter ended after the date of the consummation of such -40- acquisition and (vi) no such acquisition shall be consummated on a "hostile" basis (I.E., without the consent of the Board of Directors of the Person to be acquired). To the extent the Required Banks (or all the Banks to the extent required by Section 11.12) waive the provisions of this Section 7.02 with respect to the disposition of any Collateral, or any Collateral is disposed of as permitted by this Section 7.02, (i) such Collateral in each case shall be sold free and clear of the Liens in favor of the Secured Creditors created by the Pledge Agreement and (ii) if such Collateral includes all of the capital stock of a Subsidiary, such capital stock shall be released from the Pledge Agreement and such Subsidiary shall be released from the Subsidiary Guaranty; and the Administrative Agent and the Collateral Agent shall be authorized to take such actions as the Administrative Agent or the Collateral Agent reasonably deems appropriate in connection therewith. 7.03 LIENS. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets of any kind (real or personal, tangible or intangible) of the Borrower or any such Subsidiary whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable or notes with recourse to the Borrower or any of its Subsidiaries) or assign any right to receive income, or file or permit the filing of any financing statement under the UCC or any other similar notice of Lien under any similar recording or notice statute relating to any such property, except: (a) Liens for taxes not yet due or Liens for taxes being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Borrower) have been established; (b) Liens in respect of property or assets of any of the Borrower's Subsidiaries imposed by law which were incurred in the ordinary course of business, such as carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business, and (x) which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Borrower or any Subsidiary or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Lien; (c) Liens created by this Agreement or the other Credit Documents; (d) Liens in existence on the Effective Date which (x) have been reviewed and approved by the Banks and are listed, and the property subject thereto on the Effective Date described, in Annex VII, without giving effect to any extensions or renewals thereof (provided that (i) the securities subject to any such Lien may be replaced by other securities of no greater principal amount and (ii) no such extension or renewal will increase the obligations secured thereby or result in any such Lien attaching to any additional property) or (y) are otherwise permitted under this Section 7.03; -41- (e) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 8.09; (f) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds, Reinsurance Agreements, Retrocession Agreements and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money); (g) Leases or subleases granted to others not interfering in any material respect with the business of the Borrower or any of its Subsidiaries and any interest or title of a lessor under any lease not in violation of this Agreement; (h) Easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens arising from UCC financing statements regarding leases not in violation of this Agreement; (j) Liens on pledges or deposits of cash or securities made by any Regulated Insurance Company as a condition to obtaining or maintaining any licenses issued to it by any Applicable Insurance Regulatory Authority; and (k) Liens on assets which are subject to the Asset Restructuring Transaction. 7.04 INDEBTEDNESS. The Borrower will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement and the other Credit Documents; (b) Capitalized Lease Obligations of the Borrower and its Subsidiaries, provided that the aggregate Capitalized Lease Obligations under all Capital Leases shall not exceed $15,000,000 at any time; (c) Indebtedness in existence on the Effective Date which has been reviewed and approved by the Banks and is listed in Annex III (including the Trust Preferred Notes), without giving effect to any subsequent extension, renewal or refinancing thereof; (d) Obligations of any Regulated Insurance Company with respect to (i) letters of credit securing obligations under Reinsurance Agreements entered into in the ordinary course of business of any such Regulated Insurance Company, (ii) letters of credit issued in lieu of deposits to satisfy Legal Requirements or (iii) letters of credit or surety bonds -42- issued in lieu of depositing securities with any Applicable Insurance Regulatory Authority to satisfy regulatory requirements in connection with worker's compensation insurance; in any case to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than 10 days following receipt by the Borrower or such Subsidiary of notice of payment on such letter of credit; (e) Indebtedness of the Borrower under Interest Rate Agreements entered into in respect of the Obligations; (f) Indebtedness under reimbursement obligations in respect of letters of credit issued to guaranty or support the payment of performance bonds, workers' compensation claims, insurance claims and contested appeals and compliance with operations and regulatory obligations incurred in the ordinary course of business, in an aggregate principal amount not to exceed $10,000,000; and (g) Indebtedness owing pursuant to the Reverse Repurchase Program in an aggregate principal amount not to exceed $20,000,000 at any time and which shall remain outstanding for no more than 90 days at any time; and (h) Other unsecured Indebtedness of the Borrower and its Subsidiaries not to exceed $5,000,000 in the aggregate principal amount outstanding at any time. 7.05 CAPITAL EXPENDITURES. The Borrower will not incur, and will not permit any of its Subsidiaries to incur, Capital Expenditures, PROVIDED that the Borrower and its Subsidiaries may incur Capital Expenditures so long as the aggregate amount so incurred by the Borrower and its Subsidiaries (on a consolidated basis) during any fiscal year does not exceed $5,000,000. 7.06 ADVANCES, INVESTMENTS AND LOANS. The Borrower will not, and will not permit any of its Subsidiaries to, lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, except: (a) The Transaction shall be permitted; (b) The Borrower and its Subsidiaries which are not Regulated Insurance Companies may invest in cash, Cash Equivalents, open-ended mutual funds and Investment Grade Securities other than investments which are Risk Derivatives (determined at the time of acquisition); PROVIDED that (i) investments in open-ended mutual funds shall not exceed $5,000,000 in the aggregate and (ii) any investment in Investment Grade Securities (other than U.S. Government Obligations) issued by any single Issuer shall not exceed on the date such investment is made an amount which, when added to all other investments by all Regulated Insurance Companies and the Borrower in such Issuer and outstanding on such date, is equal to 5% of Invested Assets at such time; -43- (c) The Borrower and its Subsidiaries may acquire and hold receivables owing to them in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (d) Loans and advances to employees for business-related travel expenses, moving expenses and other similar expenses, in each case incurred in the ordinary course of business; (e) The transactions described in Section 7.02(d), (e) and (i) shall be permitted; (f) Regulated Insurance Companies may invest in (i) cash, (ii) Cash Equivalents, (iii) Investment Grade Securities and (iv) Non-Investment Grade Securities; PROVIDED that (A) no investment will be made in (i) any debt securities which are Non-Investment Grade Securities or (ii) any equity securities, at a time when, or if after giving effect thereto, the aggregate principal amount of all Non-Investment Grade Securities held by all Regulated Insurance Companies plus the aggregate outstanding investment made by all Regulated Insurance Companies in equity securities (other than securities of Persons which are Affiliates of the Borrower on the Effective Date) equals or exceeds or would equal or exceed 10% of Invested Assets; (B) no investment will be made in any real estate or loan secured by real estate (other than (I) credit tenant loans (as defined by the NAIC on the Effective Date), (II) those existing on the Effective Date (without giving effect to any increase thereto) and (III) loans secured by owner-occupied real estate, if made at a time when, and if after giving effect thereto, the aggregate of all such investments in mortgage loans does not exceed, and would not exceed, 1% of Invested Assets); and (C) no investment (other than U.S. Government Obligations) in any single Issuer shall exceed on the date such investment is made an amount which, when added to all other investments by the Borrower and its Subsidiaries in the same Issuer and outstanding on such date, is equal to 5% of Invested Assets at such time; (g) Any Regulated Insurance Company may make investments in companies which are Wholly-Owned Subsidiaries of such Person (or any other Subsidiary of such Person created or acquired in accordance with Section 7.15) but only to the extent that any such investment, at the time made, does not reduce Statutory Surplus of such Regulated Insurance Company; (h) The Borrower and its Subsidiaries may make investments pursuant to commitments in effect as of the Effective Date and described (as to matter and amount) on Annex VIII; (i) Investments acquired by the Borrower or any of its Subsidiaries (x) in exchange for any other investment held by the Borrower or any such Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other investment or (y) as a result of a foreclosure by the Borrower or any of its Subsidiaries with respect to any secured investment or other transfer of title with respect to any secured investment in default; -44- (j) Any Regulated Insurance Company may make (i) policy loans in the ordinary course of business and (ii) agent debit balances in the ordinary course of business; (k) Investments existing on the Effective Date which have been reviewed and approved by the Banks and are identified on Annex VIII; (l) The Borrower may make Employee Participation Loans, provided that the aggregate principal amount of such loans does not exceed $10,400,000; and (m) Investments existing in connection with the Reverse Repurchase Program; PROVIDED that (i) the aggregate amount of such investments shall not exceed $20,000,000 at any time and (ii) each such investment shall remain outstanding for no more than 90 days. 7.07 PREPAYMENTS OF INDEBTEDNESS, MODIFICATIONS OF AGREEMENTS, ETC. The Borrower will not, and will not permit any of its Subsidiaries to: (a) make (or give any notice in respect thereof) any voluntary or optional payment or prepayment or redemption or acquisition for value of (including, without limitation, by way of depositing with the trustee with respect thereto money or securities before due for the purpose of payment when due) or exchange of, any Trust Preferred Notes; (b) amend or modify (or permit the amendment or modification of) in any manner adverse to the interests of the Banks any of the terms or provisions of the Acquisition Documents, the Existing Reinsurance Agreement Documents, the Asset Restructuring Transaction documents, or the Trust Preferred Note Documents; (c) amend, modify or change in any manner adverse to the interests of the Banks the Certificate of Incorporation (including, without limitation, by the filing of any certificate of designation) or By-Laws of the Borrower or any of its Subsidiaries, or any other agreement entered into by the Borrower or any of its Subsidiaries with respect to its capital stock, or enter into any new agreement with respect to the capital stock of the Borrower (to the extent adverse to the interests of the Banks) or any of its Subsidiaries; and/or (d) amend, modify or terminate (or permit the amendment, modification or termination of) in any manner adverse to the interests of the Banks the Tax Sharing Agreements. 7.08 DIVIDENDS, ETC. (a) The Borrower will not, and will not permit any of its Subsidiaries to, declare or pay any dividends (other than dividends payable solely in common stock of such Person) or return any capital to, its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock now or hereafter outstanding (or any warrants for or options or stock -45- appreciation rights in respect of any of such shares), or set aside any funds for any of the foregoing purposes, or purchase or otherwise acquire or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of the Borrower or any of its Subsidiaries, as the case may be, now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by such Person with respect to its capital stock) (all of the foregoing "Dividends"), except that any Subsidiary of the Borrower may pay cash dividends to its parent if such parent is the Borrower or a Wholly-Owned Subsidiary of the Borrower. (b) The Borrower will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist any encumbrance or restriction which prohibits or otherwise restricts (i) the ability of any Subsidiary to (A) pay dividends or make other distributions or pay any Indebtedness owed to the Borrower or any of its Subsidiaries, as applicable, (B) make loans or advances to the Borrower or any Subsidiary, as applicable, (C) transfer any of its properties or assets to the Borrower or any Subsidiary, as applicable, or (D) guarantee the Obligations or (ii) the ability of the Borrower or any Subsidiary of the Borrower to create, incur, assume or suffer to exist any Lien upon its property or assets to secure the Obligations, other than prohibitions or restrictions existing under or by reason of (I) this Agreement, the other Credit Documents and the Trust Preferred Note Documents and (II) Legal Requirements. 7.09 TRANSACTIONS WITH RELATED PARTIES. The Borrower will not, and will not permit any Subsidiary to, enter into any transaction or series of transactions with any Related Party (excluding the Borrower or any Wholly-Owned Subsidiary of the Borrower) other than in the ordinary course of business and on terms and conditions substantially as favorable to the Borrower or such Subsidiary as would be obtainable by the Borrower or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than a Related Party. 7.10 LEVERAGE RATIO. The Borrower will not permit the ratio of (i) Consolidated Indebtedness of the Borrower to (ii) Consolidated Total Capital of the Borrower at any time during any period set forth below to be greater than the ratio set forth opposite such period below:
Period Ratio ------ ----- Initial Borrowing Date to and including December 31, 2000 0.30:1.00 January 1, 2001 to and including December 31, 2001 0.25:1.00 January 1, 2002 and thereafter 0.20:1.00
7.11 INTEREST COVERAGE RATIO. The Borrower will not permit the Interest Coverage Ratio for any Test Period ending during a period set forth below to be less than the ratio set forth opposite such period below: -46-
Period Ratio ------ ----- Initial Borrowing Date to and including December 31, 2000 2.50:1.00 January 1, 2001 to and including December 31, 2001 2.75:1.00 January 1, 2002 and thereafter 3.00:1.00
7.12 MINIMUM COMBINED STATUTORY SURPLUS. The Borrower shall not permit the Regulated Insurance Companies, collectively, on a combined basis, to have Statutory Surplus at any time of less than the minimum combined Statutory Surplus of (a) at any time prior to December 31, 1999, $285,000,000, and (b) at any time after December 31, 1999, the sum of (i) $285,000,000 and (ii) an amount, if positive, equal to 50% of the net income of all Regulated Insurance Companies (determined on a combined basis, in accordance with SAP) for the period from January 1, 1999 through the last day of the then most recently ended fiscal quarter. 7.13 MINIMUM RISK-BASED CAPITAL. (a) The Borrower will not permit the Risk-Based Capital for any Regulated Insurance Company to be less than 225%. (b) The Borrower will not permit the Risk-Based Capital for all Regulated Insurance Companies (collectively, on a combined basis) to be less than 275%. 7.14 ISSUANCE OF STOCK. (a) The Borrower will not directly or indirectly issue, sell, assign, pledge, or otherwise encumber or dispose of any shares of its capital stock or other equity securities (or warrants, rights or options to acquire shares or other equity securities), except (i) the issuance of common stock (and warrants, options and other rights to acquire common stock), so long as no Event of Default occurs under Section 8.11, and (ii) the issuance of preferred stock, so long as (x) no part of the preferred stock is mandatorily redeemable until after the tenth anniversary of the Initial Borrowing Date, (y) any dividends associated with such preferred stock are solely payable in kind and (z) the aggregate amount of such preferred stock issued after the Initial Borrowing Date does not exceed $75,000,000. (b) The Borrower will not permit any of its Subsidiaries directly or indirectly to issue, sell, assign, pledge, or otherwise encumber or dispose of any shares of its capital stock or other equity securities (or warrants, rights or options to acquire shares or other equity securities) of such Subsidiary, except (i) to the Borrower or to a Wholly-Owned Subsidiary of the Borrower, (ii) to qualify directors if required by applicable law and (iii) pursuant to the Pledge Agreement. 7.15 CREATION OF SUBSIDIARIES. The Borrower shall not create or acquire any Subsidiary other than (i) Regulated Insurance Companies which are direct Subsidiaries of the Borrower or of a Subsidiary Guarantor and all of the capital stock of such Subsidiary owned by the Borrower or such Subsidiary Guarantor is pledged pursuant to the Pledge Agreement; and (ii) Non-Regulated Insurance Companies which are not Subsidiaries of any Regulated Insurance Company, so long as (x) all of the capital stock of such Subsidiary is pledged pursuant to the -47- Pledge Agreement and (y) such new Subsidiary executes a counterpart of the Subsidiary Guaranty and the Pledge Agreement. In addition, at the request of the Administrative Agent, each new Subsidiary that is required to execute any Credit Document shall execute and deliver, or cause to be executed and delivered, all other relevant documentation of the type described in Section 4 as such new Subsidiary would have had to deliver if such new Subsidiary were a Credit Party on the Initial Borrowing Date. 7.16 PARTNERSHIP AGREEMENTS. The Borrower will not enter into any partnership agreement as a general partner. SECTION 8. EVENTS OF DEFAULT. Upon the occurrence of any of the following specified events (each an "Event of Default"): 8.01 PAYMENTS. The Borrower shall (i) default in the payment when due of any principal of the Loans, (ii) default, and such default shall continue for two or more days, in the payment when due of any interest on the Loans or any Fees or (iii) default in the prompt payment following notice or demand in respect of any other amounts owing hereunder or under any other Credit Document; or 8.02 REPRESENTATIONS, ETC. Any representation, warranty or statement made or deemed made by the Borrower or any other Credit Party herein or in any other Credit Document or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 8.03 COVENANTS. Any Credit Party shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Section 6.10 or 7, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 8.01 or clause (a) of this Section 8.03) contained in this Agreement and such default shall continue unremedied for a period of at least 30 days; or 8.04 DEFAULT UNDER OTHER AGREEMENTS. (a) The Borrower or any of its Subsidiaries shall (i) default in any payment with respect to Indebtedness (other than the Obligations, but including the Trust Preferred Notes) in excess of $2,500,000 individually or in the aggregate, for the Borrower and its Subsidiaries, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice of acceleration, or any lapse of time prior to the effectiveness of any notice of acceleration, is required), any such Indebtedness to become due prior to its stated maturity; or (b) any Indebtedness of the Borrower or any of its Subsidiaries of the type referred to in clause (a) above shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or -48- 8.05 BANKRUPTCY, ETC. The Borrower or any of its Subsidiaries shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower or any of its Subsidiaries and the petition is not controverted within 10 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any of its Subsidiaries; or the Borrower or any of its Subsidiaries commences (including by way of applying for or consenting to the appointment of, or the taking of possession by, a rehabilitator, receiver, custodian, trustee, conservator or liquidator (collectively, a "conservator") of itself or all or any substantial portion of its property) any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency, liquidation, rehabilitation, conservatorship or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Subsidiaries; or any such proceeding is commenced against (a) any Regulated Insurance Company which is engaged in the business of underwriting insurance and/or reinsurance in the United States, or (b) the Borrower or any of its Subsidiaries (other than (x) any Regulated Insurance Company described in the immediately preceding clause (a) or (y) any dissolution or liquidation proceeding commenced against a Non-Regulated Subsidiary (i) the assets of which do not exceed an aggregate amount of $100,000 and (ii) in connection with the winding-up of such Subsidiary) to the extent such proceeding is consented to by such Person, and in the case of either clause (a) or (b) remains undismissed for a period of 60 days; or the Borrower or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or (a) any Regulated Insurance Company which is engaged in the business of underwriting insurance and/or reinsurance in the United States suffers any appointment of any conservator or the like for it or any substantial part of its property, or (b) the Borrower or any of its Subsidiaries (other than any Regulated Insurance Company described in the immediately preceding clause (a)) suffers any appointment of any conservator or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Subsidiaries for the purpose of effecting any of the foregoing; or 8.06 ERISA. (a) Any Plan shall fail to satisfy the minimum funding standard required for any plan year or part thereof under Section 412 of the Code or Section 302 of ERISA or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or Section 303 or 304 of ERISA, a Reportable Event shall have occurred, any Plan which is subject to Title IV of ERISA shall have had or is likely to have a trustee appointed by the PBGC to administer such Plan, any Plan which is subject to Title IV of ERISA is, shall have been or is likely to be terminated or to be the subject of termination proceedings under ERISA, any Plan shall have an Unfunded Current Liability, a contribution required to be made with respect to a Plan has not been timely made, the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate has incurred or is likely to incur any liability to or on account of a Plan under Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or on account of a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) -49- under Section 4980B of the Code, or the Borrower or any Subsidiary of the Borrower has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) that provide death, health or severance benefits to retired employees or other former employees (other than as required by Section 601 of ERISA or applicable state law) or Plans; (b) there shall result from any such event or events the imposition of a lien, the granting of a security interest, or a liability or a material risk of incurring a liability; and (c) such lien, security interest or liability, individually and/or in the aggregate, in the opinion of the Required Banks, has had, or could reasonably be expected to have, a Material Adverse Effect; or 8.07 SUBSIDIARY GUARANTY. The Subsidiary Guaranty or any provision thereof shall cease to be in full force and effect, or any Subsidiary Guarantor or any Person acting by or on behalf of such Subsidiary Guarantor shall deny or disaffirm such Subsidiary Guarantor's obligations under the Subsidiary Guaranty or any Subsidiary Guarantor shall default in the due performance or observance of any material term, covenant or agreement on its part to be performed or observed pursuant to the Subsidiary Guaranty; or 8.08 PLEDGE AGREEMENT. The Pledge Agreement shall cease to be in full force and effect, or shall cease to give the Collateral Agent the Liens, rights, powers and privileges purported to be created thereby (including, without limitation, a first priority perfected security interest in, and Lien on, all of the Collateral subject thereto, in favor of the Collateral Agent, superior to and prior to the rights of all third Persons and subject to no other Liens), or any Credit Party shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Pledge Agreement; or 8.09 JUDGMENTS. One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving a liability, net of undisputed reinsurance, of $2,500,000 or more in the case of any one such judgment or decree or in the aggregate for all such judgments and decrees for the Borrower and its Subsidiaries and any such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or 8.10 A.M. BEST RATINGS. Any Regulated Insurance Company shall fail to maintain an A.M. Best rating of at least B; or 8.11 OWNERSHIP. A Change of Control shall occur; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent shall, upon the written request of the Required Banks, by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of the Administrative Agent or any Bank to enforce its claims against the Borrower or any other Credit Party, except as otherwise specifically provided for in this Agreement (PROVIDED that if an Event of Default specified in Section 8.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by the Administrative Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Commitment terminated, whereupon the Commitment of each Bank -50- shall forthwith terminate immediately; (ii) declare the principal of and any accrued interest in respect of all Loans and all Obligations owing hereunder and under the other Credit Documents to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and/or (iii) enforce, as Collateral Agent (or direct the Collateral Agent to enforce), any or all of the Liens and security interests created pursuant to the Pledge Agreement. Any and all remedies and rights notwithstanding, in the event of a default and acceleration of the Obligations hereunder, neither the Collateral Agent nor any Bank shall vote, sell, or in any manner exercise control as to any Regulated Insurance Company pledged as Collateral without first filing for and obtaining written prior approval pursuant to California Insurance Code Section 1215.2. SECTION 9. DEFINITIONS. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: "Acquisition" shall mean the acquisition by the Borrower of 100% of the equity interests of BIG from Foundation Health Corporation ("FHC"), a wholly owned subsidiary of Foundation Health Systems, Inc. "Acquisition Agreement" shall mean the Purchase Agreement, dated as of May 5, 1998, by and between the Borrower and FHC. "Acquisition Documents" shall mean the Acquisition Agreement and all other agreements and documents relating to the Acquisition including the Annexes and Exhibits to the Acquisition Agreement, in the form delivered pursuant to Section 4.11 and as the same may be amended or modified pursuant to the terms thereof and hereof. "Administrative Agent" shall have the meaning provided in the first paragraph of this Agreement and shall include any successor to the Administrative Agent appointed pursuant to Section 10.09. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. "Annual Statement" shall mean the annual financial statement required to be filed by any Regulated Insurance Company with the Applicable Insurance Regulatory Authority. -51- "Applicable Insurance Regulatory Authority" shall mean, when used with respect to any Regulated Insurance Company, the insurance department or similar administrative authority or agency located in (x) each state in which such Regulated Insurance Company is domiciled or (y) to the extent asserting regulatory jurisdiction over such Regulated Insurance Company, the insurance department, authority or agency in each state in which such Regulated Insurance Company is licensed, and shall include any Federal insurance regulatory department, authority or agency that may be created and that asserts regulatory jurisdiction over such Regulated Insurance Company. "Applicable Percentage" shall mean (a) with respect to Base Rate Loans, 2% and (ii) with respect to Eurodollar Loans, 3%. "Approved Bank" shall have the meaning provided in the definition of "Cash Equivalents." "Approved Company" shall have the meaning provided in the definition of "Cash Equivalents". "Asset Sale" shall mean any sale, transfer or other disposition effected on or after the Initial Borrowing Date by the Borrower or any of its Subsidiaries of (i) any capital stock or equity securities of a Subsidiary of the Borrower or (ii) any other asset, in each case to any Person other than the Borrower or any of its Wholly-Owned Subsidiaries (other than sales, transfers or other dispositions in the ordinary course of business). "Asset Restructuring Transaction" shall mean the sale of agent balances, retro receivables and due and accrued investment income by CalComp, CCIC and CBIC (together with a related sale/leaseback transaction not to exceed $18,500,000), provided that such transaction may only be consummated if (i) the documentation governing such transaction has been submitted to, and determined to be in form and substance satisfactory to, the Administrative Agent, (ii) such transaction is permitted under the terms of the Trust Preferred Note Documents and (iii) the Banks shall have received an opinion from Riordan & McKinzie, counsel to the Borrower, that such transaction is permitted under the terms of the Trust Preferred Note Documents. "Assignment and Assumption Agreement" shall have the meaning provided in Section 11.04(b). "Associates" shall mean each of (i) Capital Z Financial Services Fund II, L.P., (ii) Capital Z Financial Services Private Fund II, L.P., (iii) Insurance Partners Offshore (Bermuda), L.P. and (iv) Insurance Partners, L.P., and any person or entity that controls, is under common control with, or is controlled by Insurance Partners or such persons or entities, and all individuals who are officers, directors or control persons of any such entities, including Insurance Partners; PROVIDED, HOWEVER, that International Insurance Investors, LP or its limited partners shall not be deemed Associates hereunder. -52- "Authorized Control Level" shall mean "Authorized Control Level" as defined by the NAIC from time to time and as applied in the context of the Risk Based Capital Guidelines promulgated by the NAIC (or any term substituted therefor by the NAIC). "Authorized Officer" shall mean any senior officer of the Borrower designated as such in writing by the Borrower to, and found acceptable by, the Administrative Agent. "Bank" shall have the meaning provided in the first paragraph of this Agreement. "Bank Default" shall mean (i) the refusal (which has not been retracted) of a Bank to make available its portion of any Borrowing or (ii) a Bank having notified the Administrative Agent and/or the Borrower that it does not intend to comply with the obligations under Section 1.01, in the case of either clause (i) or (ii) above as a result of the appointment of a receiver or conservator with respect to such Bank at the direction or request of any regulatory agency or authority. "Bankruptcy Code" shall have the meaning provided in Section 8.05. "Base Rate" at any time shall mean the higher of (x) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate and (y) the Prime Lending Rate as in effect from time to time. "Base Rate Loans" shall mean each Loan bearing interest at the rates provided in Section 1.08(a). "Benchmark Statement" shall mean, as of any date, an annual financial statement of the Regulated Insurance Companies as would be prepared as of such date utilizing the identical format utilized by SNIC in preparing its December 31, 1997 Annual Statement filed with the Insurance Department of the State of California, with each page, line item and column of a Benchmark Statement to contain the same type of information, computed in the same manner, as contained in the identically numbered page, line item and column of such Annual Statement. "BIC" shall means Business Insurance Company, a New York stock insurance company. "BIG" shall mean Business Insurance Group, Inc., a Delaware insurance holding company. "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrowing" shall mean the incurrence of one Type of Loan pursuant to a single Facility by the Borrower from all of the Banks having Commitments with respect to such Facility, on a PRO RATA basis on a given date (or resulting from conversions on a given date), having in the case of Eurodollar Loans the same Interest Period, PROVIDED that Base Rate Loans -53- incurred pursuant to Section 1.10(b) shall be considered part of any related Borrowing of Eurodollar Loans. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day, excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close, and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the interbank Eurodollar market. "CalComp" shall mean California Compensation Insurance Company, a California stock insurance company. "Capital Expenditures" shall mean expenditures (whether paid in cash or accrued as liabilities and including in all events all amounts expended or capitalized under Capital Leases but excluding any amount representing capitalized interest) by the Borrower and its Subsidiaries that, in conformity with GAAP, are or are required to be included in the property, plant or equipment reflected in the consolidated balance sheet of the Borrower and its Subsidiaries, PROVIDED that Capital Expenditures shall in any event include the purchase price paid in connection with the acquisition of any Person (including through the purchase of all of the capital stock or other ownership interests of such Person or through merger or consolidation) to the extent allocable to property, plant and equipment. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of the Borrower or any of its Subsidiaries in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Capital Lease" as applied to any Person, shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of that Person. "Cash Equivalents" shall mean (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (PROVIDED that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (ii) U.S. dollar denominated time deposits, certificates of deposit and bankers acceptances of (x) any FDIC insured bank, in amounts up to the FDIC insured limit, (y) any Bank having capital and surplus in excess of $500,000,000 or the U.S. dollar equivalent thereof or (z) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank, an "Approved Bank"), in each case with maturities of not more than one year from the date of acquisition, (iii) commercial paper issued by any Bank or Approved Bank or by the parent company of any Bank or Approved Bank and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-2 or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody's (any such company, an "Approved Company"), or guaranteed -54- by any industrial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody's, as the case may be, and in each case maturing within six months after the date of acquisition, PROVIDED, HOWEVER, that commercial paper rated A-2 or the equivalent thereof by S&P or P-2 or the equivalent thereof by Moody's and held by the Borrower and all Regulated Insurance Companies under this clause (iii) shall not exceed (x) for any Issuer, 1% of Invested Assets, and (y) in the aggregate, 3% of Invested Assets, (iv) commercial paper of any United States municipal, state or local government rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's and maturing within one year after the date of acquisition, (v) any fund or funds investing solely in investments of the type described in clauses (i) through (iv) above, and (vi) agreements to sell and repurchase direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the U.S. Treasury, such agreements to be with primary treasury dealers, to be evidenced by standard industry forms and to have maturities of not more than six months from the date of commencement of the repurchase transaction. "Cash Proceeds" shall mean, with respect to any Asset Sale, the aggregate cash payments (including any cash received by way of deferred payment pursuant to a note receivable issued in connection with such Asset Sale, other than the portion of such deferred payment constituting interest, but only as and when received) received by the Borrower and/or any Subsidiary from such Asset Sale, PROVIDED that any such proceeds received in currency other than U.S. dollars shall be converted into U.S. dollars at the spot exchange rate for the currency in question on the date of receipt by the Borrower and/or its Subsidiaries of such proceeds. "CBIC" shall mean Combined Benefits Insurance Company, a California stock insurance company. "CCIC" shall mean Commercial Compensation Insurance Company, a California stock insurance company. "Change of Control" shall mean (a) Insurance Partners and its Associates collectively shall cease to own directly or indirectly an amount of the economic and voting interest in the Borrower's capital stock equal to at least 70% of the amount of the economic and voting interest in the Borrower's capital stock that was owned by Insurance Partners and its Associates collectively as of the Initial Borrowing Date; (b) the Borrower shall cease to own directly or indirectly (other than as a result of a transaction permitted under Section 7.02(d) hereof) 100% of the capital stock of SPIG, BIG, SNIC, SPCC, CalComp, CBIC or, to the extent acquired by the Borrower pursuant to Section 6.15, CCIC; (c) any Person other than Insurance Partners and Centre Solutions (Bermuda) Limited (together with their respective Affiliates) shall own directly or indirectly 20% or more on a fully diluted basis of the economic and voting interest in the capital stock of the Borrower; (d) a majority of the Board of Directors of the Borrower shall cease to consist of Continuing Directors; or (e) any "Change of Control" as such term is defined in the Trust Preferred Note Documents or any successor or similar provision shall occur. "Chase" shall mean The Chase Manhattan Bank. -55- "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all of the Collateral as defined in the Pledge Agreement. "Collateral Agent" shall mean the Administrative Agent acting as collateral agent for the Banks. "Commitment" shall mean, with respect to each Bank, such Bank's Term Loan Commitment and Revolving Loan Commitment. "Commitment Fee" shall have the meaning provided in Section 2.01(a). "Consolidated Indebtedness" shall mean, at any time and as to any Person, all Indebtedness for borrowed money of such Person and its Subsidiaries at such time determined on a consolidated basis in accordance with GAAP, but, in the case of the Borrower and its Subsidiaries, excluding the Trust Preferred Notes and including (i) any Residual Indemnity Liabilities outstanding subsequent to April 30, 1999 and (ii) all obligations under the Reverse Repurchase Program. "Consolidated Interest Expense" shall mean, for any period and as to any Person, total interest expense (including that attributable to Capital Leases in accordance with GAAP and all interest paid on the Trust Preferred Notes) of such Person and its Subsidiaries on a consolidated basis including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, but excluding however, (i) any amortization of deferred financing costs. "Consolidated Net Worth" shall mean, with respect to any Person, the Net Worth of such Person and its Subsidiaries determined on a consolidated basis in accordance with GAAP after appropriate deduction for any minority interests in Subsidiaries. "Consolidated Total Capital" shall mean, at any time and as to any Person, (i) the sum of Consolidated Indebtedness of such Person at such time, (ii) Consolidated Net Worth of such Person at such time and (iii) in the case of the Borrower, to the extent not included in (i) or (ii) above, the Trust Preferred Notes at such time. "Contingent Obligations" shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of -56- the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term Contingent Obligation shall not include (x) endorsements of instruments for deposit or collection in the ordinary course of business or (y) obligations of any Regulated Insurance Company under Insurance Contracts, Reinsurance Agreements or Retrocession Agreements. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Continuing Directors" shall mean the directors of the Borrower on the Initial Borrowing Date and each other director if such director's nomination for the election to the Board of Directors of the Borrower is recommended by a majority of the then Continuing Directors. "Credit Documents" shall mean this Agreement, the Notes, the Subsidiary Guaranty and the Pledge Agreement. "Credit Party" shall mean the Borrower and each Subsidiary Guarantor. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. "Dividends" shall have the meaning provided in Section 7.08. "Domestic Subsidiary" shall mean each Subsidiary of the Borrower which is not a Foreign Subsidiary. "Effective Date" shall have the meaning provided in Section 11.10. "Employee Participation Loans" shall mean the loans by the Borrower to employees, officers and claims consultants of the Borrower and its Subsidiaries in an aggregate principal amount not to exceed $10,400,000 the proceeds of which are used to purchase common stock of the Borrower in connection with the November, 1998 registered offering of such stock to fund the Acquisition. "Equity Financing" shall have the meaning provided in Section 4.11(b). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and the regulations promulgated and rulings issued thereunder. -57- Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Borrower or a Subsidiary of the Borrower would be deemed to be a "single employer" within the meaning of Section 414(b),(c), (m) or (o) of the Code. "Eurodollar Loans" shall mean each Loan bearing interest at the rates provided in Section 1.08(b). "Eurodollar Rate" shall mean, with respect to each Interest Period for a Eurodollar Loan, (i) the arithmetic average (rounded to the nearest 1/100 of 1%) of the offered quotation to first-class banks in the interbank Eurodollar market by Chase for U.S. dollar deposits of amounts in same day funds comparable to the outstanding principal amount of the Eurodollar Loan of Chase for which an interest rate is then being determined with maturities comparable to the Interest Period to be applicable to such Eurodollar Loan, determined as of 10:00 A.M. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period divided (and rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D). "Event of Default" shall have the meaning provided in Section 8. "Existing Reinsurance Agreements" shall mean (a) the Workers' Compensation Quota Share Reinsurance Contract, effective May 1, 1998, between the Borrower, various Subsidiaries of the Borrower and United States Life Insurance Company, and (b) the Aggregate Excess of Loss Reinsurance Agreement, dated as of September 3, 1998, between BIG, various Subsidiaries of BIG and Inter-Ocean Reinsurance Company Ltd., in each case as amended, modified or supplemented from time to time in accordance with the terms thereof and hereof. "Existing Reinsurance Agreement Documents" shall have the meaning provided in Section 4.06. "Expiration Date" shall mean December 31, 1998. "Facility" shall mean any of the credit facilities established under this Agreement, I.E., the Term Loan Facility and the Revolving Loan Facility. "FASB 113" shall mean the Statement of Financial Accounting Standards No. 113, as the same may be revised, replaced, or supplemented from time to time. -58- "Federal Funds Effective Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 2.01. "FHC" shall mean Foundation Health Corporation, a wholly owned subsidiary of Foundation Health Systems, Inc. "Financial Reinsurance Agreement" shall mean a reinsurance agreement covering any transaction in which any Regulated Insurance Company cedes business that does not meet the conditions for reinsurance accounting as provided by the Financial Accounting Standards Board in FASB 113. "Foreign Subsidiary" shall mean each Subsidiary of the Borrower that is incorporated under the laws of any jurisdiction other than the United States of America, any State thereof, or any territory thereof. "GAAP" shall mean generally accepted accounting principles in the United States of America; it being understood and agreed that determinations in accordance with GAAP for purposes of Section 7, including defined terms as used therein, are subject (to the extent provided therein) to Section 11.07(a). "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Indebtedness" of any Person shall mean (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder, (iv) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (v) all Capitalized Lease Obligations of such Person, (vi) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, I.E., take-or-pay and similar obligations, (vii) all obligations of such Person under Interest Rate Agreements and Other Hedging Agreements, (viii) all Contingent Obligations of such Person and (ix) all obligations of such Person under the Reverse Repurchase Program; PROVIDED that Indebtedness shall not include trade payables (including payables under insurance contracts and reinsurance payables) and accrued expenses, in each case arising in the ordinary course of business. -59- "Initial Borrowing Date" shall mean the date upon which the Term Loans are initially incurred hereunder. "Insurance Business" shall mean one or more aspects of the business of selling, issuing or underwriting insurance or reinsurance. "Insurance Contract" shall mean any insurance contract or policy issued by a Regulated Insurance Company but shall not include any Reinsurance Agreement or Retrocession Agreement. "Insurance Partners" shall mean Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. "Interest Coverage Ratio" shall mean, for any period, the ratio of Statutory EBIT for such period to Consolidated Interest Expense of the Borrower for such period. "Interest Period" shall mean, with respect to any Eurodollar Loan, the interest period applicable thereto, as determined pursuant to Section 1.09. "Interest Rate Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedging agreement or other similar agreement or arrangement. "Invested Assets" shall mean, at any date for the Regulated Insurance Companies (on a consolidated basis), the total amount as would be shown on line 9, page 2, column 1 of a Benchmark Statement for the Regulated Insurance Companies (on a consolidated basis) prepared as of such date. "Investment Grade Securities" shall mean and include (i) U.S. Government Obligations (other than Cash Equivalents), (ii) debt securities or debt instruments with a rating of BBB- or higher by S&P, Baa3 or higher by Moody's, Class (2) or higher by NAIC or the equivalent of such rating by S&P, Moody's or NAIC, or if none of S&P, Moody's and NAIC shall then exist, the equivalent of such rating by any other nationally recognized securities rating agency, but excluding any debt securities or instruments constituting loans or advances among the Borrower and its Wholly-Owned Subsidiaries, and (iii) any fund investing exclusively in investments of the type described in clauses (i) and (ii) which funds may also hold immaterial amounts of cash pending investment and/or distribution. "Issuer" shall mean any issuer of Investment Grade Securities or Non-Investment Grade Securities acquired or proposed to be acquired by the Borrower or any of its Subsidiaries pursuant to Section 7.06. "Legal Requirements" shall mean all applicable laws, rules and regulations made by any governmental body or regulatory authority (including, without limitation, any Applicable Insurance Regulatory Authority) having jurisdiction over the Borrower or a Subsidiary of the Borrower. -60- "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" shall have the meaning provided in Section 1.01. "Management Agreements" shall have the meaning provided in Section 4.13. "Margin Stock" shall have the meaning provided in Regulation U. "Master Repurchase Agreement" shall mean the Master Repurchase Agreement, dated as of February 8, 1995, between SNIC and Merrill Lynch Government Securities Inc. and/or Merrill Lynch, Pierce, Fenner & Smith Incorporated. "Material Adverse Effect" shall mean a material adverse effect on the business, operations, property, condition (financial or otherwise), material agreements, contracts, contingent liabilities or prospects of the Borrower and its Subsidiaries taken as a whole after giving effect to the Transaction. "Material Contracts" shall have the meaning provided in Section 4.13. "Maturity Date" with respect to any Facility shall mean either the Term Loan Maturity Date or the Revolving Loan Maturity Date, as the case may be. "Moody's" shall mean Moody's Investors Service, Inc. and its successors. "NAIC" shall mean the National Association of Insurance Commissioners or any successor organization thereto. "NAIC Tests" shall mean the ratios and other financial measurements developed by the NAIC under its Insurance Regulatory Information System, as in effect from time to time. "Net Available Proceeds" shall mean (i) with respect to any Asset Sale consummated by a Regulated Insurance Company, the Surplus Increase with respect to such Regulated Insurance Company as a result of such Asset Sale, (ii) with respect to any Asset Sale consummated by the Borrower or any Non-Regulated Insurance Company which is not a Subsidiary of a Regulated Insurance Company, the Net Cash Proceeds resulting therefrom and (iii) with respect to any Asset Sale consummated by a Non-Regulated Insurance Company which is a Subsidiary of a Regulated Insurance Company, an amount equal to the dividend that such Regulated Insurance Company would be permitted to pay in accordance with the Legal Requirements applicable to it as a result of the receipt by such Regulated Insurance Company of a dividend from such Non-Regulated Insurance Company in an amount equal to the Net Cash Proceeds resulting from such Asset Sale; in each case as determined in good faith by the Borrower and certified in writing by the Borrower to the Administrative Agent (showing the calculation thereof and supporting assumptions) on or prior to the date on which the Borrower or any Subsidiary is to receive the initial proceeds from such Asset Sale. -61- "Net Cash Proceeds" shall mean, with respect to any Asset Sale, the Cash Proceeds resulting therefrom net of (a) cash expenses of sale (including payment of principal, premium and interest on Indebtedness other than the Loans required to be repaid as a result of such Asset Sale) and (b) incremental income taxes paid or payable as a result thereof, in each case as determined in good faith by the Borrower and certified in writing by the Borrower to the Administrative Agent (showing the calculation thereof and supporting assumptions) on or prior to the date on which the Borrower or any Subsidiary is to receive the initial proceeds from such Asset Sale. "Net Worth" shall mean, as to any Person, the sum of its capital stock (including, without limitation, its preferred stock), capital in excess of par or stated value of shares of its capital stock (including, without limitation, its preferred stock), retained earnings and any other account which, in accordance with GAAP, constitutes stockholders equity, but excluding (i) any treasury stock and (ii) the effects of Financial Accounting Statement No. 115. "Non-Defaulting Bank" shall mean any Bank other than a Defaulting Bank. "Non-Investment Grade Securities" shall mean debt and equity securities and debt and equity instruments that do not constitute Investment Grade Securities or Cash Equivalents (but excluding any debt or equity securities or instruments constituting loans or advances among the Borrower and its Wholly-Owned Subsidiaries), it being understood that for the purposes of any determination under Section 7.06(f), the amounts, if any, paid by such Regulated Insurance Company to purchase such equity securities or warrants shall be included in the principal amounts of Non-Investment Grade Securities. "Non-Regulated Company" shall mean each Subsidiary of the Borrower which is not a Regulated Insurance Company. "Note" shall mean each Term Note and each Revolving Note. "Notice of Borrowing" shall have the meaning provided in Section 1.03. "Notice of Conversion" shall have the meaning provided in Section 1.06. "Notice Office" shall mean the office of the Administrative Agent at 270 Park Avenue, New York, New York 10017; Attn: Russell Myers, Telephone: (212) 270-7169, Fax: (212) 270-1001, or such other office as the Administrative Agent may designate to the Borrower and the Banks from time to time. "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to the Administrative Agent, the Collateral Agent or any Bank pursuant to the terms of this Agreement or any other Credit Document. -62- "Other Hedging Agreements" shall mean any foreign exchange contracts, currency swap agreements or other similar agreements or arrangements designed to protect against fluctuations in currency values. "Payment Office" shall mean the office of the Administrative Agent c/o The Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention: Laura Rebecca, Facsimile No.: (212) 552-7490 or such other office as the Administrative Agent may designate to the Borrower and the Banks from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permitted Acquisition" shall have the meaning provided in Section 7.02(i). "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) the Borrower or a Subsidiary of the Borrower or an ERISA Affiliate, and each such plan for the five year period immediately following the latest date on which the Borrower, or a Subsidiary of the Borrower or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Plan Documents" shall have the meaning provided in Section 4.13(a). "Pledge Agreement" shall have the meaning provided in Section 4.10. "Pledged Securities" shall mean all the Pledged Securities as defined in the Pledge Agreement. "Prime Lending Rate" shall mean the rate which Chase announces from time to time as its prime commercial lending rate, the Prime Lending Rate to change when and as such prime commercial lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Chase may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Quarterly Statement" shall mean the quarterly financial statement required to be filed by any Regulated Insurance Company with the Applicable Regulatory Insurance Authority. "Register" shall have the meaning provided in Section 6.13. "Regulated Insurance Company" shall mean any Subsidiary of the Borrower, whether now owned or hereafter acquired, that is authorized or admitted to carry on or transact Insurance Business in any jurisdiction and is regulated by any Applicable Insurance Regulatory Authority. -63- "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Reinsurance Agreement" shall mean any agreement, contract, treaty or other arrangement whereby one or more insurers, as reinsurers, assume liabilities under insurance policies or agreements issued by another insurance or reinsurance company or companies. "Related Parties" shall mean any Affiliate, any Associate, Centre Reinsurance (Bermuda) Limited and Insurance Partners. "Replaced Bank" shall have the meaning provided in Section 1.13. "Replacement Bank" shall have the meaning provided in Section 1.13. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan other than those events as to which the 30-day notice period is waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC Regulation Section 2615. "Required Banks" shall mean Non-Defaulting Banks the sum of whose outstanding Term Loans and Revolving Loan Commitment (or, if after the Total Revolving Loan Commitment has been terminated, outstanding Revolving Loans) constitute 66 2/3% or more of the sum of (i) the total outstanding Term Loans of Non-Defaulting Banks and (ii) the Total Revolving Loan Commitment less the aggregate Revolving Loan Commitments of Defaulting Banks, if any, or, if after the Total Revolving Loan Commitment has been terminated, the total outstanding Revolving Loans of Non-Defaulting Banks) "Residual Indemnity Liabilities" shall mean the dollar amount of any accounts receivable of CalComp or CBIC (or CCIC to the extent acquired in accordance with Section 6.15) transferred pursuant to the Asset Restructuring Transaction which are not paid prior to April 30, 1999 and with respect to which the Borrower is liable pursuant to the Support Agreement entered into by the Borrower in connection with the Asset Restructuring Transaction, which indemnifies the purchaser of the accounts receivable for up to 80% of the face value of such accounts receivable. "Retrocession Agreement" shall mean any agreement, contract, treaty or other arrangement whereby one or more insurers or reinsurers, as retrocessionaires, assume liabilities of reinsurers under a Reinsurance Agreement or other retrocessionaires under another Retrocession Agreement. "Reverse Repurchase Program" shall mean the reverse repurchase program entered into pursuant to the Master Repurchase Agreement. -64- "Revolving Loan" shall have the meaning provided in Section 1.01(b). "Revolving Loan Commitment" shall mean, with respect to each Bank, the amount set forth opposite such Bank's name in Annex I directly below the column entitled "Revolving Loan Commitment," as the same may be reduced from time to time or terminated pursuant to Sections 2.02, 2.03 and/or 8. "Revolving Loan Facility" shall mean the Facility evidenced by the Total Revolving Loan Commitment. "Revolving Loan Maturity Date" shall mean December 10, 2003. "Revolving Note" shall have the meaning provided in Section 1.05(a). "Risk-Based Capital" shall mean for any Subsidiary listed in Section 7.14, the ratio (expressed as a percentage), at any time, of the Total Adjusted Capital of such Subsidiary to the Authorized Control Level of such Subsidiary. "Risk Derivatives" shall mean Z bonds, floaters/inverse floaters, PAC II, PAC III, Ioettes, support bonds, Interest Only Investments, Principal Only Investments residuals, inverse IO's, super floaters, any other instruments with similar economic risk factors and any bonds backed in whole or in part by any of the foregoing (including component or "kitchen sink" bonds). "S&P" shall mean Standard & Poor's Ratings Group and its successors. "S&P Credit Rating" shall mean the rating level (it being understood that a rating level shall include numerical modifiers and (+) and (-) modifiers) assigned by S&P to the senior unsecured long-term debt of an Issuer. "S&P Equivalent Rating" shall mean, with respect to any Investment Grade Security or Non-Investment Grade Security, the rating given such security by S&P or the S&P equivalent rating of the rating given such security by Moody's or NAIC, it being understood that if any such security is rated by more than one of S&P, Moody's and NAIC and any of such ratings (or the S&P equivalent of such ratings) differ, then the S&P Equivalent Rating for such security shall be the lower or lowest, as the case may be, of such ratings (or the S&P equivalent of such ratings). "SAP" shall mean, with respect to any Regulated Insurance Company, the accounting procedures and practices prescribed or permitted by the Applicable Insurance Regulatory Authority of the state in which such Regulated Insurance Company is domiciled; it being understood and agreed that determinations in accordance with SAP for purposes of Section 7, including defined terms as used therein, are subject (to the extent provided therein) to Section 11.07(a). "Scheduled Repayments" shall have the meaning provided in Section 3.02(i)(a). -65- "SEC" shall mean the Securities and Exchange Commission or any successor thereto. "SEC Regulation D" shall mean Regulation D as promulgated under the Securities Act of 1933, as amended, as the same may be in effect from time to time. "Section 3.04(b)(ii) Certificate" shall have the meaning provided in Section 3.04(b)(ii). "Secured Creditors" shall have the meaning provided in the Pledge Agreement. "Shared Expenses Agreements" shall have the meaning provided in Section 4.13. "SNCHC" shall mean Superior National Capital Holding Company, a Nevada corporation. "SNIC" shall mean Superior National Insurance Company, a California corporation. "SPCC" shall mean Superior Pacific Casualty Company, a California corporation. "SPIG" shall mean Superior Pacific Insurance Group, a Delaware corporation. "Statutory Earnings" shall mean, for any period, for any Regulated Insurance Company, (i) the total amount as would be shown on line 16, page 4, column 1 of a Benchmark Statement for such Regulated Insurance Company (I.E., net gain from operations, after taxes but before unrealized capital gains and losses) prepared for such period less (ii) the undistributed earnings of Subsidiaries of such Regulated Insurance Company to the extent included in such total amount. "Statutory EBIT" shall mean, for any period, the sum (without duplication) of the net income before dividends to policyholders and before federal and foreign income taxes as same would be shown on line 14(b), page 4, column 1 of a Benchmark Statement of each Regulated Insurance Company, in each case for such period as determined on a consolidated basis in accordance with SAP. "Statutory Surplus" shall mean, at any date for any Regulated Insurance Company, the total amount as would be shown on line 25, page 3, column 1 of a Benchmark Statement for such Regulated Insurance Company prepared as of such date. "Stockholders Agreements" shall have the meaning provided in Section 4.13. "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly -66- through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries has more than a 50% equity or voting interest at the time. Unless otherwise expressly provided, all references herein to "Subsidiary" shall mean a Subsidiary of the Borrower. "Subsidiary Guarantor" shall mean each Subsidiary of the Borrower which is a Non-Regulated Company, except Non-Regulated Company Subsidiaries of any Regulated Insurance Company. "Subsidiary Guaranty" shall have the meaning provided in Section 4.09. "Surplus Increase" shall mean, with respect to each Asset Sale effected by a Regulated Insurance Company, the increase in Statutory Surplus of such Regulated Insurance Company as a result of such Asset Sale. "Syndication Date" shall mean the earlier of (x) the date which is 90 days after the Initial Borrowing Date and (y) the date upon which the Administrative Agent determines in its sole discretion (and notifies the Borrower) that the primary syndication (and the resulting addition of Banks pursuant to Section 11.04) has been completed. "Tax Sharing Agreements" shall have the meaning provided in Section 4.13. "Taxes" shall have the meaning provided in Section 3.04(a). "Term Loan" shall have the meaning provided in Section 1.01(a). "Term Loan Commitment" shall mean, with respect to each Bank, the amount set forth opposite such Bank's name in Annex I directly below the column entitled "Term Loan Commitment," as the same may be terminated pursuant to Sections 2.02, 2.03 and/or 8. "Term Loan Facility" shall mean the Facility evidenced by the Total Term Loan Commitment. "Term Loan Maturity Date" shall mean December 10, 2004. "Term Note" shall have the meaning provided in Section 1.05(a). "Test Period" shall mean (i) for any determination made on and prior to September 30, 1999, the period from January 1, 1999 to the last day of the fiscal quarter of the Borrower then last ended, PROVIDED that the first Test Period shall end on March 31, 1999, and (ii) for any determination made thereafter, the four consecutive fiscal quarters of the Borrower ended on the last day of the most recently ended fiscal quarter of the Borrower (taken as one accounting period). "Total Adjusted Capital" shall mean "Total Adjusted Capital" as defined by the NAIC as of December 31, 1997 and as applied in the context of the Risk Based Capital Guidelines promulgated by the NAIC. -67- "Total Commitment" shall mean the sum of the Total Term Loan Commitment and the Total Revolving Loan Commitment. "Total Revolving Loan Commitment" shall mean the sum of the Revolving Loan Commitments of each of the Banks. "Total Term Loan Commitment" shall mean the sum of the Term Loan Commitments of each of the Banks. "Total Unutilized Revolving Loan Commitment" shall mean, at any time, (i) the Total Revolving Loan Commitment at such time less (ii) the sum of the aggregate principal amount of all Revolving Loans outstanding at such time. "Transaction" shall mean, collectively, (i) the Acquisition, (ii) the Equity Financing, (iii) the incurrence by the Borrower of the Term Loans hereunder on the Initial Borrowing Date and (iv) the payment of fees and expenses in connection with the foregoing. "Transaction Documents" shall mean, collectively, (i) the Acquisition Documents, (ii) the documents and instruments governing the Equity Financing and (iii) the Credit Documents. "Trust Preferred Note Documents" shall mean the Trust Preferred Notes, the Trust Preferred Note Indenture and all other documents and instruments entered into in connection with the Trust Preferred Note Indenture. "Trust Preferred Note Indenture" shall mean the Senior Subordinated Indenture, dated as of December 3, 1997, between the Borrower and Wilmington Trust Company, as Trustee. "Trust Preferred Notes" shall mean the Borrower's 10 3/4% Senior Subordinated Notes due December 1, 2017, issued pursuant to the Trust Preferred Note Indenture. "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto, I.E., a Base Rate Loan or a Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the actuarial present value of the accumulated plan benefits under the Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, each determined in accordance with Statement of Financial Accounting Standards No. 87, based upon the actuarial assumptions used by the Plan's actuary in the most recent annual valuation of the Plan. "Unutilized Revolving Loan Commitment" with respect to any Bank at any time shall mean such Bank's Revolving Loan Commitment at such time LESS the aggregate outstanding principal amount of all Revolving Loans made by such Bank. -68- "U.S. Government Obligations" shall mean and include (A) securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; PROVIDED that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt and (B) to the extent in each case having an S&P Equivalent Rating of AAA, obligations issued or guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, the Student Loan Marketing Association and the Federal Home Loan Bank. "Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of such Person to the extent all of the capital stock or other ownership interests in such Subsidiary, other than directors' or nominees' qualifying shares, is owned directly or indirectly by such Person. "Written" or "in writing" shall mean any form of written communication or a communication by means of telex, facsimile device, telegraph or cable. SECTION 10. The Administrative Agent. 10.01 APPOINTMENT. Each Bank hereby irrevocably designates and appoints Chase as Administrative Agent (such term as used in this Section 10 to include Chase acting as Collateral Agent) to act as specified herein and in the other Credit Documents, and each such Bank hereby irrevocably authorizes Chase as the Administrative Agent for such Bank, to take such action on its behalf under the provisions of this Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. The Administrative Agent agrees to act as such upon the express conditions contained in this Section 10. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein or in the other Credit Documents, nor any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Administrative Agent. The provisions of this Section 10 are solely for the benefit of the Administrative Agent and the Banks, and no Credit Party shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties -69- under this Agreement, the Administrative Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for the Credit Party. 10.02 DELEGATION OF DUTIES. The Administrative Agent may execute any of its duties under this Agreement or any other Credit Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by Section 10.03. 10.03 EXCULPATORY PROVISIONS. Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by the Borrower or any Subsidiary or any of their respective officers contained in this Agreement, any other Credit Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Credit Document or for any failure of the Borrower or any of its Subsidiaries or any of their respective officers to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrower or any of its Subsidiaries. The Administrative Agent shall not be responsible to any Bank for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any Credit Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Administrative Agent to the Banks or by or on behalf of the Borrower to the Administrative Agent or any Bank or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. 10.04 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile transmission, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Credit Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by -70- the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Credit Documents in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks. 10.05 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Bank or any other Credit Party referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks, PROVIDED that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 10.06 NON-RELIANCE. Each Bank expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Bank. Each Bank represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower and its Subsidiaries. The Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, assets, property, financial and other conditions, prospects or creditworthiness of the Borrower or any Subsidiary which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 10.07 INDEMNIFICATION. Each Bank agrees to indemnify the Administrative Agent and the Collateral Agent in its respective capacities as such ratably according to such Bank's respective Loans and Unutilized Revolving Loan Commitment, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without -71- limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Administrative Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Credit Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by the Administrative Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by the Borrower or any of its Subsidiaries, PROVIDED that no Bank shall be liable to the Administrative Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. If any indemnity furnished to the Administrative Agent for any purpose shall, in the opinion of the Administrative Agent, be insufficient or become impaired, the Administrative Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 10.07 shall survive the payment of all Obligations. 10.08 THE ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY. The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower and its Subsidiaries as though not acting as Administrative Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, the Administrative Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Administrative Agent, and the terms "Bank" and "Banks" shall include the Administrative Agent in its individual capacity. 10.09 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may resign as the Administrative Agent upon 20 days' notice to the Banks and the Borrower. Upon such resignation, the Required Banks shall, with the consent of the Borrower (such consent not to be unreasonably withheld), appoint from among the Banks a successor Administrative Agent for the Banks, whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall include such successor agent effective upon its appointment, and the resigning Administrative Agent's rights, powers and duties as the Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement. After the retiring Administrative Agent's resignation hereunder as the Administrative Agent, the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. SECTION 11. MISCELLANEOUS. 11.01 PAYMENT OF EXPENSES, ETC. The Borrower hereby agree to: (i) whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Administrative Agent in connection with the negotiation, preparation, syndication, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of White & Case); (ii) whether or not the -72- transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Administrative Agent and each of the Banks in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for the Administrative Agent and for each of the Banks); (iii) pay and hold each of the Banks harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Banks harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes; and (iv) indemnify the Administrative Agent and each Bank, and their respective officers, directors, employees, representatives and agents (each, an "indemnified person") from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses (collectively, "Claims") incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not the Administrative Agent or any Bank is a party thereto) related to the entering into and/or performance of any Credit Document or other Transaction Document or the use of the proceeds of any Loans hereunder or the Transaction or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 11.02 RIGHT OF SETOFF. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and continuance of an Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to any Credit Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of such Credit Party against and on account of the Obligations and liabilities of such Credit Party to such Bank or any other Bank under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of such Credit Party purchased by such Bank or any other Bank pursuant to Section 11.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Bank shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured. Each Bank is hereby designated the agent of all other Banks for purposes of effecting set off pursuant to this Section 11.02 and each Credit Party hereby grants to each Bank for such Bank's own benefit and as agent for all other Banks a continuing security interest in any and all deposits, accounts or moneys of such Credit Party maintained from time to time with such Bank. 11.03 NOTICES. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered, if to any Credit Party, at the address specified opposite its signature below; if to any -73- Bank, at its address specified for such Bank on Annex II hereto; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telegraphed, telexed, telecopied, cabled or sent by overnight courier and shall be effective when received. 11.04 BENEFIT OF AGREEMENT. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; PROVIDED, HOWEVER, no Credit Party may assign or transfer any of its rights or obligations hereunder without the prior written consent of the Banks. Each Bank may at any time grant participations in any of its rights hereunder or under any of its Notes to any bank or other financial institution; PROVIDED that in the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents, including rights of consent, approval or waiver (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation, except that the participant shall be entitled to receive the additional amounts under Sections 1.10, 1.11 and 3.04 of this Agreement to, and only to, the extent that such Bank would be entitled to such benefits if the participation had not been entered into or sold; and PROVIDED FURTHER, that no Bank shall transfer, grant or assign any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend any Scheduled Repayment or the final scheduled maturity of any Loan or Note in which such participant is participating (it being understood that any waiver of the application of any prepayment or the method of application of any prepayment to the amortization of, the Loans shall not constitute an extension of a Scheduled Repayment or the final scheduled maturity date), or reduce the rate or extend the time of payment of interest thereon or Fees, or reduce the principal amount thereof, or increase such participant's participating interest in any Commitment or Loan over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment or of a mandatory repayment or prepayment shall not constitute a change in the terms of any Commitment and that an increase in any Commitment shall be permitted without the consent of any participant if such participant's participation is not increased as a result thereof), (ii) release all or any material portion of the Collateral (except as expressly provided in the Credit Documents) or (iii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or any other Credit Document except in accordance with the terms hereof and thereof. (b) Notwithstanding the foregoing, any Bank may assign all or a portion of its rights and obligations hereunder to a bank or other financial institution with the prior written consent of the Administrative Agent, which consent shall not be unreasonably withheld. No assignment of less than all of a Bank's rights and obligations hereunder pursuant to the immediately preceding sentence shall, to the extent such transaction represents an assignment to an institution other than one or more Banks hereunder, be in an aggregate amount less than the minimum of $5,000,000 unless otherwise agreed to by the Administrative Agent and the Borrower in writing. If any Bank so sells or assigns all or a part of its rights hereunder or under -74- the Notes, any reference in this Agreement or the Notes to such assigning Bank shall thereafter refer to such Bank and to the respective assignee to the extent of their respective interests and the respective assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights and benefits as it would if it were such assigning Bank. Each assignment pursuant to this Section 11.04(b) shall be effected by the assigning Bank and the assignee Bank executing an Assignment and Assumption Agreement substantially in the form of Exhibit H (appropriately completed) (the "Assignment and Assumption Agreement"). At the time of any such assignment, (i) Annex I shall be deemed to be amended to reflect the Commitments, if any, and outstanding Loans of the respective assignee (which shall result in a direct reduction to the Commitments, if any, and outstanding Loans of the assigning Bank) and of the other Banks, (ii) if any such assignment occurs after the Initial Borrowing Date, at the request of the assignor or the assignee the Borrower will issue new Notes to the respective assignee and to the assigning Bank in conformity with the requirements of Section 1.05, (iii) the Administrative Agent shall receive from the assigning Bank and/or the assignee Bank or financial institution at the time of each assignment the payment of a nonrefundable assignment fee of $3,500 and (iv) the Administrative Agent shall receive from the assignee Bank the Administrative Agent's administrative questionnaire completed by such assignee Bank, PROVIDED that such transfer or assignment will not be effective until recorded by the Administrative Agent on the Register pursuant to Section 6.13 hereof. At the time of each assignment pursuant to this Section 11.04(b) to a Person which is not already a Bank hereunder and which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective assignee Bank shall provide to the Borrower and the Administrative Agent the appropriate Internal Revenue Service forms (and, if applicable a Section 3.04(b)(ii) Certificate) described in Section 3.04(b). Each Bank and the Borrower agrees to execute such documents (including, without limitation, amendments to this Agreement and the other Credit Documents) as shall be necessary to effect the foregoing. Promptly following any assignment pursuant to this Section 11.04(b), the assigning Bank shall promptly notify the Borrower and the Administrative Agent thereof. Nothing in this Section 11.04 shall prevent or prohibit any Bank from pledging its Loans or Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. (c) Notwithstanding any other provisions of this Section 11.04, no transfer or assignment of the interests or obligations of any Bank hereunder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Borrower to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any State. (d) Each Bank initially party to this Agreement hereby represents, and each Person that becomes a Bank pursuant to an assignment permitted by clause (b) above will upon its becoming party to this Agreement represent, that it is a commercial lender, other financial institution or other "accredited investor" (as defined in SEC Regulation D) which makes loans in the ordinary course of its business or is acquiring the Loans without a view to distribution of the Loans within the meaning of the federal securities laws, and that it will make or acquire Loans for its own account in the ordinary course of such business, PROVIDED that, subject to the -75- preceding clauses (a) through (c), the disposition of any promissory notes or other evidences of or interests in Indebtedness held by such Bank shall at all times be within its exclusive control. 11.05 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between any Credit Party and the Administrative Agent or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Bank would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Banks to any other or further action in any circumstances without notice or demand. 11.06 PAYMENTS PRO RATA. (a) The Administrative Agent agrees that promptly after its receipt of each payment from or on behalf of the Borrower in respect of any Obligations of the Borrower, it shall distribute such payment to the Banks (other than any Bank that has consented in writing to waive its PRO RATA share of such payment) PRO RATA based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans or Fees, of a sum which with respect to the related sum or sums received by other Banks is in a greater proportion than the total of such Obligation then owed and due to such Bank bears to the total of such Obligation then owed and due to all of the Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the Obligations of the Borrower to such Banks in such amount as shall result in a proportional participation by all of the Banks in such amount, PROVIDED that if all or any portion of such excess amount is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. (c) Notwithstanding anything to the contrary contained herein, the provisions of the preceding Sections 11.06(a) and (b) shall be subject to the express provisions of this Agreement which require, or permit, differing payments to be made to Non-Defaulting Banks as opposed to Defaulting Banks. 11.07 CALCULATIONS; COMPUTATIONS. (a) The financial statements to be furnished to the Banks pursuant hereto shall be made and prepared in accordance with GAAP or SAP, as the case may be, consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks). In addition, -76- except as otherwise specifically provided herein, all computations determining compliance with Section 7, including definitions used therein, shall utilize accounting principles and policies in effect from time to time; PROVIDED that (i) if any such accounting principle or policy (whether GAAP or SAP or both) shall change after the Effective Date, the Borrower shall give reasonable notice thereof to the Administrative Agent and each of the Banks and if within 30 days following such notice the Borrower, the Administrative Agent or the Required Banks shall elect by giving written notice of such election to the other parties hereto, such computations shall not give effect to such change unless and until this Agreement shall be amended pursuant to Section 11.12 to give effect to such change, and (ii) if at any time the computations determining compliance with Section 7 utilize accounting principles different from those utilized in the financial statements then being furnished to the Banks pursuant to Section 6.01, such financial statements shall be accompanied by reconciliation work-sheets. (b) All computations of interest on Eurodollar Loans and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days. (c) All computations of interest on Base Rate Loans hereunder shall be made on the actual number of days elapsed over a year of 365/366 days. 11.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH CREDIT PARTY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH CREDIT PARTY HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK JURISDICTION OVER SUCH CREDIT PARTY, AND AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN ANY OF THE AFORESAID COURTS, THAT ANY SUCH COURT LACKS JURISDICTION OVER SUCH CREDIT PARTY. EACH CREDIT PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH CREDIT PARTY AT ITS ADDRESS FOR NOTICES PURSUANT TO SECTION 11.03, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. EACH CREDIT PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING HEREUNDER OR UNDER ANY OTHER CREDIT DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY WAY -77- INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY CREDIT PARTY IN ANY OTHER JURISDICTION. (b) EACH CREDIT PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (A) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 11.09 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. 11.10 EFFECTIVENESS. This Agreement shall become effective on the date (the "Effective Date") on which the Borrower and each of the Banks shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Administrative Agent at the Administrative Agent's Notice Office or, in the case of the Banks, shall have given to the Administrative Agent telephonic (confirmed in writing), written, telex or telecopy notice (actually received) at such office that the same has been signed and mailed to it. The Administrative Agent will give the Borrower and each Bank prompt written notice of the occurrence of the Effective Date. 11.11 HEADINGS DESCRIPTIVE. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 11.12 AMENDMENT OR WAIVER. Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the respective Credit Parties thereto and the Required Banks, PROVIDED that no such change, waiver, discharge or termination shall, without the consent of each Bank affected thereby (other than a Defaulting Bank), (i) extend any Scheduled Repayment or the scheduled final maturity of any Loan or Note (it being understood that any waiver of the application of any prepayment or the method of application of any prepayment to the amortization of the Loans shall not constitute an extension of any Scheduled Repayment or the scheduled final maturity thereof), or reduce the rate or extend the time of payment of interest thereon or Fees or reduce the principal amount thereof, (ii) increase the Commitments of any Bank over the amount thereof then in effect (it being -78- understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment or mandatory repayment or prepayment shall not constitute a change in the terms of any Commitment of any Bank), (iii) release all or any material portion of the Collateral (except as expressly provided in the Credit Documents), (iv) amend, modify or waive any provision of this Section 11.12, (v) reduce any percentage specified in, or otherwise modify, the definition of Required Banks or (vi) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement. No provision of Section 10 or any other provision relating to the rights and/or obligations of the Administrative Agent may be amended without the consent of the Administrative Agent. 11.13 SURVIVAL. All indemnities set forth herein including, without limitation, in Section 1.10, 1.11, 3.04, 10.07 or 11.01 shall survive the execution and delivery of this Agreement and the making of the Loans, the repayment of the Obligations and the termination of the Total Commitment. 11.14 DOMICILE OF LOANS. Subject to Section 11.04, each Bank may transfer and carry its Loans at, to or for the account of any branch office, subsidiary or affiliate of such Bank, PROVIDED that the Borrower shall not be responsible for costs arising under Section 1.10 or 3.04 resulting from any such transfer to the extent not otherwise applicable to such Bank prior to such transfer. 11.15 CONFIDENTIALITY. Each Bank shall hold all non-public information furnished by or on behalf of the Borrower in connection with such Bank's evaluation of whether to become a Bank hereunder or obtained by such Bank pursuant to the requirements of this Agreement ("Confidential Information") in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking or lending practices; PROVIDED that any Bank and/or its affiliates may disclose any such Confidential Information (a) to their respective affiliates, directors, officers, employees, auditors or counsel for purposes related to the Transaction, PROVIDED that the Bank disclosing such confidential information pursuant to this clause (a) shall remain liable for any non-permitted disclosure of such information by any such employee, director, agent, attorney, accountant or professional advisor, (b) as has become generally available to the public other than as a result of disclosure in violation of this Section 11.15, (c) as has become available to such Bank or any such affiliate on a non-confidential basis from a source other than the Borrower and its affiliates, provided that the source is not known by such Bank to be prohibited from transmitting such information to such Bank by a contractual, legal or fiduciary obligation, (d) as may be required or appropriate in any report, statement or testimony submitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over such Bank and/or its affiliates, (e) as may be required or appropriate in respect to any summons or subpoena or in connection with any litigation or other judicial process (it being understood that, to the extent reasonably practicable under the circumstances, the Borrower shall be given prior notice and an opportunity to contest any proposed disclosure pursuant to this clause (e)), (f) in order to comply with any law, order, regulation or ruling applicable to such Bank and/or its affiliates, and (g) to any permitted prospective or actual syndicate member or participant in the Loans, provided that such prospective or actual syndicate member or participant agrees with the respective assigning Bank -79- to be bound by the provisions of this Section 11.15. The provisions of this Section 11.15 shall survive any termination of this Agreement. 11.16 WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 11.17 TRUST PREFERRED NOTE DOCUMENTS. All Obligations shall be senior in right of payment to the Trust Preferred Notes and shall constitute "Senior Indebtedness" for all purposes of the Trust Preferred Note Documents. * * * -80- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. ADDRESS: 26601 Agoura Road SUPERIOR NATIONAL INSURANCE Calabasas, CA 91302 GROUP, INC. Tel: (818) 878-2240 Fax: (818) 880-8615 Attention: J. Chris Seaman By /s/ J. CHRIS SEAMAN ------------------------------- Title: Executive Vice President & Chief Financial Officer ADDRESS: THE CHASE MANHATTAN BANK, 270 Park Avenue Individually and as Administrative Agent New York, New York 10017 By /s/ LAWRENCE PALUMBO, JR. --------------------------------------- Name: Lawrence Palumbo, Jr. Title: Vice President DRESDNER BANK AG NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: /s/ LLOYD C. STEVENS -------------------------------- Name: Lloyd C. Stevens Title: Vice President By: /s/ RAJIV GUPTA -------------------------------- Name: Rajiv Gupta Title: Associate THE BANK OF NEW YORK By: /s/ BENJAMIN L. BOLKIND -------------------------------- Name: Benjamin L. Bolkind Title: Vice President FIRST UNION NATIONAL BANK By: /s/ GAIL M. GOLIGHTLY -------------------------------- Name: Gail M. Golightly Title: Senior Vice President LASALLE NATIONAL BANK By: /s/ JANET R. GATES -------------------------------- Name: Janet R. Gates Title: First Vice President IMPERIAL BANK By: /s/ EMILY B. WU -------------------------------- Name: Emily B. Wu Title: Vice President UNION BANK OF CALIFORNIA, N.A. By: /s/ JAMES R. FOTHENGILL -------------------------------- Name: James R. Fothengill Title: Vice President EX-10.68 8 EXHIBIT 10.68 SUBSIDIARY GUARANTY GUARANTY, dated as of December 10, 1998 (as amended, modified or supplemented from time to time, this "Guaranty"), made by each of the undersigned guarantors (each, a "Guarantor" and, together with any other entity that becomes a party hereto pursuant to Section 26 hereof, the "Guarantors"). Except as otherwise defined herein, terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : WHEREAS, Superior National Insurance Group, Inc. (the "Borrower"), the financial institutions from time to time party thereto (the "Banks"), and The Chase Manhattan Bank, as Administrative Agent (together with any successor administrative agent, the "Administrative Agent"), have entered into a Credit Agreement, dated as of December 10, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans to the Borrower as contemplated therein (the Banks and the Administrative Agent are herein called the "Bank Creditors"); WHEREAS, the Borrower may from time to time be party to one or more (i) interest rate agreements, interest rate cap agreements, interest rate collar agreements or other similar agreements or arrangements, (ii) foreign exchange contracts, currency swap agreements or similar agreements or arrangements designed to protect against the fluctuations in currency values and/or (iii) other types of hedging agreements from time to time (each such agreement or arrangement with an Other Creditor (as hereinafter defined), an "Interest Rate Protection Agreement or Other Hedging Agreement") with a Bank or an affiliate of a Bank (each such Bank or affiliate, even if the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason, together with such Bank's or affiliate's successors and assigns, collectively, the "Other Creditors," and together with the Bank Creditors, are herein called the "Creditors"); WHEREAS, each Guarantor is a Subsidiary of the Borrower; WHEREAS, it is a condition to the making of Loans to the Borrower under the Credit Agreement that each Guarantor shall have executed and delivered this Guaranty; and WHEREAS, each Guarantor will obtain benefits from the incurrence of Loans by the Borrower under the Credit Agreement and the entering into of Interest Rate Protection Agreements or Other Hedging Agreements and, accordingly, desires to execute this Guaranty in order to satisfy the conditions described in the preceding paragraph and to induce the Banks to make Loans to the Borrower and Other Creditors to enter into Interest Rate Protection Agreements or Other Hedging Agreements with the Borrower; Page 2 NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, each Guarantor hereby makes the following representations and warranties to the Creditors and hereby covenants and agrees with each Creditor as follows: 1. Each Guarantor, jointly and severally, irrevocably and unconditionally guarantees: (i) to the Bank Creditors the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of (x) the principal of and interest on the Notes issued by, and the Loans made to, the Borrower under the Credit Agreement and (y) all other obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities owing by the Borrower to the Bank Creditors under the Credit Agreement (including, without limitation, indemnities, Fees and interest thereon) and the other Credit Documents, whether now existing or hereafter incurred under, arising out of or in connection with the Credit Agreement or any such other credit Document and the due performance and compliance with the terms of the Credit Documents by the Borrower (all such principal, interest, liabilities and obligations under this clause (i), except to the extent consisting of obligations or liabilities with respect to Interest Rate Protection Agreements or Other Hedging Agreements, being herein collectively called the "Credit Document Obligations"); and (ii) to each Other Creditor the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities owing by the Borrower under any Interest Rate Protection Agreements or Other Hedging Agreements, whether now in existence or hereafter arising, and the due performance and compliance by the Borrower with all terms, conditions and agreements contained therein (all such obligations and liabilities being herein collectively called the "Other Obligations", and together with the Credit Document Obligations are herein collectively called the "Guaranteed Obligations"), provided that the maximum amount payable by each Guarantor hereunder shall at no time exceed the Maximum Amount (as hereinafter defined) of such Guarantor. As used herein, "Maximum Amount" of any Guarantor means an amount equal to 95% of the amount by which (i) the present fair saleable value of such Guarantor's assets exceeds (ii) the amount reasonably expected to come due in respect of all liabilities (including, without limitation, contingent liabilities), other than liabilities (contingent or otherwise) of such Guarantor hereunder, in each case determined on the Initial Borrowing Date (or, in the case of a Guarantor that becomes a party hereto pursuant to Section 26 hereof, on the date such Guarantor becomes a party hereto) or (in either case) on the day any demand is made under this Guaranty, whichever date results in a higher Maximum Amount. Subject to the proviso in the second preceding sentence, each Guarantor understands, agrees and confirms that the Creditors may enforce this Guaranty up to the full amount of the Guaranteed Obligations against each Guarantor without proceeding against any other Guarantor, the Borrower, against any security for the Guaranteed Obligations, or under any other guaranty covering all or a portion of the Guaranteed Obligations. All payments by each Guarantor under this Guaranty shall be made on the same basis as payments by the Borrower are made under Sections 3.03 and 3.04 of the Credit Agreement. Page 3 2. Additionally, subject to the Maximum Amount limitation contained in Section 1 above, each Guarantor, jointly and severally, unconditionally and irrevocably, guarantees the payment of any and all Guaranteed Obligations of the Borrower to the Creditors whether or not due or payable by the Borrower upon the occurrence in respect of the Borrower of any of the events specified in Section 8.05 of the Credit Agreement, and unconditionally and irrevocably, jointly and severally, promises to pay such Guaranteed Obligations to the Creditors, or order, on demand, in lawful money of the United States. 3. The liability of each Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Guaranteed Obligations of the Borrower whether executed by such Guarantor, any other Guarantor, any other guarantor or by any other party, and the liability of each Guarantor hereunder shall not be affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Guaranteed Obligations of the Borrower, (c) any payment on or in reduction of any such other guaranty or undertaking, (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower or (e) any payment made to any Creditor on the Guaranteed Obligations which any Creditor repays the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding. 4. The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor, any other guarantor or the Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor, any other guarantor or the Borrower and whether or not any other Guarantor, any other guarantor of the Borrower or the Borrower be joined in any such action or actions. Each Guarantor waives, to the fullest extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to each Guarantor. 5. Each Guarantor hereby waives (to the fullest extent permitted by applicable law) notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives promptness, diligence, presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liabilities, suit or taking of other action by the Administrative Agent or any other Creditor against, and any other notice to, any party liable thereon (including such Guarantor or any other guarantor or the Borrower). 6. Any Creditor may (except as shall be required by applicable statute and cannot be waived) at any time and from time to time without the consent of, or notice to, any Guarantor, without incurring responsibility to such Guarantor, without impairing or releasing the obligations of such Guarantor hereunder, upon or without any terms or conditions and in whole or in part: Page 4 (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew, increase, accelerate or alter, any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, and the guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (b) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (c) exercise or refrain from exercising any rights against the Borrower or others or otherwise act or refrain from acting; (d) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to creditors of the Borrower; (e) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Creditors regardless of what liabilities of the Borrower remain unpaid; (f) consent to or waive any breach of, or any act, omission or default under, any of the Interest Rate Protection Agreements or Other Hedging Agreements, the Credit Documents or any of the instruments or agreements referred to therein, or otherwise amend, modify or supplement any of the Interest Rate Protection Agreements or Other Hedging Agreements, the Credit Documents or any of such other instruments or agreements; and/or (g) act or fail to act in any manner referred to in this Guaranty which may deprive such Guarantor of its right to subrogation against the Borrower to recover full indemnity for any payments made pursuant to this Guaranty. 7. No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty, and this Guaranty shall be primary, absolute and unconditional notwithstanding the occurrence of any event or the existence of any other circumstances which might constitute a legal or equitable discharge of a surety or guarantor except payment in full of the Guaranteed Obligations. 8. This Guaranty is a continuing one and all liabilities to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. No failure or delay on the part of any Creditor in exercising any right, power or privilege Page 5 hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly specified are cumulative and not exclusive of any rights or remedies which any Creditor would otherwise have. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Creditor to any other or further action in any circumstances without notice or demand. It is not necessary for any Creditor to inquire into the capacity or powers of the Borrower or any of its Subsidiaries or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 9. Any indebtedness of the Borrower now or hereafter held by any Guarantor is hereby subordinated to the indebtedness of the Borrower to the Creditors; and such indebtedness of the Borrower to any Guarantor, if the Administrative Agent, after an Event of Default has occurred and is continuing, so requests, shall be collected, enforced and received by such Guarantor as trustee for the Creditors and be paid over to the Creditors on account of the indebtedness of the Borrower to the Creditors, but without affecting or impairing in any manner the liability of such Guarantor under the other provisions of this Guaranty. Prior to the transfer by any Guarantor of any note or negotiable instrument evidencing any indebtedness of the Borrower to such Guarantor, such Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. Without limiting the generality of the foregoing, each Guarantor hereby agrees with the Guaranteed Creditors that it will not exercise any right of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been irrevocably paid in full in cash. 10. (a) Each Guarantor waives any right (except as shall be required by applicable statute or law and cannot be waived) to require the Creditors to: (i) proceed against the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party; (ii) proceed against or exhaust any security held from the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party; or (iii) pursue any other remedy in the Creditors' power whatsoever. Each Guarantor waives (to the fullest extent permitted by applicable law) any defense based on or arising out of any defense of the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party other than payment in full of the Guaranteed Obligations, including, without limitation, any defense based on or arising out of the disability of the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party, or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the Guaranteed Obligations. The Creditors may, at their election, foreclose on any security held by the Administrative Agent, the Collateral Agent or the other Creditors by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Creditors may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Guaranteed Page 6 Obligations have been paid in full. Each Guarantor waives any defense arising out of any such election by the Creditors, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against the Borrower or any other party or any security. (b) Each Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional indebtedness. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which such Guarantor assumes and incurs hereunder, and agrees that the Creditors shall have no duty to advise any Guarantor of information known to them regarding such circumstances or risks. 11. The Creditors agree that this Guaranty may be enforced only by the action of the Administrative Agent or the Collateral Agent, in each case acting upon the instructions of the Required Banks (or, after the date on which all Credit Document Obligations have been paid in full, the holders of at least a majority of the outstanding Other Obligations) and that no other Creditor shall have any right individually to seek to enforce or to enforce this Guaranty or to realize upon the security to be granted by the Security Documents, it being understood and agreed that such rights and remedies may be exercised by the Administrative Agent or the Collateral Agent or the holders of at least a majority of the outstanding Other Obligations, as the case may be, for the benefit of the Creditors in accordance with the terms of this Guaranty and the Security Documents. The Creditors further agree that this Guaranty may not be enforced against any director, officer, employee, partner or stockholder of any Guarantor (except to the extent such stockholder is also a Guarantor hereunder). 12. In order to induce the Banks to make Loans pursuant to the Credit Agreement, and in order to induce the Other Creditors to execute, deliver and perform the Interest Rate Protection Agreements or Other Hedging Agreements, each Guarantor represents, warrants and covenants that: (a) Such Guarantor (i) is a duly organized and validly existing corporation, limited liability company or partnership, as the case may be, and is in good standing (to the extent such concept is relevant in such jurisdiction) under the laws of the jurisdiction of its organization, and has the corporate, limited liability company or partnership, as the case may be, power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (ii) is duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified could reasonably be expected to have a Material Adverse Effect. (b) Such Guarantor has the corporate, limited liability company or partnership, as the case may be, power and authority to execute, deliver and carry out the terms and Page 7 provisions of this Guaranty and each other Credit Document to which it is a party and has taken all necessary corporate, limited liability company or partnership, as the case may be, action to authorize the execution, delivery and performance by it of each such Credit Document. Such Guarantor has duly executed and delivered this Guaranty and each other Credit Document to which it is a party and each such Credit Document constitutes the legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms, except to the extent that the enforceability hereof or thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by equitable principles (regardless of whether enforcement is sought in equity or at law). (c) Neither the execution, delivery or performance by such Guarantor of this Guaranty or any other Credit Document to which it is a party, nor compliance by it with the terms and provisions hereof or thereof (i) will contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Security Documents) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of such Guarantor or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or other material agreement or other material instrument (other than any real property lease in effect on the Initial Borrowing Date) to which such Guarantor or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the certificate of incorporation or by-laws (or equivalent organizational documents) of such Guarantor or any of its Subsidiaries. (d) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (other than in connection with the Security Documents), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of this Guaranty or any other Credit Document to which such Guarantor is a party, or (ii) the legality, validity, binding effect or enforceability of this Guaranty or any other Credit Document to which such Guarantor is a party (other than (x) any such consent, approval, license, authorization, validation, filing or registration required in order for such Guarantor to be in compliance with the Credit Agreement, which such Guarantor will make or obtain when and as required and (y) filings and recordings required to perfect security interests created under the Security Documents, which such Guarantor will make promptly (but in no event more than 10 days) after the time such Guarantor is required to do so). (e) There are no actions, suits or proceedings pending or, to the knowledge of such Guarantor, threatened with respect to such Guarantor (i) that could reasonably be expected to have a Material Adverse Effect or (ii) that could reasonably be expected to have a material adverse effect on the rights or remedies of the Creditors or on the ability Page 8 of such Guarantor to perform its respective obligations to the Creditors hereunder and under the other Credit Documents to which it is a party. 13. Each Guarantor covenants and agrees that on and after the date hereof and until the termination of the Total Commitment and all Interest Rate Protection Agreements or Other Hedging Agreements and when no Note or Loan remains outstanding and all Guaranteed Obligations have been paid in full (other than indemnities described in Section 11.13 of the Credit Agreement and analogous provisions in the Pledge Agreement which are not then due and payable), such Guarantor shall take, or will refrain from taking, as the case may be, all actions that are necessary to be taken or not taken so that no violation of any provision, covenant or agreement contained in Section 6 or 7 of the Credit Agreement, and so that no Default or Event of Default, is caused by the actions of such Guarantor or any of its Subsidiaries. 14. The Guarantors hereby jointly and severally agree to pay all reasonable out-of-pocket costs and expenses of each Creditor in connection with the enforcement of this Guaranty, and of the Administrative Agent in connection with any amendment, waiver or consent relating hereto (including, without limitation, the reasonable fees and disbursements of counsel (including in-house counsel) employed by any of the Creditors or the Administrative Agent, as the case may be). 15. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the Creditors and their successors and assigns. 16. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated except with the written consent of each Guarantor directly affected thereby and either (x) the Required Banks (or to the extent required by Section 11.12 of the Credit Agreement, with the written consent of each Bank) at all times prior to the time on which all Credit Document Obligations have been paid in full or (y) the holders of at least a majority of the outstanding Other Obligations at all times after the time on which all Credit Document Obligations have been paid in full; PROVIDED, that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Creditors (and not all Creditors in a like or similar manner) shall require the written consent of the Requisite Creditors (as defined below) of such Class of Creditors (it being understood that the addition or release of any Guarantor hereunder shall not constitute a change, waiver, discharge or termination affecting any Guarantor other than the Guarantor so added or released). For the purpose of this Guaranty the term "Class" shall mean each class of Creditors, I.E., whether (x) the Bank Creditors as holders of the Credit Document Obligations or (y) the Other Creditors as the holders of the Other Obligations. For the purpose of this Guaranty, the term "Requisite Creditors" of any Class shall mean each of (x) with respect to the Credit Document Obligations, the Required Banks (or all the Banks if required by Section 11.12 of the Credit Agreement) and (y) with respect to the Other Obligations, the holders of at least a majority of all obligations outstanding from time to time under the Interest Rate Protection Agreements or Other Hedging Agreements. 17. Each Guarantor acknowledges that an executed (or conformed) copy of each of the Credit Documents and Interest Rate Protection Agreements or Other Hedging Agreements Page 9 has been made available to its principal executive officers and such officers are familiar with the contents thereof. 18. In addition to any rights now or hereafter granted under applicable law (including, without limitation, Section 151 of the New York Debtor and Creditor Law) and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default (such term to mean and include any "Event of Default" as defined in the Credit Agreement or any payment default under any Interest Rate Protection Agreement or Other Hedging Agreement continuing after any applicable grace period), each Creditor is hereby authorized at any time or from time to time, without notice to any Guarantor or to any other Person, any such notice being expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Creditor to or for the credit or the account of such Guarantor, against and on account of the obligations and liabilities of such Guarantor to such Creditor under this Guaranty, irrespective of whether or not such Creditor shall have made any demand hereunder and although said obligations, liabilities, deposits or claims, or any of them, shall be contingent or unmatured. 19. All notices, requests, demands or other communications pursuant hereto shall be deemed to have been duly given or made when delivered to the Person to which such notice, request, demand or other communication is required or permitted to be given or made under this Guaranty, addressed to such party at (i) in the case of any Bank Creditor, as provided in the Credit Agreement, (ii) in the case of any Guarantor, at 26601 Agoura Road, Calabasas, California 91302, Attention: General Counsel, Telephone No.: (818) 880-1600, Telecopier No.: (818) 880-8615 and (iii) in the case of any Other Creditor, at such address as such Other Creditor shall have specified in writing to the Guarantor; or in any case at such other address as any of the Persons listed above may hereafter notify the others in writing. 20. If claim is ever made upon any Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of the aforesaid payees repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such payee or any of its property or (ii) any settlement or compromise of any such claim effected by such payee with any such claimant (including the Borrower), then and in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon such Guarantor, notwithstanding any revocation hereof or other instrument evidencing any liability of the Borrower, and such Guarantor shall be and remain liable to the aforesaid payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such payee. 21. (a) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE CREDITORS AND OF THE UNDERSIGNED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Guaranty or any other Credit Document to which such Guarantor is a party may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, Page 10 and, by execution and delivery of this Guaranty, each Guarantor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor hereby further irrevocably waives any claim that any such courts lack jurisdiction over such Guarantor, and agrees not to plead or claim, in any legal action or proceeding with respect to this Guaranty or any other Credit Document to which such Guarantor is a party brought in any of the aforesaid courts, that any such court lacks jurisdiction over such Guarantor. Each Guarantor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to each Guarantor at its address set forth in Section 19, such service to become effective 30 days after such mailing. Each Guarantor hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other Credit Document to which such Guarantor is a party that service of process was in any way invalid or ineffective. Nothing herein shall affect the right of any of the Creditors to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against each Guarantor in any other jurisdiction. (b) Each Guarantor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Guaranty or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that such action or proceeding brought in any such court has been brought in an inconvenient forum. 22. In the event that all of the equity interests of one or more Guarantors is sold or otherwise disposed of or liquidated in compliance with the requirements of Section 7.02 of the Credit Agreement (or such sale or other disposition or liquidation has been approved in writing by the Required Banks (or all Banks if required by Section 11.12 of the Credit Agreement)) and the proceeds of such sale, disposition or liquidation are applied in accordance with the provisions of the Credit Agreement, to the extent applicable, such Guarantor shall be released from this Guaranty and this Guaranty shall, as to each such Guarantor or Guarantors, terminate, and have no further force or effect (it being understood and agreed that the sale of one or more Persons that own, directly or indirectly, all of the equity interests of any Guarantor shall be deemed to be a sale of such Guarantor for the purposes of this Section 22). 23. This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. 24. EACH GUARANTOR AND EACH OF THE CREDITORS HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS Page 11 GUARANTY, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 25. All payments made by any Guarantor hereunder will be made without setoff, counterclaim or other defense. 26. It is understood and agreed that any Subsidiary of the Borrower that is required to execute a counterpart of this Guaranty after the date hereof pursuant to Section 7.15 of the Credit Agreement shall automatically become a Guarantor hereunder by executing a counterpart hereof and delivering the same to the Administrative Agent. * * * IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed and delivered as of the date first above written. SUPERIOR PACIFIC INSURANCE GROUP, INC., as a Pledgor By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer BUSINESS INSURANCE GROUP, INC., as a Pledgor By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Vice President PACIFIC INSURANCE BROKERAGE, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer INFONET MANAGEMENT SYSTEMS, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer SN INSURANCE SERVICES, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer SN INSURANCE ADMINISTRATORS, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer THE CHASE MANHATTAN BANK, as Administrative Agent By: /s/ LAWRENCE PALUMBO, JR. ------------------------------- Name: Lawrence Palumbo, Jr. Title: Vice President EX-10.69 9 EXHIBIT 10.69 PLEDGE AGREEMENT PLEDGE AGREEMENT, dated as of December 10, 1998 (as same may be amended, amended and restated, modified or supplemented from time to time, this "Agreement"), made by Superior National Insurance Group, Inc. (the "Borrower"), the Subsidiary Guarantors (as defined in the Credit Agreement referred to below) and each other Subsidiary of the Borrower that is required to execute a counterpart hereof pursuant to Section 25 of this Agreement, (the "Pledgors", and each, a "Pledgor"), and The Chase Manhattan Bank, not in its individual capacity but solely as Collateral Agent (including any successor collateral agent, the "Pledgee") for the benefit of (x) the Banks and the Administrative Agent under, and any other lenders from time to time party to, the Credit Agreement hereinafter referred to (such Banks, the Administrative Agent and other lenders, if any, are hereinafter called the "Bank Creditors") and (y) if The Chase Manhattan Bank, in its individual capacity ("Chase") and/or any Bank or any Affiliate of a Bank enters into one or more interest rate agreements relating to the Loans (including, without limitation, interest rate swaps, caps, floors, collars and similar agreements) (collectively, the "Interest Rate Agreements") with, or guaranteed by, any of the Pledgors, Chase, any such Bank or Banks or a syndicate of financial institutions organized by Chase or an affiliate of Chase (even if Chase or the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason), so long as any such Bank or Affiliate participates in the extension of such Interest Rate Agreements, and their subsequent assigns, if any (collectively, the "Interest Rate Creditors", and the Interest Rate Creditors together with the Bank Creditors, are hereinafter called the "Secured Creditors"). Except as otherwise defined herein, terms used herein and defined in the Credit Agreement shall be used herein as so defined. W I T N E S S E T H: WHEREAS, the Borrower, the financial institutions from time to time party thereto (the "Banks") and The Chase Manhattan Bank, as Administrative Agent (in its capacity as Administrative Agent, being herein referred to as the "Administrative Agent") have entered into a Credit Agreement, dated as of December 10, 1998, providing for the making of Loans to the Borrower (as used herein, the term "Credit Agreement" means the Credit Agreement described above in this paragraph, as the same may be amended, amended and restated, modified or supplemented from time to time, and including any successor agreement extending the maturity of, or restructuring (including, but not limited to, the inclusion of additional borrowers thereunder that are Subsidiaries of the Borrower and whose obligations are guaranteed by the Borrower thereunder or any increase in the amount borrowed) of all or any portion of the Indebtedness under such agreement or any successor agreements); WHEREAS, the Borrower may from time to time be party to one or more Interest Rate Agreements with the Interest Rate Creditors; WHEREAS, pursuant to a Subsidiary Guaranty, dated as of December 10, 1998 (as amended, amended and restated, modified or supplemented from time to time, the "Subsidiary Guaranty"), each Pledgor (other than the Borrower) has jointly and severally Page 2 guaranteed to the Secured Creditors the payment when due of all obligations and liabilities of the Borrower under or with respect to the Credit Documents and the Interest Rate Agreements; WHEREAS, it is a condition precedent to the making of Loans to the Borrower under the Credit Agreement that each Pledgor shall have executed and delivered to the Pledgee this Agreement; and WHEREAS, each Pledgor will obtain benefits from the incurrence of Loans by the Borrower and the Borrower's entering into Interest Rate Agreements and, accordingly, desires to execute this Agreement in order to satisfy the conditions precedent described in the preceding paragraph and to induce the Banks to make Loans to the Borrower and to induce the Interest Rate Creditors to enter into Interest Rate Agreements with the Borrower; NOW, THEREFORE, in consideration of the benefits accruing to each Pledgor, the receipt and sufficiency of which are hereby acknowledged, each Pledgor hereby makes the following representations and warranties to the Pledgee and hereby covenants and agrees with the Pledgee as follows: 1. SECURITY FOR OBLIGATIONS. This Agreement is made by each Pledgor for the benefit of the Secured Creditors to secure: (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including, without limitation, indemnities, Fees and interest thereon) of such Pledgor owing to the Bank Creditors, whether now existing or hereafter incurred under, arising out of, or in connection with the Credit Agreement and the other Credit Documents to which such Pledgor is a party (including all such obligations, liabilities and indebtedness under the Subsidiary Guaranty to which such Pledgor is a party) and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained in the Credit Agreement and such other Credit Documents (all such obligations, liabilities and indebtedness under this clause (i), except to the extent guaranteeing obligations of the Borrower under Interest Rate Agreements, being herein collectively called the "Credit Agreement Obligations"); (ii) the full and prompt payment when due (whether at stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including, without limitation, indemnities, fees and interest thereon) of such Pledgor owing to the Interest Rate Creditors, now existing or hereafter incurred under, arising out of or in connection with any Interest Rate Agreement, whether such Interest Rate Agreement is now in existence or hereinafter arising, and the due performance and compliance with the terms, conditions and agreements of each such Interest Rate Agreement by such Pledgor including, in the case of Pledgors other than the Borrower, all obligations liabilities and indebtedness under the Subsidiary Guaranty in respect of the Interest Rate Agreements, and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained in each such Interest Rate Agreement (all such Page 3 obligations, liabilities and indebtedness under this clause (ii) being herein collectively called the "Interest Rate Obligations"); (iii) any and all sums advanced by the Pledgee in order to preserve the Collateral (as hereinafter defined) and/or preserve its security interest therein; (iv) in the event of any proceeding for the collection of the Obligations (as defined below) or the enforcement of this Agreement, after an Event of Default (such term, as used in this Agreement, shall mean any Event of Default under, and as defined in, the Credit Agreement or any payment default under any Interest Rate Agreement and shall in any event include, without limitation, any payment default (after the expiration of any applicable grace period) on any of the Obligations (as defined below)) shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Pledgee of its rights hereunder, together with reasonable attorneys' fees and court costs; and (v) all amounts paid by any Indemnitee to which such Indemnitee has the right to reimbursement under Section 11 of this Agreement. all such obligations, liabilities, indebtedness, sums and expenses set forth in clauses (i) through (v) of this Section 1 being collectively called the "Obligations", it being acknowledged and agreed that the "Obligations" shall include extensions of credit of the types described above, whether outstanding on the date of this Agreement or extended from time to time after the date of this Agreement. 2. DEFINITIONS; ANNEXES. (a) Unless otherwise defined herein, all capitalized terms used herein and defined in the Credit Agreement shall be used herein as therein defined. Reference to singular terms shall include the plural and vice versa. (b) The following capitalized terms used herein shall have the definitions specified below: "ADMINISTRATIVE AGENT" has the meaning set forth in the Recitals hereto. "ADVERSE CLAIM" has the meaning given such term in Section 8-102(a)(1) of the UCC. "AGREEMENT" has the meaning set forth in the first paragraph hereof. "BANK CREDITORS" has the meaning set forth in the first paragraph hereof. "BANKS" has the meaning set forth in the Recitals hereto. "CERTIFICATED SECURITY" has the meaning given such term in Section 8-102(a)(4) of the UCC. Page 4 "CLEARING CORPORATION" has the meaning given such term in Section 8-102(a)(5) of the UCC. "COLLATERAL" has the meaning set forth in Section 3.1 hereof. "COLLATERAL ACCOUNTS" means any and all accounts established and maintained by the Pledgee in the name of any Pledgor to which Collateral may be credited. "CREDIT AGREEMENT" has the meaning set forth in the Recitals hereto. "CREDIT AGREEMENT OBLIGATIONS" has the meaning set forth in Section 1 hereof. "EVENT OF DEFAULT" has the meaning set forth in Section 1 hereof. "FINANCIAL ASSET" has the meaning given such term in Section 8-102(a)(9) of the UCC. "INDEMNITEES" has the meaning set forth in Section 11 hereof. "INSTRUMENT" has the meaning given such term in Section 9-105(1)(i) of the UCC. "INTEREST RATE AGREEMENTS" has the meaning set forth in the first paragraph hereof. "INTEREST RATE OBLIGATIONS" has the meaning set forth in Section 1 hereof. "INVESTMENT PROPERTY" has the meaning given such term in Section 9-115(f) of the UCC. "LIMITED LIABILITY COMPANY ASSETS" means all assets, whether tangible or intangible and whether real, personal or mixed (including, without limitation, all limited liability company capital and interest in other limited liability companies), at any time owned or represented by any Limited Liability Company Interest. "LIMITED LIABILITY COMPANY INTERESTS" means the entire limited liability company membership interest at any time owned by any Pledgor in any limited liability company which is a Subsidiary. "NOTES" means (x) all intercompany notes at any time issued to each Pledgor and (y) all surplus notes at any time issued to, or held by, each Pledgor. "OBLIGATIONS" has the meaning set forth in Section 1 hereof. "PARTNERSHIP ASSETS" means all assets, whether tangible or intangible and whether real, personal or mixed (including, without limitation, all partnership capital and interest in other partnerships), at any time owned or represented by any Partnership Interest. Page 5 "PARTNERSHIP INTEREST" means the entire general partnership interest or limited partnership interest at any time owned by any Pledgor in any general partnership or limited partnership, in each case which is a Subsidiary. "PLEDGED NOTES" has the meaning set forth in Section 3.5 hereof. "PLEDGEE" has the meaning set forth in the first paragraph hereof. "PLEDGOR" has the meaning set forth in the first paragraph hereof. "PROCEEDS" has the meaning given such term in Section 9-306(l) of the UCC. "REQUIRED BANKS" has the meaning given such term in the Credit Agreement. "SECURED CREDITORS" has the meaning set forth in the first paragraph hereof. "SECURED DEBT AGREEMENTS" has the meaning set forth in Section 5 hereof. "SECURITIES ACCOUNT" has the meaning given such term in Section 8-501(a) of the UCC. "SECURITIES ACT" means the Securities Act of 1933, as amended, as in effect from time to time. "SECURITY" and "SECURITIES" means all Stock and Notes. "SECURITY ENTITLEMENT" has the meaning given such term in Section 8-102(a)(17) of the UCC. "STOCK" means all of the issued and outstanding shares of capital stock or other ownership interests of any Subsidiary at any time owned by any Pledgor. "TERMINATION DATE" has the meaning set forth in Section 19 hereof. "UCC" means the Uniform Commercial Code as in effect in the State of New York from time to time; PROVIDED that all references herein to specific sections or subsections of the UCC are references to such sections or subsections, as the case may be, of the Uniform Commercial Code as in effect in the State of New York on the date hereof. "UNCERTIFICATED SECURITY" has the meaning given such term in Section 8-102(a)(18) of the UCC. 3. PLEDGE OF SECURITY INTEREST, ETC. 3.1 PLEDGE. To secure the Obligations now or hereafter owed or to be performed by such Pledgor, each Pledgor does hereby grant, pledge and assign to the Pledgee for the benefit of the Secured Creditors, and does hereby create a continuing security interest (subject to those Page 6 Liens permitted to exist with respect to the Collateral pursuant to the terms of all Secured Debt Agreements then in effect) in favor of the Pledgee for the benefit of the Secured Creditors in, all of the right, title and interest in and to the following, whether now existing or hereafter from time to time acquired (collectively, the "Collateral"): (a) each of the Collateral Accounts, including any and all assets of whatever type or kind deposited by such Pledgor in such Collateral Account, whether now owned or hereafter acquired, existing or arising, including, without limitation, all Financial Assets, Investment Property, moneys, checks, drafts, Instruments, Securities or interests therein of any type or nature deposited or required by the Credit Agreement or any other Secured Debt Agreement to be deposited in such Collateral Account, and all investments and all certificates and other Instruments (including depository receipts, if any) from time to time representing or evidencing the same, and all dividends, interest, distributions, cash and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing; (b) all Securities of such Pledgor from time to time; (c) all Limited Liability Company Interests of such Pledgor from time to time and all of its right, title and interest in each limited liability company to which each such interest relates, whether now existing or hereafter acquired, including, without limitation: (A) all the capital thereof and its interest in all profits, losses, Limited Liability Company Assets and other distributions to which such Pledgor shall at any time be entitled in respect of such Limited Liability Company Interests; (B) all other payments due or to become due to such Pledgor in respect of Limited Liability Company Interests, whether under any limited liability company agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (C) all of its claims, rights, powers, privileges, authority, options, security interests, liens and remedies, if any, under any limited liability company agreement or operating agreement, or at law or otherwise in respect of such Limited Liability Company Interests; (D) all present and future claims, if any, of such Pledgor against any such limited liability company for moneys loaned or advanced, for services rendered or otherwise; (E) all of such Pledgor's rights under any limited liability company agreement or operating agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of such Pledgor relating to such Limited Liability Company Interests, including any power to terminate, cancel or modify any limited liability company agreement or operating agreement, to Page 7 execute any instruments and to take any and all other action on behalf of and in the name of any of such Pledgor in respect of such Limited Liability Company Interests and any such limited liability company, to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing or for any Limited Liability Company Asset, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing; and (F) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; (d) all Partnership Interests of such Pledgor from time to time and all of its right, title and interest in each partnership to which each such interest relates, whether now existing or hereafter acquired, including, without limitation: (A) all the capital thereof and its interest in all profits, losses, Partnership Assets and other distributions to which such Pledgor shall at any time be entitled in respect of such Partnership Interests; (B) all other payments due or to become due to such Pledgor in respect of Partnership Interests, whether under any partnership agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (C) all of its claims, rights, powers, privileges, authority, options, security interests, liens and remedies, if any, under any partnership agreement or operating agreement, or at law or otherwise in respect of such Partnership Interests; (D) all present and future claims, if any, of such Pledgor against any such partnership for moneys loaned or advanced, for services rendered or otherwise; (E) all of such Pledgor's rights under any partnership agreement or operating agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of such Pledgor relating to such Partnership Interests, including any power to terminate, cancel or modify any partnership agreement or operating agreement, to execute any instruments and to take any and all other action on behalf of and in the name of any of such Pledgor in respect of such Partnership Interests and any such partnership, to make determinations, to exercise any election (including, but not limited to, election of remedies) or option Page 8 or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing or for any Partnership Asset, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing (with all of the foregoing rights only to be exercisable upon the occurrence and during the continuation of an Event of Default); and (F) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and (e) all Proceeds of any and all of the foregoing. Nothing in this Agreement is to be construed as a pledge of any tangible or intangible asset or right of a Regulated Insurance Company, however, this Agreement includes the pledge of capital stock of each Regulated Insurance Company. [Notwithstanding anything to the contrary contained herein (i) SNIG is not pledging any capital stock of SNCHC or its general partnership interest in SNAC and (ii) SNCHC is not pledging its general partnership interest in SNAC.] 3.2 PROCEDURES. (a) To the extent that any Pledgor at any time or from time to time owns, acquires or obtains any right, title or interest in any Collateral, such Collateral shall automatically (and without the taking of any action by the respective Pledgor) be pledged pursuant to Section 3.1 of this Agreement and, in addition thereto, such Pledgor shall (to the extent provided below) take the following actions as set forth below (as promptly as practicable and, in any event, within 10 days after it obtains such Collateral) for the benefit of the Pledgee and the Secured Creditors: (i) with respect to a Certificated Security (other than a Certificated Security credited on the books of a Clearing Corporation), the respective Pledgor shall physically deliver such Certificated Security to the Pledgee, endorsed to the Pledgee or endorsed in blank; (ii) with respect to an Uncertificated Security (other than an Uncertificated Security credited on the books of a Clearing Corporation), the respective Pledgor shall cause the issuer of such Uncertificated Security to duly authorize and execute, and deliver to the Pledgee, an agreement for the benefit of the Pledgee and the Secured Creditors substantially in the form of Annex G hereto (appropriately completed to the satisfaction of the Pledgee and with such modifications, if any, as shall be satisfactory to the Pledgee) pursuant to which such issuer agrees to comply with any and all instructions originated by the Pledgee without further consent by the registered owner and not to comply with instructions regarding such Uncertificated Security (and any Partnership Interests and Page 9 Limited Liability Company Interests issued by such issuer) originated by any other Person other than a court of competent jurisdiction; (iii) with respect to a Certificated Security, Uncertificated Security, Partnership Interest or Limited Liability Company Interest credited on the books of a Clearing Corporation (including a Federal Reserve Bank, Participants Trust Company or The Depository Trust Company), the respective Pledgor shall promptly notify the Pledgee thereof and shall promptly take all actions required (i) to comply with the applicable rules of such Clearing Corporation and (ii) to perfect the security interest of the Pledgee under applicable law (including, in any event, under Sections 9-115 (4)(a) and (b), 9-115 (1)(e) and 8-106 (d) of the UCC). The Pledgor further agrees to take such actions as the Pledgee deems necessary or desirable to effect the foregoing; (iv) with respect to a Partnership Interest or a Limited Liability Company Interest (other than a Partnership Interest or Limited Liability Interest credited on the books of a Clearing Corporation), (1) if such Partnership Interest or Limited Liability Company Interest is represented by a certificate, the procedure set forth in Section 3.2(a)(i), and (2) if such Partnership Interest or Limited Liability Company Interest is not represented by a certificate, the procedure set forth in Section 3.2(a)(ii); (v) with respect to any Note, physical delivery of such Note to the Pledgee, endorsed to the Pledgee or endorsed in blank; and (vi) with respect to cash, to the extent not otherwise provided in the Security Agreement, (i) establishment by the Pledgee of a cash account in the name of such Pledgor over which the Pledgee shall have exclusive and absolute control and dominion (and no withdrawals or transfers may be made therefrom by any Person except with the prior written consent of the Pledgee) and (ii) deposit of such cash in such cash account. (b) In addition to the actions required to be taken pursuant to preceding Section 3.2(a), each Pledgor shall take the following additional actions with respect to the Securities and Collateral (as defined below): (i) with respect to all Collateral of such Pledgor whereby or with respect to which the Pledgee may obtain "control" thereof within the meaning of Section 8-106 of the UCC (or under any provision of the UCC as same may be amended or supplemented from time to time, or under the laws of any relevant State other than the State of New York), the respective Pledgor shall take all actions as may be requested from time to time by the Pledgee so that "control" of such Collateral is obtained and at all times held by the Pledgee; and (ii) each Pledgor shall from time to time cause appropriate financing statements (on Form UCC-1 or other appropriate form) under the Uniform Commercial Code as in effect in the various relevant States, on form covering all Collateral hereunder (with the form of such financing statements to be satisfactory to the Pledgee), to be filed in the Page 10 relevant filing offices so that at all times the Pledgee has a security interest in all Collateral that is Investment Property, which is perfected by the filing of such financing statements (in each case to the maximum extent perfection by filing may be obtained under the laws of the relevant States, including, without limitation, Section 9-115(4)(b) of the UCC). 3.3 SUBSEQUENTLY ACQUIRED COLLATERAL. If any Pledgor shall acquire (by purchase, stock dividend or otherwise) any additional Collateral at any time or from time to time after the date hereof, such Collateral shall automatically (and without any further action being required to be taken) be subject to the pledge and security interests created pursuant to Section 3.1 and, furthermore, the Pledgor will promptly thereafter take (or cause to be taken) all action with respect to such Collateral in accordance with the procedures set forth in Section 3.2, and will promptly thereafter deliver to the Pledgee (i) a certificate executed by a principal executive officer of such Pledgor describing such Collateral and certifying that the same has been duly pledged in favor of the Pledgee (for the benefit of the Secured Creditors) hereunder and (ii) supplements to Annexes A through F hereto as are necessary to cause such annexes to be complete and accurate at such time. 3.4 TRANSFER TAXES. Each pledge of Collateral under Section 3.1 or Section 3.3 shall be accompanied by any transfer tax stamps required in connection with the pledge of such Collateral. 3.5 DEFINITION OF PLEDGED NOTES. All Notes at any time pledged or required to be pledged hereunder are hereinafter called the "Pledged Notes". 3.6 CERTAIN REPRESENTATIONS AND WARRANTIES REGARDING THE COLLATERAL. Each Pledgor represents and warrants that on the date hereof (i) each Subsidiary of such Pledgor, and the direct ownership thereof, is listed in Annex A hereto; (ii) the Stock held by such Pledgor consists of the number and type of shares of the stock of the corporations as described in Annex B hereto; (iii) such Stock constitutes that percentage of the issued and outstanding capital stock of the issuing corporation as is set forth in Annex B hereto; (iv) the Notes held by such Pledgor consist of the promissory notes described in Annex C hereto where such Pledgor is listed as the lender; (v) the Limited Liability Company Interests held by such Pledgor consist of the number and type of interests of the Persons described in Annex D hereto; (vi) each such Limited Liability Company Interest constitutes that percentage of the issued and outstanding equity interest of the issuing Person as set forth in Annex D hereto; (vii) the Partnership Interests held by such Pledgor consist of the number and type of interests of the Persons described in Annex E hereto; (viii) each such Partnership Interest constitutes that percentage or portion of the entire partnership interest of the Partnership as set forth in Annex E hereto; (ix) the Pledgor has complied with the respective procedure set forth in Section 3.2(a) with respect to each item of Collateral described in Annexes A through E hereto; and (x) on the date hereof, such Pledgor owns no other Securities, Limited Liability Company Interests or Partnership Interests. 4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. The Pledgee shall have the right to appoint one or more sub-agents for the purpose of retaining physical Page 11 possession of the Collateral, which may be held (in the discretion of the Pledgee) in the name of the relevant Pledgor, endorsed or assigned in blank or in favor of the Pledgee or any nominee or nominees of the Pledgee or a sub-agent appointed by the Pledgee. 5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until there shall have occurred and be continuing an Event of Default (or a Default under Section 8.05 of the Credit Agreement), each Pledgor shall be entitled to exercise all voting rights attaching to any and all Collateral owned by it, and to give consents, waivers or ratifications in respect thereof PROVIDED that no vote shall be cast or any consent, waiver or ratification given or any action taken which would violate, result in breach of any covenant contained in, or be inconsistent with, any of the terms of this Agreement, the Credit Agreement, any other Credit Document or any Interest Rate Agreement (collectively, the "Secured Debt Agreements"), or which would have the effect of impairing the value of the Collateral or any part thereof or the position or interests of the Pledgee or any Secured Creditor therein. All such rights of a Pledgor to vote and to give consents, waivers and ratifications shall cease in case an Event of Default (or a Default under Section 8.05 of the Credit Agreement) shall occur and be continuing and Section 7 hereof shall become applicable. 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an Event of Default (or a Default under Section 8.05 of the Credit Agreement) shall have occurred and be continuing, all cash dividends, cash distributions, cash Proceeds and other cash amounts payable in respect of the Collateral shall be paid to the respective Pledgor. Subject to Section 3.2 hereof, the Pledgee shall be entitled to receive directly, and to retain as part of the Collateral: (i) all other or additional stock, notes, limited liability company interests, partnership interests, instruments or other securities or property (including, but not limited to, cash dividends other than as set forth above) paid or distributed by way of dividend or otherwise in respect of the Collateral; (ii) all other or additional stock, notes, limited liability company interests, partnership interests, instruments or other securities or property (including, but not limited to, cash) paid or distributed in respect of the Collateral by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (iii) all other or additional stock, notes, limited liability company interests, partnership interests, instruments or other securities or property (including, but not limited to, cash) which may be paid in respect of the Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization. Nothing contained in this Section 6 shall limit or restrict in any way the Pledgee's right to receive the proceeds of the Collateral in any form in accordance with Section 3 of this Agreement. All dividends, distributions or other payments which are received by the respective Pledgor contrary to the provisions of this Section 6 or Section 7 shall be received in trust for the benefit of the Pledgee, shall be segregated from other property or funds of such Pledgor and shall be forthwith Page 12 paid over to the Pledgee as Collateral in the same form as so received (with any necessary endorsement). 7. REMEDIES IN CASE OF AN EVENT OF DEFAULT OR CERTAIN DEFAULTS. In case an Event of Default shall have occurred and be continuing, the Pledgee shall be entitled to exercise all of the rights, powers and remedies (whether vested in it by this Agreement or by any other Secured Debt Agreement or by law) for the protection and enforcement of its rights in respect of the Collateral, including, without limitation, all the rights and remedies of a secured party upon default under the Uniform Commercial Code of the State of New York, and the Pledgee shall be entitled, without limitation, to exercise any or all of the following rights, which each Pledgor hereby agrees to be commercially reasonable: (i) to receive all amounts payable in respect of the Collateral otherwise payable under Section 6 to such Pledgor; (ii) to transfer all or any part of the Collateral into the Pledgee's name or the name of its nominee or nominees; (iii) to accelerate any Pledged Note which may be accelerated in accordance with its terms, and take any other lawful action to collect upon any Pledged Note (including, without limitation, to make any demand for payment thereon); (iv) to vote all or any part of the Collateral (whether or not transferred into the name of the Pledgee) and give all consents, waivers and ratifications in respect of the Collateral and otherwise act with respect thereto as though it were the outright owner thereof (each Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney-in-fact of such Pledgor, with full power of substitution to do so); (v) at any time or from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Collateral, or any interest therein, at any public or private sale, without demand of performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or to redeem or otherwise (all of which are hereby waived by each Pledgor), for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Pledgee in its absolute discretion may determine; PROVIDED that at least 10 days' notice of the time and place of any such sale shall be given to such Pledgor. The Pledgee shall not be obligated to make such sale of Collateral regardless of whether any such notice of sale has theretofore been given. Each purchaser at any such sale shall hold the property so sold absolutely free from any claim or right on the part of each Pledgor, and each Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral, whether before or after sale hereunder, all rights, if any, of marshaling the Collateral and any other security for the Obligations or otherwise, and all rights, if any, of stay and/or appraisal which it now has or may at any time in the future have under rule of law or statute now existing or hereafter enacted. At any such sale, unless prohibited by applicable law, the Page 13 Pledgee on behalf of all Secured Creditors (or certain of them) may bid for and purchase (by bidding in Obligations or otherwise) all or any part of the Collateral so sold free from any such right or equity of redemption. Neither the Pledgee nor any Secured Creditor shall be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto; and (vi) to set-off any and all Collateral against any and all Obligations, and to withdraw any and all cash or other Collateral from any and all Collateral Accounts and to apply such cash and other Collateral to the payment of any and all Obligations; provided that, upon the occurrence of a Default under Section 8.05 of the Credit Agreement, the Pledgee may exercise the rights specified in clause (i) above. Any and all remedies and rights notwithstanding, in the event of default and acceleration of the Obligations hereunder and under the Credit Agreement, neither the Collateral Agent nor any Secured Creditor shall vote, sell, or in any manner exercise control as to any Regulated Insurance Company pledged as Collateral without first filing for and obtaining written prior approval pursuant to California Insurance Code Section 1215.2. 8. REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of the Pledgee provided for in this Agreement or any other Secured Debt Agreement, or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by the Pledgee or any Secured Creditor of any one or more of the rights, powers or remedies provided for in this Agreement or any other Secured Debt Agreement or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Pledgee or any Secured Creditor of all such other rights, powers or remedies, and no failure or delay on the part of the Pledgee or any Secured Creditor to exercise any such right, power or remedy shall operate as a waiver thereof. Unless otherwise required by the Credit Documents, no notice to or demand on any Pledgor in any case shall entitle such Pledgor to any other or further notice or demand in similar other circumstances or constitute a waiver of any of the rights of the Pledgee or any Secured Creditor to any other or further action in any circumstances without demand or notice. The Secured Creditors agree that this Agreement may be enforced only by the action of the Pledgee, acting upon the instructions of the Required Banks (or, after the date on which all Credit Agreement Obligations have been paid in full, the holders of at least a majority of the Interest Rate Obligations) and that no other Secured Creditor shall have any right individually to seek to enforce or to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be exercised by the Pledgee or the holders of at least a majority of the Interest Rate Obligations, as the case may be, for the benefit of the Secured Creditors upon the terms of this Agreement and the other Credit Documents. 9. APPLICATION OF PROCEEDS. (a) All moneys collected by the Pledgee upon any sale or other disposition of the Collateral pursuant to the terms of this Agreement, together with all other moneys received by the Pledgee hereunder, shall be applied as follows: Page 14 (i) first, to the payment of all Obligations owing the Pledgee of the type provided in clauses (iii) and (iv) of the definition of Obligations contained in Section 1 hereof; (ii) second, to the extent proceeds remain after the application pursuant to the preceding clause (i), an amount equal to the outstanding Obligations shall be paid to the Secured Creditors as provided in Section 9(c) hereof with each Secured Creditor receiving an amount equal to its outstanding Obligations or, if the proceeds are insufficient to pay in full all such Obligations, its Pro Rata Share (as defined below) of the amount remaining to be distributed; and (iii) third, to the extent proceeds remain after the application pursuant to the preceding clauses (i) and (ii) and following the termination of this Agreement pursuant to Section 19 hereof, to the relevant Pledgor or, to the extent directed by such Pledgor or a court of competent jurisdiction, to whomever may be lawfully entitled to receive such surplus. (b) For purposes of this Agreement, "Pro Rata Share" shall mean, when calculating a Secured Creditor's portion of any distribution or amount, that amount (expressed as a percentage) equal to a fraction the numerator of which is the then unpaid amount of such Secured Creditor's Obligations and the denominator of which is the then outstanding amount of all Obligations. (c) All payments required to be made to the Bank Creditors hereunder shall be made to the Administrative Agent under the Credit Agreement for the account of the Bank Creditors and all payments required to be made to the Interest Rate Creditors hereunder shall be made directly to the respective Interest Rate Creditors. (d) For purposes of applying payments received in accordance with this Section 9, the Pledgee shall be entitled to rely upon (i) the Administrative Agent under the Credit Agreement and (ii) the Interest Rate Creditors for a determination (which the Administrative Agent, each Interest Rate Creditor and the Secured Creditors agree (or shall agree) to provide upon request of the Collateral Agent) of the outstanding Obligations owed to the Bank Creditors or the Interest Rate Creditors, as the case may be. Unless it has actual knowledge (including by way of written notice from a Bank Creditor or an Interest Rate Creditor) to the contrary, the Administrative Agent under the Credit Agreement, in furnishing information pursuant to the preceding sentence, and the Collateral Agent, in acting hereunder, shall be entitled to assume that (x) no Credit Agreement Obligations other than principal, interest and regularly accruing fees are owing to any Bank Creditor and (y) no Interest Rate Agreement, or Interest Rate Obligations in respect thereof, are in existence. (e) It is understood and agreed that the Pledgors shall remain liable to the extent of any deficiency between the amount of the proceeds of the Collateral hereunder and the aggregate amount of the Obligations. Page 15 10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the Pledgee hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or nonapplication thereof. 11. INDEMNITY. Each Pledgor jointly and severally agrees (i) to indemnify and hold harmless the Pledgee, each Secured Creditor and their respective successors, assigns, employees, agents and servants (individually an "Indemnitee", and collectively, the "Indemnitees") from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and (ii) to reimburse each Indemnitee for all reasonable costs and expenses, including reasonable attorneys' fees, in each case arising out of or resulting from this Agreement or the exercise by any Indemnitee of any right or remedy granted to it hereunder or under any other Secured Debt Agreement (but excluding any claims, demands, losses, judgments and liabilities (including liabilities for penalties) or expenses of whatsoever kind or nature to the extent incurred or arising by reason of gross negligence or willful misconduct of such Indemnitee). In no event shall any Indemnitee hereunder be liable, in the absence of gross negligence or willful misconduct on its part, for any matter or thing in connection with this Agreement other than to account for monies or other property actually received by it in accordance with the terms hereof. If and to the extent that the obligations of any Pledgor under this Section 11 are unenforceable for any reason, each Pledgor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. The indemnity obligations of each Pledgor contained in this Section 11 shall continue in full force and effect notwithstanding the full payment of all the Notes issued under the Credit Agreement, the termination of all Interest Rate Agreements and the payment of all other Obligations and notwithstanding the discharge thereof. 12. FURTHER ASSURANCES; POWER OF ATTORNEY. (a) Each Pledgor agrees that it will join with the Pledgee in executing and, at such Pledgor's own expense, file and refile under the Uniform Commercial Code such financing statements, continuation statements and other documents in such offices as the Pledgee (acting on its own or on the instructions of the Required Banks) may reasonably deem necessary or appropriate and wherever required or permitted by law in order to perfect and preserve the Pledgee's security interest in the Collateral hereunder and hereby authorizes the Pledgee to file financing statements and amendments thereto relative to all or any part of the Collateral without the signature of such Pledgor where permitted by law, and agrees to do such further acts and things and to execute and deliver to the Pledgee such additional conveyances, assignments, agreements and instruments as the Pledgee may reasonably require or deem advisable to carry into effect the purposes of this Agreement or to further assure and confirm unto the Pledgee its rights, powers and remedies hereunder or thereunder. Page 16 (b) Each Pledgor hereby appoints the Pledgee such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, from time to time after the occurrence and during the continuance of an Event of Default, in the Pledgee's discretion to take any action and to execute any instrument which the Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement. 13. THE PLEDGEE AS COLLATERAL AGENT. The Pledgee will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed that the obligations of the Pledgee as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement. The Pledgee shall act hereunder on the terms and conditions set forth herein and in Article 10 of the Credit Agreement. 14. TRANSFER BY THE PLEDGORS. No Pledgor will sell or otherwise dispose of, grant any option with respect to, or mortgage, pledge or otherwise encumber any of the Collateral or any interest therein (except in accordance with the terms of this Agreement and the Credit Documents). 15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGORS. (a) Each Pledgor represents, warrants and covenants that: (i) it is the legal, beneficial and record owner of, and has good and marketable title to, all Collateral consisting of one or more Securities and that it has sufficient interest in all Collateral in which a security interest is purported to be created hereunder for such security interest to attach (subject, in each case, to no pledge, lien, mortgage, hypothecation, security interest, charge, option, Adverse Claim or other encumbrance whatsoever, except the liens and security interests created by this Agreement); (ii) it has full power, authority and legal right to pledge all the Collateral pledged by it pursuant to this Agreement; (iii) this Agreement has been duly authorized, executed and delivered by such Pledgor and constitutes a legal, valid and binding obligation of such Pledgor enforceable against such Pledgor in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (iv) except to the extent already obtained or made, no consent of any other party (including, without limitation, any stockholder or creditor of such Pledgor or any of their Subsidiaries) and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required to be obtained by such Pledgor in connection with (a) the execution, delivery or performance of this Agreement, (b) the validity or Page 17 enforceability of this Agreement (except as set forth in clause (iii) above), (c) the perfection or enforceability of the Pledgee's security interest in the Collateral or (d) the exercise by the Pledgee of any of its rights or remedies provided herein, except (x) as may be required in connection with the disposition of the Securities by laws affecting the offering and sale of securities generally or (y) in connection with the exercise of rights and remedies pursuant to this Agreement, those approvals required to be obtained pursuant to California Insurance Code Section 1215.2; (v) the execution, delivery and performance of this Agreement will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, applicable to such Pledgor, or of the certificate of incorporation, operating agreement, limited liability company agreement or by-laws of such Pledgor or of any securities issued by such Pledgor or any of its Subsidiaries, or of any mortgage, deed of trust, indenture, lease, loan agreement, credit agreement or other contract, agreement or instrument or undertaking to which such Pledgor or any of its Subsidiaries is a party or which purports to be binding upon such Pledgor or any of its Subsidiaries or upon any of their respective assets and will not result in the creation or imposition of (or the obligation to create or impose) any lien or encumbrance on any of the assets of such Pledgor or any of its Subsidiaries except as contemplated by this Agreement (other than the Liens created by the Collateral Documents); (vi) all of the Collateral (consisting of Securities, Limited Liability Company Interests or Partnership Interests) has been duly and validly issued, is fully paid and non-assessable and is subject to no options to purchase or similar rights; (vii) each of the Pledged Notes constitutes, or when executed by the obligor thereof will constitute, the legal, valid and binding obligation of such obligor, enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); and (viii) the pledge, collateral assignment and delivery to the Pledgee of the Collateral consisting of certificated securities pursuant to this Agreement creates a valid and perfected first priority security interest in such Securities, and the proceeds thereof, subject to no prior Lien or encumbrance or to any agreement purporting to grant to any third party a Lien or encumbrance on the property or assets of such Pledgor which would include the Securities (other than Permitted Liens) and the Pledgee is entitled to all the rights, priorities and benefits afforded by the UCC or other relevant law as enacted in any relevant jurisdiction to perfect security interests in respect of such Collateral; and (ix) "control" (as defined in Section 8-106 of the UCC) has been obtained by the Pledgee over all Collateral consisting of Securities (including Notes which are Securities) Page 18 with respect to which such "control" may be obtained pursuant to Section 8-106 of the UCC. (b) Each Pledgor covenants and agrees that it will defend the Pledgee's right, title and security interest in and to the Securities and the proceeds thereof against the claims and demands of all persons whomsoever; and each Pledgor covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Pledgee as Collateral hereunder and will likewise defend the right thereto and security interest therein of the Pledgee and the Secured Creditors. (c) Each Pledgor covenants and agrees that it will take no action which would violate any of the terms of any Secured Debt Agreement. 16. CHIEF EXECUTIVE OFFICE; RECORDS. The chief executive office of each Pledgor is located at the address specified in Annex F hereto. Each Pledgor will not move its chief executive office except to such new location as such Pledgor may establish in accordance with the last sentence of this Section 16. The originals of all documents in the possession of such Pledgor evidencing all Collateral, including but not limited to all Limited Liability Company Interests and Partnership Interests, and the only original books of account and records of the Pledgor relating thereto are, and will continue to be, kept at such chief executive office at the location specified in Annex F hereto, or at such new locations as the Pledgor may establish in accordance with the last sentence of this Section 16. All Limited Liability Company Interests and Partnership Interests are, and will continue to be, maintained at, and controlled and directed (including, without limitation, for general accounting purposes) from, such chief executive office location specified in Annex F hereto, or such new locations as the Pledgor may establish in accordance with the last sentence of this Section 16. No Pledgor shall establish a new location for such offices until (i) it shall have given to the Collateral Agent not less than 30 days' prior written notice of its intention so to do, clearly describing such new location and providing such other information in connection therewith as the Collateral Agent may reasonably request and (ii) with respect to such new location, it shall have taken all action, satisfactory to the Collateral Agent, to maintain the security interest of the Collateral Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. Promptly after establishing a new location for such offices in accordance with the immediately preceding sentence, the respective Pledgor shall deliver to the Pledgee a supplement to Annex F hereto so as to cause such Annex F hereto to be complete and accurate. 17. PLEDGORS' OBLIGATIONS ABSOLUTE, ETC. The obligations of each Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever (other than termination of this Agreement pursuant to Section 19 hereof), including, without limitation: (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from any Secured Debt Agreement (other than this Agreement Page 19 in accordance with its terms), or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such agreement or instrument or this Agreement (other than a waiver, consent or extension with respect to this Agreement in accordance with its terms); (iii) any furnishing of any additional security to the Pledgee or its assignee or any acceptance thereof or any release of any security by the Pledgee or its assignee; (iv) any limitation on any party's liability or obligations under any such instrument or agreement or any invalidity or unenforceability, in whole or in part, of any such instrument or agreement or any term thereof; or (v) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to any Pledgor or any Subsidiary of any Pledgor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not such Pledgor shall have notice or knowledge of any of the foregoing. 18. REGISTRATION, ETC. (a) If an Event of Default shall have occurred and be continuing and any Pledgor shall have received from the Pledgee a written request or requests that such Pledgor cause any registration, qualification or compliance under any Federal or state securities law or laws to be effected with respect to all or any part of the Collateral consisting of Securities, Limited Liability Company Interests or Partnership Interests, such Pledgor as soon as practicable and at its expense will use its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Collateral consisting of Securities, Limited Liability Company Interests or Partnership Interests, including, without limitation, registration under the Securities Act of 1933, as then in effect (or any similar statute then in effect), appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with any other governmental requirements; PROVIDED, that the Pledgee shall furnish to such Pledgor such information regarding the Pledgee as such Pledgor may request in writing and as shall be required in connection with any such registration, qualification or compliance. Each Pledgor will cause the Pledgee to be kept reasonably advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Pledgee such number of prospectuses, offering circulars and other documents incident thereto as the Pledgee from time to time may reasonably request, and will indemnify, to the extent permitted by law, the Pledgee and all other Secured Creditors participating in the distribution of such Collateral consisting of Securities, Limited Liability Company Interests or Partnership Interests against all claims, losses, damages and liabilities caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein Page 20 or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to such Pledgor by the Pledgee expressly for use therein. (b) If at any time when the Pledgee shall determine to exercise its right to sell all or any part of the Collateral consisting of Securities, Limited Liability Company Interests or Partnership Interests pursuant to Section 7, and such Collateral or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as then in effect, the Pledgee may, in its sole and absolute discretion, sell such Collateral or part thereof by private sale in such manner and under such circumstances as the Pledgee may deem necessary or advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the foregoing, in any such event the Pledgee, in its sole and absolute discretion: (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Collateral or part thereof shall have been filed under such Securities Act; (ii) may approach and negotiate with a single possible purchaser to effect such sale; and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Collateral or part thereof. In the event of any such sale, the Pledgee shall incur no responsibility or liability for selling all or any part of the Collateral at a price which the Pledgee, in its sole and absolute discretion, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until the registration as aforesaid. 19. TERMINATION; RELEASE. (a) On the Termination Date (as defined below), this Agreement shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 11 hereof shall survive any such termination) and the Pledgee, at the request and expense of the respective Pledgor, will execute and deliver to such Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement (including, without limitation, UCC termination statements and instruments of satisfaction, discharge and/or reconveyance), and will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Pledgee and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Pledgee or any of its sub-agents hereunder and, with respect to any Collateral consisting of an Uncertificated Security (other than an Uncertificated Security credited on the books of a Clearing Corporation), a Partnership Interest or a Limited Liability Company Interest, a termination of the agreement relating thereto executed and delivered by the issuer of such Uncertificated Security pursuant to Section 3.2(a)(ii) or by the respective partnership or limited liability company pursuant to Section 3.2(a)(iv). As used in this Agreement, "Termination Date" shall mean the date upon which the Total Commitments and all Interest Rate Agreements have been terminated, no Note is outstanding (and all Loans have been paid in full) and all other Obligations then due and payable have been paid in full. (b) In the event that any part of the Collateral is sold or otherwise disposed of in connection with a sale or disposition permitted by the Credit Agreement or is otherwise released Page 21 at the direction of the Required Banks (or all the Banks if required by Section 11.12 of the Credit Agreement), and the proceeds of such sale or sales or from such release are applied in accordance with the terms of the Credit Agreement to the extent required to be so applied, the Pledgee, at the request and expense of the respective Pledgor will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral as is then being (or has been) so sold or released and as may be in possession of the Pledgee and has not theretofore been released pursuant to this Agreement. (c) At any time that any Pledgor desires that Collateral be released as provided in the foregoing Section 19(a) or (b), it shall deliver to the Pledgee a certificate signed by a principal executive officer of such Pledgor stating that the release of the respective Collateral is permitted pursuant to Section 19(a) or (b). If reasonably requested by the Pledgee (although the Pledgee shall have no obligation to make any such request), the relevant Pledgor shall furnish appropriate legal opinions (from counsel reasonably acceptable to the Pledgee) to the effect set forth in the immediately preceding sentence. The Pledgee shall have no liability whatsoever to any Secured Creditor as the result of any release of Collateral by it as permitted by this Section 19. (d) The Pledgee shall have no liability whatsoever to any Secured Creditor as the result of any release of Collateral by it in accordance with this Section 19. 20. NOTICES, ETC. All notices and other communications hereunder shall be in writing and shall be delivered or mailed by first class mail, postage prepaid, addressed: (i) if to any Pledgor, at its address set forth opposite its signature below; (ii) if to the Pledgee, at: The Chase Manhattan Bank 270 Park Avenue New York, New York 10017 Attention: Russell Myers Tel: (212) 270-7169 Fax: (212) 270-1001; (iii) if to any Bank (other than the Pledgee), at such address as such Bank shall have specified in the Credit Agreement; (iv) if to any Interest Rate Creditor, at such address as such Interest Rate Creditor shall have specified in writing to the Borrower and the Pledgee; or at such address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. 21. THE PLEDGEE. The Pledgee will hold, directly or indirectly in accordance with this Agreement, all items of the Collateral at any time received by it under this Agreement. Page 22 It is expressly understood and agreed that the obligations of the Pledgee with respect to the Collateral, interests therein and the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in the UCC and this Agreement. 22. WAIVER; AMENDMENT. Except as contemplated in Section 25 hereof, none of the terms and conditions of this Agreement may be changed, waived, discharged or terminated in any manner whatsoever unless such change, waiver, discharge or termination is in writing duly signed by each Pledgor to be bound thereby and the Collateral Agent (with the consent of the Required Banks or, to the extent required by Section 11.12 of the Credit Agreement, all of the Banks), PROVIDED, HOWEVER, that no such change, waiver, modification or variance shall be made to Section 9 hereof or this Section 22 without the consent of each Secured Creditor adversely affected thereby, PROVIDED FURTHER that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall require the written consent of the Requisite Creditors of such Class of Secured Creditors. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, i.e., whether (x) the Bank Creditors as holders of the Credit Agreement Obligations, (y) the Interest Rate Creditors as holders of the Interest Rate Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of (x) with respect to each of the Credit Agreement Obligations, the Required Banks and (y) with respect to the Interest Rate Obligations, the holders of 51% of all obligations outstanding from time to time under the Interest Rate Agreements. 23. MISCELLANEOUS. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect, subject to release and/or termination as set forth in Section 19, (ii) be binding upon each Pledgor, its successors and assigns; PROVIDED, HOWEVER, that no Pledgor shall assign any of its rights or obligations hereunder without the prior written consent of the Pledgee (with the prior written consent of the Required Banks, or to the extent required by Section 11.12 of the Credit Agreement, all of the Banks), and (iii) inure, together with the rights and remedies of the Pledgee hereunder, to the benefit of the Pledgee, the Secured Creditors and their respective successors, transferees and assigns. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. The headings of the several sections and subsections in this Agreement are for purposes of reference only and shall not limit or define the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. In the event that any provision of this Agreement shall prove to be invalid or unenforceable, such provision shall be deemed to be severable from the other provisions of this Agreement which shall remain binding on all parties hereto. 24. WAIVER OF JURY TRIAL. Each Pledgor hereby irrevocably waives all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this agreement or the transactions contemplated hereby. 25. ADDITIONAL PLEDGORS. It is understood and agreed that any Subsidiary of the Borrower that is required to execute a counterpart of this Agreement after the date hereof Page 23 pursuant to the Credit Agreement shall automatically become a Pledgor hereunder by executing a counterpart hereof and delivering the same to the Pledgee. 26. RECOURSE. This Agreement is made with full recourse to the Pledgors and pursuant to and upon all the representations, warranties, covenants and agreements on the part of the Pledgors contained herein and in the other Secured Debt Agreements and otherwise in writing in connection herewith or therewith. 27. LIMITED OBLIGATIONS. It is the desire and intent of each Pledgor and the Secured Creditors that this Agreement shall be enforced against each Pledgor to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Notwithstanding anything to the contrary contained herein, in furtherance of the foregoing, it is noted that the obligations of each Pledgor constituting a Subsidiary Guarantor have been limited as provided in the Subsidiary Guaranty. 28. PLEDGEE NOT A PARTNER OR LIMITED LIABILITY COMPANY MEMBER. (a) Nothing herein shall be construed to make the Pledgee or any other Secured Creditor liable as a member of any limited liability company or partnership and neither the Pledgee nor any other Secured Creditor by virtue of this Agreement or otherwise (except as referred to in the following sentence) shall have any of the duties, obligations or liabilities of a member of any limited liability company or partnership. The parties hereto expressly agree that, unless the Pledgee shall become the absolute owner of Collateral consisting of a Limited Liability Company Interest or Partnership Interest pursuant hereto, this Agreement shall not be construed as creating a partnership or joint venture among the Pledgee, any other Secured Creditor and/or any Pledgor. (b) Except as provided in the last sentence of paragraph (a) of this Section 28, the Pledgee, by accepting this Agreement, did not intend to become a member of any limited liability company or partnership or otherwise be deemed to be a co-venturer with respect to any Pledgor or any limited liability company or partnership either before or after an Event of Default shall have occurred. The Pledgee shall have only those powers set forth herein and the Secured Creditors shall assume none of the duties, obligations or liabilities of a member of any limited liability company or partnership or any Pledgor except as provided in the last sentence of paragraph (a) of this Section 28. (c) The Pledgee and the other Secured Creditors shall not be obligated to perform or discharge any obligation of any Pledgor as a result of the pledge hereby effected. (d) The acceptance by the Pledgee of this Agreement, with all the rights, powers, privileges and authority so created, shall not at any time or in any event obligate the Pledgee or any other Secured Creditor to appear in or defend any action or proceeding relating to the Collateral to which it is not a party, or to take any action hereunder or thereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Collateral. Page 24 IN WITNESS WHEREOF, each Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. ADDRESSES: SUPERIOR NATIONAL INSURANCE GROUP, INC., as a Pledgor By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer SUPERIOR PACIFIC INSURANCE GROUP, INC., as a Pledgor By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer BUSINESS INSURANCE GROUP, INC., as a Pledgor By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer PACIFIC INSURANCE BROKERAGE, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer Page 25 INFONET MANAGEMENT SYSTEMS, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer SN INSURANCE SERVICES, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Executive Vice President & Chief Financial Officer SN INSURANCE ADMINISTRATORS, INC. By: /s/ J. CHRIS SEAMAN ------------------------------- Name: J. Chris Seaman Title: Vice President THE CHASE MANHATTAN BANK, as Collateral Agent and Pledgee By: /s/ LAWRENCE PALUMBO, JR. ------------------------------ Name: Lawrence Palumbo, Jr. Title: Vice President ANNEX G FORM OF AGREEMENT REGARDING UNCERTIFICATED SECURITIES, LIMITED LIABILITY COMPANY INTERESTS AND PARTNERSHIP INTERESTS AGREEMENT (as amended, modified or supplemented from time to time, this "Agreement"), dated as of _________ __, _____, among each of the undersigned pledgors (each a "Pledgor" and, collectively, the "Pledgors"), __________, not in its individual capacity but solely as Collateral Agent (the "Pledgee"), and __________, as the issuer of the Uncertificated Securities, Limited Liability Company Interests and/or Partnership Interests (each as defined below) (the "Issuer"). W I T N E S S E T H : WHEREAS, each Pledgor and the Pledgee are entering into a Pledge Agreement, dated as of December __, 1998 (as amended, amended and restated, modified or supplemented from time to time, the "Pledge Agreement"), under which, among other things, in order to secure the payment of the Obligations (as defined in the Pledge Agreement), each Pledgor will pledge to the Pledgee for the benefit of the Secured Creditors (as defined in the Pledge Agreement), and grant a security interest in favor of the Pledgee for the benefit of the Secured Creditors in, all of the right, title and interest of such Pledgor in and to any and all (1) "uncertificated securities" (as defined in Section 8-102(a)(18) of the Uniform Commercial Code, as adopted in the State of New York) ("Uncertificated Securities"), (2) Partnership Interests (as defined in the Pledge Agreement) and (3) Limited Liability Company Interests (as defined in the Pledge Agreement), in each case issued from time to time by the Issuer, whether now existing or hereafter from time to time acquired by such Pledgor (with all of such Uncertificated Securities, Partnership Interests and Limited Liability Company Interests being herein collectively called the "Issuer Pledged Interests"); and WHEREAS, each Pledgor desires the Issuer to enter into this Agreement in order to perfect the security interest of the Pledgee under the Pledge Agreement in the Issuer Pledged Interests, to vest in the Pledgee control of the Issuer Pledge Interests and to provide for the rights of the parties under this Agreement; NOW THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Each Pledgor hereby irrevocably authorizes and directs the Issuer, and the Issuer hereby agrees, to comply with any and all instructions and orders originated by the Pledgee (and its successors and assigns) regarding any and all of the Issuer Pledged Interests without the further consent by the registered owner (including the respective Pledgor), and not to comply with any instructions or orders regarding any or all of the Issuer Pledged Interests ANNEX G Page 2 originated by any person or entity other than the Pledgee (and its successors and assigns) or a court of competent jurisdiction. 2. The Issuer hereby certifies that (i) no notice of any security interest, lien or other encumbrance or claim affecting the Issuer Pledged Interests (other than the security interest of the Pledgee) has been received by it, and (ii) the security interest of the Pledgee in the Issuer Pledged Interests has been registered in the books and records of the Issuer. 3. The Issuer hereby represents and warrants that (i) the pledge by the Pledgors of, and the granting by the Pledgors of a security interest in, the Issuer Pledged Interests to the Pledgee, for the benefit of the Secured Creditors, does not violate the charter, by-laws, partnership agreement, membership agreement or any other agreement governing the Issuer or the Issuer Pledged Interests, and (ii) the Issuer Pledged Interests are fully paid and nonassessable. 4. All notices, statements of accounts, reports, prospectuses, financial statements and other communications to be sent to any Pledgor by the Issuer in respect of the Issuer will also be sent to the Pledgee at the following address: The Chase Manhattan Bank 270 Park Avenue New York, New York 10017 Attention: _____________ Tel: (212) _____________ Fax: (212) _____________ 5. Until the Pledgee shall have delivered written notice to the Issuer that all of the Obligations have been paid in full and this Agreement is terminated, the Issuer will send any and all redemptions, distributions, interest or other payments in respect of the Issuer Pledged Interests from the Issuer for the account of the Pledgor only by wire transfers to the following address: _____________________ _____________________ _____________________ _____________________ [Account Information] ABA No.: _____________________ Account in the Name of: ___________ Account No.: ______________________ 6. Except as expressly provided otherwise in Sections 4 and 5, all notices, instructions, orders and communications hereunder shall be sent or delivered by mail, telex, telecopy or overnight courier service and all such notices and communications shall, when mailed, telexed, telecopied or sent by overnight courier, be effective when deposited in the mails or delivered to the overnight courier, prepaid and properly addressed for delivery on such or the next Business Day, or sent by telex or telecopier, except that notices and communications to the ANNEX G Page 3 Pledgee shall not be effective until received by the Pledgee. All notices and other communications shall be in writing and addressed as follows: (a) if to any Pledgor, at: __________________________ __________________________ Attention: ______________ Tel.: (___) _____________ Fax: (___) ______________ (b) if to the Pledgee, at: The Chase Manhattan Bank 270 Park Avenue New York, New York 10017 Attention: _____________ Tel: (212) _____________ Fax: (212) _____________ (c) if to the Issuer, at: _________________________ _________________________ _________________________ Attention: _____________ Telephone No.:___________ Telecopier No.:__________ or at such other address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. As used in this Section 6, "Business Day" means any day other than a Saturday, Sunday, or other day in which banks in New York are authorized to remain closed. 7. This Agreement shall be binding upon the successors and assigns of each Pledgor and the Issuer and shall inure to the benefit of and be enforceable by the Pledgee and its successors and assigns. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which shall constitute one instrument. In the event that any provision of this Agreement shall prove to be invalid or unenforceable, such provision shall be deemed to be severable from the other provisions of this Agreement which shall remain binding on all parties hereto. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever except in writing signed by the Pledgee, the Issuer and any Pledgor which at such time owns any Issuer Pledged Interests. 8. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its principles of conflict of laws. ANNEX G Page 4 IN WITNESS WHEREOF, each Pledgor, the Pledgee and the Issuer have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. [ ], as a Pledgor By ----------------------------- Name: Title: [ ], as a Pledgor By ----------------------------- Name: Title: [ ], as a Pledgor By ----------------------------- Name: Title: THE CHASE MANHATTAN BANK, not in its individual capacity but solely as Collateral Agent and Pledgee By ----------------------------- Name: Title: ANNEX G Page 5 [ ], the Issuer By ----------------------------- Name: Title: EX-10.70 10 EXHIBIT 10.70 EXECUTION VERSION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RECEIVABLES PURCHASE AND SALE AGREEMENT Dated as of December 9, 1998 Among CALIFORNIA COMPENSATION INSURANCE COMPANY, COMMERCIAL COMPENSATION INSURANCE COMPANY, COMBINED BENEFITS INSURANCE COMPANY and BUSINESS INSURANCE COMPANY, EACH AS AN ORIGINATOR, and INSURANCE FUNDING LLC, AS THE BUYER. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Accounting and Certain Other Terms.. . . . . . . . . . . . . . . . . 8 SECTION 1.03. Other Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 1.04. Computation of Time Periods. . . . . . . . . . . . . . . . . . . . . 9 ARTICLE II AMOUNTS AND TERMS OF THE PURCHASE. SECTION 2.01. Agreement to Purchase. . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2.02. Payment for the Purchase . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2.03. Payments and Computations, Etc . . . . . . . . . . . . . . . . . . . 9 SECTION 2.04. Transfer of Records to the Buyer. . . . . . . . . . . . . . . . . . .10 ARTICLE III CONDITIONS OF PURCHASE SECTION 3.01. Conditions Precedent to the Purchase . . . . . . . . . . . . . . . .10 SECTION 3.02. Effect of Payment of Purchase Price. . . . . . . . . . . . . . . . .10 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Originators. . . . . . . . . .11 ARTICLE V GENERAL COVENANTS SECTION 5.01. General Covenants. . . . . . . . . . . . . . . . . . . . . . . . . .14 ARTICLE VI COLLECTION AND MONITORING OF ASSETS SECTION 6.01. Collections and Lock-Boxes.. . . . . . . . . . . . . . . . . . . . .17 SECTION 6.02. UCC Matters; Protection and Perfection of Transferred Assets.. . . .18 SECTION 6.03. Obligations of the Originators With Respect to Receivables.. . . . .19 SECTION 6.04. Applications of Collections. . . . . . . . . . . . . . . . . . . . .19 ARTICLE VII FURTHER ASSURANCES SECTION 7.01. Further Assurances.. . . . . . . . . . . . . . . . . . . . . . . . .19 ARTICLE VIII INDEMNIFICATION SECTION 8.01. Indemnities by the Originators. . . . . . . . . . . . . . . . . . . .19 ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments and Waivers.. . . . . . . . . . . . . . . . . . . . . . .21 SECTION 9.02. Notices, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . .21 SECTION 9.03. Setoff and Counterclaim. . . . . . . . . . . . . . . . . . . . . . .22 SECTION 9.04. No Waiver; Remedies. . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 9.05. Binding Effect; Assignability. . . . . . . . . . . . . . . . . . . .22 SECTION 9.06. Term of this Agreement.. . . . . . . . . . . . . . . . . . . . . . .22 SECTION 9.07. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION TO VENUE. . . . . . . . . . . . . . . . . . . . . . . .22
SECTION 9.08. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . .23 SECTION 9.09. Costs, Expenses and Taxes. . . . . . . . . . . . . . . . . . . . . .23 SECTION 9.10. Execution in Counterparts; Severability; Integration . . . . . . . .23 SECTION 9.11. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . .24
SCHEDULES Schedule I -- Condition Precedent Documents Schedule II -- Description of Credit and Collection Policy Schedule III -- Lock-Box Banks and Lock-Box Accounts Schedule IV -- Tradenames, Fictitious Names and "Doing Business As" Names Schedule V -- List of Receivables Purchased on the Closing Date EXHIBITS Exhibit A -- Form of Lock-Box Agreements Exhibit B -- Form of Opinion of Counsel for the Originators THIS RECEIVABLES PURCHASE AND SALE AGREEMENT (the "AGREEMENT") is made as of December 9, 1998, by and among CALIFORNIA COMPENSATION INSURANCE COMPANY, a California corporation, COMMERCIAL COMPENSATION INSURANCE COMPANY, a New York corporation, COMBINED BENEFITS INSURANCE COMPANY, a California corporation, and BUSINESS INSURANCE COMPANY, a Delaware corporation, as the originators (each an "ORIGINATOR" and, collectively, the "ORIGINATORS"), INSURANCE FUNDING LLC, a Delaware limited liability company (the "BUYER"). WITNESSETH: WHEREAS, the Originators desire to sell, and the Buyer desires to purchase, all of the Originators' right, title and interest in certain receivables on the terms and conditions provided herein; NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. CERTAIN DEFINED TERMS. (a) Certain capitalized terms used throughout this Agreement are defined above or in this SECTION 1.01. (b) As used in this Agreement and its exhibits, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ADVERSE CLAIM" means a lien, security interest, charge, encumbrance or other right or claim of any Person having the practical effect of a lien, security interest, charge or encumbrance. "AFFILIATE" when used with respect to a Person means any other Person controlling, controlled by or under common control with such Person. For purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract, or otherwise; and the terms "controlling" and "controlled" have the meanings correlative to the foregoing. "AGENT'S BALANCE" means, in respect of an Insurance Premium, the amount of such Insurance Premium due and payable to an Originator by (a) an Insurance Agent, on behalf of the related Policyholder, in which case the Insurance Agent has deducted any commissions due such Insurance Agent from the Outstanding Balance thereof or (b) a Policyholder, in which case the Originator shall have deducted any commissions due such Insurance Agent from the Outstanding Balance thereof. "BANKRUPTCY CODE" means the United States Bankruptcy Reform Act of 1978 (11 U.S.C. Sections 101 ET SEQ.), as amended from time to time, or any successor statute. "BASE RATE" means, on any day, a fluctuating rate of interest per annum equal to the higher of (a) the per annum rate of interest announced from time to time by BankBoston, N.A. at its head office in Boston, Massachusetts as its "base rate", and (b) 1/2 of one percent per annum above the Federal Funds Rate. "BENEFIT PLAN" means any employee benefit plan as defined in Section 3(3) of ERISA in respect of which any Originator or any ERISA Affiliate of any Originator is, or at any time during the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA. "BUSINESS DAY" means a day of the year other than a Saturday or a Sunday on which banks are required to be open in New York City and Boston, Massachusetts. "CLOSING DATE" means the date on which the Buyer makes the Purchase of Receivables under this Agreement. "CODE" means the Internal Revenue Code of 1986, as amended, and any successor statute. "COLLECTION ACCOUNT" has the meaning set forth in the Receivables Purchase Agreement. "COLLECTION ACCOUNT AGREEMENT" means that certain Collection Account Agreement dated as of even date herewith among the Collection Account Bank, the Servicer, the Buyer and the Deal Agent. "COLLECTION ACCOUNT BANK" means the financial institution maintaining the Collection Account, which initially shall be BankBoston, N.A. "COLLECTIONS" means, with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including, without limitation, all cash proceeds of the Related Security with respect thereto. "CONFIDENTIAL INFORMATION" has the meaning assigned to such term in SECTION 9.11. "CONTRACT" means an agreement between an Originator and a Person pursuant to or under which such Obligor shall be obligated to make one or more payments to an Originator including, without limitation, (i) Insurance Policies and (ii) Reinsurance Treaties. "CREDIT AND COLLECTION POLICY" means those credit and collection policies and practices relating to Contracts and Receivables described in SCHEDULE II. "DEAL AGENT" means the "Deal Agent" under the Receivables Purchase Agreement. "DEFAULTED RECEIVABLE" means a Receivable (a) (ii) in the case of an Agent's Balance, as to which any payment, or part thereof, remains unpaid for more than 270 days from the original invoice date for such payment and (ii) in the case of a Reinsurance Recoverable, as to which any payment, or party thereof, remains unpaid for more than 270 days from the date of this Agreement, (b) as to which the Obligor thereof has taken any action constituting an Insolvency Event or suffered any Insolvency Event or (c) which, consistent with the Credit and Collection Policy, has been or should be written off the applicable Originator's books as uncollectible. "DILUTION FACTORS" means, with respect to the Receivables, any credits, rebates, freight charges, discounts, allowances, disputes, chargebacks, allowances for early payments and other allowances or adjustments granted in accordance with the Buyer's or the Originators' usual practices. "DISCOUNT FACTOR" means a percentage calculated to provide the Buyer with a reasonable return on its investment in the Transferred Assets after taking account of the time value of money based upon the anticipated dates of collection of the Transferred Assets. The Discount Factor shall be 5.5%. "EAGLEFUNDING" means EagleFunding Capital Corporation, a Delaware corporation. "ELIGIBLE RECEIVABLE" means, at any time, a Receivable: (a) the Obligor of which is a United States resident, is not an Affiliate of the Buyer or any Originator, and is not a government or a governmental subdivision or agency; (b) which is not a Defaulted Receivable; (c) which arises under a Contract (i) the performance of which has been completed by the applicable Originator and by all other parties other than the Obligor and (ii) that has been duly authorized and, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Receivable, enforceable against such Obligor in accordance with its terms and is not subject to any dispute, offset, counterclaim or defense whatsoever; (d) (i) which is an "account" or a "general intangible" within the meaning of Section 9-106 of the UCC of all applicable jurisdictions, (ii) as to which all performance and other action required to be taken in connection therewith by such Originator for the 3 Obligor has been so performed or taken, (iii) is denominated and payable only in United States dollars in the United States, (iv) no portion of which is payable on account of sales taxes, and (v) in which the applicable Originator can grant a perfected security interest; (e) which arises in the ordinary course of the Originators' business in connection with providing services or the sale of goods within the United States; (f) the assignment of which (including, without limitation, the sale of an undivided percentage interest therein and the assignment of any Related Security) does not contravene or conflict with any applicable laws, rules or regulations or any contractual or other restriction, limitation or encumbrance; (g) which does not have an Adverse Claim filed against it (other than pursuant to the Receivables Purchase Agreement) and is not otherwise subject to an Adverse Claim and has not been compromised, adjusted or modified (including by extension of time of payment or the granting of any discounts, allowances or credits) except for discounts, allowances or credits made in accordance with the Credit and Collection Policy and in the ordinary course of the Originators' business; (h) which, together with the Contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party to the Contract related thereto is in violation of any such law, rule or regulation in any material respect; (i) which satisfies, and has been originated in accordance with, all applicable requirements of the Credit and Collection Policy; (j) as to which the Buyer has not notified the applicable Originator in writing that the Buyer or Deal Agent (as Buyer's assignee) has determined, in its reasonable business judgment, that such Receivable (or class of Receivables) is not acceptable for purchase hereunder; (k) with respect to which, (i) prior to the Purchase hereunder by Buyer, the applicable Originator has a first priority ownership interest therein, free and clear of any Adverse Claim, and (ii) from and after the Purchase hereunder, Buyer has a properly perfected first priority ownership interest therein, free and clear of any Adverse Claim; and (l) with respect to which no Person other than the applicable Originator or an Affiliate thereof is attempting to collect the proceeds of such Receivable. 4 "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA AFFILIATE" means (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Originators; (b) a partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Originators or (c) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Originators, any corporation described in CLAUSE (a) above or any partnership, trade or business described in CLAUSE (b) above. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, in each case consistently applied. "NDEMNIFIED AMOUNTS" has the meaning assigned to that term in SECTION 8.01. "INDEMNIFIED PARTIES" has the meaning assigned to that term in SECTION 8.01. "INSOLVENCY EVENT" means, with respect to any Person, any of the following events: such Person shall make a general assignment for the benefit of creditors; or any case or proceeding shall be instituted by or against such Person seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, dissolution, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property. "INSURANCE AGENT" means a Person authorized to sell an Insurance Policy. "INSURANCE POLICY" means a duly filed and approved contract of insurance in force and effective on the date hereof. "INSURANCE PREMIUM" means an amount due from a Policyholder in order to receive the benefits of an Insurance Policy. "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as amended and any successor. "LOCK-BOX" means a post office box to which Collections are remitted for retrieval by a Lock-Box Bank and deposited by such Lock-Box Bank into a Lock-Box Account. "LOCK-BOX ACCOUNT" means an account maintained for the purpose of receiving Collections at a bank or other financial institution which has executed a Lock-Box Agreement. 5 "LOCK-BOX AGREEMENT" means an agreement, in substantially the form of EXHIBIT A, among the applicable Originator and a Lock-Box Bank. "LOCK-BOX BANK" means any of the banks or other financial institutions holding one or more Lock-Box Accounts. "MATERIAL ADVERSE EFFECT" means any act, omission, situation, circumstance, event or undertaking which could, singly or in any combination with one or more other acts, omissions, situations, circumstances, events or undertakings, have, or are reasonably likely to have, a material adverse effect upon (a) the business, assets, properties, liabilities, financial condition, or results of operations of any Originator and its subsidiaries taken as a whole, (b) the value of the whole or any material part of the Transferred Assets, the interests therein transferred or purported to be transferred pursuant to the terms hereof or the priority of such interests, (c) the respective ability of the Originators or any of their subsidiaries to perform any obligations under this Agreement or any other Originator Document to which it is a party, or (d) the legality, validity, binding effect or enforceability of any Originator Document or the ability of the Buyer or the Deal Agent to enforce any rights or remedies under or in connection with any Originator Document. "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding five years contributed to by an Originator or any ERISA Affiliate on behalf of its employees. "OBLIGOR" means a Person obligated to make payments pursuant to a Contract, and includes, without limitation, (i) in the case of a Reinsurance Recoverable, the applicable Reinsurance Company and (ii) in the case of an Agent's Balance, either the Insurance Agent or the Policyholder, as the case may be. "ORIGINATOR DOCUMENTS" means this Agreement, the Lock-Box Agreements, and all other certificates, instruments, UCC financing statements, reports, notices, agreements and documents executed or delivered under or in connection with this Agreement, in each case as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement. "OUTSTANDING BALANCE" of any Receivable at any time means the then outstanding principal balance thereof. "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to the functions thereof. 6 "PERSON" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company, government (or any agency or political subdivision thereof) or other entity. "POLICYHOLDER" means the Person who is the named insured under an Insurance Policy. "PURCHASE" means a purchase of Transferred Assets by the Buyer from the Originators pursuant to SECTION 2.01. "PURCHASE PRICE" means, with respect to the Purchase hereunder, the aggregate price to be paid to the applicable Originator for the Purchase in accordance with SECTION 2.02 for the Receivables, Related Security and Collections being sold to the Buyer, which price shall equal the product of (x) the aggregate Outstanding Balance of such Receivables and (y) one minus the Discount Factor. "RECEIVABLE" means an Agent's Balance or a Reinsurance Recoverable. "RECEIVABLES PURCHASE AGREEMENT" means that certain Receivables Purchase Agreement dated as of even date herewith by and among the Buyer, as the seller thereunder, EagleFunding, as the purchaser, BancBoston Robertson Stephens Inc., as the "Deal Agent", and the Servicer, as the same may be amended, restated, supplemented or otherwise modified from time to time. "RECORDS" means all Contracts and other documents, books, records and other information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) maintained with respect to Receivables and the related Obligors which the applicable Originator has itself generated or in which such Originator has otherwise obtained an interest. "REINSURANCE COMPANY" means an insurance company listed on Schedule V hereto which has entered into a Reinsurance Treaty with an Originator. "REINSURANCE RECOVERABLE" means an amount due an Originator from a Reinsurance Company in respect of a claim under a Reinsurance Treaty. "REINSURANCE TREATY" means a contract listed on Schedule V hereto pursuant to which an Originator reinsures or is otherwise indemnified against all or a portion of claims it must pay to a Policyholder under any Insurance Policy. "RELATED SECURITY" means with respect to any Receivable: 7 (a) all Adverse Claims and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise; (b) the assignment to the Buyer of all UCC financing statements covering any collateral securing payment of such Receivable; (c) all guarantees, indemnities, warranties, letters of credit, insurance policies and proceeds and premium refunds thereof and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise; (d) all right, title and interest of the relevant Originator in to and under the related Contract (but only to the extent relating to such Receivable); (d) all Records; and (e) all proceeds of the foregoing. "SERVICER" means at any time the Person then authorized pursuant to the Receivables Purchase Agreement to service, administer and collect Receivables. "SUPERIOR" means Superior National Insurance Group, a Delaware corporation. "SUPPORT AGREEMENT" means the Support Agreement, dated as of December 9, 1998, executed by Superior in favor of the Buyer, EagleFunding and the Deal Agent. "TERMINATION DATE" means the date on which the aggregate Outstanding Balance of all Receivables sold hereunder has been reduced to zero (or such earlier date which is 365 days after all outstanding Receivables sold hereunder have become written-off in accordance with the Credit and Collection Policy), the Buyer has received all other amounts due to it in connection with this Agreement or any other agreement executed pursuant hereto or in connection herewith. "TRANSFERRED ASSETS" means, with respect to the Purchase, (a) the Receivables sold to the Buyer in connection with the Purchase, (b) all Related Security relating to such Receivables, and (c) all Collections with respect to, and other proceeds of, such Receivables. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "UNITED STATES" means the United States of America. 8 SECTION 1.02. ACCOUNTING AND CERTAIN OTHER TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all accounting determinations made and all financial statements prepared hereunder shall be made and prepared in accordance with GAAP. All undefined terms contained in this Agreement which are used in Article 9 of the UCC in the State of California shall have the meanings provided for by such Article 9. SECTION 1.03. OTHER TERMS. The words "herein," "hereof," and "hereunder" and other words of similar import refer to this Agreement as a whole, including the exhibits and schedules hereto, as the same may from time to time be amended or supplemented and not to any particular section, subsection, or clause contained in this Agreement, and all references to Sections, Exhibits and Schedules shall mean, unless the context clearly indicates otherwise, the Sections hereof and the Exhibits and Schedules attached hereto, the terms of which Exhibits and Schedules are hereby incorporated into this Agreement. Whenever appropriate, in the context, terms used herein in the singular also include the plural, and vice versa. SECTION 1.04. COMPUTATION OF TIME PERIODS. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." ARTICLE II AMOUNTS AND TERMS OF THE PURCHASE. SECTION 2.01. AGREEMENT TO PURCHASE. (a) On the terms and conditions hereinafter set forth, the Buyer agrees to make the Purchase hereunder on the Closing Date by purchasing from each Originator, and each Originator agrees to sell to the Buyer, all Receivables of such Originator existing as of the close of business on the Business Day immediately prior to the Closing Date and identified on Schedule V hereto, together with all of the Related Security relating to such Receivables and all Collections with respect to, and other proceeds of, such Receivables. Prior to making the Purchase hereunder, the Buyer may request of any Originator, and the applicable Originator shall deliver, such approvals, opinions, information, reports or documents as the Buyer may reasonably request. (b) It is the intention of the parties hereto that the Purchase of Receivables to be made hereunder shall constitute an absolute sale which vests in the Buyer all right, title and interest of the Originators in and to such Receivables, and not a loan secured by such Receivables. If at any time a court characterizes the transactions hereunder as loans by the Buyer to the Originators, then each of the Originators hereby pledges, grants a security interest in and assigns to the Deal Agent, for the benefit of the Buyer, all of its right and title to and interest in the Purchased Property, including the Purchased Receivables, Related Security and Collections related thereto, as security for such loans and for the payment and performance of all obligations of the Originators hereunder (including, without limitation, their indemnification obligations 9 under ARTICLE VIII). The security interest granted pursuant to the foregoing sentence shall be released and terminated upon the occurrence of the Collection Date. Each sale of Receivables by any Originator to the Buyer is made without recourse; PROVIDED, HOWEVER, that (i) the Originators shall be liable to the Buyer for all representations, warranties and covenants made by the Originators pursuant to the terms of this Agreement, and (ii) such sale does not constitute and is not intended to result in an assumption by the Buyer or any assignee thereof of any obligation of the Originators or any other person arising in connection with the Transferred Assets, or any other obligations of the Originators. In view of the intention of the parties hereto that the Purchase of Receivables to be made hereunder shall constitute a sale of such Receivables rather than a loan secured by such Receivables, each Originator agrees to clearly, expressly and accurately state on its respective financial statements that the Receivables have been sold to the Buyer. SECTION 2.02. PAYMENT FOR THE PURCHASE. (a) The Purchase Price for the Purchase shall be payable in full in cash by the Buyer to the applicable Originator or its designee on the date of the Purchase. SECTION 2.03. PAYMENTS AND COMPUTATIONS, ETC. All amounts to be paid by any Originator to the Buyer hereunder shall be paid in accordance with the terms hereof no later than 11:00 A.M. (Boston, Massachusetts time) on the day when due in immediately available funds to such account as the Buyer may from time to time specify in writing. Payments received by the Buyer after such time shall be deemed to have been received on the next Business Day. In the event that any payment becomes due on a day which is not a Business Day, then such payment shall be made on the next succeeding Business Day. Each of the Originators shall, to the extent permitted by law, pay to the Buyer, on demand, interest on all amounts not paid when due hereunder at 2.0% per annum above the Base Rate, payable on demand; PROVIDED, HOWEVER, that such interest rate shall not at any time exceed the maximum rate permitted by applicable law. All computations of interest payable hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. SECTION 2.04. TRANSFER OF RECORDS TO THE BUYER. (a) The Purchase of Receivables hereunder shall include the transfer to the Buyer of all of the applicable Originator's right and title to and interest in the Records relating to such Receivables and rights to the use of such Originator's computer software to access and create the Records, and each Originator hereby agrees that such transfer shall be effected automatically with the Purchase, without any action on the part of the parties hereto or any further documentation. (b) Each Originator shall take such action requested by the Buyer, from time to time hereafter, that may be necessary or appropriate to ensure that the Buyer and its assignees have (i) an enforceable ownership interest in the Records relating to the Receivables purchased hereunder and (ii) an enforceable right (whether by license or sublicense or otherwise) to use all of the computer software used to account for the Receivables and/or to recreate such Records. 10 ARTICLE III CONDITIONS OF PURCHASE SECTION 3.01. CONDITIONS PRECEDENT TO THE PURCHASE. (a) The Purchase hereunder is subject to the conditions precedent that the Buyer shall have received on or before the date of such purchase the items listed in SCHEDULE I, each (unless otherwise indicated) dated such date, in form and substance satisfactory to the Buyer. (b) The Purchase from the Originators by the Buyer shall be subject to the further conditions precedent that (i) on the Closing Date, (A) the representations and warranties contained in SECTION 4.01 are correct on and as of such day as though made on and as of such date, and (B) no law or regulation shall prohibit, and no order, judgment or decree of any federal, state or local court or governmental body, agency or instrumentality shall prohibit or enjoin, the making of the Purchase by the Buyer in accordance with the provisions hereof and (ii) the Buyer shall have received such other approvals, opinions or documents as the Buyer may reasonably request. SECTION 3.02. EFFECT OF PAYMENT OF PURCHASE PRICE. Each Originator, by accepting the proceeds of the Purchase Price, shall be deemed to have certified to the Buyer the satisfaction of the conditions precedent described in the immediately preceding SECTION 3.01. Upon the payment of the Purchase Price, title to the Transferred Assets included in the Purchase shall vest irrevocably in the Buyer, whether or not the conditions precedent to the Purchase were in fact satisfied; PROVIDED, HOWEVER, that the Buyer shall not be deemed to have waived thereby any claim for indemnification it may have under this Agreement for the failure by any Originator in fact to have satisfied any such condition precedent. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATORS. The Originators represent and warrant that as of the date hereof and as of the date of the Purchase: (a) Each of the Originators is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified to do business, and is in good standing, in every jurisdiction in which the nature of its business requires it to be so qualified and the failure to do so could reasonably be expected to have a Material Adverse Effect. (b) The execution, delivery and performance by the Originators of this Agreement and all other Originator Documents to be entered into by them, including the Originators' use of the proceeds of the Purchase, are within each Originator's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) each 11 Originator's charter or by-laws, (ii) any law, rule or regulation applicable to the Originators, (iii) any contractual restriction binding on or affecting each Originator or its property or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting each Originator or its property, and do not result in or require the creation of any Adverse Claim upon or with respect to any of its properties (other than in favor of the Buyer with respect to the Transferred Assets); and no transaction contemplated hereby requires compliance with any bulk sales act or similar law. This Agreement and each other Originator Document to be entered into by the Originators have each been duly executed and delivered by the Originators. (c) This Agreement and each other Originator Document to be entered into by the Originators constitute the legal, valid and binding obligation of the Originators enforceable against each Originator in accordance with their respective terms subject to bankruptcy and similar laws affecting creditors generally and principles of equity. (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Originators of this Agreement or any other Originator Document to be entered into by them, except for the filing of the UCC financing statements referred to in ARTICLE III, all of which financing statements have been duly executed and are in proper form for filing in the relevant jurisdictions. (e) No filing, recording, notice or acknowledgment is necessary in any jurisdiction to provide third parties with notice of the sale of the Receivables herein contemplated, and to give to the Buyer a first priority perfected security interest in such Receivables, except for (i) the filing of the UCC financing statements referred to in ARTICLE III, all of which financing statements have been duly executed and are in proper form for filing in the relevant jurisdictions and (ii) the delivery of the notices of change of ownership referred to in ARTICLE III, all of which notices of change of ownership have been duly executed and are in proper form for delivery to the relevant Reinsurance Companies. (f) (i) Each Originator has furnished to the Buyer and the Deal Agent (A) copies of the audited consolidated balance sheets of each Originator and its consolidated subsidiaries as at June 30, 1998, and the related audited consolidated statements of income, shareholders' equity and cash flows for the fiscal year of each Originator and its consolidated subsidiaries then ended reported on by June 30, 1998, which financial statements present fairly in all material respects in accordance with GAAP the financial position of each Originator and its consolidated subsidiaries as at June 30, 1998, and the results of operations of each Originator and its consolidated subsidiaries for the fiscal year of each Originator then ended, and (B) copies of the unaudited consolidated balance sheets of each Originator and its consolidated subsidiaries as at September 30, 1998, and the related unaudited consolidated statements of income, shareholders' equity and cash flows for the three-month period then ended, which financial statements present fairly in all material respects in accordance with GAAP the financial position of each Originator and its consolidated subsidiaries as at September 30, 1998, and the results of operations of each Originator and its consolidated subsidiaries for the three-month period then ended; and (ii) since 12 September 30, 1998, (A) no material adverse change has occurred in the business, assets, liabilities, financial condition, or results of operations or business prospects of each Originator and its subsidiaries taken as a whole, and (B) no event has occurred or failed to occur which has had, or may have, singly or in the aggregate, a Material Adverse Effect. (g) There is no pending or threatened action or proceeding affecting any Originator or any subsidiaries of any Originator before any court, governmental agency or arbitrator that could reasonably be expected to have a Material Adverse Effect. None of the Originators, or any subsidiary of any Originator is in default with respect to any order of any court, arbitrator or governmental body except for defaults with respect to orders of governmental agencies which defaults are not material to the business or operations of the Originators or any subsidiary of any of the Originators. (h) No proceeds of the Purchase will be used by the Originators to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (i) Immediately prior to the Purchase hereunder, each Receivable to be sold hereunder, together with the Contract related thereto and the other Transferred Assets relating thereto, is owned by the applicable Originator free and clear of any Adverse Claim except as provided herein or permitted hereby, and the Buyer shall acquire all of such Originator's right, title and interest in such Transferred Assets and a valid and perfected first priority ownership interest in each such Receivable then existing or thereafter arising and in the Related Security and Collections with respect thereto, free and clear of any Adverse Claim except as created hereby or by the Buyer in the Receivables Purchase Agreement or any related document. No effective financing statement or other instrument similar in effect covering any Transferred Assets shall at any time be on file in any recording office except such as may be filed in favor of the Buyer relating to this Agreement or in favor of assignees of the Buyer under the Receivables Purchase Agreement. No notice of the change of ownership of any Transferred Assets shall at any time have been or be delivered to any Obligor except such as may be delivered to give notice of the change in ownership of the Transferred Assets comprised of Reinsurance Recoverables to the Buyer pursuant to this Agreement or to the assignees of the Buyer pursuant to the Receivables Purchase Agreement. The Purchase of the Transferred Assets by the Buyer constitute true and valid sales and transfers for consideration (and not merely a pledge of such Transferred Assets for security purposes), enforceable against creditors of the Buyers and no Transferred Assets shall constitute property of any Originator. (j) No information, exhibit, financial statement, document, book, record or report furnished or to be furnished by any Originator to the Buyer in connection with this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Buyer, as the case may be, at such time) as of the date so furnished, and no such document contains or will contain any material misstatement of fact or omits or shall omit to state a material fact or any fact necessary to make the statements contained therein not misleading. 13 (k) The principal place of business and chief executive office of the Originators and the offices where the Originators keep all the Records are located at the addresses of the Originators referred to in SECTION 9.02 hereof (or at such other locations as to which the notice and other requirements specified in SECTION 6.08 shall have been satisfied). (l) The names and addresses of all the Lock-Box Banks, together with the account numbers of the Lock-Box Accounts at such Lock-Box Banks and the names, addresses and account numbers of all accounts to which Collections of the Receivables outstanding before the Purchase hereunder have been sent, are specified in SCHEDULE III (which shall be deemed to be amended in respect of terminating or adding any Lock-Box Account or Lock-Box Bank upon satisfaction of the notice and other requirements specified in respect thereof). The Originators have no other lock-box accounts or similar deposit accounts for the collection of the Transferred Assets except for the Lock-Box Accounts. No Adverse Claim exists upon or with respect to any of the Lock-Box Accounts. (m) Except as described in SCHEDULE IV, none of the Originators has any trade names, fictitious names, assumed names or "doing business as" names or other names under which it has done (at any time during the five year period preceding the date hereof) or is currently doing business. (n) The Purchase Price constitutes reasonably equivalent value in consideration for the transfer to the Buyer of the Transferred Assets from the Originators and no such transfer shall have been made for or on account of an antecedent debt owed by any Originator to the Buyer and no such transfer is or may be voidable under any Section of the Bankruptcy Code. (o) Each Originator has received advice from its counsel which is consistent with the conclusions set forth in the legal opinion(s) of Tobin & Tobin, relating to the issues of substantive consolidation and true sale of the Receivables and the related property. (p) Each Originator is solvent at the time of (and immediately after) each transfer of Transferred Assets to the Buyer hereunder. (q) Each Originator has accounted for and has otherwise treated the Purchase of Transferred Assets hereunder in its books, records and financial statements as a sale to the Buyer, in each case consistent with GAAP and with the requirements set forth herein. (r) None of the Originators is an "investment company" or a company controlled by an "investment company" registered or required to be registered under the Investment Company Act, or otherwise subject to any other federal or state statute or regulation limiting its ability to incur indebtedness. 14 (s) None of the Originators is engaged, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each of the quoted terms is defined or used in Regulation T, U or X). No part of the proceeds of any Transferred Asset has been used for so purchasing or carrying margin stock or for any purpose which violates, or which would be inconsistent with, the provisions of Regulation T, U or X. (t) Each of the Originators has the right (whether by license, sublicense or assignment) to use all of the computer software used by the Originators to account for the Transferred Assets to the extent necessary to administer the Transferred Assets, and to assign (by way of sale) or sublicense such rights to use all of such software to the Buyer. (u) Each Originator has filed or caused to be filed all Federal, state and local tax returns which are required to be filed by it, and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which the applicable Originator has set aside adequate reserves on its books in accordance with GAAP and which proceedings have not given rise to any Adverse Claim. (v) Each Receivable sold hereunder is an Eligible Receivable. (w) The copy of the Credit and Collection Policy attached hereto as SCHEDULE II is a true and complete copy thereof. ARTICLE V GENERAL COVENANTS SECTION 5.01. GENERAL COVENANTS. (a) COMPLIANCE WITH LAWS; PRESERVATION OF CORPORATE EXISTENCE. The Originators shall comply in all material respects with all applicable laws (including, without limitation, ERISA and the Code), rules, regulations, orders and Originator Documents and preserve and maintain their corporate existence, rights, franchises, qualifications and privileges where the failure to comply could reasonably be expected to have a Material Adverse Effect. (b) SALES, LIENS, ETC. Except as otherwise specifically provided herein, no Originator shall (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, any Transferred Asset, or upon or with respect to any Lock-Box Account, the Collection Account or any other account to which any Collections of any Receivable are sent, or assign any right to receive income in 15 respect thereof or (ii) create or suffer to exist any Adverse Claim upon or with respect to any of the Originators' inventory, the sale of which would give rise to a Receivable. (c) GENERAL REPORTING REQUIREMENTS. Each Originator will provide, or cause to be provided, to the Buyer the following: (i) as soon as available and in any event within 90 days after the end of each fiscal year of each Originator, consolidated balance sheets of each Originator and its consolidated subsidiaries and the related statement of income, shareholders' equity and cash flows for such year, each prepared in accordance with GAAP and reported on by nationally recognized independent public accountants acceptable to the Buyer; (ii) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of each Originator, consolidated balance sheets of each Originator and its consolidated subsidiaries and the related statements of income, shareholders' equity and cash flows each for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, prepared in accordance with GAAP and certified by a senior financial officer of each Originator; (iii) promptly after the filing or receiving thereof, copies of all reports and notices with respect to any Reportable Event defined in Article IV of ERISA which the applicable Originator or any ERISA Affiliate files under ERISA with the Internal Revenue Service or the PBGC or the U.S. Department of Labor or which the applicable Originator or any ERISA Affiliate receives from such entity; and (iv) promptly following the Buyer's request therefor, such other information respecting the Receivables or the conditions or operations, financial or otherwise, of the Originators or any of their Affiliates as the Buyer may from time to time reasonably request in order to protect the interests of the Buyer in connection with this Agreement. (d) ACCOUNTING OF THE PURCHASE. Each Originator will not prepare any financial statements which shall account for the transactions contemplated hereby in any manner other than as the sale of the Transferred Assets to the Buyer or in any other respect account for or treat the transactions contemplated hereby in any manner other than as a sale of the Transferred Assets by the applicable Originator to the Buyer. (e) ERISA MATTERS. No Originator will (a) fail to comply in all material respects with ERISA and the provisions of the Code applicable to the Benefit Plans; (b) engage or permit any ERISA Affiliate to engage in any prohibited transaction which would subject any Originator to a material tax or penalty imposed on a prohibited transaction; (c) permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (d) incur any liability to the PBGC over and above the premiums required by law; and (e) terminate any Benefit Plan in a manner which could result in the imposition of a lien on the property of any Originator or any such ERISA Affiliate. 16 (f) CHANGE IN CORPORATE NAME. No Originator will make any change to its corporate name or use any trade names, fictitious names, assumed names or conduct business under any names other than those described in SCHEDULE IV. (g) AUDITS. At any time and from time to time upon prior written notice from the Buyer during regular business hours and on an annual (or more frequent) basis, if requested by the Buyer, the Originators will permit the Buyer, or their agents or representatives, (i) to examine and make copies of and abstracts from all Records, (ii) to visit the offices and properties of the Originators for the purpose of examining such Records, and to discuss matters relating to the Receivables or the Originators' performance hereunder with any of the officers or employees of the Originators having knowledge of such matters and (iii) to have access to its software for the purposes of examining such Records. Each such audit shall be at the sole expense of the Originators. (h) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Originators will maintain (or cause to be maintained) and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Receivables in the event of the destruction of the originals thereof) and keep and maintain, all documents, books, records and other information which are reasonably necessary or advisable for the collection of the Transferred Assets (including all Receivables and Collections included therein). Such books and records shall be marked to indicate the sales of all Receivables and Related Security hereunder and shall include, without limitation, records adequate to permit the daily identification of each Receivable and all collections of and adjustments (including, without limitation, adjustments on account of Dilution Factors) to each Receivable. (i) LOCATION OF RECORDS. Each Originator will keep its chief place of business and chief executive office, and the offices where it keeps the Records, at the addresses referred to in SECTION 9.02, or, in any such case, upon 30 days' prior written notice to the Buyer, at such other locations within the United States where all action required by SECTION 6.02 shall have been taken and completed. (j) CREDIT AND COLLECTION POLICIES. Each Originator will comply in all material respects with the Credit and Collection Policy (as currently in effect) in regard to each Receivable and the related Contract. The Originators shall not, without the written consent of the Buyer and the Deal Agent (as Buyer's assignee), make any change in the Credit and Collection Policy. (k) CHANGE IN PAYMENT INSTRUCTIONS TO OBLIGORS. The Originators will not add or terminate any bank as a Lock-Box Bank from those listed in SCHEDULE III or make any change in its instructions to Obligors regarding payments to be made to any Lock-Box Bank, unless the Buyer shall have given its prior written consent to such addition, termination or change (which consent shall not be unreasonably withheld) and the Buyer shall have received (i) ten Business Days' prior notice of such addition, termination or change, (ii) prior to the effective date of such 17 addition, termination or change, (x) executed copies of Lock-Box Agreements executed by each new Lock-Box Bank and the applicable Originator and (y) copies of all agreements and documents signed by either the applicable Originator or the respective Lock-Box Bank with respect to any new Lock-Box Account, and (iii) the prior written consent of the Buyer to such addition, termination or change (which consent shall not be unreasonably withheld). (l) SEGREGATION OF COLLECTIONS. To the extent that any such funds other than Collections are deposited into any of the Collection Accounts, the applicable Originator will promptly identify any such funds to the Servicer for segregation and remittance to the owner thereof. (m) RECEIVABLES. No Originator will, without the written consent of the Buyer and the Deal Agent (as Buyer's assignee), amend, modify, waive or cancel the terms of any Receivable unless such amendment, modification, waiver or cancellation is in the ordinary course of business of such Originator and, with respect to the cancellation of any Receivable, for which cash consideration is paid with respect to any such Receivable. ARTICLE VI COLLECTION AND MONITORING OF ASSETS SECTION 6.01. COLLECTIONS AND LOCK-BOXES. The Originators will (i) instruct all Obligors to cause all Collections to be either (A) remitted to a Lock-Box and will cause each Lock-Box Bank to retrieve such Collections promptly and deposit the same to the respective Lock-Box Accounts or (B) deposited directly with the Lock-Box Bank, and (ii) pursuant to the Receivables Purchase Agreement, instruct all Lock-Box Banks to transfer such Collections in same day funds to the Collection Account (listed in SCHEDULE III attached hereto) maintained with a Collection Account Bank. If the Originators receive any Collections, the applicable Originator will remit such Collections to the Collection Account within one Business Day following such Originator's receipt thereof. The Originators will not add or terminate any bank as Lock-Box Bank from those listed in SCHEDULE III or make any change in their instructions to Obligors regarding payments to be made to any Lock Box or any Lock-Box Bank, unless the Buyer shall have received at least ten Business Days' prior written notice of such addition, termination or change and all actions reasonably requested by the Buyer to protect and perfect the interest of the Buyer in the Collections of Transferred Assets have been taken and completed. 18 SECTION 6.02. UCC MATTERS; PROTECTION AND PERFECTION OF TRANSFERRED ASSETS. Each Originator will keep its principal place of business and chief executive office, and the office where it keeps the Records, at the address of such Originator referred to in SECTION 9.02 or, upon 30 days' prior written notice to the Buyer, at such other locations within the United States where all actions reasonably requested by the Buyer to protect and perfect the interest of the Buyer in the Transferred Assets have been taken and completed. Each Originator agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that the Buyer may reasonably request in order to perfect, protect or more fully evidence the Transferred Assets acquired by the Buyer hereunder, or to enable the Buyer to exercise or enforce any of its respective rights hereunder. Without limiting the generality of the foregoing, the Originators will: (a) upon the request of the Buyer, execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate or as the Buyer may request, and (b) on or prior to the date hereof, mark their master data processing records evidencing such Transferred Assets and related Contracts with a legend, acceptable to the Buyer, evidencing that the Buyer or its assigns have purchased all right and title thereto. Each Originator hereby authorizes the Buyer to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Transferred Assets now existing or hereafter arising without the signature of the applicable Originator where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Transferred Assets or any part thereof shall be sufficient as a financing statement. On or before the Closing Date, the Originators (at the Originators' expense) shall (i) deliver, return receipt requested, to the Reinsurance Companies in respect of the Reinsurance Recoverables, notice of the change in ownership of the Transferred Assets comprised of Reinsurance Recoverables from the applicable Originators to the Buyer. Notwithstanding the foregoing, the Originators shall, upon the request of the Buyer at any time and at the Originators' expense, notify (to the extent not otherwise notified in accordance with the immediately preceding sentence) the Obligors of Transferred Assets, or any of them, of the ownership of Transferred Assets by the Buyer. If the Originators fail to perform any of their agreements or obligations under this SECTION 6.02, the Buyer may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Buyer incurred in connection therewith shall be payable by the Originators upon the Buyer's demand therefor. For purposes of enabling the Buyer to exercise its rights described in the preceding sentence and elsewhere in this ARTICLE VI, the Originators hereby authorize the Buyer to take any and all steps in the Originators' names and on behalf of the Originators necessary or desirable, in the determination of the Buyer, to collect all amounts due under any and all Receivables, including, without limitation, endorsing the Originators' names on checks and other instruments representing Collections and enforcing such Receivables and the related Contracts. SECTION 6.03. OBLIGATIONS OF THE ORIGINATORS WITH RESPECT TO RECEIVABLES. Each Originator will (a) at its expense, regardless of any exercise by the Buyer of its rights hereunder, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Transferred Assets to the same extent as if Transferred Assets therein had not been sold hereunder and (b) pay when 19 due any taxes, including without limitation, sales and excise taxes, payable in connection with the Transferred Assets. In no event shall the Buyer have any obligation or liability with respect to any Transferred Assets or related Contracts, nor shall it be obligated to perform any of the obligations of the Originators or any of their Affiliates thereunder. The Originators will timely and fully comply in all material respects with the Credit and Collection Policy in regard to each Receivable and the related Contract. The Originators will not make any change in the character of their businesses or in the Credit and Collection Policy, which change would, in either case, impair the collectibility of any Transferred Asset. SECTION 6.04. APPLICATIONS OF COLLECTIONS. Any payment by an Obligor in respect of any indebtedness owed by it to any Originator shall, except as otherwise specified by such Obligor or otherwise required by contract or law and unless otherwise instructed by the Buyer, be applied as a Collection of any Receivables constituting Transferred Assets of such Obligor, in the order of the age of such Receivables, starting with the oldest such Receivable, to the extent of any amounts then due and payable thereunder, before being applied to any Receivable that is not a Transferred Asset or other indebtedness of such Obligor. ARTICLE VII FURTHER ASSURANCES SECTION 7.01. FURTHER ASSURANCES. The Originators agree to do and perform from time to time, any and all acts and to execute any and all further instruments required or reasonably requested by the Buyer or the Deal Agent (as the Buyer's assignee) more fully to effect the purposes of this Agreement in a manner consistent with this Agreement including, without limitation, the execution of any financing statements or continuation statements or other documents or instruments relating to the Transferred Assets for filing under the provisions of the UCC or other relevant laws of any applicable jurisdiction. ARTICLE VIII INDEMNIFICATION SECTION 8.01. INDEMNITIES BY THE ORIGINATORS. Without limiting any other rights which the Buyer may have hereunder or under applicable law, each of the Originators, on a joint and several basis, hereby agrees to indemnify the Buyer and its assigns, and each of their respective directors, officers, employees, agents and attorneys (all of the foregoing being collectively referred to as "INDEMNIFIED PARTIES") from and against any and all damages, losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively referred to as "INDEMNIFIED AMOUNTS") awarded against or incurred by any of them arising out of or resulting from: 20 (i) the sale of any Receivable under this Agreement which is not at the date of Purchase an Eligible Receivable; (ii) reliance on any representation or warranty made or deemed made by any Originator or any of their respective officers under or in connection with this Agreement, which shall have been false or incorrect in any material respect when made or deemed made or delivered; (iii) the failure by any Originator to comply with any term, provision or covenant contained in this Agreement or the Receivables Purchase Agreement or any of the other Originator Documents, or with any applicable law, rule or regulation with respect to any Receivable, the related Contract or the Related Security, or the nonconformity of any Receivable, the related Contract or the Related Security with any such applicable law, rule or regulation; (iv) (A) the failure to vest and maintain vested in the Buyer or to transfer to the Buyer, legal and equitable title to and ownership of, the Receivables and the other Transferred Assets which are, or are purported to be, sold by the Originators hereunder; or (B) the failure to grant to the Buyer a valid and perfected ownership interest under Article 9 of the UCC in and to the Receivables which are, or are purported to be, Transferred Assets, together with all Collections and Related Security; in each case free and clear of any Adverse Claim whether existing at the time of the Purchase of any such Receivable or at any time thereafter (other than Adverse Claims created in favor of the Buyer hereunder or by the Buyer under the Receivables Purchase Agreement); (v) the failure by any Originator to make any payment required on its part to be made hereunder; (vi) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables and other Transferred Assets which are, or are purported to be, sold by the Originators hereunder, whether at the time of the Purchase or at any subsequent time; (vii) any dispute, claim, offset or defense (other than the discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable which is, or is purported to be sold by an Originator hereunder (including, without limitation, a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the Originator's performance of services related to such Receivable or the failure to perform such services; (viii) any failure of any Originator to perform its duties or obligations in accordance with the provisions of this Agreement or any failure by any Originator or any Affiliate thereof to perform its respective duties under the Contracts; 21 (ix) the failure to pay when due any taxes, including without limitation, sales, excise or personal property taxes payable in connection with the Transferred Assets; (x) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of the Purchase or the ownership by the Buyer of Transferred Assets except any such investigation, litigation or proceeding arising from the gross negligence or willful misconduct of the Buyer; (xi) any attempt by any Person to void or otherwise avoid any transfer of a Transferred Asset from the Originators to the Buyer under any statutory provision or common law or equitable action, including, without limitation, any provision of the Bankruptcy Code; or (xii) the failure of any Originator or any of their respective agents or representatives (including, without limitation, agents, representatives and employees of the Originators acting pursuant to authority granted under SECTION 6.01) to remit to the Servicer, Collections of Transferred Assets remitted to such Originator or any such agent or representative. Any amounts subject to the indemnification provisions of this SECTION 8.01 shall be paid by the applicable Originator to the Buyer within two (2) Business Days following the Buyer's written demand therefor. Notwithstanding any other provision of this Agreement to the contrary, the Originators shall not indemnify the Indemnified Parties for or with respect to any Indemnified Amounts that would constitute recourse for uncollectible Transferred Assets due to credit reasons. ARTICLE IX MISCELLANEOUS SECTION 9.01. AMENDMENTS AND WAIVERS. No amendment to or modification of any provision of this Agreement shall be effective without the written agreement of the parties hereto and, to the extent then required in the Receivables Purchase Agreement, the written consent of the Deal Agent. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 9.02. NOTICES, ETC. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telex communication and communication by facsimile copy) and mailed, telexed, transmitted or delivered, as to each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, upon receipt, or in the case of (a) notice by mail, five days after being deposited in the United States mails, first class postage prepaid, (b) notice by telex, when telexed against receipt of answerback, or (c) notice by facsimile copy, when verbal communication of receipt is obtained, except that notices and communications pursuant to ARTICLE II shall not be effective until received. 22 SECTION 9.03. SETOFF AND COUNTERCLAIM. All payments to be made by the Originators under this Agreement shall be made free and clear of any counterclaim, set-off, deduction or other defense, which the Originators may have against the Buyer, or against each other. SECTION 9.04. NO WAIVER; REMEDIES. No failure on the part of the Buyer to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.05. BINDING EFFECT; ASSIGNABILITY. (a) This Agreement shall be binding upon and inure to the benefit of the Originators, the Buyer and their respective successors and permitted assigns. None of the Originators may assign its rights and obligations or any interest herein without the prior written consent of the Buyer. The Buyer may, subject to any restrictions in the Receivables Purchase Agreement, assign at any time all of its rights and obligations hereunder and interests herein without the consent of the Originators. Without limiting the foregoing, the Originators acknowledge the assignment of Buyer's rights and interests hereunder pursuant to the Receivables Purchase Agreement and agrees that, subject to the terms set forth in the Receivables Purchase Agreement, any such assignee of the Buyer (and any further assignee of such assignee) shall have the right, as the assignee of the Buyer (or the assignee of such assignee), to enforce the Buyer's rights and remedies under this Agreement directly against such party (including, without limitation, the right to give or withhold any and all consents, requests, notices, directions, approvals, demands, extensions or waivers under or with respect to this Agreement or the obligations in respect of any Originator hereunder to the same extent as the Buyer may do), but without any obligation on the part of any such assignee to perform any of the obligations of the Buyer hereunder. Each of the Originators also agrees that it shall send to the Deal Agent a copy of all notices required or desired to be given by the Originators to the Buyer hereunder. SECTION 9.06. TERM OF THIS AGREEMENT. This Agreement, including, without limitation, the Originators' obligations to observe its covenants set forth in ARTICLES V and VI, shall remain in full force and effect until the Termination Date; PROVIDED, HOWEVER, that the rights and remedies with respect to any breach of any representation and warranty made or deemed made by the Originators pursuant to ARTICLES III and IV, and the indemnification and payment provisions of ARTICLE VIII shall be continuing and shall survive any termination of this Agreement. SECTION 9.07. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION TO VENUE. THIS AGREEMENT, OTHER THAN THE PROVISIONS RELATING TO THE CREATION, PERFECTION AND PRIORITY OF THE SECURITY INTEREST IN THE RECEIVABLES, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK; THE PROVISIONS OF THIS AGREEMENT RELATING TO THE GRANT, 23 PERFECTION AND PRIORITY OF THE SECURITY INTEREST IN THE RECEIVABLES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN THE STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO HEREBY AGREES TO THE JURISDICTION OF ANY FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. SECTION 9.08. WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE BUYER AND THE ORIGINATORS EACH WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN ANY OF THEM IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. INSTEAD, ANY SUCH DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY. SECTION 9.09. COSTS, EXPENSES AND TAXES. In addition to the rights of indemnification granted to the Buyer and the Indemnified Parties under ARTICLE VIII hereof, the Originators agree to pay on demand, on a joint and several basis, all reasonable costs and expenses of the Buyer and its assignee incurred in connection with the preparation, execution, delivery, administration (including periodic auditing), amendment or modification of, or any waiver or consent issued in connection with, this Agreement and the other documents to be delivered hereunder or in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Buyer and its assignee with respect thereto, and with respect to advising the Buyer and its assignee as to its respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith, and all reasonable costs and expenses, if any (including reasonable counsel fees and expenses), incurred by the Buyer and its assignee in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith. SECTION 9.10. EXECUTION IN COUNTERPARTS; SEVERABILITY; INTEGRATION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement contains the final and complete integration of all prior 24 expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings. SECTION 9.11. CONFIDENTIALITY. Except to the extent otherwise required by applicable laws, rules or regulation, unless the provider thereof shall otherwise consent in writing, each Originator agrees that it shall (i) maintain the confidentiality of information obtained as a result of being a party hereto, to any related documents or to any of the transactions contemplated hereby or thereby (including, without limitation, the contents of any summary of indicative terms and conditions with respect to such transactions, and the provisions of this Agreement and any of the other Originator Documents) ("CONFIDENTIAL INFORMATION") and (ii) not disclose, deliver or otherwise make available to any third party any part of any such Confidential Information; PROVIDED, HOWEVER, that the Originators may disclose any Confidential Information (w) to its legal counsel, auditors and accountants, (x) as may be required or requested by any governmental authority, regulatory body or rating agency, (y) subject to a written confidentiality agreement having terms substantially similar to this SECTION 9.11, to any financial institution or other party that extends or is considering the extension of material debt or equity financing to the applicable Originator or (z) as may be required or appropriate in response to a court order or in connection with any litigation; PROVIDED FURTHER, HOWEVER, that the Originators shall have no obligation of confidentiality whatsoever in respect of any information which may be generally available to the public or becomes available to the public through no fault of the Buyer. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE ORIGINATORS: CALIFORNIA COMPENSATION INSURANCE COMPANY By: /s/ J. CHRIS SEAMAN --------------------------------------- Name: J. Chris Seaman Title: Vice President c/o Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, CA 91302 Attention: J. Chris Seaman, Executive Vice President and CFO Phone: 818-880-1600 Facsimile: 818-880-8615 COMMERCIAL COMPENSATION INSURANCE COMPANY By: /s/ J. CHRIS SEAMAN --------------------------------------- Name: J. Chris Seaman Title: Vice President c/o Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, CA 91302 Attention: J. Chris Seaman, Executive Vice President and CFO Phone: 818-880-1600 Facsimile: 818-880-8615 COMBINED BENEFITS INSURANCE COMPANY By: /s/ J. CHRIS SEAMAN --------------------------------------- Name: Title: c/o Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, CA 91302 Attention: J. Chris Seaman, Executive Vice President and CFO Phone: 818-880-1600 Facsimile: 818-880-8615 BUSINESS INSURANCE COMPANY By: /s/ J. CHRIS SEAMAN --------------------------------------- Name: Title: c/o Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, CA 91302 Attention: J. Chris Seaman, Executive Vice President and CFO Phone: 818-880-1600 Facsimile: 818-880-8615 THE BUYER: INSURANCE FUNDING LLC By: /s/ ANDREW L. STIDD --------------------------------------- Name: Andrew L. Stidd Title: Manager c/o GSS Holdings II, Inc. 25 West 43rd Street Suite 704 New York, New York 10036 Attention: Andy Stidd Facsimile No: (212)302-8767 Telephone No: (212)302-8330 EX-10.71 11 EXHIBIT 10.71 EXECUTION VERSION SUPPORT AGREEMENT THIS SUPPORT AGREEMENT (this "AGREEMENT") is made as of December 9, 1998 by SUPERIOR NATIONAL INSURANCE GROUP, INC., a Delaware corporation ("SUPERIOR") in favor of INSURANCE FUNDING LLC, a Delaware limited liability company ("INSURANCE FUNDING"), EAGLEFUNDING CAPITAL CORPORATION, a Delaware corporation (the "PURCHASER"), and BANCBOSTON ROBERTSON STEPHENS INC. (the "DEAL AGENT"). Reference is made to (i) that certain Receivables Purchase and Sale Agreement (as the same may from time to time be amended, restated, supplemented or otherwise modified, the "ORIGINATOR SALE AGREEMENT") of even date herewith between California Compensation Insurance Company, a California corporation, Commercial Compensation Insurance Company, a New York corporation, Combined Benefits Insurance Company, a California corporation and Business Insurance Company, a Delaware corporation, as the originators (each an "ORIGINATOR" and, collectively, the "ORIGINATORS"), and Insurance Funding, as the buyer and (ii) that certain Receivables Purchase Agreement (as the same may from time to time be amended, restated, supplemented or otherwise modified, the "RECEIVABLES PURCHASE AGREEMENT") of even date herewith among Insurance Funding, the Purchaser, the Deal Agent and Superior, in its capacity as servicer thereunder. It is a condition precedent to the willingness of Insurance Funding to enter into the Originator Sale Agreement and to make the "Purchase" (as defined in the Originator Sale Agreement) from the Originators thereunder and a condition precedent to the willingness of the Purchaser and the Deal Agent to enter into the Receivables Purchase Agreement and to make the "Purchase" (as defined in the Receivables Purchase Agreement) from Insurance Funding thereunder, that Superior execute and deliver this Agreement. Section 1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms shall have the meanings set forth in the Receivables Purchase Agreement and the Originator Sale Agreement, as applicable. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "AGGREGATE YIELD AND FEES" shall mean, for any Settlement Date, the sum of accrued and unpaid (i) Servicer Fee, (ii) Yield, (iii) Liquidity Fee, (iv) Program Fee and (v) Administrative Fee. "DEFAULTED RECEIVABLE" shall have the meaning assigned thereto in the Receivables Purchase Agreement, PROVIDED that such term shall include any Receivable that has been written off Insurance Funding's or the applicable Originator's books as uncollectible. "DILUTION FACTORS" means, with respect to the Receivables, any credits, rebates, freight charges, discounts, allowances, disputes, chargebacks, allowances for early payments and other allowances or adjustments granted in accordance with Insurance Funding's or an Originator's usual practices. "ELIGIBLE ACCOUNT BANK" means (a) any commercial bank satisfactory to the Administrator and having (i) combined capital and surplus of at least $250,000,000, (ii) a short-term debt rating of at least A-1 from S&P, P-1 from Moody's and D-1 from DCR (if rated by DCR), and (iii) in a manner acceptable to the Deal Agent and the Borrower, expressly waived all contractual and equitable rights of set-off and combination of accounts it may have with respect to the relevant Support Account, or (b) such other commercial bank satisfactory to the Administrator and in respect of which each of S&P, Moody's and DCR shall have delivered prior written confirmation to the Administrator that the maintenance of the Support Account with such commercial bank will not result in the reduction or withdrawal of the respective ratings of the EagleFunding CP Notes. "EQUITY INVESTMENT" shall have the meaning given such term in the Recievables Purchase Agreement. "FUNDED SUPPORT BALANCE" means an amount equal to the sum of all payments made by Superior pursuant to paragraphs (a), (b), (c) and (d) of SECTION 2 of this Agreement. "NONCOMPLYING RECEIVABLE" means any Receivable with respect to which (i) an Originator or Superior has received notice from Insurance Funding or the Deal Agent (as Insurance Funding's assignee) that such Receivable was not an Eligible Receivable as of the date purchased under the Originator Sale Agreement or that such Originator otherwise breached any representation, warranty or covenant made with respect to such Receivable under the Originator Sale Agreement or (ii) Insurance Funding or Superior has received notice from the Purchaser or the Deal Agent that such Receivable was not an Eligible Receivable as of the date purchased under the Receivables Purchase Agreement or that Insurance Funding otherwise breached any representation, warranty or covenant made with respect to such Receivable under the Receivables Purchase Agreement. "SERVICER DOWNGRADE TERMINATION EVENT" shall have the meaning assigned thereto in the Receivables Purchase Agreement. "SUPPORT ACCOUNT" means a segregated trust account, in the name of the Purchaser and referencing the name of the Deal Agent, maintained at an Eligible Account Bank chosen by the Purchaser. "SUPPORT ACCOUNT BALANCE" shall have the meaning assigned thereto in paragraph (b) of SECTION 5 hereof. "SUPPORT AMOUNT" means an amount equal to the Purchase Limit in effect on the Closing Date TIMES 80%. "SUPPORT DEFICIENCY AMOUNT" shall have the meaning assigned thereto in paragraph (b) of SECTION 5 hereof. "SUPPORT PAYMENT" shall have the meaning assigned thereto in paragraph (b) of SECTION 5 hereof. "TOTAL SUPPORT PAYMENT" shall have the meaning assigned thereto in paragraph (b) of SECTION 5 hereof. "UNFUNDED SUPPORT BALANCE" means an amount equal to the Support Amount MINUS the Funded Support Balance. Section 2. PERFORMANCE AND RECOURSE OBLIGATIONS. (a) Superior does hereby unconditionally and irrevocably guarantee: (i) to Insurance Funding and all of its successors and assigns, the due and punctual performance and observance by each Originator of all covenants, agreements, terms, conditions, undertakings, indemnities and other obligations to be performed and observed by each such Originator under the Originator Sale Agreement and each of the other Transaction Documents to which each such Originator is a party including, without limitation, the due and punctual payment of all sums which are or may become due and owing by each such Originator under the terms and provisions of the Originator Sale Agreement, whether for fees, expenses (including, without limitation, attorneys' fees), indemnified amounts or otherwise, whether upon any termination or for any other reason; and (ii) to the Deal Agent and the Purchaser and all of their respective successors and assigns, the due and punctual performance and observance by Insurance Funding of all covenants, agreements, terms, conditions, undertakings, indemnities and other obligations to be performed and observed by Insurance Funding under the Receivables Purchase Agreement and each of the other Transaction Documents to which Insurance Funding is a party including, without limitation, the due and punctual payment of all sums which are or may become due and owing by Insurance Funding under the terms and provisions of the Receivables Purchase Agreement, whether for fees, expenses (including, without limitation, attorneys' fees), indemnified amounts or otherwise, whether upon any termination or for any other reason; PROVIDED, HOWEVER, that Superior shall only be obligated to make a payment with respect to amounts under this SECTION 2(a) to the extent that the aggregate amounts paid under this SECTION 2(a) (together with the aggregate amounts paid under other provisions of this SECTION 2 other than 2(e)) does not exceed an amount equal to the lesser of (i) the Support Amount and (ii) the amounts necessary to reduce the Purchased Interest to zero. The obligations of Superior under this SECTION 2(a) are in addition to, and not in limitation or in lieu of, all other obligations of Superior under this SECTION 2. (b) In addition to and not in limitation of the foregoing, Superior does hereby unconditionally and irrevocably agree, notwithstanding any limitations on the recourse obligations of the Originators under the Originator Sale Agreement or any limitations on the recourse obligations of Insurance Funding under the Receivables Purchase Agreement, that Superior shall, upon written demand from the Purchaser or the Deal Agent, pay to the Purchaser and any other Person to whom the Purchaser may have assigned a portion of the Purchased Interest under the Receivables Purchase Agreement an amount equal to their respective percentage interests of the Outstanding Balance of any Purchased Receivables which have become Defaulted Receivables; PROVIDED, HOWEVER, that Superior shall only be obligated to make a payment with respect to any such Defaulted Receivables under this SECTION 2(b) to the extent that the aggregate amounts paid under this SECTION 2(b) (together with the aggregate amounts paid under other provisions of this SECTION 2 other than 2(e)) does not exceed an amount equal to the lesser of (i) the Support Amount and (ii) the amounts necessary to reduce the Purchased Interest to zero. The obligations of Superior under this SECTION 2(b) are in addition to, and not in limitation or in lieu of, all other obligations of Superior under this SECTION 2. (c) In addition to and not in limitation of the foregoing, Superior does hereby unconditionally and irrevocably agree, notwithstanding any limitations on the recourse obligations of the Originators under the Originator Sale Agreement or any limitations on the recourse obligations of Insurance Funding under the Receivables Purchase Agreement, that Superior shall, upon written demand from the Purchaser or the Deal Agent, (i) pay to the Purchaser and any other Person to whom the Purchaser may have assigned a portion of the Purchased Interest under the Receivables Purchase Agreement an amount equal to their respective percentage interests of the Outstanding Balance of any Purchased Receivables which are reasonably determined by the Purchaser or the Deal Agent to be Noncomplying Receivables and (ii) pay to the Purchaser and any other Person to whom the Purchaser may have assigned a portion of the Purchased Interest under the Receivables Purchase Agreement an amount equal to their respective percentage interests of the actual reduction in the Outstanding Balance of any Purchased Receivables as a result of any of the Dilution Factors; PROVIDED, HOWEVER, that Superior shall only be obligated to make a payment with respect to any such Noncomplying Receivables or Dilutions Factors under this SECTION 2(c) to the extent that the aggregate amounts paid under the provisions of this SECTION 2(c) (together with the aggregate amounts paid under other provisions of this SECTION 2 other than 2(e)) does not exceed an amount equal to the lesser of (i) the Support Amount and (ii) the amounts necessary to reduce the Purchased Interest to zero. The obligations of Superior under this SECTION 2(c) are in addition to, and not in limitation or in lieu of, all other obligations of Superior under this SECTIONS 2. (d) Any payment owed by Superior under any of the foregoing provisions of this SECTION 2 shall be due and owing upon the 5th Business Day following Insurance Funding's, Purchaser's or Deal Agent's written demand therefor. Superior shall pay interest on all amounts owed by it under this Agreement at the per annum rate of 2% PLUS the Adjusted Base Rate, from the date of demand for such amounts until such amounts are paid in full. (e) Upon the occurrence of a Servicer Downgrade Termination Event solely with respect to Superior, the Purchaser shall, by delivery of a written notice to the Deal Agent and Superior, require Superior to deposit an amount equal to the Unfunded Support Balance into the Support Account within 5 Business Days of receipt of such notice. (i) The Purchaser and EagleFunding hereby grant to the Deal Agent full power and authority, on behalf of the Purchaser and Insurance Funding, to withdraw funds from the Support Account in accordance with the terms of and for the purposes set forth in this Agreement. (ii) From and after the establishment of the Support Account, and until the earlier of (i) the date upon which the balance of the Support Account shall be zero and (ii) the termination date of this Agreement as set forth in SECTION 9, all payments to be made by Superior under this Agreement shall be made automatically by the Deal Agent from the Support Account. (iii) From and after the establishment of the Support Account, and until the earlier of (i) the date upon which the balance of the Support Account shall be zero and (ii) the termination date of this Agreement as set forth in SECTION 9, at the direction of the Purchaser, the Deal Agent shall from time to time invest and reinvest the funds on deposit in such Support Account from time to time in Permitted Investments. Notwithstanding anything herein to the contrary, neither the Deal Agent nor the Purchaser shall have any liability for any loss arising from any investment or reinvestment made by it in accordance with, and pursuant to, the provisions hereof. (v) If on the termination date of this Agreement as set forth in SECTION 9, after giving effect to paragraph (b) of SECTION 5, there are funds remaining in the Support Account, the Deal Agent shall withdraw the balance of such funds and pay them to Superior. Section 3. WAIVERS; VALIDITY OF OBLIGATIONS. (a) Superior hereby waives promptness, diligence and notice of acceptance of this Agreement, of any action taken or omitted in reliance hereon or of any default in the payment of any sums or in the performance of any covenants, agreements, terms, conditions, and any demand, protest or other notice of any kind. Superior expressly waives the right to require Insurance Funding, the Deal Agent or the Purchaser to protect, secure, perfect, insure, proceed against or exhaust any security granted to it as security for the payment of any sums due under the Transaction Documents or to exhaust any right or take any action against any Originator or any other Person or any collateral. Superior further agrees that the execution and delivery of this Agreement by Superior shall be conclusive evidence against Superior that its obligations under this Agreement are unconditional and absolute. Superior hereby warrants to the Purchaser and the Deal Agent that it has adequate means to obtain from the Originators and Insurance Funding on a continuing basis all information concerning each of the Transaction Documents, the financial condition of the Originators and Insurance Funding and the collectibility of the Receivables, and that it is not relying on the Purchaser or the Deal Agent to provide such information either now or in the future. (b) The obligations of Superior under this Agreement constitute a present and continuing guaranty of payment and not of collectibility, shall be absolute and unconditional, shall not be subject to any counterclaim, set-off, deduction or defense based upon any claim Superior, any Originator, Insurance Funding or any Affiliate may have against each other or against the Deal Agent, the Purchaser or any other Person and shall remain in full force and effect without regard to and shall not be released, discharged or in any way affected or impaired by, any thing, event, happening, matter, circumstance or condition whatsoever (whether or not Superior shall have any knowledge or notice thereof or consent thereto), including, without limitation: (i) any amendment or modification of or supplement to the Originator Sale Agreement, the Receivables Purchase Agreement or any other Transaction Document or in connection therewith agreed to by the requisite parties specified therein, or any assignment or transfer of any interest of Insurance Funding, the Deal Agent or Purchaser therein, including, without limitation, any renewal or extension of the terms of payment of any sums due or contingently due thereunder or the granting of time in respect of any payment, or any furnishing or acceptance of security or any release of any security so furnished or accepted for the sum due or contingently due under any Transaction Document or any addition of one or more new or different Lock-Box Banks or eligibility criteria for the purchase of Receivables and Purchased Interests thereunder; (ii) any waiver, consent, extension, granting of time, forbearance, indulgence or other action or inaction under or in respect of the Originator Sale Agreement, the Receivables Purchase Agreement or any other Transaction Document or any exercise or nonexercise of any right, remedy or power in respect thereof; (iii) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceedings with respect to any Originator or any other Person, or the properties or creditors of any of them; (iv) the occurrence of any Trigger Event under the Receivables Purchase Agreement, or any invalidity or any unenforceability of, or any misrepresentation, irregularity or other defect in, the Originator Sale Agreement, the Receivables Purchase Agreement or any other Transaction Document or any other document to be delivered in connection therewith; (v) any failure by Insurance Funding to take any required steps to perfect and maintain perfected its 100% ownership interest in any Receivable, Related Security related thereto or Collections with respect thereto, or any failure by the Deal Agent or the Purchaser to take any required steps to perfect and maintain perfected its respective Purchased Interest in any Purchased Property; (vi) any transfer or purported transfer, any consolidation or merger of an Originator or Insurance Funding with or into any other corporation or entity, or any change whatsoever in the objects, capital structure, constitution or business of an Originator or Insurance Funding; (vii) any failure on the part of the Originators or Insurance Funding to perform or comply with any term of the Originator Sale Agreement, the Receivables Purchase Agreement or any other Transaction Document or any other document to be delivered in connection therewith; (viii) any suit or other action brought by any creditors of an Originator or Insurance Funding for any reason whatsoever, including, without limitation, any suit or action in any way attacking or involving the Originator Sale Agreement, the Receivables Purchase Agreement or any other Transaction Document or any other document to be delivered in connection therewith; or (ix) any other fact or circumstance which might constitute a defense available to, or a discharge of, an Originator or Insurance Funding or a guarantor. (c) Superior further acknowledges and agrees that the rights and defenses waived by it pursuant to this Agreement include any right or defense that it may have or be entitled to assert based upon or arising out of any one or more of Sections 2787 to 2855, inclusive, of the California Civil Code. Section 4. REINSTATEMENT. The obligations of Superior in respect of this Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any obligations guaranteed hereunder is rescinded or must otherwise be returned by Insurance Funding, the Deal Agent or the Purchaser upon the insolvency, bankruptcy or reorganization of an Originator or Insurance Funding or otherwise, all as though such payment had not been made. Section 5. SUBROGATION. (a) If Superior shall make any payment due in respect of the Originator Sale Agreement, the Receivables Purchase Agreement or any other Transaction Document pursuant to this Agreement, it shall, to the extent permitted by applicable law, be subrogated to the rights of Insurance Funding, the Deal Agent and the Purchaser in respect of which such payment was made; PROVIDED, HOWEVER, that such rights of subrogation and all indebtedness and claims arising therefrom shall be, and Superior hereby declares that they are, and shall at all times be, in all respects subordinate and junior to all sums due or contingently due under the Originator Sale Agreement, the Receivables Purchase Agreement or such Transaction Document in respect of which payment was not made. Superior hereby agrees that the foregoing right of subrogation shall not be effective until, and that it shall not be entitled to receive any payment, under any condition, in respect of any such subrogated claim unless and until, all sums which may become due, or are stated in the Originator Sale Agreement, the Receivables Purchase Agreement or such Transaction Document to become due, shall have become due and shall have been paid in full or funds for their payment shall have been duly and sufficiently provided. Superior further agrees that, if, solely as a result of (i) the existence of this Agreement and (ii) the application of Section 550 of the Bankruptcy Code, or any similar provision of any state insolvency law, Insurance Funding, the Purchaser or the Deal Agent is required in any bankruptcy or insolvency proceeding to turn over or otherwise pay to the estate of an Originator or Insurance Funding or lose the right to receive from an Originator's or Insurance Funding's estate any amount representing or constituting a transfer avoidable as to Insurance Funding, the Purchaser or the Deal Agent (which transfer, but for the existence of this Agreement, would not have been recoverable from any such Person), Superior agrees to pay or cause to be paid to the Deal Agent, for the benefit of the Purchaser, an amount, in cash, equal to such avoided or recovered amount. (b) If, prior to the termination date of this Agreement pursuant to SECTION 9, Superior made any payment due in respect of the Originator Sale Agreement, the Receivables Purchase Agreement or any other Transaction Document pursuant to this Agreement other than SECTION 2(e) (each a "Support Payment" and collectively, the "Support Payments"), then, solely to the extent funds are available from the sources set forth in clauses (i) and (ii) below, Superior shall be entitled to reimbursement in an amount up to the aggregate amount of all such Support Payments (the "Total Support Payment Amount"). (i) If (A) prior to such termination of this Agreement Superior funded the Support Account pursuant to SECTION 2(e), and (B) following such termination of this Agreement, there are funds remaining in the Support Account (the total amount of such funds, the "Support Account Balance"), then the Deal Agent shall pay to Superior, solely from the Support Balance, an amount equal to the lesser of (i) the Total Support Payment Amount or (ii) the Support Account Balance. (ii) If (A) (i) the Support Account Balance is insufficient to pay the Total Support Payment Amount (the amount by which the Total Support Payment Amount exceeds the Support Account Balance, the "Support Deficiency Amount"), or (ii) Superior did not fund the Support Account pursuant to SECTION 2(e) , and (B) following the termination of this Agreement pursuant to SECTION 9, there are Collections remaining in the Collection Account after the payment to the Seller of its Equity Investment, then the Servicer shall pay to Superior, solely from the Collections remaining in the Collection Account, an amount equal to the lesser of (i) the Support Deficiency Amount or (ii) the total amount of Collections remaining in the Collection Account. Section 6. REPRESENTATIONS AND WARRANTIES OF SUPERIOR. Superior hereby represents and warrants as follows on and as of the date hereof and on and as of each date on which a purchase shall be made under the Originator Sale Agreement or the Receivables Purchase Agreement: (a) Superior is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified to do business, and is in good standing, in every jurisdiction in which the nature of its business requires it to be so qualified and the failure to do so could reasonably be expected to have a material adverse effect on Superior's ability to perform its obligations under this Agreement or the other Transaction Documents to which it is a party. (b) The execution, delivery and performance by Superior of this Agreement and all other Transaction Documents to which it is a party, (i) are within Superior's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene (A) Superior's charter or by-laws, (B) any law, rule or regulation applicable to Superior, (C) any contractual restriction binding on or affecting Superior or its property or (D) any order, writ, judgment, award, injunction or decree binding on or affecting Superior or its property, and (iv) do not result in or require the creation of any Adverse Claim upon or with respect to any of its properties. This Agreement and each other Transaction Document to which Superior is a party have each been duly executed and delivered by Superior. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Superior of this Agreement or any other Transaction Document to which it is a party. (d) This Agreement and each other Transaction Document to which Superior is a party constitutes the legal, valid and binding obligation of Superior enforceable against it in accordance with their respective terms. (e) (i) Superior has furnished to the Deal Agent (A) copies of the audited consolidated balance sheets of Superior and its consolidated subsidiaries as at December 31, 1997 audited consolidated statements of income, shareholders' equity and cash flows for the fiscal year of Superior and its consolidated subsidiaries then ended reported on by December 31, 1997, which financial statements present fairly in all material respects in accordance with GAAP the financial position of Superior and its consolidated subsidiaries as at December 31, 1997, and the results of operations of Superior and its consolidated subsidiaries for the fiscal year of Superior then ended, and (B) copies of the unaudited consolidated balance sheets of Superior and its consolidated subsidiaries as at September 30, 1998, and the related unaudited consolidated statements of income, shareholders' equity and cash flows for the three-month period then ended, which financial statements present fairly in all material respects in accordance with GAAP the financial position of Superior and its consolidated subsidiaries as at September 30, 1998, and the results of operations of Superior and its consolidated subsidiaries for the three-month period then ended; and (ii) since September 30, 1998, (A) no material adverse change has occurred in the business, assets, liabilities, financial condition, results of operations or business prospects of Superior and its subsidiaries taken as a whole, and (B) no event has occurred or failed to occur which has had, or can be reasonably expected to have, singly or in the aggregate, a material adverse effect on the ability of Superior to perform its obligations under this Agreement or any other Transaction Document to which it is a party. (f) There is no pending or threatened action or proceeding affecting Superior or any of its subsidiaries before any court, governmental agency or arbitrator that could reasonably be expected to have a material adverse effect on the financial condition of Superior or any of its subsidiaries, the ability of Superior to perform its obligations under this Agreement or the other Transaction Documents to which it is a party or which affects or purports to affect the legality, validity or enforceability of this Agreement or any other Transaction Document. (g) None of the information, exhibits, financial statements, documents, books, records or reports furnished or to be furnished by Superior to the Deal Agent or the Purchaser pursuant to the provisions of this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Deal Agent or the Purchaser, as the case may be, at such time) as of the date so furnished, and no such document contains or will contain any material misstatement of fact or omits or shall omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (h) Superior has filed or caused to be filed all Federal, state and local tax returns which are required to be filed by it, and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which Superior has set aside adequate reserves on its books in accordance with GAAP and which proceedings have not given rise to any Adverse Claim. (i) Superior does not have any direct ownership or other financial interest in the Purchaser. Section 7. COVENANTS OF SUPERIOR. Superior hereby covenants that, until this Agreement is terminated in accordance with SECTION 9 hereof, (a) Superior shall (x) comply in all material respects with all applicable laws (including, without limitation, ERISA and the Code), rules, regulations, orders and each of the Transaction Documents to which it is a party and (y) preserve and maintain its corporate existence, rights, franchises, qualifications and privileges where the failure to comply, preserve or maintain could reasonably be expected to have a material adverse effect on Superior's ability to perform its obligations under this Agreement or any other Transaction Document to which it is a party; (b) Superior will, except to the extent that Insurance Funding or Superior (as Servicer under the Receivables Purchase Agreement) has already delivered the same to the Deal Agent in accordance with Section 5.01 of the Receivables Purchase Agreement, promptly deliver to the Deal Agent copies of all financial statements of Superior, reports to Superior's security holders, registration statements and similar filings made by Superior, ERISA notices, notices of litigation, notices of material adverse change and similar information in the possession and/or under the control of Superior or otherwise pertaining to Superior and its subsidiaries, all as more particularly described in subsection (c) of Section 5.01 of the Receivables Purchase Agreement; (c) Superior will not (a) fail to comply in all material respects with ERISA and the provisions of the Code applicable to the Benefit Plans; (b) engage or permit any ERISA Affiliate to engage in any prohibited transaction which would subject Superior to a material tax or penalty imposed on a prohibited transaction; (c) permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (d) incur any liability to the PBGC over and above the premiums required by law; or (e) terminate any Benefit Plan in a manner which could result in the imposition of a lien on the property of Superior or any such ERISA Affiliate. (d) Superior will file or cause to be filed all federal, state and local tax returns which are required to be filed by it. Superior shall pay or cause to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which Superior shall have set aside adequate reserves on its books in accordance with GAAP. Section 8. NO PROCEEDINGS. Superior covenants and agrees that it will not institute against, or join any other Person in instituting against, either Insurance Funding or the Purchaser any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and one day after the latest maturing commercial paper note issued by the Purchaser is paid in full. Section 9. TERMINATION. Subject to SECTION 4 hereof, this Agreement shall terminate after the latest to occur of (i) the Collection Date under the Receivables Purchase Agreement, (ii) the Termination Date under the Originator Sale Agreement or (iii) the date all other amounts owed to the Purchaser, the Deal Agent and any other Indemnified Party or Affected Person by an Originator, Insurance Funding or Superior under this Agreement and each of the other Transaction Documents to which Originator, Insurance Funding or Superior is a party shall be paid in full SECTION 10. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. SUPERIOR HEREBY AGREES TO THE JURISDICTION OF ANY FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK. SUPERIOR IRREVOCABLY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. SECTION 11. WAIVER OF JURY TRIAL. SUPERIOR WAIVES ITS RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. SUPERIOR AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, SUPERIOR FURTHER AGREES THAT ITS RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. Section 12. AMENDMENT AND WAIVER. No amendment or waiver of any provision of this Agreement shall be effective unless in a writing signed by Superior, Insurance Funding, the Purchaser and the Deal Agent and then such amendment or waiver shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Insurance Funding, the Purchaser or the Deal Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver hereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. Section 13. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of each of Insurance Funding, the Purchaser and the Deal Agent and their respective successors and assigns. Each such Person shall have the right to assign any and all of its or their rights hereunder to any other Person and the Person acquiring any interest herein shall succeed to all of the rights of the transferor thereof hereunder to the extent of such transfer. Without limiting the foregoing, Superior acknowledges the assignment of Insurance Funding's rights and interests hereunder pursuant to the Receivables Purchase Agreement and agrees that, subject to the terms of the Receivables Purchase Agreement, any such assignee of Insurance Funding (and any further assignee of such assignee) shall have the right, as the assignee of Insurance Funding (or the assignee of such assignee), to enforce Insurance Funding's rights and remedies under this Agreement directly against Superior (including, without limitation, the right to give or withhold any and all consents, requests, notices, directions, approvals, demands, extensions or waivers under or with respect to this Agreement or the obligations in respect of Superior hereunder to the same extent as Insurance Funding may do), but without any obligation on the part of any such assignee to perform any of the obligations of Insurance Funding hereunder. Section 14. COSTS AND EXPENSES. Superior shall pay on demand all reasonable costs and expenses of Insurance Funding, the Purchaser or the Agent or their respective successors and assigns incurred in connection with the preparation, execution, delivery, administration, amendment or modification of, or any waiver or consent issued in connection with, this Agreement and the other documents to be delivered hereunder or in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for Insurance Funding, the Purchaser, the Deal Agent and their respective successors and assigns with respect thereto, and with respect to advising Insurance Funding, the Purchaser, the Deal Agent and their respective successors or assigns as to their respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith, and all reasonable costs and expenses, if any (including reasonable counsel fees and expenses), incurred by Insurance Funding, the Purchaser, the Deal Agent and their respective successors and assigns in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith. Section 15. EXECUTION IN COUNTERPARTS; SEVERABILITY; INTEGRATION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement contains a final and complete integration of all prior expressions of the parties hereto with respect to the subject matter hereof, and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings. Section 16. HEADINGS. The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation hereof or thereof. Section 17. CONFIDENTIALITY. Except to the extent otherwise required by applicable laws, rules or regulation, unless the provider thereof shall otherwise consent in writing, Superior agrees that it shall (i) maintain the confidentiality of information obtained as a result of being a party hereto, to any related documents or to any of the transactions contemplated hereby or thereby (including, without limitation, the contents of any summary of indicative terms and conditions with respect to such transactions, and the provisions of this Agreement and any of the other Transaction Documents) ("CONFIDENTIAL INFORMATION") and (ii) not disclose, deliver or otherwise make available to any third party any part of any such Confidential Information; PROVIDED, HOWEVER, that Superior may disclose any Confidential Information (w) to its legal counsel, auditors and accountants, (x) as may be required or requested by any governmental authority, regulatory body or rating agency, (y) subject to a written confidentiality agreement having terms substantially similar to this SECTION 17, to any financial institution or other party that extends or is considering the extension of material debt or equity financing to Superior or (z) as may be required or appropriate in response to a court order or in connection with any litigation; PROVIDED, FURTHER, that Superior shall have no obligation of confidentiality whatsoever in respect of any information which may be generally available to the public or becomes available to the public through no fault of Superior or any of its Affiliates. [Support Agreement -- signature page] IN WITNESS WHEREOF, the undersigned has caused this Agreement to be signed by its duly authorized officer as of the date first set forth above. SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ ROBERT E. NAGLE ---------------------------- Name: Robert E. Nagle Title: EX-10.72 12 EXHIBIT 10.72 EXECUTION VERSION U.S. $63,416,465 RECEIVABLES PURCHASE AGREEMENT Dated as of December 9, 1998 Among INSURANCE FUNDING LLC, as the Seller ------------- and EAGLEFUNDING CAPITAL CORPORATION, as the Purchaser ---------------- and BANCBOSTON ROBERTSON STEPHENS INC., as the Deal Agent ----------------- and SUPERIOR NATIONAL INSURANCE GROUP, INC., as the Servicer --------------- TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Other Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 SECTION 1.03. Computation of Time Periods. . . . . . . . . . . . . . . . . . . . .16 ARTICLE II THE PURCHASE FACILITY SECTION 2.01. Purchase of the Purchased Interest. (a). . . . . . . . . . . . . . .16 SECTION 2.02. The Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 SECTION 2.03. Selection of Purchase Periods. . . . . . . . . . . . . . . . . . . .17 SECTION 2.04. Settlement Procedures. . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 2.05. Payments and Computations, Etc . . . . . . . . . . . . . . . . . . .19 SECTION 2.06. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 2.07. Increased Costs; Capital Adequacy; Illegality. . . . . . . . . . . .21 SECTION 2.08. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 2.09. Assignment of the Originator Sale Agreement. . . . . . . . . . . . .23 ARTICLE III CONDITIONS OF THE PURCHASE SECTION 3.01. Conditions Precedent to the Purchase . . . . . . . . . . . . . . . .24 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Seller . . . . . . . . . . . .25 SECTION 4.02. Representations and Warranties of the Servicer . . . . . . . . . . .29 ARTICLE V GENERAL COVENANTS SECTION 5.01. General Covenants of the Seller. . . . . . . . . . . . . . . . . . .31 SECTION 5.02. General Covenants of the Servicer. . . . . . . . . . . . . . . . . .35 ARTICLE VI ADMINISTRATION, COLLECTION AND MONITORING OF ASSETS SECTION 6.01. Appointment and Designation of the Servicer. . . . . . . . . . . . .38 SECTION 6.02. Collection of Receivables by the Servicer; Extensions and Amendments of Receivables. . . . . . . . . . . . . . . . . . . . . .38 SECTION 6.03. Distribution and Application of Collections. . . . . . . . . . . . .39 SECTION 6.04. Other Rights of the Deal Agent . . . . . . . . . . . . . . . . . . .39 SECTION 6.05. Records; Audits. . . . . . . . . . . . . . . . . . . . . . . . . . .40 SECTION 6.06. Receivable Reporting . . . . . . . . . . . . . . . . . . . . . . . .40 SECTION 6.07. Collections and Lock-Boxes . . . . . . . . . . . . . . . . . . . . .41 SECTION 6.08. UCC Matters; Protection and Perfection of Purchased Property . . . .41 SECTION 6.09. Obligations of the Seller With Respect to Receivables. . . . . . . .42 SECTION 6.10. Applications of Collections. . . . . . . . . . . . . . . . . . . . .42 SECTION 6.11. Annual Servicing Report of Independent Public Accountants. . . . . .43 ARTICLE VII TRIGGER EVENTS SECTION 7.01. Trigger Events . . . . . . . . . . . . . . . . . . . . . . . . . . .43 ARTICLE VIII INDEMNIFICATION SECTION 8.01. Indemnities by the Seller. . . . . . . . . . . . . . . . . . . . . .45 SECTION 8.02. Optional Repurchase of the Purchased Interest. . . . . . . . . . . .47 ARTICLE IX THE DEAL AGENT SECTION 9.01. Authorization and Action . . . . . . . . . . . . . . . . . . . . . .48 SECTION 9.02. Deal Agent's Reliance, Etc . . . . . . . . . . . . . . . . . . . . .49 SECTION 9.03. Deal Agent and Affiliates. . . . . . . . . . . . . . . . . . . . . .49 SECTION 9.04. [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 SECTION 9.05. Resignation of the Deal Agent. . . . . . . . . . . . . . . . . . . .49 SECTION 9.06. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 ARTICLE X MISCELLANEOUS SECTION 10.01. Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . .50 SECTION 10.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . .51 SECTION 10.03 Setoff and Counterclaim . . . . . . . . . . . . . . . . . . . . . .51 SECTION 10.04. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . .51 SECTION 10.05. Binding Effect; Assignability . . . . . . . . . . . . . . . . . . .51 SECTION 10.06. Term of this Agreement. . . . . . . . . . . . . . . . . . . . . . .52 SECTION 10.07. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION TO VENUE . . . . . . . . . . . . . . . . . . . . . . .52 SECTION 10.08. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . . . .52 SECTION 10.09. Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . .52 SECTION 10.10. No Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . .53 SECTION 10.11. Recourse Against Certain Parties. . . . . . . . . . . . . . . . . .54 SECTION 10.12. Execution in Counterparts; Severability; Integration. . . . . . . .54 SECTION 10.13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . .54
SCHEDULES Schedule I -- Condition Precedent Documents Schedule II -- Description of Credit and Collection Policy Schedule III -- Lock-Box Banks and Lock-Box Accounts Schedule IV -- Tradenames, Fictitious Names and "Doing Business As" Names Schedule V -- List of Purchased Receivables EXHIBITS Exhibit A -- Form of Lock-Box Agreements Exhibit B -- Form of Monthly Asset Report Exhibit C -- Form of Opinion of Counsel for the Seller Exhibit D -- Seller's Certificate of Formation THIS RECEIVABLES PURCHASE AGREEMENT (the "AGREEMENT") is made as of December 9, 1998, among: (1) INSURANCE FUNDING LLC, a Delaware limited liability company (the "SELLER"); (2) EAGLEFUNDING CAPITAL CORPORATION, a Delaware corporation ("EAGLEFUNDING"), as the purchaser (the "Purchaser"); (3) BANCBOSTON ROBERTSON STEPHENS INC. ("BRSI"), as agent (the "DEAL AGENT"); and (4) SUPERIOR NATIONAL INSURANCE GROUP, INC., a Delaware corporation ("SUPERIOR"), in its capacity as the initial Servicer hereunder (in such capacity, the "SERVICER"). IT IS AGREED as follows: ARTICLE I DEFINITIONS SECTION 1.01. CERTAIN DEFINED TERMS. (a) Certain capitalized terms used throughout this Agreement are defined above or in this SECTION 1.01. (b) As used in this Agreement and its exhibits, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ADJUSTED BASE RATE" means, at any time, the rate of interest equal to the sum of (a) the Applicable Base Rate Margin and (b) the Base Rate in effect at such time and from time to time. "ADJUSTED EURODOLLAR RATE" means, with respect to any Purchase Period for all Capital allocated to such Purchase Period, an interest rate per annum equal to the sum of (a) a per annum rate equal to the Applicable Eurodollar Margin; PLUS (b) the quotient, stated as a percentage, of (i) the per annum rate determined by the Deal Agent at which dollar deposits for such Purchase Period are offered by BankBoston, N.A. based on information presented on Telerate Page 3750 as of 11:00 a.m. London time on the second Business Day prior to the first day of such Purchase Period, divided by (ii) a number equal to 1.00 minus the Eurodollar Reserve Percentage, if applicable. "ADMINISTRATIVE FEE" means the fee payable by the Seller to the Deal Agent annually in advance on the Closing Date and, if the Collection Date has not occurred, on each anniversary of the Closing Date, and identified as the "Administrative Fee" in the Fee Letter. "ADVERSE CLAIM" means a lien, security interest, charge, encumbrance or other right or claim of any Person having the practical effect of a lien, security interest, charge or encumbrance. "AFFECTED PARTY" has the meaning assigned to that term in SECTION 2.07(a). "AFFILIATE" when used with respect to a Person means any other Person controlling, controlled by or under common control with such Person. For purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract, or otherwise; and the terms "controlling" and "controlled" have the meanings correlative to the foregoing. "AGENT'S BALANCE" means, in respect of an Insurance Premium, the amount of such Insurance Premium due and payable to an Originator by (a) an Insurance Agent, on behalf of the related Policyholder, in which case the Insurance Agent has deducted any commissions due such Insurance Agent from the Outstanding Balance thereof or (b) a Policyholder, in which case the Originator shall reduce the Outstanding Balance thereof for any commissions due such Insurance Agent. "ALTERNATIVE RATE" means, with respect to any Purchase Period for all Capital allocated to such Purchase Period, an interest rate per annum equal to the Adjusted Eurodollar Rate or the Adjusted Base Rate as the Seller shall select by notice to the Deal Agent in accordance with the terms of this Agreement; PROVIDED, HOWEVER, that the "ALTERNATIVE RATE" for such Capital allocated to such Purchase Period shall be the Adjusted Base Rate if (a) on or before the first day of such Purchase Period, the Purchaser shall have notified the Deal Agent that a Eurodollar Disruption Event has occurred, (b) such Purchase Period is a period of 29 days or less, or (c) such Capital is less than $1,000,000. "APPLICABLE BASE RATE MARGIN" means 0.0% per annum; PROVIDED, HOWEVER, that, at all times after the occurrence of a Trigger Event (other than with respect to an event of the type described in SECTION 7.01(h) hereof), the "Applicable Base Rate Margin" means 2.0% per annum. "APPLICABLE EURODOLLAR RATE MARGIN" means 0.75% per annum; PROVIDED, HOWEVER, that, at all times after the occurrence of a Trigger Event (other than with respect to an event of the type described in SECTION 7.01(h) hereof), the "Applicable Eurodollar Rate Margin" means 4.25% per annum. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance pursuant to which the assignee agrees to purchase an interest in the Purchased Interest and this Agreement from the Purchaser, in form and substance satisfactory to the Deal Agent and the Seller, entered into by the Purchaser and such assignee pursuant to SECTION 10.05. "BANKRUPTCY CODE" means the United States Bankruptcy Reform Act of 1978 (11 U.S.C. Sections 101, ET SEQ.), as amended from time to time, or any successor statute. "BASE RATE" means, on any day, a fluctuating rate of interest per annum equal to the higher of (a) the per annum rate of interest announced from time to time by BankBoston, N.A. at its head office in Boston, Massachusetts as its "base rate", and (b) 1/2 of one percent per annum above the Federal Funds Rate. "BENEFIT PLAN" means any employee benefit plan as defined in Section 3(3) of ERISA in respect of which the Seller or any ERISA Affiliate of the Seller is, or at any time during the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA. "BUSINESS DAY" means a day of the year other than a Saturday or a Sunday on which (a) banks are required to be open in New York City and Boston, Massachusetts and (b) if the term "Business Day" is used in connection with the Adjusted Eurodollar Rate, dealings in dollar deposits are carried on in the London interbank market. "CAPITAL" means the Purchase Price, reduced from time to time by any amounts paid by the Seller to the Purchaser as a reduction to Capital and any Collections received and distributed on account of such Capital pursuant to SECTION 2.04; PROVIDED, HOWEVER, that such Capital shall not be reduced by any distribution of any portion of Collections if at any time such distribution is rescinded or must be returned for any reason. "CAPITAL LIMIT" means, at any time, an amount equal to the remainder of (a) the Eligible Receivables Balance at such time, MINUS (b) the Yield Reserve at such time. "CERTIFICATE OF FORMATION" means the certificate of formation of Insurance Funding LLC filed with the Secretary of State of the State of Delaware on December 1, 1998. "CLOSING DATE" means December 9, 1998. "CODE" means the Internal Revenue Code of 1986, as amended, and any successor. "COLLECTION ACCOUNT" has the meaning specified in SECTION 6.07. "COLLECTION ACCOUNT AGREEMENT" means that certain Collection Account Agreement dated as of even date herewith among the Collection Account Bank, the Servicer, the Purchaser and the Deal Agent "COLLECTION ACCOUNT BANK" has the meaning specified in SECTION 6.07. "COLLECTION DATE" means the date on which the aggregate outstanding Capital has been reduced to zero, the Purchaser has received all Yield and other amounts due to it in connection with this Agreement and the Deal Agent has received all amounts due to it in connection with this Agreement. "COLLECTIONS" means, (a) with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including, without limitation, all cash proceeds of the Related Security with respect to such Receivable, and (b) any amounts paid to the Seller (or the Deal Agent, the Purchaser or any assignees thereof) pursuant to the terms of the Originator Sale Agreement. "COMMERCIAL PAPER" means the short-term promissory notes of EagleFunding denominated in dollars, issued by EagleFunding in connection with the transactions contemplated by the Transaction Documents, including any portion of such short-term promissory notes that are identified on the books and records of EagleFunding as issued in respect of the transactions contemplated by the Transaction Documents. "CONFIDENTIAL INFORMATION" has the meaning assigned to such term in SECTION 10.13. "CONTRACT" means an agreement between an Originator and a Person pursuant to or under which an Obligor shall be obligated to make one or more payments to an Originator including, without limitation, (i) an Insurance Policy and (ii) a Reinsurance Contract. "COVERAGE SHORTFALL EVENT" means, at any time, the aggregate Capital outstanding hereunder exceeds the Capital Limit in effect at such time. "CP DEALER FEE" means, on any day, the fees payable to the Dealer in respect of any Commercial Paper. "CP DISRUPTION EVENT" means the inability of EagleFunding, at any time, whether as a result of a prohibition, a contractual restriction or any other event or circumstance whatsoever, to raise funds through the issuance of its commercial paper notes (whether or not constituting "Commercial Paper" hereunder) in the United States commercial paper market. "CP RATE" means, with respect to any Purchase Period for all Capital allocated to such Purchase Period, the rate equivalent to the rate (or if more than one rate, the weighted average of the rates) at which commercial paper notes of EagleFunding having a term equal to such Purchase Period and to be issued to fund or maintain the applicable Purchase by EagleFunding may be sold by any placement agent or commercial paper dealer selected by EagleFunding, as agreed between each such agent or dealer and EagleFunding and notified by EagleFunding or such agent or dealer to the Deal Agent and the Servicer, including an increment to such rate sufficient in amount to enable EagleFunding to collect all amounts of CP Dealer Fees payable in respect of all such commercial paper notes issued for the term of such Purchase Period; PROVIDED, HOWEVER, if the rate (or rates) as agreed between any such agent or dealer and EagleFunding with regard to any Purchase Period for the applicable Purchase is a discount rate (or rates), the "CP RATE" for such Purchase Period shall be the rate (or if more than one rate, the weighted average of the rates) resulting from converting such discount rate (or rates) to an interest-bearing equivalent rate per annum. "CREDIT AND COLLECTION POLICY" means those credit and collection policies and practices relating to Contracts and Receivables described in SCHEDULE II. "DCR" means Duff & Phelps Credit Rating Co., and any successor thereto. "DEAL AGENT'S ACCOUNT" means a special account (account number 24207) in the name of the Deal Agent (or for so long as EagleFunding is the Purchaser, in the name of EagleFunding), maintained at Bankers Trust Company for the benefit of the Deal Agent and the Purchaser. "DEALER" means any dealer or placement agent in respect of the Commercial Paper. "DEBT" of any Person means (a) indebtedness of such Person for borrowed money, (b) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) obligations of such Person to pay the deferred purchase price of property or services beyond ordinary course of business payment terms for trade payables, (d) obligations of such Person as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (e) obligations secured by an Adverse Claim upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations and (f) without duplication obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in CLAUSES (a) THROUGH (e) above. "DEFAULTED RECEIVABLE" means a Receivable (a) (ii) in the case of an Agent's Balance, as to which any payment, or part thereof, remains unpaid for more than 270 days from the original invoice date for such payment and (ii) in the case of a Reinsurance Recoverable, as to which any payment, or party thereof, remains unpaid for more than 270 days from the date of this Agreement, (b) as to which the Obligor thereof has taken any action constituting an Insolvency Event or suffered any Insolvency Event or (c) which, consistent with the Credit and Collection Policy, has been or should be written off the applicable Originator's books as uncollectible. "DILUTION FACTORS" means, with respect to the Receivables, any credits, rebates, freight charges, discounts, allowances, disputes, chargebacks, allowances for early payments and other allowances or adjustments granted in accordance with the Originators' and the Seller's usual practices. "DISCOUNT FACTOR" means a percentage calculated to provide the Purchaser with a reasonable return on its investment in the Purchased Property after taking account of the time value of money based upon the anticipated dates of collection of the Transferred Assets. The Discount Factor shall be 5.5%. "ELIGIBLE RECEIVABLE" means, at any time, a Receivable: (a) the Obligor of which is a United States resident, is not an Affiliate of the Seller, the Servicer or any Originator, and is not a government or a governmental subdivision or agency; (b) which is not a Defaulted Receivable; (c) which arises under a Contract (i) the performance of which has been completed by the applicable Originator and by all other parties other than the Obligor and (ii) that has been duly authorized and, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Receivable, enforceable against such Obligor in accordance with its terms and is not subject to any dispute, offset, counterclaim or defense whatsoever; (d) (i) which is an "account" or "general intangible" within the meaning of Section 9-106 of the UCC of all applicable jurisdictions, (ii) as to which all performance and other action required to be taken in connection therewith by the applicable Originator (and, if applicable, the Seller) for the Obligor has been so performed or taken, (iii) is denominated and payable only in United States dollars in the United States, (iv) no portion of which is payable on account of sales taxes, and (v) in which the applicable Originator can grant a perfected security interest; (e) which arises in the ordinary course of the Originators' business in connection with providing services or the sale of goods within the United States; (f) the assignment of which (including, without limitation, the sale of an undivided percentage interest therein and the assignment of any Related Security) does not contravene or conflict with any applicable laws, rules or regulations or any contractual or other restriction, limitation or encumbrance; (g) which does not have an Adverse Claim filed against it and is not otherwise subject to an Adverse Claim and has not been compromised, adjusted or modified (including by extension of time of payment or the granting of any discounts, allowances or credits) except for discounts, allowances or credits made in accordance with the Credit and Collection Policy and in the ordinary course of the Originators' business; (h) which, together with the Contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party to the Contract related thereto is in violation of any such law, rule or regulation in any material respect; (i) which satisfies, and has been originated in accordance with, all applicable requirements of the Credit and Collection Policy; (j) as to which the Deal Agent has not notified the Seller that the Deal Agent has determined, in its reasonable business judgment, that such Receivable (or class of Receivables) is not acceptable for purchase hereunder; (k) with respect to which, (i) prior to the Purchase thereof by Purchaser, Seller has a first priority ownership interest therein, free and clear of any Adverse Claim, and (ii) from and after the Purchase thereof, EagleFunding has a properly perfected first priority undivided percentage ownership interest therein, free and clear of any Adverse Claim; and (l) with respect to which no Person other than the applicable Originator or an Affiliate thereof is attempting to collect the proceeds of such Receivable. "ELIGIBLE RECEIVABLES BALANCE" means, at any time, the aggregate Outstanding Balance of Eligible Receivables which constitute Purchased Receivables. "EQUITY INVESTMENT" means, the sum of $1,000.00. "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA AFFILIATE" means (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Seller; (b) a partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Seller or (c) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Seller, any corporation described in CLAUSE (a) above or any partnership, trade or business described in CLAUSE (b) above. "EUROCURRENCY LIABILITIES" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "EURODOLLAR DISRUPTION EVENT" means, with respect to all Capital allocated to any Purchase Period, any of the following: (a) a determination by the Purchaser that it would be contrary to law or to the directive of any central bank or other governmental authority (whether or not having the force of law) to obtain United States dollars in the London interbank market to make, fund or maintain the Purchase for such Purchase Period, (b) the failure of BankBoston, N.A. to furnish timely information for purposes of determining the Adjusted Eurodollar Rate, (c) a determination by the Purchaser that the rate at which deposits of United States dollars are being offered in the London interbank market does not accurately reflect the cost to the Purchaser of making, funding or maintaining the Purchase for such Purchase Period or (d) the inability of the Purchaser to obtain United States dollars in the London interbank market to make, fund or maintain the Purchase for such Purchase Period. "EURODOLLAR RESERVE PERCENTAGE" means, for any day with respect to a Purchase Period to which Capital has been allocated hereunder, the maximum rate (expressed as a decimal) at which any lender subject thereto would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any successor or similar regulations relating to such reserve requirements) against Eurocurrency Liabilities, if such liabilities were outstanding. The Eurodollar Reserve Percentage shall be adjusted automatically on and as of the effective date of any change in the maximum rate described above. "FEDERAL FUNDS RATE" means, for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day for such transactions received by the Liquidity Agent from three Federal funds brokers of recognized standing selected by it. "FEE LETTER" has the meaning assigned to that term in SECTION 2.06(a). "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, in each case consistently applied. "INDEMNIFIED AMOUNTS" has the meaning assigned to that term in SECTION 8.01. "INDEMNIFIED PARTIES" has the meaning assigned to that term in SECTION 8.01. "INSURANCE AGENT" means a Person authorized to sell an Insurance Policy. "INSURANCE POLICY" means a duly filed and approved contract of insurance in force and effective on the date hereof. "INSURANCE PREMIUM" means an amount due from a Policyholder in order to receive the benefits of an Insurance Policy. "INVESTMENT" means, with respect to any Person, any direct or indirect loan, advance or investment by such Person in any other Person, whether by means of share purchase, capital contribution, loan or otherwise, excluding the acquisition of Receivables and other Purchased Property (and interests therein) pursuant to the Originator Sale Agreement and excluding commission, travel and similar advances to officers, employees and directors made in the ordinary course of business. "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as amended and any successor. "IRS" shall mean the Internal Revenue Service and any Person succeeding to the functions thereof. "ISSUER" means EagleFunding and any other Purchaser whose principal business consists of issuing commercial paper or other rated securities to fund the acquisition and maintenance of interests in, or the making of loans secured by a grant of security interests in, receivables, accounts, instruments, chattel paper, general intangibles and other similar assets. "LIQUIDATION FEE" means, for the Capital allocated to a Purchase Period (computed without regard to any shortened duration of such Purchase Period as a result of the occurrence of the Termination Date) during which such Capital is reduced or the applicable Yield Rate for such Capital is for any reason changed, the amount, if any, by which (a) the additional Yield (calculated without taking into account any Liquidation Fee) which would have accrued on the reduction of such Capital during such Purchase Period (as so computed) if such reductions had remained as Capital or if the applicable Yield Rate had remained unchanged, as the case may be, exceeds (b) the sum of (i) Yield actually received by a Purchaser in respect of such Capital for such Purchase Period and (ii) if applicable, the income, if any, received by such Purchaser from such Purchaser's investing the proceeds of reductions of Capital. "LIQUIDITY AGENT" means BankBoston, N.A., in its capacity as "Liquidity Agent" under the Liquidity Agreement, together with any successor or permitted assign in such capacity. "LIQUIDITY AGREEMENT" means that certain Liquidity Agreement dated as of even date herewith by and among EagleFunding, the financial institutions party thereto from time to time as "Liquidity Providers," and the Liquidity Agent, as the same may be amended, restated, supplemented or otherwise modified from time to time. "LIQUIDITY FEE" means the fee payable by the Seller and identified as the "Liquidity Fee" in the Fee Letter. "LIQUIDITY PROVIDERS" means the financial institutions party to the Liquidity Agreement from time to time as "Liquidity Providers" thereunder. "LLC AGREEMENT" means the Operating Agreement of Insurance Funding LLC executed by GSS Holdings II, Inc., as the sole member, as the same may be amended, restated, supplemented or otherwise modified from time to time hereafter. "LOCK-BOX" means a post office box to which Collections are remitted for retrieval by a Lock-Box Bank and deposited by such Lock-Box Bank into a Lock-Box Account. "LOCK-BOX ACCOUNT" means an account maintained for the purpose of receiving Collections at a bank or other financial institution which has executed a Lock-Box Agreement. "LOCK-BOX AGREEMENT" means an agreement, in substantially the form of EXHIBIT A, among the applicable Originator and a Lock-Box Bank. "LOCK-BOX BANK" means any of the banks or other financial institutions holding one or more Lock-Box Accounts. "MANAGEMENT AGREEMENT" means the Management Agreement dated as of December 9, 1998 between Global Securitization Services LLC and the Seller (as the same may be amended, restated, supplemented or otherwise modified from time to time). "MANAGEMENT FEE" means the fee payable by the Seller and identified as the "Management Fee" in the Management Agreement. "MANAGER" means Global Securitization Services LLC, a Delaware limited liability company. "MONTHLY ASSET REPORT" means a report, in substantially the form of EXHIBIT B, furnished by the Servicer to the Deal Agent for the Purchaser pursuant to SECTION 6.06(b). "MONTHLY ASSET REPORT DATE" means, with respect to any calendar month, the 20th day of such month, or if such date is not a Business Day, the next Business Day to occur thereafter. "MOODY'S" means Moody's Investors Service, Inc., and any successor thereto. "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding five years contributed to by the Seller or any ERISA Affiliate on behalf of its employees. "OBLIGOR" means a Person obligated to make payments pursuant to a Contract, and includes, without limitation, (i) in the case of a Reinsurance Recoverable, the applicable Reinsurance Company and (ii) in the case of an Agent's Balance, either the Insurance Agent or the Policyholder, as the case may be. "ORIGINATOR" means each of California Compensation Insurance Company, a California corporation, Commercial Compensation Insurance Company, a New York corporation, Combined Benefits Insurance Company, a California corporation and Business Insurance Company, a Delaware corporation; and "ORIGINATORS" means such corporations, collectively. "ORIGINATOR SALE AGREEMENT" means the Receivables Purchase and Sale Agreement of even date herewith among the Originators and the Seller, together with all instruments, documents and agreements executed by the Originators in connection therewith, in each case as the same may from time to time be amended, supplemented or otherwise modified in accordance with the terms hereof. "OTHER COSTS" has the meaning assigned to such term in SECTION 10.09(c). "OTHER SELLERS" has the meaning assigned to such term in SECTION 10.09(c). "OUTSTANDING BALANCE" of any Receivable at any time means the then outstanding principal balance thereof. "PBGC" means the Pension Benefit Guaranty Corporation and any Person succeeding to the functions thereof. "PERMITTED INVESTMENTS" means (a) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of no more than 45 days from the date of acquisition (or, if earlier, maturing no later than the next occurring end of any Purchase Period); (b) time deposits and certificates of deposit having maturities of no more than 45 days from the date of acquisition (or, if earlier, maturing no later than the next occurring end of any Purchase Period), maintained with or issued by any commercial bank having capital and surplus in excess of $500,000,000 and having a short-term rating of not less than P-1 or the equivalent thereof from Moody's, A-1 or the equivalent thereof from S&P, and D-1 or the equivalent thereof from DCR (if rated by DCR); (c) repurchase obligations for underlying securities of the types described in CLAUSES (a) or (b) above with a term of not more than ten days and maturing no later than 45 days after the date of acquisition (or, if earlier, maturing no later than the next occurring end of any Purchase Period); and (d) commercial paper maturing within 45 days after the date of acquisition (or, if earlier, maturing no later than the next occurring end of any Purchase Period) and having a rating of not less than P-1 or the equivalent thereof from Moody's, A-1 or the equivalent thereof from S&P, and D-1 or the equivalent thereof from DCR (if rated by DCR). "PERSON" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company, government (or any agency or political subdivision thereof) or other entity. "POLICYHOLDER" means the Person who is the named insured under an Insurance Policy. "PROGRAM FEE" means the fee payable by the Seller and identified as the "Program Fee" in the Fee Letter. "PURCHASE" means a purchase by the Purchaser of interests in the Purchased Property from the Seller pursuant to ARTICLE II. "PURCHASE LIMIT" means, at any time, $63,416,465. "PURCHASE PERIOD" for any outstanding Capital means (a) if Yield in respect of all or any part thereof is computed by reference to the CP Rate, a period of 1 to and including 45 days, (b) if Yield in respect thereof is computed by reference to the Adjusted Eurodollar Rate, a period of one month and (c) if Yield in respect thereof is computed at the Adjusted Base Rate, a period of 1 to and including 31 days, PROVIDED that the last day of such period shall in each case be a Settlement Date, in each case, as determined pursuant to SECTION 2.03. "PURCHASE PRICE" means, with respect to the Purchase hereunder, the aggregate price to be paid to the Seller for the Purchase of the Purchased Property in accordance with SECTION 2.02, which price shall be equal to the product of (x) the aggregate Outstanding Balance of the Purchased Receivables and (y) one MINUS the Discount Factor, and shall be an integral multiple of $250,000. "PURCHASED INTEREST" means the undivided percentage ownership interest in the Purchased Property conveyed by Seller to the Purchaser under this Agreement. The Purchased Interest shall be equal to 100% and shall remain constant until the Collection Date, on which date the Purchased Interest shall become zero. "PURCHASED PROPERTY" means (i) all the Receivables purchased in accordance with SECTION 2.01 or 2.02 and identified in SCHEDULE V hereto, (ii) all Related Security relating to such Receivables and (iii) all Collections with respect to, and other proceeds of, such Receivables. "PURCHASED RECEIVABLE" means any Receivable included in the Purchased Property and in which a Purchased Interest has been purchased under this Agreement. "PURCHASER" means EagleFunding or any other Person that agrees, pursuant to an Assignment and Acceptance, to purchase an interest in this Agreement and in the Purchased Interest pursuant to SECTION 2.02 of this Agreement, and to assume the obligations of EagleFunding under this Agreement. "RATE VARIANCE FACTOR" means that number which reflects the Deal Agent's reasonable estimate of the potential variance in selected interest rates over a period of time designated by the Deal Agent, as shall be computed from time to time by the Deal Agent. The Deal Agent shall notify the Servicer in writing of the Rate Variance Factor in effect from time to time. "RATING AGENCY" has the meaning assigned to such term in SECTION 10.01 of this Agreement. "RECEIVABLE" means an Agent's Balance or a Reinsurance Recoverable. "RECORDS" means all Contracts and other documents, books, records and other information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) maintained with respect to Receivables and the related Obligors which the Seller has itself generated, in which the Seller has acquired an interest pursuant to the Originator Sale Agreement or in which the Seller has otherwise obtained an interest. "REINSURANCE COMPANY" means an insurance company listed on Schedule V hereto which has entered into a Reinsurance Treaty with an Originator. "REINSURANCE RECOVERABLE" means an amount due an Originator from a Reinsurance Company in respect of a claim under a Reinsurance Treaty. "REINSURANCE TREATY" means a contract listed on Schedule V hereto pursuant to which an Originator reinsures or is otherwise indemnified against all or a portion of claims it must pay to a Policyholder under any Insurance Policy. "RELATED SECURITY" means with respect to any Receivable: (a) all Adverse Claims and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise; (b) the assignment to the Deal Agent, for the benefit of the Purchaser, of all UCC financing statements covering any collateral securing payment of such Receivable; (c) all guarantees, indemnities, warranties, letters of credit, insurance policies and proceeds and premium refunds thereof and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise; (d) all Records; (e) all of the Seller's right and title to, and interest in, the Originator Sale Agreement, the Support Agreement and the assignment to the Deal Agent of all UCC financing statements filed by the Seller against the Originators under or in connection with the Originator Sale Agreement; (f) all right, title and interest of the relevant Originators in to and under the related Contract (but only to the extent relating to such Receivable); and (g) all proceeds of the foregoing. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and any successor thereto. "SECURITY AGREEMENT" means that certain Security Agreement dated as of even date herewith by and between EagleFunding and Bankers Trust Company, as "Liquidity Collateral Agent" and as "Supplemental Enhancement Collateral Agent" thereunder, as the same may be amended, restated, supplemented or otherwise modified from time to time. "SERVICER" means at any time the Person then authorized pursuant to ARTICLE VI to service, administer and collect Receivables. "SERVICER DOWNGRADE TERMINATION EVENT" has the meaning assigned to that term in paragraph (c) of the definition of "Servicer Termination Event". "SERVICER FEE" has the meaning assigned to that term in SECTION 2.06(b). "SERVICER TERMINATION EVENT" means the occurrence of any of the following: (a) any representation or warranty made or deemed to be made by the Servicer (or any of its officers or agents) under or in connection with this Agreement or any information, document or report delivered pursuant hereto shall prove to have been false or incorrect in any material respect when made; (b) the Servicer shall fail to pay any principal of or premium or interest on any Debt when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue, without waiver or cure, for a period of 45 Business Days; or (ii) any other default or any event which, with the passage of time or the giving of notice, or both, would constitute a default under any agreement or instrument relating to any such Debt, shall occur and shall continue, without waiver or cure, for a period of 45 Business Days; or (iii) any Debt of the Servicer shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; (c) the unsecured financial obligation credit rating of the Servicer shall be rated lower than "BB" by Standard & Poor's or "B1" by Moody's or the equivalent thereof by a nationally recognized credit rating agency (a "SERVICER DOWNGRADE TERMINATION EVENT"); or (d) a material failure on the part of the Servicer to observe or perform any of its duties or obligations as Servicer under this Agreement, as determined by the Deal Agent in the exercise of its reasonable commercial judgment and such failure shall remain unremedied for two Business Days. "SETTLEMENT DATE" means, with respect to any calendar month, the 25th day of such month, or if such date is not a Business Day, the next Business Day to occur thereafter. "SUPPLEMENTAL ENHANCEMENT AGREEMENT" means the Supplemental Enhancement Agreement dated as of December 9, 1998, among the Borrower, the financial institutions from time to time parties thereto as Supplemental Enhancement Providers, BankBoston, N.A. as supplemental enhancement agent for the Supplemental Enhancement Providers and Bankers Trust Company, as supplemental collateral agent for the Supplemental Enhancement Providers, as the same may be amended, restated, supplemented or otherwise modified from time to time. "SUPPLEMENTAL ENHANCEMENT AGENT" means BankBoston, N.A., in its capacity as agent for the Supplemental Enhancement Providers under the Supplemental Enhancement Agreement, and any successor "Supplemental Enhancement Agent" thereunder. "SUPPLEMENTAL ENHANCEMENT FEE" means the fee payable by the Seller and identified as the "Supplemental Enhancement Fee" in the Fee Letter. "SUPPLEMENTAL ENHANCEMENT PROVIDERS" means the financial institutions parties to the Supplemental Enhancement Agreement from time to time as lenders thereunder. "SUPPORT AGREEMENT" means the Support Agreement dated as of the date hereof executed by Superior in favor of the Seller, the Purchaser and the Deal Agent. "SUPPORT DEFICIENCY AMOUNT" has the meaning assigned to such term in the Support Agreement. "TAXES" has the meaning assigned to such term in SECTION 2.08(a). "TERMINATION DATE" means the date of the declaration or automatic occurrence of the Termination Date pursuant to SECTION 7.01. "TRANSACTION DOCUMENTS" means this Agreement, the Collection Account Agreement, the Originator Sale Agreement, the Support Agreement, the Fee Letter, the Liquidity Agreement, the Liquidity Fee Letter, the Supplemental Enhancement Agreement, the Supplemental Enhancement Fee Letter, the Security Agreement, and all other certificates, instruments, UCC financing statements, reports, notices, agreements and documents executed or delivered under or in connection with such documents, in each case as the same may be amended, supplemented or otherwise modified from time to time in accordance therewith. "TRIGGER EVENT" has the meaning assigned to that term in SECTION 7.01. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "UNITED STATES" means the United States of America. "YIELD" means, for all Capital allocated to any Purchase Period during any such Purchase Period, the product of YRT x C x ED --- 360 where: C = the Capital allocated to such Purchase Period, ED = the actual number of days elapsed during such Purchase Period, and YRT = the Yield Rate for such Purchase Period; PROVIDED, HOWEVER that (a) no provision of this Agreement shall require the payment or permit the collection of Yield in excess of the maximum permitted by applicable law and (b) Yield shall not be considered paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason. "YIELD RATE" means, for any Purchase Period for all Capital allocated to such Purchase Period: (a) to the extent a Purchaser will be funding the applicable Purchase on the first day of such Purchase Period through the issuance of commercial paper, a rate equal to the CP Rate for such Purchase Period, and (b) to the extent a Purchaser will not be funding the applicable Purchase on the first day of such Purchase Period through the issuance of commercial paper, a rate equal to the Alternative Rate for such Purchase Period or such other rate as the Deal Agent and the Seller shall agree to in writing. "YIELD RESERVE" means, at any time, an amount equal to (a) the product of (i) the aggregate outstanding Capital at such time MULTIPLIED BY (ii) a rate equal to 5.5% per annum. SECTION 1.02. OTHER TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of California, and not specifically defined herein, are used herein as defined in such Article 9. SECTION 1.03. COMPUTATION OF TIME PERIODS. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." ARTICLE II THE PURCHASE FACILITY SECTION 2.01. PURCHASE OF THE PURCHASED INTEREST. (a) On the terms and conditions hereinafter set forth, the Purchaser shall Purchase the Purchased Interest from the Seller. Under no circumstances shall the Purchaser make the Purchase if (i) the Purchase Price would exceed the Purchase Limit or (ii) a Coverage Shortfall Event would exist. (b) It is the intention of the parties hereto that the Purchase to be made hereunder shall constitute a sale of an undivided percentage ownership interest in the Purchased Property, and not a loan secured by such Purchased Property. If at any time a court characterizes the transactions hereunder as loans by the Purchaser to the Seller, then the Seller hereby pledges, grants a security interest in and assigns to the Deal Agent, for the benefit of the Purchaser, all of its right and title to and interest in the Purchased Property, including the Purchased Receivables, Related Security and Collections related thereto, as security for such loans and for the payment and performance of all obligations of the Seller hereunder (including, without limitation, its indemnification obligations under ARTICLE VIII). The security interest granted pursuant to the foregoing sentence shall be released and terminated upon the occurrence of the Collection Date. SECTION 2.02. THE PURCHASE. (a) Subject to the conditions described in SECTION 2.01(a), the Purchase shall be made in accordance with the procedures described in SECTION 2.02(b). After the Collection Date has occurred, the Purchaser and the Deal Agent, in accordance with their respective interests, shall assign and transfer to the Seller their respective remaining interest in the Purchased Property in accordance with SECTION 2.09 free and clear of any Adverse Claim resulting or arising from any act or omission by the Purchaser or the Deal Agent, but without any other representation or warranty, express or implied. (b) The Purchase shall be made on at least two Business Days' notice from the Seller to the Deal Agent prior to 10:00 a.m. (Boston, Massachusetts time) on the day of notice; PROVIDED, HOWEVER, that if the Yield to accrue with respect to the Purchase is computed by reference to the Adjusted Eurodollar Rate, such notice must be received by the Deal Agent prior to 10:00 a.m. (Boston, Massachusetts time) at least three Business Days prior to the date of the Purchase. The notice shall specify (i) the Purchase Price, (ii) the date of the Purchase, (iii) the duration of the initial Purchase Periods for the Capital arising as a result of the Purchase, and (iv) the rate at which Yield is to accrue on such Capital for such Purchase Periods. The Deal Agent shall notify the Seller whether the duration and applicable rates of the initial Purchase Periods described in such notice are acceptable or, if not acceptable, the Deal Agent shall advise the Seller of such Purchase Periods and rates as may be acceptable. On the date of the Purchase, the Purchaser shall, upon satisfaction of the applicable conditions set forth in ARTICLE III, make available to the Seller in same day funds, at Account No.26817259 at BankBoston, N.A., the Purchase Price. (c) It is expressly acknowledged that the Purchase hereunder shall be made without recourse to the Seller; PROVIDED, HOWEVER, that the Seller shall be liable to the Deal Agent and the Purchaser (i) for all representations, warranties, covenants and indemnities made hereunder and (ii) for all fees, costs, expenses, taxes and other indemnifications owed under this Agreement. SECTION 2.03. SELECTION OF PURCHASE PERIODS. At all times hereafter until the Termination Date, the Seller shall, subject to the Deal Agent's and the Purchaser's approval and the limitations described below, select (a) Purchase Periods and allocate a portion of the outstanding Capital to each selected Purchase Period, so that the outstanding Capital is at all times allocated to a Purchase Period and (b) Yield Rates to apply to such Capital for such Purchase Periods. The initial Purchase Period(s) and Yield Rate(s) applicable to the Capital arising as a result of the Purchase shall be specified in the notice relating to the Purchase described in SECTION 2.02(b). Each subsequent Purchase Period shall commence on the last day of the immediately preceding Purchase Period, and the duration of and Yield Rate applicable to such subsequent Purchase Period shall be such as the Seller shall select and the Deal Agent shall approve on notice from the Seller received by the Deal Agent (including notice by telephone, confirmed in writing) not later than 11:00 A.M. (Boston, Massachusetts time) on the Business Day next preceding such last day, EXCEPT that (a) if the Deal Agent shall not have received such notice before 11:00 A.M. (Boston, Massachusetts time) or the Deal Agent and the Seller shall not have so mutually agreed before 12:30 P.M. (Boston, Massachusetts time) on the Business Day next preceding such last day, such Purchase Period shall be one day and the applicable Yield Rate shall be the Adjusted Base Rate and (b) if the Deal Agent notifies the Seller that the Yield shall accrue for each Purchase Period at the Alternative Rate, and the Seller notifies the Deal Agent that it selects the Adjusted Eurodollar Rate (as opposed to the Adjusted Base Rate) for such Purchase Period, such notice must be received by the Deal Agent no later than 11:00 A.M. (Boston, Massachusetts time) on the third Business Day prior to such last day. Any Purchase Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day; PROVIDED, HOWEVER, that if Yield in respect of such Purchase Period is computed by reference to the Adjusted Eurodollar Rate, and such next succeeding Business Day is in the next calendar month, then such Purchase Period shall end on the next preceding Business Day. In addition, whenever any Purchase Period as to which Yield accrues at the Adjusted Eurodollar Rate commences on the last Business Day in a month or on a day for which there is no numerically corresponding day in the month in which such Purchase Period ends, the last day of such Purchase Period shall occur on the last Business Day of the month in which such Purchase Period ends. Furthermore, if a CP Disruption Event shall have occurred and be continuing, the Purchaser, or the Deal Agent on its behalf, may, upon notice to the Seller, terminate any Purchase Period then in effect if the Purchaser has funded the Capital allocated to such Purchase Period by issuing its commercial paper notes. Any Purchase Period which commences before the Termination Date and would otherwise end on a date occurring after the Termination Date shall end on the Termination Date. On or after the Termination Date, the Deal Agent shall have the right to allocate outstanding Capital to Purchase Periods of such duration as shall be selected by the Deal Agent. The Purchaser shall, on the first day of each Purchase Period, notify the Deal Agent of the Yield Rate for the Capital allocated to such Purchase Period. SECTION 2.04. SETTLEMENT PROCEDURES. (a) The Servicer shall cause all Collections received by it or deposited in the Lock-Box Accounts to be transferred in same day funds to the Collection Account. The Servicer shall segregate, set aside and hold in trust for the Purchaser, in the Collection Account, the percentage interest representing the Purchased Interest in Collections of Purchased Receivables received on such day. (b) On each Settlement Date, the amounts set aside in the Collection Account in accordance with CLAUSE (a) above shall be withdrawn from the Collection Account to be applied in the following order of priority; (i) First, (if the Servicer is a party other than Superior, an Originator or an Affiliate thereof) to pay any accrued and unpaid Servicer Fee which is then due and payable, or to be retained in the Collection Account to the extent of any daily accrued and unpaid amounts of such Servicer Fee which are not then due and payable, until the next relevant payment date therefor, and not to be applied to any of the following items; (ii) Second, to pay accrued and unpaid Yield which is then due and payable, or to be retained in the Collection Account to the extent of any accrued and unpaid amounts of such Yield which are not then due and payable, and not to be applied to any of the following items; (iii) Third, (to the extent that the payment of such Liquidity Fee does not cause a Coverage Shortfall Event to occur) to pay accrued and unpaid Liquidity Fee which is then due and payable, or to be retained in the Collection Account to the extent of any accrued and unpaid amounts of such Liquidity Fee which are not then due and payable, and not to be applied to any of the following items; (iv) Fourth, (to the extent that the payment of such Supplemental Enhancement Fee does not cause a Coverage Shortfall Event to occur) to pay accrued and unpaid Supplemental Enhancement Fee which is then due and payable, or to be retained in the Collection Account to the extent of any accrued and unpaid amounts of such Supplemental Enhancement Fee which are not then due and payable, and not to be applied to any of the following items; (v) Fifth, (to the extent that the payment of such Program Fee does not cause a Coverage Shortfall Event to occur) to pay accrued and unpaid Program Fee which is then due and payable, or to be retained in the Collection Account to the extent of any accrued and unpaid amounts of such Program Fee which are not then due and payable, and not to be applied to any of the following items; (vi) Sixth, (to the extent that the payment of such Administrative Fee does not cause a Coverage Shortfall Event to occur) to pay any Administrative Fee which is then due and payable, or to be retained in the Collection Account to the extent of the Administrative Fee payable in respect of the next succeeding annual period, until the next relevant payment date therefor, and not to be applied to any of the following items; (vii) Seventh, to pay all Capital then outstanding relating to any Yield which is then due and payable, or to be retained in the Collection Account to the extent of any Capital remaining outstanding; (viii) Eighth, to pay the portion of any other accrued and unpaid obligations which have not been paid pursuant to clauses (i) through (vi) above and which are then due and payable by the Seller to the Purchaser or the Deal Agent under this Agreement or any of the other Transaction Documents, or to be retained in the Collection Account to the extent of any accrued and unpaid amounts of such obligations which are not then due and payable, until the next relevant payment date therefor, and not to be applied to any of the following items; (iv) Ninth, to pay any accrued and unpaid Management Fee which is then due and payable, or to be retained in the Collection Account to the extent of any daily accrued and unpaid amounts of such Management Fee which are not then due and payable, until the next relevant payment date therefor, and not to be applied to any of the following items; (ix) Tenth, (if the Servicer is Superior, an Originator or an Affiliate thereof) to pay any accrued and unpaid Servicer Fee which is then due and payable, or to be retained in the Collection Account to the extent of any accrued and unpaid amounts of such Servicer Fee which are not then due and payable, until the next relevant payment date therefor. Following the Collection Date, the Servicer shall pay any remaining Collections set aside and held by the Servicer pursuant to CLAUSE (a) of this SECTION 2.04, in the following order of priority; (i) First, to Seller in the amount of its Equity Investment; (ii) Second, to Superior in respect of any Support Deficiency Amount; and (iii) Third, any and all remaining amounts to the Seller. SECTION 2.05. PAYMENTS AND COMPUTATIONS, ETC. (a) All amounts to be paid or deposited by the Seller or the Servicer hereunder shall be paid or deposited in accordance with the terms hereof no later than 11:00 A.M. (Boston, Massachusetts time) on the day when due in lawful money of the United States in immediately available funds to the Deal Agent's Account. The Seller shall, to the extent permitted by law, pay to the Deal Agent interest on all amounts not paid or deposited when due hereunder (whether owing by the Seller individually or by the Servicer) at 2.0% per annum above the Adjusted Base Rate, payable on demand; PROVIDED, HOWEVER, that such interest rate shall not at any time exceed the maximum rate permitted by applicable law. Such interest shall be retained by the Deal Agent except to the extent that such failure to make a timely payment or deposit has continued beyond the date for distribution by the Deal Agent of such overdue amount to the Purchaser, in which case such interest accruing after such date shall be for the account of, and distributed by the Deal Agent to the Purchaser. All computations of interest and all computations of Yield, Servicer Fee, Program Fee, Liquidation Fee and other fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. (b) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of Yield, interest or any fee payable hereunder, as the case may be; PROVIDED, HOWEVER, that, if such extension would cause payment of Yield on or Capital in respect of any Purchased Property on which Yield accrues at the Adjusted Eurodollar Rate to be made in the next following month, such payment shall be made on the next preceding Business Day. (c) If the Purchase requested by the Seller and approved by the Purchaser and the Deal Agent pursuant to SECTION 2.02 or any selection of a subsequent Purchase Period for any Capital requested by the Seller and approved by the Deal Agent pursuant to SECTION 2.03 is not for any reason other than the act or omission of Purchaser contrary to this Agreement made or effectuated, as the case may be, on the date specified therefor, the Seller shall indemnify the Purchaser against any loss, cost or expense incurred by the Purchaser, including, without limitation, any loss (including loss of anticipated profits, net of anticipated profits in the reemployment of such funds in the manner determined by the Purchaser), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Purchaser to fund or maintain the Purchase, as the case may be, during such Purchase Period. SECTION 2.06. FEES. (a) The Seller shall pay to the Purchaser (either directly or through the Deal Agent) and to the Deal Agent certain fees in the amounts and on the dates set forth in a fee letter executed among the Seller, the Purchaser and the Deal Agent, dated on or about the date hereof (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "FEE LETTER"). (b) The Seller shall pay to the Manager the Management Fee in the amounts and on the dates set forth in Section 2 of the Management Agreement. (c) The Purchaser shall pay to the Servicer a collection fee (the "SERVICER FEE") of 0.5% per annum on the average daily amount of the Outstanding Balance of Purchased Receivables, from the date hereof until the Collection Date, payable on each Settlement Date; PROVIDED, HOWEVER, that such fee shall be payable only from Collections pursuant to, and subject to the priority of payment set forth in, SECTION 2.04; and PROVIDED, FURTHER, that, upon three Business Days' notice to the Deal Agent, the Servicer may (if not Superior, an Originator or an Affiliate thereof), elect to be paid, as such fee, another percentage per annum on the average daily amount of outstanding Receivables, but in no event shall the Servicer Fee payable in respect of any calendar month after the date any such election is made exceed 110% of the reasonable and appropriate costs and expenses of the Servicer incurred during such calendar month. (d) The Seller shall pay to the Deal Agent, within one Business Day after the Deal Agent's demand therefore, for the benefit of the Purchaser, the Liquidation Fee relating to the Purchased Property. SECTION 2.07. INCREASED COSTS; CAPITAL ADEQUACY; ILLEGALITY. (a) If either (i) the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in any law, regulation, treaty or official directive, or in the interpretation or application thereof by any central bank or other governmental agency or authority charged with the administration thereof (whether or not having the force of law), or (ii) the compliance by the Deal Agent, the Purchaser or any affiliate of either thereof (each of which, an "AFFECTED PARTY") with any guideline or request from any central bank or other governmental agency or authority (whether or not having the force of law), (A) shall subject an Affected Party to any tax (except for taxes on the overall net income of such Affected Party imposed by the United States of America or any political subdivision thereof), duty or other charge with respect to the Purchased Property, or any right or obligation to make Purchases hereunder, or on any payment made hereunder or (B) shall impose, modify or deem applicable any reserve requirement (including, without limitation, any reserve requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve requirement, if any, included in the determination of Yield), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Affected Party or (C) shall impose any other condition affecting the Purchased Property or the Purchaser's rights or obligations hereunder, the result of which is to increase the cost to any Affected Party or to reduce the amount of any sum received or receivable by an Affected Party under this Agreement, then within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Seller shall pay directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such additional or increased cost incurred or such reduction suffered. (b) If either (i) the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in any law, regulation, treaty or official directive, or in the interpretation or application thereof, in each case occurring after the date hereof, by any central bank or other governmental agency or authority charged with the administration thereof (whether or not having the force of law), or (ii) the compliance by an Affected Party with any guideline or request from any central bank or other governmental agency or authority (whether or not having the force of law) in each case promulgated after the date hereof, including, without limitation, compliance by an Affected Party with any request or directive regarding capital adequacy, has or would have the effect of reducing the rate of return on the capital of any Affected Party as a consequence of its obligations hereunder or otherwise arising in connection herewith to a level below that which any such Affected Party could have achieved but for such introduction, change or compliance (taking into consideration the policies of such Affected Party with respect to capital adequacy and assuming full utilization of such Affected Party's capital) by an amount deemed by such Affected Party to be material, then from time to time, within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Seller shall pay directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such reduction. (c) If as a result of any event or circumstance similar to those described in SECTION 2.07(a) or 2.07(b), any Affected Party is required to compensate a bank or other financial institution providing liquidity support, credit enhancement or other similar support to such Affected Party in connection with this Agreement or the funding or maintenance of Purchases hereunder, then within ten days after demand by such Affected Party, the Seller shall pay to such Affected Party such additional amount or amounts as may be necessary to reimburse such Affected Party for any amounts to be paid by it. (d) In determining any amount provided for in this SECTION 2.07, the Affected Party may use any reasonable averaging and attribution methods. Any Affected Party making a claim under this SECTION 2.07 shall submit to the Seller a certificate as to the calculation of such additional or increased cost or reduction, which certificate shall be conclusive absent manifest error. (e) If the Purchaser shall notify the Deal Agent that a Eurodollar Disruption Event as described in CLAUSE (a) of the definition of "EURODOLLAR DISRUPTION EVENT" has occurred, the Deal Agent shall in turn so notify the Seller, whereupon all Capital in respect of which Yield accrues at the Adjusted Eurodollar Rate for the then current Purchase Period shall immediately be converted into Capital in respect of which Yield accrues at the Adjusted Base Rate for the remainder of such Purchase Period. (f) Without prejudice to the survival of any other agreement of the Seller hereunder, the agreements and obligations of the Seller contained in this SECTION 2.07 shall survive the termination of this Agreement. SECTION 2.08. TAXES. (a) Any and all payments by the Seller or the Servicer hereunder shall be made, in accordance with SECTION 2.05, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, EXCLUDING, in the case of the Purchaser and the Deal Agent, net income taxes and branch profits taxes that are imposed by the United States and franchise taxes, net income taxes and branch profits taxes that are imposed on the Purchaser or the Deal Agent by the state or foreign jurisdiction under the laws of which the Purchaser or the Deal Agent (as the case may be) is organized or conducts business or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "TAXES"). If the Seller or the Servicer shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Purchaser or the Deal Agent, (i) the Seller shall make an additional payment to the Purchaser or the Deal Agent, as the case may be, in an amount sufficient so that, after making all required deductions (including deductions applicable to additional sums payable under this SECTION 2.08), the Purchaser or the Deal Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Seller or the Servicer, as the case may be, shall make such deductions and (iii) the Seller or the Servicer, as the case may be, shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) The Seller will indemnify the Purchaser and the Deal Agent for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this SECTION 2.08) paid by the Purchaser or the Deal Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto; PROVIDED that the Purchaser or the Deal Agent, as appropriate, making a demand for indemnity payment shall provide the Seller, at its address referred to in SECTION 10.02, with a certificate from the relevant taxing authority or from a responsible officer of the Purchaser or the Deal Agent stating or otherwise evidencing that the Purchaser or the Deal Agent has made payment of such Taxes and will provide a copy of or extract from documentation, if available, furnished by such taxing authority evidencing assertion or payment of such Taxes. This indemnification shall be made within ten days from the date the Purchaser or the Deal Agent (as the case may be) makes written demand therefor. (c) Within 30 days after the date of any payment by the Seller of any Taxes, the Seller will furnish to the Deal Agent, at its address referred to in SECTION 10.02, appropriate evidence of payment thereof. (d) Within 30 days of the written request of the Seller therefor, the Deal Agent and the Purchaser, as appropriate, shall execute and deliver to the Seller such certificates, forms or other documents which can be furnished consistent with the facts and which are reasonably necessary to assist the Seller in applying for refunds of taxes remitted hereunder. (e) If, in connection with an agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchaser in connection with this Agreement or the funding or maintenance of Purchases hereunder, the Purchaser is required to compensate a bank or other financial institution in respect of taxes under circumstances similar to those described in this SECTION 2.08 then within ten days after demand by the Purchaser, the Seller shall pay to the Purchaser such additional amount or amounts as may be necessary to reimburse such Purchaser for any amounts paid by it. (f) Without prejudice to the survival of any other agreement of the Seller hereunder, the agreements and obligations of the Seller contained in this SECTION 2.08 shall survive the termination of this Agreement. SECTION 2.09. ASSIGNMENT OF THE ORIGINATOR SALE AGREEMENT. The Seller hereby represents, warrants and confirms to the Deal Agent that the Seller has assigned to the Deal Agent, for the benefit of itself and the Purchaser hereunder, all of the Seller's right and title to and interest in each of the Originator Sale Agreement and the Support Agreement. The Seller confirms and agrees that the Deal Agent shall have, following a Trigger Event, the sole right to enforce the Seller's rights and remedies under the Originator Sale Agreement for the benefit of the Purchaser, but without any obligation on the part of the Deal Agent, the Purchaser or any of their respective Affiliates, to perform any of the obligations of the Seller under the Originator Sale Agreement. The Seller further confirms and agrees that such assignment to the Deal Agent shall terminate upon the Collection Date; PROVIDED, HOWEVER, that the rights of the Deal Agent and the Purchaser pursuant to such assignment with respect to rights and remedies in connection with any indemnities and any breach of any representation, warranty or covenants made by the Originators pursuant to the Originator Sale Agreement or Superior pursuant to the Support Agreement, which rights and remedies survive the termination of the Originator Sale Agreement and the Support Agreement, respectively, shall be continuing and shall survive any termination of such assignment. ARTICLE III CONDITIONS OF THE PURCHASE SECTION 3.01. CONDITIONS PRECEDENT TO THE PURCHASE. (a) The Purchase hereunder is subject to the conditions precedent (i) that the Deal Agent shall have received on or before the Closing Date the items listed in SCHEDULE I, each (unless otherwise indicated) dated as of such date, in form and substance satisfactory to the Deal Agent and the Purchaser, (ii) that all fees and expenses required to be paid prior to the Purchase pursuant to the Fee Letter have been paid, (iii) on and as of the Closing Date, the Purchase Price is less than or equal to the remainder of the Eligible Receivables Balance MINUS the Yield Reserve, and (iv) each of S&P, Moody's and DCR shall have delivered written confirmation to the Deal Agent to the effect that the consummation of this Agreement will not result in the reduction or withdrawal of their respective ratings of the Commercial Paper. (b) The Purchase from the Seller by the Purchaser shall be subject to the further conditions precedent that (i) on or prior to the Closing Date, the Servicer shall have delivered to the Deal Agent, in each case in form and substance satisfactory to the Deal Agent, a completed Monthly Asset Report dated as of November 30, 1998, and containing such additional information as may be reasonably requested by the Deal Agent; (ii) on the date of the Purchase the following statements shall be true and the Seller by accepting the Purchase Price shall be deemed to have certified that: (A) The representations and warranties contained in SECTION 4.01 are correct on and as of such day as though made on and as of such date, (B) No event has occurred and is continuing, or would result from the Purchase which constitutes a Trigger Event, (C) On and as of such day, after giving effect to the Purchase, a Coverage Shortfall Event does not exist, (D) On and as of such day, there are no Receivables as to which any payment, or part thereof, has been unpaid for no more than 90 days from the original invoice date for such payment, and (E) No law or regulation shall prohibit, and no order, judgment or decree of any federal, state or local court or governmental body, agency or instrumentality shall prohibit or enjoin, the making of the Purchase by the Purchaser in accordance with the provisions hereof. and (iii) the Deal Agent shall have received such other approvals, opinions or documents as the Deal Agent may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller represents and warrants as follows: (a) The Seller is a limited liability company duly incorporated, validly existing and in good standing under the laws of the jurisdiction named at the beginning hereof and is duly qualified to do business, and is in good standing, in every jurisdiction in which the nature of its business requires it to be so qualified and the failure to do so could reasonably be expected to have a material adverse effect on the Seller's ability to perform its obligations hereunder or the ability to assign or collect the Purchased Receivables hereunder. (b) The execution, delivery and performance by the Seller of this Agreement, the Originator Sale Agreement and all other Transaction Documents to be entered into by it, including the Seller's use of the proceeds of the Purchase, are within the Seller's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Seller's Certificate of Formation or LLC Agreement, (ii) any law, rule or regulation applicable to the Seller, (iii) any contractual restriction binding on or affecting the Seller or its property or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting the Seller or its property, and do not result in or require the creation of any Adverse Claim upon or with respect to any of its properties (other than in favor of the Deal Agent for the benefit of the Purchaser with respect to the Purchased Receivables and related Purchased Property); and no transaction contemplated hereby or by the Originator Sale Agreement requires compliance with any bulk sales act or similar law. This Agreement, the Originator Sale Agreement and each other Transaction Document to be entered into by the Seller have each been duly executed and delivered by the Seller. (c) This Agreement, the Originator Sale Agreement and each other Transaction Document to be entered into by the Seller constitute the legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with their respective terms subject to bankruptcy and similar laws affecting creditors generally and principles of equity. (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Seller of this Agreement, the Originator Sale Agreement or any other Transaction Document to be entered into by it, except for the filing of the UCC financing statements described in SCHEDULE I. (e) No filing, recording, notice or acknowledgment is necessary in any jurisdiction to provide third parties with notice of the Purchase of the Purchased Interests contemplated herein, and to give the Purchaser or the Deal Agent, on behalf of the Purchaser, a valid and perfected first priority "security interest", under Article 9 of the UCC, in and to the Purchased Receivables, except for (i) the filing of the UCC financing statements referred to in Article III, all of which financing statements have been duly executed and are in acceptable form for filing in the relevant jurisdictions and (ii) the delivery of the notices of the Purchaser's interest in the Reinsurance Recoverables referred to in SECTION 6.04 hereof, all of which notices have been duly executed and are in acceptable form for delivery to the relevant Reinsurance Companies. (f) There is no pending or threatened action or proceeding affecting any Originator, the Seller or any subsidiary of any Originator before any court, governmental agency or arbitrator that could reasonably be expected to have a material adverse effect on the financial condition of any Originator, the Seller or any subsidiary of any Originator or the ability of any Originator to perform its obligations under the Originator Sale Agreement or the ability of the Seller to perform its obligations under this Agreement or the ability to assign or collect the Purchased Receivables hereunder. None of the Originators, the Seller, or any subsidiary of any of the Originators is in default with respect to any order of any court, arbitrator or governmental body except for defaults with respect to orders of governmental agencies which defaults are not material to the business or operations of the Originators, the Seller or any subsidiary of any of the Originators. (g) No proceeds of the Purchase will be used by the Seller (i) to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended, or (ii) for any purpose other than to fund a purchase of Receivables and related assets from the Originators. (h) Each Receivable, together with the Contract related thereto, shall, at all times, be owned by the Seller free and clear of any Adverse Claim except as provided herein, and upon the Purchase, the Purchaser shall acquire a valid and perfected first priority undivided percentage ownership interest in each Purchased Receivable then existing or thereafter arising and in the Related Security and Collections with respect thereto, which percentage shall correspond at any time hereunder to the Purchased Interest, free and clear of any Adverse Claim except as provided hereunder. No effective financing statement or other instrument similar in effect covering any Receivable or the Related Security or Collections with respect thereto shall at any time be on file in any recording office except such as may be filed in favor of the Deal Agent relating to this Agreement or in favor of Seller relating to the Originator Sale Agreement. The purchase of the Receivables and related assets by the Seller from each of the Originators constitute valid and true sales and transfers for consideration (and not merely a pledge of such Receivables and assets for security purposes), enforceable against creditors of each such Originator, and no such Receivables or related assets shall constitute property of any such Originator. (i) As of the close of business on the Closing Date, a Coverage Shortfall Event shall not exist. (j) No Monthly Asset Report (if prepared by the Seller or any Affiliate thereof, or to the extent that information contained therein is supplied by the Seller or such Affiliate), information, exhibit, financial statement, document, book, record or report furnished or to be furnished by the Seller to the Deal Agent or the Purchaser in connection with this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Deal Agent or the Purchaser, as the case may be, at such time) as of the date so furnished, and no such document contains or will contain any material misstatement of fact or omits or shall omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (k) The principal place of business and chief executive office of the Seller and the office where the Seller keeps all the Records are located at the address of the Seller referred to in SECTION 10.02 hereof (or at such other locations as to which the notice and other requirements specified in SECTION 6.08 shall have been satisfied). (l) The names and addresses of all the Lock-Box Banks, together with the account numbers of the Lock-Box Accounts at such Lock-Box Banks and the names, addresses and account numbers of all accounts to which Collections of the Receivables outstanding before the Purchase hereunder have been sent, are specified in SCHEDULE III (which shall be deemed to be amended in respect of terminating or adding any Lock-Box Account or Lock-Box Bank upon satisfaction of the notice and other requirements specified in respect thereof). The Seller has no other lock-box accounts or similar deposit accounts for the collection of the Purchased Property except for the Lock-Box Accounts. No Adverse Claim exists upon or with respect to any of the Lock-Box Accounts. (m) Except as described in SCHEDULE IV, the Seller has no trade names, fictitious names, assumed names or "doing business as" names or other names under which it has done or is doing business. (n) The Originator Sale Agreement is the only agreement pursuant to which the Seller purchases Receivables; the Seller has furnished to the Deal Agent true, correct and complete copies of the Originator Sale Agreement; and the Originator Sale Agreement is in full force and effect and no event or circumstance has occurred that would constitute (or, with the giving of notice or the passage of time or both, would constitute) a Trigger Event pursuant to SECTION 7.01(h). (o) The Seller shall have given reasonably equivalent value to each Originator in consideration for the transfer by such Originator to the Seller of the Receivables and Related Security under the Originator Sale Agreement, no such transfer shall have been made for or on account of an antecedent debt owed by any Originator to the Seller, and no such transfer is or may be voidable or subject to avoidance under any section of the Bankruptcy Code. (p) A copy of the Certificate of Formation of the Seller as in effect on the date of this Agreement is attached as EXHIBIT D hereto. Each of the Seller and the Originators has received advice from its counsel which is consistent with the conclusions set forth in the legal opinion(s) of Tobin & Tobin, special counsel to the Originators, issued in connection with the Originator Sale Agreement and relating to the issues of substantive consolidation and true sale of the Receivables and the related property. (q) The Seller is not "insolvent" (within the meaning of such term in the Bankruptcy Code); at the time of (and immediately after) the transfer of Receivables to the Seller under the Originator Sale Agreement, the Seller shall not have been insolvent; and at the time of (and immediately after) the Purchase hereunder, the Seller shall not have been insolvent. (r) The Seller accounts for the transfers to it from the Originators of interests in Receivables, Related Security and Collections under the Originator Sale Agreement as sales of such Receivables, Related Security and Collections in its books, records and financial statements, in each case consistent with GAAP and with the requirements set forth herein. (s) The sole and exclusive business of the Seller is the purchase of Receivables and Related Security pursuant to the Originator Sale Agreement for its own account and for resale to the Purchaser pursuant to the terms of this Agreement. (t) The Seller is not an "investment company" or a company controlled by an "investment company" registered or required to be registered under the Investment Company Act, or otherwise subject to any other federal or state statute or regulation limiting its ability to incur indebtedness. (u) The Seller is not engaged, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each of the quoted terms is defined or used in Regulation T, U or X). No part of the proceeds of any Purchased Receivable has been used for so purchasing or carrying margin stock or for any purpose which violates, or which would be inconsistent with, the provisions of Regulation T, U or X. (v) Each of the Seller, the Servicer and the Deal Agent has the right (whether by license, sublicense or assignment) to use all of the computer software used by the Servicer and/or the Originators to account for the Purchased Property to the extent necessary to administer the Purchased Property, and, in the case of the Seller and the Servicer, to assign (by way of sale or collateral pledge) or sublicense such rights to use all of such software to the Deal Agent. (w) The Seller has filed or caused to be filed all Federal, state and local tax returns which are required to be filed by it, if any, and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, if any, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which the Seller has set aside adequate reserves on its books in accordance with GAAP and which proceedings have not given rise to any Adverse Claim. (x) The copy of the Credit and Collection Policy attached hereto as SCHEDULE II is a true and complete copy thereof. (y) Each Purchased Receivable, as of the date of purchase, is an Eligible Receivable. SECTION 4.02. REPRESENTATIONS AND WARRANTIES OF THE SERVICER. The Servicer represents and warrants as follows: (a) The Servicer is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction named at the beginning hereof and is duly qualified to do business, and is in good standing, in every jurisdiction in which the nature of its business requires it to be so qualified and the failure to do so could reasonably be expected to have a material adverse effect on the Servicer's ability to perform its obligations hereunder or the ability to collect the Purchased Receivables hereunder. (b) The execution, delivery and performance by the Servicer of this Agreement and all other Transaction Documents to be entered into by it are within the Servicer's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Servicer's charter or by-laws, (ii) any law, rule or regulation applicable to the Servicer, (iii) any contractual restriction binding on or affecting the Servicer or its property or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting the Servicer or its property, and do not result in or require the creation of any Adverse Claim upon or with respect to any of its properties. This Agreement and each other Transaction Document to be entered into by the Servicer have each been duly executed and delivered by the Servicer. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Servicer of this Agreement or any other Transaction Document to be entered into by it. (d) This Agreement and each other Transaction Document to be entered into by the Servicer constitute the legal, valid and binding obligation of the Servicer enforceable against the Servicer in accordance with their respective terms subject to bankruptcy and similar laws affecting creditors generally and principles of equity. (e) (i) The Servicer has furnished to the Deal Agent (A) copies of the audited consolidated balance sheets of Servicer and its consolidated subsidiaries as at December 31, 1997, and the related audited consolidated statements of income, shareholders' equity and cash flows for the fiscal year of Servicer and its consolidated subsidiaries then ended reported on by December 31, 1997, which financial statements present fairly in all material respects in accordance with GAAP the financial position of Servicer and its consolidated subsidiaries as at December 31, 1997, and the results of operations of Servicer and its consolidated subsidiaries for the fiscal year of Servicer then ended, and (B) copies of the unaudited consolidated balance sheets of Servicer and its consolidated subsidiaries as at September 30, 1998, and the related unaudited consolidated statements of income, shareholders' equity and cash flows for the three-month period then ended, which financial statements present fairly in all material respects in accordance with GAAP the financial position of Servicer and its consolidated subsidiaries as at September 30, 1998, and the results of operations of Servicer and its consolidated subsidiaries for the three-month period then ended; and (ii) since September 30, 1998, (A) no material adverse change has occurred in the business, assets, liabilities, financial condition, results of operations or business prospects of Servicer and its subsidiaries taken as a whole, and (B) no event has occurred or failed to occur which has had, or may have, singly or in the aggregate, a material adverse effect on the ability of the Servicer to perform its obligations under this Agreement or the ability to collect the Purchased Receivables hereunder. (f) There is no pending or threatened action or proceeding affecting the Servicer before any court, governmental agency or arbitrator that could reasonably be expected to have a material adverse effect on the financial condition of the Servicer or the ability of the Servicer to perform its obligations under this Agreement or the ability to collect the Purchased Receivables hereunder. The Servicer is not in default with respect to any order of any court, arbitrator or governmental body except for defaults with respect to orders of governmental agencies which defaults are not material to the business or operations of the Servicer. (g) No Monthly Asset Report (if prepared by the Servicer or any Affiliate thereof, or to the extent that information contained therein is supplied by the Servicer or such Affiliate), information, exhibit, financial statement, document, book, record or report furnished or to be furnished by the Servicer to the Deal Agent or the Purchaser in connection with this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Deal Agent or the Purchaser, as the case may be, at such time) as of the date so furnished, and no such document contains or will contain any material misstatement of fact or omits or shall omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (h) The Servicer has filed or caused to be filed all Federal, state and local tax returns which are required to be filed by it, and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which the Servicer has set aside adequate reserves on its books in accordance with GAAP and which proceedings have not given rise to any Adverse Claim. (i) The principal place of business and chief executive office of the Servicer and the office where the Servicer keeps all the Records are located at the address of the Servicer referred to in SECTION 10.02 hereof or, in any case, upon thirty (30) days' prior notice to the Deal Agent, at another location within the United States. (j) The copy of the Credit and Collection Policy attached hereto as SCHEDULE II is a true and complete copy thereof. ARTICLE V GENERAL COVENANTS SECTION 5.01. GENERAL COVENANTS OF THE SELLER. (a) COMPLIANCE WITH LAWS; PRESERVATION OF CORPORATE EXISTENCE. The Seller shall comply in all material respects with all applicable laws (including, without limitation, ERISA and the Code), rules, regulations, orders and Transaction Documents and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges where the failure to comply could reasonably be expected to have a material adverse effect on the Seller's ability to perform its obligations hereunder or the ability to assign or collect the Purchased Receivables hereunder. (b) SALES, LIENS, ETC. Except as otherwise specifically provided herein, the Seller shall not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, any Purchased Receivable or the related Contract, Collections or Related Security, or upon or with respect to any Lock-Box Account, the Collection Account or any other account to which any Collections of any Receivable are sent, or assign any right to receive income in respect thereof or (ii) create or suffer to exist any Adverse Claim upon or with respect to any of the Seller's other assets. (c) GENERAL REPORTING REQUIREMENTS. The Seller will provide, or cause to be provided, to the Deal Agent (with a copy for the Purchaser) the following: (i) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Seller, a copy of the balance sheet of the Seller and the related statement of income and cash flows each for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, prepared in accordance with GAAP and certified by a senior financial officer of the Seller; (ii) as soon as available and in any event within 90 days after the end of each fiscal year of the Seller, a copy of the balance sheet of the Seller and the related statement of income and cash flows for such year, each prepared in accordance with GAAP consistently applied and reported on by nationally recognized independent public accountants acceptable to the Deal Agent; (iii) promptly after the filing or receiving thereof, copies of all reports and notices with respect to any Reportable Event defined in Article IV of ERISA which the Seller or any ERISA Affiliate files under ERISA with the Internal Revenue Service or the PBGC or the U.S. Department of Labor or which the Seller or any ERISA Affiliate receives from such entity; (iv) as soon as possible and in any event within three days after the occurrence of each Trigger Event or each event which, with the giving of notice or lapse of time or both, would constitute a Trigger Event, a statement of the chief financial officer or chief accounting officer of the Seller setting forth details of such Trigger Event or event and the action which the Seller has taken and proposes to take with respect thereto; (v) promptly following receipt thereof, copies of all financial statements, settlement statements, portfolio and other reports, notices, disclosures, certificates, budgets and other written material delivered or made available to the Seller by any Originator pursuant to the terms of the Originator Sale Agreement; and (vi) promptly following the Deal Agent's request therefor, such other information respecting the Receivables or the conditions or operations, financial or otherwise, of the Seller as the Deal Agent may from time to time request in order to protect the interests of the Deal Agent or the Purchaser in connection with this Agreement. (d) MERGER, ETC. The Seller will not merge or consolidate with, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now owned or hereafter acquired), or acquire all or substantially all of the assets or capital stock or other ownership interest of any Person, other than, with respect to asset dispositions, in connection herewith. (e) ACCOUNTING OF PURCHASES. The Seller will not account for or treat (whether in financial statements or otherwise) the transactions contemplated by the Originator Sale Agreement in any manner other than the sale of the "Transferred Assets" (as defined therein) by the Originators to the Seller. (f) ERISA MATTERS. The Seller will not (a) fail to comply in all material respects with ERISA and the provisions of the Code applicable to the Benefit Plans; (b) engage or permit any ERISA Affiliate to engage in any prohibited transaction which would subject the Seller to a material tax or penalty imposed on a prohibited transaction; (c) permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (d) incur any liability to the PBGC over and above the premiums required by law; or (e) terminate any Benefit Plan in a manner which could result in the imposition of a lien on the property of the Seller or any such ERISA Affiliate. (g) NATURE OF BUSINESS. The Seller will engage in no business other than the purchase of Receivables and Related Security from the Originators, the resale or grant of such Receivables and Related Security to the Purchaser and the other transactions permitted or contemplated by this Agreement. (h) ORIGINATOR RECEIVABLES. With respect to each Receivable acquired by the Seller from an Originator, the Seller will (i) acquire such Receivable pursuant to and in accordance with the terms of the Originator Sale Agreement, (ii) take all action necessary to perfect, protect and more fully evidence the Seller's ownership of such Receivable, including, without limitation, (A) filing and maintaining effective financing statements (Form UCC-1) against the Originators in all necessary or appropriate filing offices, and filing continuation statements, amendments or assignments with respect thereto in such filing offices and (B) executing or causing to be executed such other instruments or notices as may be necessary or appropriate and (iii) take all additional action that the Deal Agent may reasonably request to perfect, protect and more fully evidence the respective interests of the parties to this Agreement in the Receivables and other Purchased Property related thereto. (i) DEBT; INVESTMENTS. The Seller will not incur any Debt other than Debt arising hereunder or under the Originator Sale Agreement. The Seller will not make any Investments (including, without limitation, the creation of, and the making of capital contributions to, a subsidiary) other than Permitted Investments. (j) CHANGE IN THE ORIGINATOR SALE AGREEMENT. The Seller will not, without the prior consent of the Deal Agent, (a) amend, modify, waive or terminate any terms or conditions of the Originator Sale Agreement or of any other Transaction Document to which it is a party, or (b) exercise any discretionary rights granted to the Seller under the Originator Sale Agreement pursuant to provisions thereof providing for certain actions to be taken "with the consent of the Buyer", "acceptable to the Buyer" as "specified by the Buyer", "in the reasonable judgment of the Buyer" or similar provisions. (k) AMENDMENT TO CERTIFICATE OF FORMATION OR THE LLC AGREEMENT. The Seller will not amend, modify or otherwise make any change to its Certificate of Formation or its LLC Agreement, except in accordance with the terms and provisions thereof. (l) AUDITS. At any time and from time to time upon prior written notice to the Seller during regular business hours and on an annual (or more frequent) basis, if requested by the Deal Agent, the Seller will permit the Deal Agent, or its agents or representatives, (i) to examine and make copies of and abstracts from all Records, and (ii) to visit the offices and properties of the Seller for the purpose of examining such Records, and to discuss matters relating to the Receivables or the Seller's performance hereunder with any of the officers or employees of the Seller having knowledge of such matters. Each such audit shall be at the sole expense of the Seller (subject to the Seller's right under the Originator Sale Agreement to recover such expenses from the Originators). (m) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Seller will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Receivables in the event of the destruction of the originals thereof) and keep and maintain, all documents, books, records and other information reasonably necessary or advisable for the collection of all Purchased Receivables (including, without limitation, records adequate to permit the daily identification of all collections of and adjustments to each Purchased Receivable). (n) LOCATION OF RECORDS. The Seller will keep its chief place of business and chief executive office, and the offices where it keeps the Records, at the address of the Seller referred to in SECTION 10.02, or, in any such case, upon 30 days' prior written notice to the Deal Agent, at such other locations within the United States where all action required by SECTION 6.08 shall have been taken and completed. (o) CREDIT AND COLLECTION POLICIES. The Seller will, and will cause the Servicer to, comply in all material respects with the Credit and Collection Policy in regard to each Purchased Receivable and the related Contract. The Seller shall not, without the written consent of the Deal Agent (i) make any change in the character of its business or (ii) make or agree to make any material change in the Credit and Collection Policy. (p) CHANGE IN PAYMENT INSTRUCTIONS TO OBLIGORS. The Seller will not add or terminate any bank as a Lock-Box Bank from those listed in Schedule III to the Originator Sale Agreement or SCHEDULE III hereto or make any change in its instructions to Obligors regarding payments to be made to any Lock-Box Bank, unless the Deal Agent shall have given its prior written consent to such addition, termination or change (which consent shall not be unreasonably withheld) and the Deal Agent shall have received (i) ten Business Days' prior notice of such addition, termination or change, (ii) prior to the effective date of such addition, termination or change, (x) executed copies of Lock-Box Agreements executed by each new Lock-Box Bank and the Seller and (y) copies of all agreements and documents signed by either the Seller or the respective Lock-Box Bank with respect to any new Lock-Box Account, and (iii) the prior written consent of the Purchaser to such addition, termination or change (which consent shall not be unreasonably withheld). (q) CHANGE IN CORPORATE NAME. The Seller will not make any change to its corporate name, or use any trade names, fictitious names, assumed names or "doing business as" names. (r) TAXES. The Seller will file or cause to be filed all federal, state and local tax returns which are required to be filed by it. The Seller shall pay or cause to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which the Seller shall have set aside adequate reserves on its books in accordance with GAAP. (s) TRANSACTION DOCUMENTS. The Seller will comply in all material respects with the terms of and employ the procedures outlined in and enforce the obligations of the Originators under the Originator Sale Agreement, enforce all of the other rights of the Seller under each of the other Transaction Documents to which it is a party, take all such action to such end as may be from time to time reasonably requested by the Deal Agent, and maintain all such Transaction Documents in full force and effect and make to the Originators such reasonable demands and requests for information and reports or for action as the Seller is entitled to make thereunder and as may be from time to time reasonably requested by the Deal Agent. (t) SEGREGATION OF COLLECTIONS. The Seller will prevent the deposit into the Collection Account of any funds other than Collections and, to the extent that any such funds are nevertheless deposited into the Collection Account, will promptly identify any such funds to the Servicer for segregation and remittance to the owner thereof. (u) ACCOUNTING TREATMENT. The Seller will not prepare any financial statements or other statements which shall account for the transactions contemplated by the Originator Sale Agreement in any manner other than as the sale of, or a capital contribution of, the "Transferred Assets" (as defined therein) by the Originators to the Seller. (v) QUALIFICATION TO DO BUSINESS. The Seller will duly qualify to do business, and be in good standing, in every jurisdiction in which the nature of its business requires it to be so qualified and the failure to do so could reasonably be expected to have a material adverse effect on the Seller's ability to perform its obligations hereunder or the ability to assign or collect the Purchased Receivables hereunder. (w) RECEIVABLES. The Seller will not, without the written consent of the Purchaser and the Deal Agent, amend, modify, waive or cancel the terms of any Receivable unless such amendment, modification, waiver or cancellation is in the ordinary course of business of the Seller. SECTION 5.02. GENERAL COVENANTS OF THE SERVICER. (a) COMPLIANCE WITH LAWS; PRESERVATION OF CORPORATE EXISTENCE. The Servicer shall comply in all material respects with all applicable laws (including, without limitation, ERISA and the Code), rules, regulations, orders and Transaction Documents and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges where the failure to comply could reasonably be expected to have a material adverse effect on the Servicer's ability to perform its obligations hereunder or the ability to collect the Purchased Receivables hereunder. (b) GENERAL REPORTING REQUIREMENTS. The Servicer will provide, or cause to be provided, to the Deal Agent (with a copy for the Purchaser) the following: (i) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Servicer, consolidated balance sheets of the Servicer and its consolidated subsidiaries and the related statements of income, shareholders' equity and cash flows each for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, prepared in accordance with GAAP and certified by a senior financial officer of the Servicer; (ii) as soon as available and in any event within 90 days after the end of each fiscal year of the Servicer, a copy of the consolidated balance sheets of the Servicer and its consolidated subsidiaries and the related statements of income, shareholders' equity and cash flows for such year, each prepared in accordance with GAAP consistently applied and reported on by nationally recognized independent public accountants acceptable to the Deal Agent; (iii) promptly after the filing or receiving thereof, copies of all reports and notices with respect to any Reportable Event defined in Article IV of ERISA which the Servicer or any ERISA Affiliate files under ERISA with the Internal Revenue Service or the PBGC or the U.S. Department of Labor or which the Servicer or any ERISA Affiliate receives from such entity; (iv) promptly upon discovery thereof, written notice to the Deal Agent that a Coverage Shortfall Event has occurred or is likely to occur; (v) promptly following the Deal Agent's request therefor, such other information respecting the Receivables or the conditions or operations, financial or otherwise, of the Servicer as the Deal Agent may from time to time request in order to protect the interests of the Deal Agent or the Purchaser in connection with this Agreement. (c) ERISA MATTERS. The Servicer will not (a) fail to comply in all material respects with ERISA and the provisions of the Code applicable to the Benefit Plans; (b) engage or permit any ERISA Affiliate to engage in any prohibited transaction which would subject the Servicer to a material tax or penalty imposed on a prohibited transaction; (c) permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (d) incur any liability to the PBGC over and above the premiums required by law; or (e) terminate any Benefit Plan in a manner which could result in the imposition of a lien on the property of the Servicer or any such ERISA Affiliate. (c) AUDITS. At any time and from time to time upon prior written notice to the Servicer during regular business hours and on an annual (or more frequent) basis, if requested by the Deal Agent, the Servicer will permit the Deal Agent, or its agents or representatives, (i) to examine and make copies of and abstracts from all Records, and (ii) to visit the offices and properties of the Servicer for the purpose of examining such Records, and to discuss matters relating to the Receivables or the Servicer's performance hereunder with any of the officers or employees of the Servicer having knowledge of such matters. Each such audit shall be at the sole expense of the Servicer. (d) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Servicer will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Receivables in the event of the destruction of the originals thereof) and keep and maintain, all documents, books, records and other information reasonably necessary or advisable for the collection of all Purchased Receivables (including, without limitation, records adequate to permit the daily identification of all collections of and adjustments to each Purchased Receivable). (e) LOCATION OF RECORDS. The Servicer will keep its chief place of business and chief executive office, and the offices where it keeps the Records, at the address of the Servicer referred to in SECTION 10.02, or, in any such case, upon 30 days' prior written notice to the Deal Agent, at such other locations within the United States. (f) CREDIT AND COLLECTION POLICIES. The Servicer will comply in all material respects with the Credit and Collection Policy in regard to each Purchased Receivable and the related Contract. The Servicer shall not, without the written consent of the Deal Agent make or agree to make any material change in the Credit and Collection Policy. (g) CHANGE IN PAYMENT INSTRUCTIONS TO OBLIGORS. The Servicer will not add or terminate any bank as a Lock-Box Bank from those listed in Schedule III to the Originator Sale Agreement or SCHEDULE III hereto or make any change in its instructions to Obligors regarding payments to be made to any Lock-Box Bank, unless the Deal Agent shall have given its prior written consent to such addition, termination or change (which consent shall not be unreasonably withheld) and the Deal Agent shall have received (i) ten Business Days' prior notice of such addition, termination or change, (ii) prior to the effective date of such addition, termination or change, (x) executed copies of Lock-Box Agreements executed by each new Lock-Box Bank and the Servicer and (y) copies of all agreements and documents signed by either the Servicer or the respective Lock-Box Bank with respect to any new Lock-Box Account, and (iii) the prior written consent of the Purchaser to such addition, termination or change (which consent shall not be unreasonably withheld). (h) TAXES. The Servicer will file or cause to be filed all federal, state and local tax returns which are required to be filed by it. The Servicer shall pay or cause to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate proceedings and with respect to which the Servicer shall have set aside adequate reserves on its books in accordance with GAAP. (i) TRANSACTION DOCUMENTS. The Servicer will comply in all material respects with the terms of this Agreement and each of the other Transaction Documents to which it is a party, take all such action to such end as may be from time to time reasonably requested by the Deal Agent, and maintain all such Transaction Documents in full force and effect and make such reasonable demands and requests for information and reports or for action as the Servicer is entitled to make thereunder and as may be from time to time reasonably requested by the Deal Agent. (j) SEGREGATION OF COLLECTIONS. To the extent that any funds other than Collections are deposited into the Collection Account, the Servicer will promptly identify any such funds for segregation and remittance to the owner thereof. (k) QUALIFICATION TO DO BUSINESS. The Servicer will duly qualify to do business, and be in good standing, in every jurisdiction in which the nature of its business requires it to be so qualified and the failure to do so could reasonably be expected to have a material adverse effect on the Servicer's ability to perform its obligations hereunder or the ability to collect the Purchased Receivables hereunder. (l) RECEIVABLES. The Servicer will not, without the written consent of the Purchaser and the Deal Agent, amend, modify, waive or cancel the terms of any Receivable unless such amendment, modification, waiver or cancellation is in the ordinary course of business of the Servicer and, with respect to the cancellation of any Receivable, for which cash consideration is paid with respect to any such Receivable. ARTICLE VI ADMINISTRATION, COLLECTION AND MONITORING OF ASSETS SECTION 6.01. APPOINTMENT AND DESIGNATION OF THE SERVICER. The Seller, the Purchaser and the Deal Agent hereby appoint the Person (the "SERVICER") designated by the Deal Agent from time to time with the approval of the Purchaser pursuant to this SECTION 6.01, and subject to the third sentence of this SECTION 6.01, as their agent to service, administer and collect the Receivables and otherwise to enforce their respective rights and interests in, to and under the Receivables, the Related Security and the Contracts. The Servicer's authorization under this Agreement shall terminate on the Collection Date. Unless and until the Deal Agent gives notice to the Seller of a designation of a new Servicer after the occurrence of a Servicer Termination Event and continuously until such time, Superior is hereby designated as, and hereby agrees to perform the duties and obligations of, the Servicer pursuant to the terms hereof. Subject to the preceding sentence, the Deal Agent may (with the approval of the Purchaser and after the occurrence of a Servicer Termination Event) designate as Servicer any Person to succeed Superior or any successor Servicer, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Servicer pursuant to the terms hereof. Each of the Seller and the Servicer hereby grants to any successor Servicer an irrevocable power of attorney to take any and all steps in the Seller's or the Servicer's name, as applicable, and on behalf of the Seller or the Purchaser, as may be necessary or desirable, in the determination of the successor Servicer, to collect all amounts due under any and all Receivables, including, without limitation, endorsing the Seller's name on checks and other instruments representing Collections and enforcing such Receivables and the related Contracts. The Servicer may, with the prior consent of the Deal Agent, subcontract with any other Person for servicing, administering or collecting the Receivables, PROVIDED that the Servicer shall remain liable for the performance of the duties and obligations of the Servicer pursuant to the terms hereof. Notwithstanding anything to the contrary contained in this Agreement, the Servicer, if not the Seller, an Originator or an Affiliate thereof, shall have no obligation to collect, enforce or take any other action described in this ARTICLE VI with respect to any Receivable that is not a Purchased Receivable other than to deliver to the Seller the Collections and documents with respect to any such Receivable that is not a Purchased Receivable as described in SECTIONS 6.03 and 6.06(b). SECTION 6.02. COLLECTION OF RECEIVABLES BY THE SERVICER; EXTENSIONS AND AMENDMENTS OF RECEIVABLES. The Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy; PROVIDED, HOWEVER, that, (a) the Deal Agent shall have the absolute and unlimited right to direct the Servicer (whether the Servicer is the Seller, an Originator or otherwise) to commence or settle any legal action, to enforce collection of any Purchased Receivable or to foreclose upon or repossess any Related Security, (b) the Servicer shall not make the Deal Agent or the Purchaser a party to any litigation without the express written consent of the Deal Agent or the Purchaser, as the case may be. If the Termination Date shall not have occurred, Superior, while it is Servicer, may, in accordance with the Credit and Collection Policy, (a) extend the maturity or adjust the Outstanding Balance of any Defaulted Receivable as Superior may determine to be appropriate to maximize Collections thereof and (b) adjust the Outstanding Balance of any Receivable to reflect the reductions or cancellations resulting from any Dilution Factor, in each such case in accordance with the requirements of the Credit and Collection Policy and provided that such extension or adjustment shall not alter the status of such Receivable as a Defaulted Receivable or limit the rights of the Purchaser or Deal Agent under this Agreement. Except as otherwise permitted pursuant to the next preceding sentence, neither the Servicer nor the Seller will extend, amend, cancel or otherwise modify the terms of any Purchased Receivable, or amend, modify, cancel or waive any term or condition of any Contract related thereto without the prior written approval of the Deal Agent. SECTION 6.03. DISTRIBUTION AND APPLICATION OF COLLECTIONS. The Servicer shall set aside for the account of the Seller and the Purchaser their respective allocable shares of the Collections of Receivables in accordance with SECTION 2.04. The Servicer shall as soon as practicable following receipt turn over to the Seller the Collections of any Receivable which is not a Purchased Receivable less, in the event neither Superior nor an Affiliate thereof is the Servicer, all reasonable and appropriate out-of-pocket costs and expenses of such Servicer of servicing, collecting and administering the Receivables to the extent not covered by the Servicer Fee received by it. SECTION 6.04. OTHER RIGHTS OF THE DEAL AGENT. (a) On or before the Closing Date, the Seller shall have, or shall have caused the Servicer or the applicable Originator to (in each case, at the Seller's expense), (i) deliver, return receipt requested, to each of the Reinsurance Companies in respect of the Reinsurance Recoverables notice of the Purchaser's interest in the Purchased Receivables comprised of Reinsurance Recoverables. (b) At any time following the occurrence of a Servicer Termination Event or the designation of a Servicer other than Superior, the Seller or any Affiliate of either thereof pursuant to SECTION 6.01: (i) The Deal Agent may or, at the request of the Deal Agent, the Seller shall (in either case, at the Seller's expense) direct the Obligors of Receivables, or any of them, to pay all amounts payable under any Receivable directly to the Deal Agent or its designee; (ii) The Deal Agent may or, at the request of the Deal Agent, the Seller shall (in either case, at the Seller's expense) give each of the Obligors notice (to the extent the Seller has not otherwise given notice to such Obligors in accordance with clause (a)(i) of this SECTION 6.04) of the Purchaser's interests in the Purchased Receivables; and (iii) The Seller shall, at the Deal Agent's request and at the Seller's expense, (A) assemble all Records and make the same available to the Deal Agent or its designee at a place selected by the Deal Agent or its designee, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections of Receivables in a manner acceptable to the Deal Agent and, promptly following receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Deal Agent or its designee. SECTION 6.05. RECORDS; AUDITS. (a) The Servicer will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the timely and full collection of all Receivables (including, without limitation, all Collections of and adjustments to each Purchased Receivable). (b) The Servicer, whether or not Superior or an Affiliate thereof, shall hold all Records in trust for the Seller and the Purchaser in accordance with their respective interests. Subject to the receipt of contrary instructions from the Deal Agent, the Seller will deliver all Records to such Servicer; PROVIDED, HOWEVER, that the Servicer, if other than Superior, shall as soon as practicable upon demand deliver to the Seller all Records in its possession relating to Receivables of the Seller other than Purchased Receivables, and copies of Records in its possession relating to Purchased Receivables. (c) The Servicer will, from time to time during regular business hours as requested by the Deal Agent, permit the Deal Agent, or its agents or representatives, (i) to examine and make copies of and abstracts from all Records and (ii) to visit the offices and properties of the Servicer for the purpose of examining such Records and to discuss matters relating to the Receivables or the Servicer's or the Seller's performance hereunder with any of the officers or employees of the Servicer or the Seller having knowledge of such matters. SECTION 6.06. RECEIVABLE REPORTING. (a) The Servicer, so long as it is Superior or an Affiliate thereof, and otherwise the Seller, will deliver to the Deal Agent (i) prior to the Monthly Asset Report Date occurring during each calendar month hereafter, a report identifying the Purchased Receivables, by Obligor, as of the last day of the preceding calendar month, (ii) as of the Termination Date, a report identifying the Purchased Receivables, by Obligor, on the day immediately preceding the Termination Date and (iii) prior to the Monthly Asset Report Date occurring in each calendar month hereafter, a report identifying the outstanding accounts payable of each of the Originators as of the last day of the preceding calendar month, identified by the relevant Originator and the account payee. (b) On or prior to the Monthly Asset Report Date occurring in each calendar month, the Servicer shall prepare and forward to the Deal Agent for the Purchaser, a Monthly Asset Report relating to all Purchased Receivables, as of the close of business of the Servicer on the last day of the preceding calendar month. SECTION 6.07. COLLECTIONS AND LOCK-BOXES. The Seller and the Servicer will (i) instruct all Obligors to cause all Collections to be either (A) remitted to a Lock-Box and will cause each Lock-Box Bank to retrieve such Collections promptly and deposit the same to the respective Lock-Box Accounts or (B) deposited directly with the Lock-Box Bank, and (ii) instruct all Lock-Box Banks to transfer such Collections in same day funds to one of the special-purpose segregated interest-bearing trust accounts established in the name of the Deal Agent and as listed in SCHEDULE III attached hereto (each a "COLLECTION ACCOUNT") maintained with a financial institution (the "COLLECTION ACCOUNT BANK") acceptable to the Deal Agent, which shall initially be BankBoston, N.A. (PROVIDED, HOWEVER, that in the event that the Collection Account is maintained at a commercial bank having (x) combined capital and surplus of at least $250,000,000 and (y) a short-term debt rating of at least A-1 from S&P, P-1 from Moody's and D-1 from DCR (if rated by DCR), the Collection Account need not be a trust account). In accordance with the terms of the Collection Account Agreement, to be entered into among the Collection Account Bank, the Servicer, the Purchaser and the Deal Agent, the Servicer shall instruct the Collection Account Bank to allocate and remit such Collections in accordance with SECTION 2.04; PROVIDED, HOWEVER, that the Deal Agent may, at any time, revoke the Servicer's authority with respect to the Collection Account, direct the Collection Account Bank to cease taking instructions from the Servicer and to thereafter take direction solely from the Deal Agent. If the Seller receives any Collections, the Seller will remit such Collections to the Collection Account within one Business Day following the Seller's receipt thereof. The Seller will not add or terminate any bank as Lock-Box Bank from those listed in SCHEDULE III or make any change in its instructions to Obligors regarding payments to be made to any Lock Box or any Lock-Box Bank, unless the Deal Agent shall have received at least ten Business Days' prior written notice of such addition, termination or change and all actions reasonably requested by the Deal Agent to protect and perfect the interest of the Deal Agent and the Purchaser in the Collections of Purchased Receivables have been taken and completed. SECTION 6.08. UCC MATTERS; PROTECTION AND PERFECTION OF PURCHASED PROPERTY. The Seller will keep its principal place of business and chief executive office, and the office where it keeps the Records, at the address of the Seller referred to in SECTION 4.01(k) or, upon 30 days' prior written notice to the Deal Agent, at such other locations within the United States where all actions reasonably requested by the Deal Agent to protect and perfect the interest of the Deal Agent and the Purchaser in the Purchased Receivables have been taken and completed. The Seller agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that the Deal Agent may reasonably request in order to perfect, protect or more fully evidence the Purchased Interest acquired by the Purchaser hereunder, or to enable the Purchaser or the Deal Agent to exercise or enforce any of their respective rights hereunder. Without limiting the generality of the foregoing, the Seller will: (a) upon the request of the Deal Agent, execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate or as the Deal Agent may request, and (b) on or prior to the date hereof, mark its master data processing records evidencing such Purchased Receivables and related Contracts with a legend, acceptable to the Deal Agent, evidencing that the Purchaser has acquired an interest therein as provided in this Agreement. The Seller hereby authorizes the Deal Agent to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Purchased Property now existing or hereafter arising without the signature of the Seller where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Purchased Property or any part thereof shall be sufficient as a financing statement. Notwithstanding anything to the contrary herein, the Seller shall, upon the request of the Deal Agent at any time and at the Seller's expense, notify the Obligors of Purchased Receivables, or any of them, of the ownership of the Purchased Interest by the Purchaser. If the Seller fails to perform any of its agreements or obligations under this SECTION 6.08, the Deal Agent may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Deal Agent incurred in connection therewith shall be payable by the Seller upon the Deal Agent's demand therefor. For purposes of enabling the Deal Agent to exercise its rights described in the preceding sentence and elsewhere in this ARTICLE VI, the Seller and the Purchaser hereby authorize the Deal Agent to take any and all steps in the Seller's name and on behalf of the Seller and the Purchaser necessary or desirable, in the determination of the Deal Agent, to collect all amounts due under any and all Receivables, including, without limitation, endorsing the Seller's name on checks and other instruments representing Collections and enforcing such Receivables and the related Contracts. SECTION 6.09. OBLIGATIONS OF THE SELLER WITH RESPECT TO RECEIVABLES. The Seller will (a) at its expense, regardless of any exercise by the Deal Agent or the Purchaser of their rights hereunder, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Purchased Receivables to the same extent as if the Purchased Interest therein had not been sold hereunder and (b) pay when due any taxes, including without limitation, sales and excise taxes, payable in connection with the Purchased Receivables. In no event shall the Deal Agent or the Purchaser have any obligation or liability with respect to any Purchased Receivables or related Contracts, nor shall any of them be obligated to perform any of the obligations of the Seller or the Originators or any of their Affiliates thereunder. The Seller will, and will cause the Servicer to, timely and fully comply in all material respects with the Credit and Collection Policy in regard to each Purchased Receivable and the related Contract. The Seller will not make any change in the character of its business or make or agree to make any change in the Credit and Collection Policy, which change would, in either case, impair the collectibility of any Purchased Receivable. SECTION 6.10. APPLICATIONS OF COLLECTIONS. Any payment by an Obligor in respect of any indebtedness owed by it to the Seller or any Originator shall, except as otherwise specified by such Obligor or otherwise required by contract or law and unless otherwise instructed by the Deal Agent, be applied as a Collection of any Purchased Receivable of such Obligor, in the order of the age of such Receivables, starting with the oldest such Purchased Receivable, to the extent of any amounts then due and payable thereunder, before being applied to any Receivable that is not a Purchased Receivable or other indebtedness of such Obligor. SECTION 6.11. ANNUAL SERVICING REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. On an annual basis on or before November 30 of each calendar year, beginning with November 30, 1999, the Servicer shall cause nationally recognized independent public accountants acceptable to the Deal Agent, to furnish a report to each of the Servicer, the Seller, the Purchaser, the Deal Agent and each Rating Agency then rating the Commercial Paper at the request of EagleFunding substantially to the effect that (i) such accountants have examined certain documents and records relating to the servicing of Receivables under this Agreement, compared the information contained in the Monthly Asset Reports delivered by or on behalf of the Seller under this Agreement during the annual period covered by such report (or such shorter initial period, as the case may be) with such documents and records and that, on the basis of such examination, and subject to such reasonable limitations and qualifications as may be set forth in such report, such accountants are of the opinion that the servicing has been conducted substantially in compliance with the terms and conditions as set forth in Article VI of this Agreement, except for such exceptions as they believe to be immaterial and such other exceptions as shall be set forth in such statement and (ii) such accountants have compared the mathematical calculations of each amount set forth in the Monthly Asset Reports delivered pursuant to this Agreement during the period covered by such report with the Servicer's computer reports which were the source of such amounts and that on the basis of such comparison, such accountants are of the opinion that such amounts are in agreement, except for such exceptions as they believe to be immaterial and such other exceptions as shall be set forth in such statement. ARTICLE VII TRIGGER EVENTS SECTION 7.01. TRIGGER EVENTS. If any of the following events ("TRIGGER EVENTS") shall occur: (a) (i) The Servicer (if other than the Deal Agent or an Affiliate thereof) shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in CLAUSE (ii) of this SECTION 7.01(a)) and such failure shall remain unremedied for two Business Days after written notice to Servicer and Seller or (ii) either the Servicer (if other than the Deal Agent) or the Seller shall fail to make any payment or deposit to be made by it hereunder when due; or (b) (i) Any representation or warranty made or deemed to be made by the Seller (or any of its officers or agents) under or in connection with this Agreement or any Monthly Asset Report or other information or report delivered pursuant hereto shall prove to have been false or incorrect in any material respect when made or (ii) any representation or warranty made or deemed to be made by any Originator (or any of their respective officers or agents) under or in connection with the Originator Sale Agreement shall prove to have been false or incorrect in any material respect when made; or (c) Either the Seller, the Servicer or any Originator shall fail to perform or observe any term, covenant or agreement (other than any term covenant, or agreement described in either of clauses (a) or (b) above) contained in this Agreement or in the Originator Sale Agreement (as the case may be) on its part to be performed or observed and any such failure shall remain unremedied for two (2) Business Days after written notice thereof shall have been given by the Deal Agent to the Seller; or (d) Either (i) the Purchase shall for any reason, except to the extent permitted by the terms hereof, cease to create a valid and perfected first priority undivided percentage ownership or security interest in each Purchased Receivable and the Related Security and Collections with respect thereto or (ii) the purchase by the Seller of a Receivable from the Originators shall, for any reason, cease to create in favor of the Seller a valid and perfected first priority ownership or security interest in each Purchased Receivable and the Related Security and Collections with respect thereto; or (e) (i) The Seller, the Servicer, any Originator or any of their respective Affiliates shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Seller, the Servicer or any Originator seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against (but not by) the Servicer or any Originator, either such proceeding shall have remained undismissed or unstayed for a period of 60 days or any order for relief of the sort described above shall have been entered; or (ii) the Seller, the Servicer or any Originator shall take any corporate action to authorize any of the actions set forth in CLAUSE (i) above in this SECTION 7.01(e); or (f) (i) The Originator Sale Agreement shall have ceased to be valid, binding and enforceable as against any of the parties thereto without any amendment, modification, waiver or termination of any terms or conditions thereof, other than as agreed to in writing by the Deal Agent, or (ii) the assignment to the Deal Agent of all of the Seller's right and title to and interest in the Originator Sale Agreement shall have ceased, for any reason, to be fully effective and enforceable by the Deal Agent as against any of the parties of the Originator Sale Agreement; or (g) A Servicer Termination Event shall have occurred and be continuing; or (h) The date on which some or all of the "Liquidity Commitments" under the Liquidity Agreement shall cease to be effective or shall terminate without renewal or such "Liquidity Commitments" shall ever be less than 102% of the Purchase Limit; or (i) Any Originator, the Seller or the Servicer shall fail to perform or observe any material term, covenant or agreement contained in the Credit and Collection Policy; or (j) The IRS or the PBGC shall have filed notice of one or more Adverse Claims against any Originator, the Seller or any ERISA Affiliate under ERISA or the Code, UNLESS such Adverse Claim does not purport to cover the Receivables, and such notice shall have remained in effect for more than thirty (30) Business Days unless, prior to the expiration of such period, such Adverse Claims shall have been adequately bonded by such Originator, Seller or the ERISA Affiliate (as the case may be) in a transaction with respect to which the Deal Agent has given its prior written approval; or (k) The Seller shall have become subject to registration as an "investment company" within the meaning of the Investment Company Act; then, and in any such event, the Deal Agent may, by notice to the Seller declare the Termination Date to have occurred, EXCEPT that, in the case of any event described in SECTION 7.01(h) or (k), or in CLAUSE (i) of SECTION 7.01(e) above, the Termination Date shall be deemed to have occurred automatically upon the occurrence of such event. Upon any such declaration or automatic occurrence, the Deal Agent and the Purchaser shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of the applicable jurisdiction and other applicable laws, which rights shall be cumulative. ARTICLE VIII INDEMNIFICATION SECTION 8.01. INDEMNITIES BY THE SELLER. Without limiting any other rights which the Deal Agent, the Purchaser, the Liquidity Providers, the Supplemental Enhancement Providers or any of their respective Affiliates may have hereunder or under applicable law, the Seller hereby agrees to indemnify the Deal Agent, the Purchaser, each Liquidity Provider, each Supplemental Enhancement Provider each of their respective Affiliates, and each of their respective directors, officers, employees, agents and attorneys (all of the foregoing being collectively referred to as "INDEMNIFIED PARTIES") from and against any and all damages, losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively referred to as "INDEMNIFIED AMOUNTS") awarded against or actually incurred by any of them arising out of or resulting from: (i) any Purchased Receivable represented or deemed represented by the Seller to be an Eligible Receivable which is not an Eligible Receivable at the time such representation is made or deemed made; (ii) reliance on any representation or warranty made or deemed made by the Seller, the Servicer or any of their respective officers under this Agreement, which shall have been false or incorrect in any material respect when made or deemed made or delivered; (iii) the failure by the Seller or the Servicer to comply with any term, provision or covenant contained in this Agreement or any of the other Transaction Documents, or with any applicable law, rule or regulation with respect to any Receivable, the related Contract or the Related Security, or the nonconformity of any Receivable, the related Contract or the Related Security with any such applicable law, rule or regulation; (iv) (A) the failure to vest and maintain vested in the Purchaser or to transfer to the Purchaser, legal and equitable title to and ownership of, a percentage ownership interest, corresponding to the Purchased Interest, in the Receivables which are, or are purported to be, Purchased Receivables, together with all Collections and Related Security; or (B) the failure to grant to the Deal Agent, for the benefit of itself and the Purchaser, a valid and perfected first priority "security interest," under Article 9 of the UCC, in and to the Receivables which are, or are purported to be, Purchased Receivables, together with all Collections and Related Security; in each case free and clear of any Adverse Claim whether existing at the time of the Purchase of any such Receivable or at any time thereafter; (v) the failure by the Seller or the Servicer to make any payment required on its part to be made hereunder; (vi) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables which are, or are purported to be, Purchased Receivables, whether at the time of the Purchase or at any subsequent time; (vii) any dispute, claim, offset or defense (other than the discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable which is, or is purported to be, a Purchased Receivable (including, without limitation, a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Receivable or the furnishing or failure to furnish such merchandise or services; (viii) any failure of the Seller or the Servicer to perform its duties or obligations in accordance with the provisions of this Agreement or any failure by an Originator, the Seller or any Affiliate thereof to perform its respective duties under the Contracts; (ix) the failure to pay when due any taxes, including without limitation, sales, excise or personal property taxes payable in connection with the Purchased Receivables; (x) any repayment by the Deal Agent or the Purchaser of any amount previously distributed in reduction of Capital or payment of Yield or any other amount due hereunder, in each case which amount the Deal Agent or the Purchaser reasonably believes is required to be repaid; (xi) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of Purchases or reinvestments or the ownership of Purchased Property or in respect of any Receivable, Related Security or Contract; (xii) any failure by the Seller to give reasonably equivalent value to each Originator in consideration for the transfer by such Originator to the Seller of any Receivables or Related Security, or any attempt by any Person to void or otherwise avoid any such transfer under any statutory provision or common law or equitable action, including, without limitation, any provision of the Bankruptcy Code; or (xiii) the failure of the Seller, any Originator or any of their respective agents or representatives (including, without limitation, agents, representatives and employees of the Originators acting pursuant to authority granted under SECTION 6.01) to remit to the Servicer or the Deal Agent, Collections of Purchased Receivables remitted to the Seller, such Originator or any such agent or representative. Any amounts subject to the indemnification provisions of this SECTION 8.01 shall be paid by the Seller to the Deal Agent within two Business Days following the Deal Agent's demand therefor. Notwithstanding any other provision of this Agreement to the contrary, the Seller shall not indemnify the Indemnified Parties for or with respect to any Indemnified Amounts that would constitute recourse for uncollectible Purchased Receivables due to credit reasons. SECTION 8.02. OPTIONAL REPURCHASE OF THE PURCHASED INTEREST. (a) The Servicer may, at any time after the aggregate Outstanding Balance of the Purchased Receivables has declined to 10% or less of the Purchase Limit and upon not less than five Business Days' prior written notice to the Deal Agent, elect to purchase all, but not less than all, of the Purchased Interest outstanding on such date, which purchase shall take place on the Business Day next succeeding the fifth Business Day to occur following the Deal Agent's receipt of such notice, in consideration of the payment of all outstanding Capital and accrued Yield on such day in accordance with the terms of SUBSECTION (b) of this SECTION 8.02. (b) In the case of a purchase from the Purchaser by the Servicer of the Purchased Interest pursuant to this SECTION 8.02, the Seller shall, on the Business Day coinciding with such purchase, make a payment to the Deal Agent, the proceeds of which purchase shall be deemed to be Collections relating to the Purchased Interest, and the amount of which payment shall be applied in the following order of priority: (i) First, to pay any accrued and unpaid Servicer Fee (if the Servicer is a party other than Superior, an Originator or an Affiliate thereof), and to pay any such Servicer Fee to be accrued through (and including) the next scheduled payment date therefor; (ii) Second, to pay accrued and unpaid Yield with respect to Purchase Periods associated with the portions of Capital to be reduced in accordance with CLAUSE (vii) below, and to pay any Liquidation Fee payable in connection with such reduction of Capital; (iii) Third, to pay accrued and unpaid Liquidity Fee which is then due and payable, and to pay any such Liquidity Fee to be accrued through such date; (iv) Fourth, to pay accrued and unpaid Supplemental Enhancement Fee which is then due and payable, and to pay any such Supplemental Enhancement Fee to be accrued through such date; (v) Fifth, to pay accrued and unpaid Program Fee which is then due and payable, and to pay any such Program Fee to be accrued through such date; (vi) Sixth, to pay any Administrative Fee which is then due and payable, and (unless such payment is sufficient to reduce Capital to zero in accordance with the application to be made pursuant to this SECTION 8.02(b)), to be retained in the Collection Account to the extent of the Administrative Fee payable in respect of the next succeeding annual period; (vii) Seventh, to pay the portion of any other accrued and unpaid obligations which have not been paid pursuant to clauses (i) through (v) above and which are then due and payable by the Seller or the Servicer to the Purchaser or the Deal Agent under this Agreement or any of the other Transaction Documents; (viii) Eighth, to pay all Capital relating to any Purchase Periods selected by the Deal Agent in the exercise of its sole discretion; (ix) Ninth, to pay accrued and unpaid Management Fee which is then due and payable, and to pay any such Management Fee to be accrued through such date; (x) Tenth, to pay any accrued and unpaid Servicer Fee (if the Servicer is Superior, an Originator or an Affiliate thereof) which is then due and payable, and to pay any such Servicer Fee to be accrued through (and including) the next scheduled payment date therefor. (c) Any purchase made pursuant to this SECTION 8.02 shall be made without recourse or warranty, express or implied (other than a representation and warranty that the Purchased Interest so purchased is free and clear of any Adverse Claim created by or through the Purchaser). ARTICLE IX THE DEAL AGENT SECTION 9.01. AUTHORIZATION AND ACTION. The Purchaser hereby appoints and authorizes the Deal Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Deal Agent by the terms hereof, together with such powers as are reasonably incidental thereto, including, without limitation, the power and authority to hold and to perfect any ownership interest or security interest created pursuant hereto or in connection herewith on behalf of the Purchaser. SECTION 9.02. DEAL AGENT'S RELIANCE, ETC. Neither the Deal Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them as Deal Agent under or in connection with this Agreement (including, without limitation, any action taken or omitted to be taken by it or them if the Deal Agent is designated as Servicer pursuant to SECTION 6.01) or any other agreement executed pursuant hereto, except for its or their own negligence or willful malfeasance or misfeasance. Without limiting the foregoing, the Deal Agent: (i) may consult with legal counsel (including counsel for the Seller), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Person and shall not be responsible to any other Person for any statements, warranties or representations made in or in connection with this Agreement or in connection with any of the other agreements executed pursuant hereto; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Seller or to inspect the property (including the books and records) of the Seller; (iv) shall not be responsible to the Purchaser or any other Person for the due execution, legality, validity, enforceability, genuineness or sufficiency of value of this Agreement or any other agreement, instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement or any other agreement executed pursuant hereto, by acting upon any notice (including notice by telephone with respect to notices under SECTION 2.02), consent, certificate or other instrument or writing (which may be by telex or facsimile) believed by it to be genuine and signed or sent by the proper party or parties. Notwithstanding anything in this SECTION 9.02 to the contrary, the foregoing provisions of this SECTION 9.02 shall not run in favor of the Deal Agent in connection with any claim against the Deal Agent made by EagleFunding. SECTION 9.03. DEAL AGENT AND AFFILIATES. With respect to any interests which may be assigned by the Purchaser to BRSI, or any Affiliate of BRSI, pursuant to SECTION 10.04, BRSI or such Affiliate shall have the same rights and powers under this Agreement as would the Purchaser if it were holding such interests and may exercise the same as though it were not the Deal Agent. BRSI and its Affiliates may generally engage in any kind of business with the Seller, any Originator or any Obligor, any of their respective Affiliates and any Person who may do business with or own securities of the Seller, any Originator or any Obligor or any of their respective Affiliates, all as if BRSI were not the Deal Agent and without any duty to account therefor to the Purchaser, any Liquidity Provider or any Supplemental Enhancement Provider. SECTION 9.04. [Reserved]. SECTION 9.05. RESIGNATION OF THE DEAL AGENT. The Deal Agent may resign as Deal Agent hereunder at any time by giving not less than five (5) Business Days' prior written notice to the Purchaser, the Seller, the Servicer and each Rating Agency then rating the Commercial Paper, at the request of EagleFunding; such resignation to become effective only upon the later to occur of (i) the earlier of (x) the appointment and acceptance of a successor Deal Agent as provided below and (y) the 30th day following delivery of such notice, and (ii) the Purchaser's obtaining of written confirmation from each such Rating Agency that such resignation and appointment will not result in a withdrawal or downgrading of the then-current rating of the Commercial Paper by such Rating Agency. Upon any such resignation, the Purchaser shall appoint a financial institution of its choosing as Deal Agent. Following the appointment of a successor Deal Agent and such successor Deal Agent's acceptance thereof, such successor Deal Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the resigning Deal Agent as Deal Agent hereunder, and the resigning Deal Agent shall be discharged from its duties and obligations as Deal Agent hereunder. After the Deal Agent's resignation, the provisions of this ARTICLE IX shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Deal Agent. SECTION 9.06. PAYMENTS. If in the opinion of the Deal Agent the distribution of any amount received by it in such capacity hereunder or under any of the other Transaction Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been finally adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Deal Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Deal Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. ARTICLE X MISCELLANEOUS SECTION 10.01. AMENDMENTS AND WAIVERS. (a) Except as provided in SECTION 10.01(b), no amendment or modification of any provision of this Agreement shall be effective without the written agreement of the Seller, the Servicer and the Deal Agent, and no termination or waiver of any provision of this Agreement or consent to any departure therefrom by the Seller shall be effective without the written concurrence of the Deal Agent. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (b) Notwithstanding the provisions of SECTION 10.01(a), (i) the written consent of the Purchaser shall be required for any amendment, modification or waiver (A) reducing any Capital, or the Yield thereon, for any Purchase Period, (B) postponing any date for any payment of any Capital or the Yield thereon, for any Purchase Period, or for any payment of fees payable under the terms of the Fee Letter, or (C) modifying the provisions of this SECTION 10.01, and (ii) the written consent of the Purchaser shall be required for any amendment, modification or waiver increasing the Purchase Limit. (c) Any time that the Commercial Paper is being rated by one or more of Moody's, S&P and DCR (as applicable) (each, a "Rating Agency"), at the request of EagleFunding, no material amendment or modification of any material provisions hereof shall be effective absent written confirmation by each such Rating Agency that such amendment or modification will not result in a withdrawal or downgrading of the then-current rating of the Commercial Paper by such Rating Agency. EagleFunding shall send, or shall cause to be sent, copies of all amendments, modifications or supplements to this Agreement to each Rating Agency then rating the Commercial Paper, at the request of EagleFunding, prior to the execution thereof by all parties thereto. SECTION 10.02. NOTICES, ETC. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telex communication and communication by facsimile copy) and mailed, telexed, transmitted or delivered, as to each party hereto, at its address set forth under its name on the signature pages hereof or specified in such party's Assignment and Acceptance or at such other address as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, upon receipt, or in the case of (a) notice by mail, five days after being deposited in the United States mails, first class postage prepaid, (b) notice by telex, when telexed against receipt of answerback, or (c) notice by facsimile copy, when verbal communication of receipt is obtained, except that notices and communications pursuant to ARTICLE II shall not be effective until received. SECTION 10.03 SETOFF AND COUNTERCLAIM. All payments to be made by the Seller or the Servicer under this Agreement shall be made free and clear of any counterclaim, set-off, deduction or other defense, which the Seller or the Servicer may have against the Purchaser, the Deal Agent, any Liquidity Provider, any Supplemental Enhancement Provider, or against each other. SECTION 10.04. NO WAIVER; REMEDIES. No failure on the part of the Deal Agent or the Purchaser to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 10.05. BINDING EFFECT; ASSIGNABILITY. This Agreement shall be binding upon and inure to the benefit of the Seller, the Deal Agent, the Purchaser, the Servicer and their respective successors and permitted assigns. This Agreement and the Purchaser's rights and obligations hereunder and interest herein shall be assignable in whole or in part (including by way of the sale of participation interests therein) by the Purchaser and their respective successors and assigns. EagleFunding shall send, or cause to be sent, notice of such proposed assignment by the Purchaser, to each Rating Agency then rating the Commercial Paper at the request of EagleFunding, prior to the effectiveness thereof. The Seller may not assign any of its rights and obligations hereunder or any interest herein without the prior written consent of the Purchaser and the Deal Agent. The parties to each assignment or participation made pursuant to this SECTION 10.05 shall execute and deliver to the Deal Agent for its acceptance and recording in its books and records, an Assignment and Acceptance or a participation agreement or other transfer instrument reasonably satisfactory in form and substance to the Deal Agent and the Seller. Each such assignment or participation shall be effective as of the date specified in the applicable Assignment and Acceptance or other agreement or instrument only after the execution, delivery, acceptance and recording as described in the preceding sentence. The Deal Agent shall notify the Seller of any assignment or participation thereof made pursuant to this SECTION 10.05. The Purchaser may in connection with any assignment or participation or any proposed assignment or participation pursuant to this SECTION 10.05, disclose to the assignee or participant or proposed assignee or participant any information relating to the Seller and the Purchased Property furnished to the Purchaser by or on behalf of the Seller or the Servicer. SECTION 10.06. TERM OF THIS AGREEMENT. This Agreement, including, without limitation, the Seller's obligation to observe its covenants set forth in ARTICLES V and VI, and the Servicer's obligation to observe its covenants set forth in ARTICLE VI, shall remain in full force and effect until the Collection Date; PROVIDED, HOWEVER, that the rights and remedies with respect to any breach of any representation and warranty made or deemed made by the Seller pursuant to ARTICLES III and IV, and the indemnification and payment provisions of ARTICLE VIII and ARTICLE IX and the provisions of SECTION 10.10 and SECTION 10.11 shall be continuing and shall survive any termination of this Agreement. SECTION 10.07. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION TO VENUE. THIS AGREEMENT, OTHER THAN THE PROVISIONS RELATING TO THE CREATION, PERFECTION AND PRIORITY OF THE SECURITY INTEREST IN THE PURCHASED PROPERTY, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK; THE PROVISIONS OF THIS AGREEMENT RELATING TO THE GRANT, PERFECTION AND PRIORITY OF THE SECURITY INTEREST IN THE PURCHASED PROPERTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN THE STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO HEREBY AGREES TO THE JURISDICTION OF ANY FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. SECTION 10.08. WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PURCHASER, THE SELLER AND THE DEAL AGENT EACH WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN ANY OF THEM IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. INSTEAD, ANY SUCH DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY. SECTION 10.09. COSTS, EXPENSES AND TAXES. (a) In addition to the rights of indemnification granted to the Deal Agent, the Purchaser and the Indemnified Parties under ARTICLE VIII hereof, the Seller agrees to pay on demand all costs and expenses of EagleFunding and the Deal Agent incurred in connection with the preparation, execution, delivery, administration (including periodic auditing), amendment or modification of, or any waiver or consent issued in connection with, this Agreement and the other documents to be delivered hereunder or in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Deal Agent and EagleFunding with respect thereto, and with respect to advising the Deal Agent and the Purchaser as to their respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith, and all costs and expenses, if any (including reasonable counsel fees and expenses), incurred by the Deal Agent or the Purchaser in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith. (b) The Seller shall pay on demand any and all commissions of placement agents and dealers in respect of commercial paper notes (to the extent not otherwise received by the Purchaser as a portion of Yield or Program Fee) issued to fund the Purchase of any interests in Purchased Property and any and all stamp, sales, excise and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, the other documents to be delivered hereunder or any agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchaser in connection with this Agreement or the funding or maintenance of Purchases hereunder. (c) The Seller shall pay on demand all other costs, expenses and taxes (excluding income taxes) incurred by an Issuer or any general or limited partner or shareholder of such Issuer ("OTHER COSTS"), including, without limitation, the cost of auditing such Issuer's books by certified public accountants, the cost of rating such Issuer's commercial paper by independent financial rating agencies, the taxes (excluding income taxes) resulting from such Issuer's operations, and the reasonable fees and out-of-pocket expenses of counsel for such Issuer or any counsel for any general or limited partner or shareholder of such Issuer with respect to (i) advising such Person as to its rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith, (ii) the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith or matters relating to such Issuer's operations and (iii) advising such Person as to the issuance of its commercial paper notes and action in connection with such issuance; PROVIDED, HOWEVER, that the Seller and any other Persons who from time to time sell receivables or interests therein to the Purchaser ("OTHER SELLERS") each shall be liable for such Other Costs ratably in accordance with the usage under their respective facilities; and PROVIDED, FURTHER, that if such Other Costs are attributable to the Seller and not attributable to any Other Seller, the Seller shall be solely liable for such Other Costs. SECTION 10.10. NO PROCEEDINGS. Each of the Seller, the Deal Agent, the Servicer and the Purchaser hereby agrees that it will not institute against, or join any other Person in instituting against, any Issuer any proceedings of the type referred to in CLAUSE (I) of SECTION 7.01(E) so long as any commercial paper issued by such Issuer shall be outstanding or there shall not have elapsed one year and one day since the last day on which any such commercial paper shall have been outstanding. SECTION 10.11. RECOURSE AGAINST CERTAIN PARTIES. No recourse under or with respect to any obligation, covenant or agreement (including, without limitation, the payment of any fees or any other obligations) of the Purchaser as contained in this Agreement or any other agreement, instrument or document entered into by it pursuant hereto or in connection herewith shall be had against any administrator of the Purchaser or any incorporator, affiliate, stockholder, officer, employee or director of the Purchaser or of any such administrator, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; IT BEING EXPRESSLY AGREED AND UNDERSTOOD that the agreements of the Purchaser contained in this Agreement and all of the other agreements, instruments and documents entered into by it pursuant hereto or in connection herewith are, in each case, solely the corporate obligations of the Purchaser, and that no personal liability whatsoever shall attach to or be incurred by any administrator of the Purchaser or any incorporator, stockholder, affiliate, officer, employee or director of the Purchaser or of any such administrator, as such, or any other of them, under or by reason of any of the obligations, covenants or agreements of the Purchaser contained in this Agreement or in any other such instruments, documents or agreements, or which are implied therefrom, and that any and all personal liability of every such administrator of the Purchaser and each incorporator, stockholder, affiliate, officer, employee or director of the Purchaser or of any such administrator, or any of them, for breaches by the Purchaser of any such obligations, covenants or agreements, which liability may arise either at common law or at equity, by statute or constitution, or otherwise, is hereby expressly waived as a condition of and in consideration for the execution of this Agreement. The provisions of this SECTION 10.11 shall survive the termination of this Agreement. SECTION 10.12. EXECUTION IN COUNTERPARTS; SEVERABILITY; INTEGRATION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings other than the fee letters described in SECTION 2.06(a). SECTION 10.13. CONFIDENTIALITY. Except to the extent otherwise required by applicable laws, rules or regulation, unless the provider thereof shall otherwise consent in writing the Seller agrees that it shall (i) maintain the confidentiality of information obtained as a result of being a party hereto, to any related documents or to any of the transactions contemplated hereby or thereby (including, without limitation, the contents of any summary of indicative terms and conditions with respect to such transactions, and the provisions of this Agreement and any of the other Transaction Documents) ("CONFIDENTIAL INFORMATION") and (ii) not disclose, deliver or otherwise make available to any third party any part of any such Confidential Information; PROVIDED, HOWEVER, that the Seller may disclose any Confidential Information (w) to its legal counsel, auditors and accountants, (x) as may be required or requested by any governmental authority, regulatory body or rating agency, (y) subject to a written confidentiality agreement having terms substantially similar to this SECTION 10.13, to any Originator or any Affiliate thereof, any financial institution or other party that extends or is considering the extension of material debt or equity financing to any Originator or any Affiliate thereof, or (z) as may be required or appropriate in response to a court order or in connection with any litigation; PROVIDED FURTHER, HOWEVER, that the Seller shall have no obligation of confidentiality whatsoever in respect of any information which may be generally available to the public or becomes available to the public through no fault of the Seller, any Originator or any of their respective Affiliates. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE SELLER: INSURANCE FUNDING LLC By: /s/ ANDREW L. STIDD ---------------------------------- Name: Andrew L. Stidd Title: Manager c/o GSS Holdings II, Inc. 25 West 43rd Street Suite 704 New York, New York 10036 Attention: Andy Stidd Facsimile No: (212)302-8767 Telephone No: (212)302-8330 THE DEAL AGENT: BANCBOSTON ROBERTSON STEPHENS INC. By: /s/ MARK GALLIVAN ----------------------------------- Name: Mark Gallivan Title: Director BancBoston Robertson Stephens Inc. 100 Federal Street, 9th Floor Boston, Massachusetts 02110 Attention: Adam Cohen Facsimile No.: (617) 434-1533 Telephone No.: (617) 434-4301 THE SERVICER: SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ ROBERT E. NAGLE ---------------------------------- Name: Robert E. Nagle Title: 26601 Agoura Road Calabasas, CA 91302 Attention: J. Chris Seaman, Executive Vice President and CFO Phone: 818-880-1600 Facsimile: 818-880-8615 THE PURCHASER: EAGLEFUNDING CAPITAL CORPORATION By: BankBoston, N.A., as its attorney-in-fact By: /s/ MARK GALLIVAN ---------------------------------- Name: Mark Gallivan Title: Director EagleFunding Capital Corporation c/o BancBoston Robertson Stephens Inc. 100 Federal Street, 9th Floor Boston, Massachusetts 02110 Attention: Mitchell Feldman Facsimile No.: (617) 434-9591 Telephone No.: (617) 434-5760 c/o Lord Securities Corporation 2 Wall Street, 19th Floor New York, New York 10005 Attention: Dwight Jenkins Telephone No.: (212) 346-9007 Facsimile No.: (212) 346-9012 EX-10.73 13 EXHIBIT 10.73 LOSS PORTFOLIO TRANSFER AND 100% QUOTA SHARE REINSURANCE CONTRACT (hereinafter called the "AGREEMENT") between BUSINESS INSURANCE COMPANY (to be renamed "CENTRE INSURANCE COMPANY") (hereinafter called the "REINSURED") and CALIFORNIA COMPENSATION INSURANCE COMPANY (hereinafter called the "REINSURER") ARTICLE I - BUSINESS COVERED Subject to the terms, conditions and limitations of this Agreement, the Reinsured obligates itself to cede and the Reinsurer obligates itself to accept as reinsurance from the Reinsured a quota share participation of 100% of the Reinsured's Net Liability resulting from any loss or losses occurring under any and all policies, certificates, endorsements, bonds, contracts, and binders of insurance or reinsurance written or renewed prior to the Effective Date (each a "POLICY" and collectively "POLICIES"). ARTICLE 2 - TERM This Agreement shall become effective immediately prior to the Closing of the Acquisition (the "EFFECTIVE DATE") and shall remain in force until all the obligations of the Reinsurer shall have been satisfied or discharged in full (the "TERMINATION DATE"). ARTICLE 3 - TERRITORY The territorial limits of this Agreement shall be identical with those of the Policies and shall apply to losses wheresoever occurring. ARTICLE 4 - CONSIDERATION The Reinsured acknowledges receipt of good and valuable consideration for the reinsurance assumed under this Agreement. On the Effective Date the Reinsured shall remit to the Reinsurer: (a) an amount equal to 100% of the Reinsured's Gross Net Unearned Premium Reserve net of the Ceding Commission on the Policies that were in force on the Effective Date, and (b) an amount equal to the unearned portion of the Reinsured's Gross Net Written Premium collected on or before the Effective Date. It is currently estimated that this amount will be, in the aggregate, $144,514,051 (including an estimated $118,354,000 of Losses as of December 10, 1998, an estimated $19,004,000 of loss adjustment expenses as of December 10, 1998 and an estimated $7,156,051 of unearned Premium as of September 30, 1998). The actual amounts will be determined as of the Effective Date. ARTICLE 5 - CEDING COMMISSION The Reinsured shall be entitled to retain: 1 (i) an amount equal to the actual expenses of the Reinsured, including, but not limited to, all commissions (including, without limitation, commissions paid to the Underwriting Manager) and brokerages, taxes (including, without limitation, taxes on premiums paid to the Reinsurer under this Agreement), boards and bureau fees, residual market charges, insolvency assessments and all other expenses whatsoever which are the obligations of the Reinsured (excluding Loss Adjustment Expenses) (the "Reinsured's Expense"); and (ii) 2.5% of Gross Net Written Premium (the "Ceding Commission"). ARTICLE 6 - REPORTS AND REMITTANCES 1. (i) Promptly following the execution and delivery of this Agreement by the Reinsured and the Reinsurer, the Reinsured shall deliver to the Reinsurer (with a copy to the Underwriting Manager), a written notice (the "Initial Three Month Net Liability Notice"), setting forth the Reinsured's estimate of the amount of Net Liability (the "Estimated Net Liability Amount") for the three month period commencing on the Effective Date and ending three months after the Effective Date. The Reinsurer shall, within five (5) business days after receipt from the Reinsured of the Initial Three Month Net Liability Notice, pay the Estimated Net Liability Amount by wire transfer into the Claims Fiduciary Account established pursuant to the Claims Services Agreement and maintained by the TPA in the name and on behalf of the Reinsured. (ii) Periodically during the term of this Agreement (but no more frequently than monthly), the Reinsured shall have the right to deliver to the Reinsurer (with a copy to the Underwriting Manager), written notice (each a "Revised Three Month Net Liability Notice"), setting forth the Reinsured's revised estimate of the amount of Net Liability (the "Revised Estimated Net Liability Amount") for the three month period commencing on the date of such Revised Three Month Net Liability Notice and ending three months thereafter. The Reinsurer shall, within five (5) business days after receipt from the Reinsured of the Revised Three Month Net Liability Notice, pay by wire transfer into the Claims Fiduciary Account, the amount (if a positive number) equal to: (A) the Revised Estimated Net Liability Amount, minus (B) the balance in the Claims Fiduciary Account on the date of such Revised Three Month Net Liability Notice. 2. If, at any time or times during the term of this Agreement, the Reinsured has paid, or intends to pay, Net Liability ceded under this Agreement in an amount that exceeds (or will exceed) Fifty Percent (50%) of the then-current balance of the Claims Fiduciary Account, then the Reinsurer shall, within five (5) business days after receipt from the Reinsured of the Cash Call Notice, pay the Cash Call Amount by wire transfer into the Claims Fiduciary Account. The term "Cash Call Amount" shall mean the amount by which any such payments (or intended payments) by the Reinsured exceeds (or will exceed) Fifty Percent (50%) of the then-current balance of the Claims Fiduciary Account. The term "Cash Call Notice" shall mean written notice from the Reinsured to the Reinsurer setting forth the Cash Call Amount and accompanied by reasonably satisfactory proof of loss or similar documentation. 3. Within fifteen (15) days after the close of each calendar month during the term of this Agreement, and until all claims, losses or disputes arising out of the Policies have been finally resolved, the Underwriting Manager shall render a report (the "Monthly Report") to the Reinsured and the Reinsurer on forms established by the Reinsured and reasonably acceptable to the Reinsurer, setting forth the following information with respect to such month or as of the end of such month (as the case may be): i) Gross Net Written Premium; ii) Ceding Commission; iii) Collected Gross Net Written Premium; iv) Gross Net Unearned Premium Reserve; v) Reinsured Expense; 2 vi) Net Liability ceded under this Agreement which has not been paid by the Reinsured (segregated by case reserves and incurred but not reported reserves) ("Unpaid Net Liability"); vii) Net Liability ceded under this Agreement which has been paid by the Reinsured; ("Paid Net Liability"); and viii) Cash Call Amounts. The Gross Net Unearned Premium Reserves, the Unpaid Net Liability Reserves and the Paid Net Liability reserves shall hereinafter be collectively referred to as the "Reserves." 4. If the Monthly Report shows a positive balance of (a) the sum of (i) collected Gross Net Written Premium, plus (ii) Cash Call Amounts, minus (b) the sum of (i) Ceding Commission, (ii) the Reinsured's Expense, and (iii) any Paid Net Liability, then the Reinsured shall, within thirty (30) days of such Monthly Report, remit by certified check or wire transfer, such positive balance to the Reinsurer from the Premium Account or otherwise. If the Monthly Report shows a negative balance of (a) the sum of (i) collected Gross Net Written Premium, plus (ii) Cash Call Amounts, minus, (b) the sum of (i) the Ceding Commission, (ii) the Reinsured's Expense, and (iii) any Paid Net Liability, then the Reinsurer shall, within thirty (30) days of such Monthly Report, remit such negative balance to the Reinsured. Such remittance to the Reinsured shall be made by certified check or wire transfer to the Reinsured; provided, however, that such remittance shall be deemed to have been made by Reinsurer to the extent of Reinsurer's payment(s) to the Claims Fiduciary Account made pursuant to Sections 6.1(i) and (ii) during the month that is the subject of such Monthly Report. 5. The Underwriting Manager and TPA shall also periodically update and render to the Reinsured and the Reinsurer such other reports or information as are required by the Underwriting Management Agreement and/or the Claims Services Agreement or as may reasonably be required by the Reinsured or the Reinsurer and reasonably available to the Underwriting Manager or the TPA, as the case may be. ARTICLE 7 - LOSS SETTLEMENTS The liability of the Reinsurer shall follow that of the Reinsured in every case. Any settlement made by or on behalf of the Reinsured of any claim or loss which is alleged to arise under the Policies shall be unconditionally binding upon the Reinsurer, whether under strict Policy conditions (including, but not limited to, the general and specific stipulations, clauses, waivers, extensions, modifications and endorsements of any of the Reinsured's Policies), or by way of compromise (including, without limitation, EX GRATIA payments) ARTICLE 8 - DEFINITIONS "ACQUISITION" shall mean the purchase by Centre Solutions Holdings (Delaware) Limited, pursuant to that certain Purchase Agreement by and among Centre Solutions Holdings (Delaware) Limited and Superior National Insurance Group dated as of December 7, 1998 (the "Acquisition Agreement") of all of the issued and outstanding shares of capital stock of Business Insurance Company. "CLAIMS SERVICES AGREEMENT" shall mean that certain Claims Administration Services Agreement entered into and effective on the Effective Date between the Reinsured and the TPA. "CLOSING" shall mean the closing of the Acquisition. "GROSS NET UNEARNED PREMIUM RESERVE" shall be defined as the gross unearned premium reserve of the Reinsured (including the reserve for unearned premiums associated with risks assumed by the Reinsured 3 pursuant to any residual market mechanism, pools, associations, syndicates and similar assignments) on all Policies, less return premiums for cancellations and reductions. "GROSS NET WRITTEN PREMIUM" shall be defined as the gross direct and assumed audit or other additional written premium of the Reinsured on all Policies (including the reserve for unearned premiums associated with risks assumed by the Reinsured pursuant to any residual market mechanism, pools, associations, syndicates and similar assignments), less return premium for cancellations and reductions, and, if applicable, less premium paid for reinsurance which inures to the benefit of the Reinsurer under this Agreement Gross Net Written Premium shall not include any premiums ultimately determined to be uncollectible. "LOSS ADJUSTMENT EXAM" shall mean all costs and expenses incurred by the Reinsured in connection with the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of any claim or loss which arises under the Policies or incurred in connection with declaratory judgment actions with respect to the Policies, including court costs and costs of supersedeas and appeal bonds, and shall include a) prejudgment interest, unless included as part of the award or judgment; and b) post-judgment interest. As used herein, "SUPERSEDEAS BOND" shall mean a bond required of one who petitions to set aside a judgment or execution and from which the other party may be made whole if the action is unsuccessful. The terms Loss Adjustment Expense shall include all such claim or loss expenses, except the salaries of the Reinsured's employees (including, but not limited to, in house counsel, medical bill reviewers and claims investigators) office expenses, overhead and other expenses of the Reinsured generally treated as unallocated loss adjustment expenses (collectively, the "OVERHEAD EXPENSES"); provided, however, that to the extent that all or any portion of such Overhead Expenses are allocated by the Reinsured on its books and records to any or all claims or losses arising under the Policies, such Overhead Expenses shall be treated as Loss Adjustment Expenses. "NET LIABILITY" shall mean all the Reinsured's liability with respect to each Policy reinsured under this Agreement, including pre-judgment interest or delay damages, Excess of Policy Limits and Extra Contractual Obligations, as specified in Article 9 and Article 10, after deduction of all other reinsurance which inures to the benefit of the Reinsurer under this Agreement, if any. The term Net Liability shall include Loss Adjustment Expense. Nothing herein shall be construed to mean that losses under this Agreement are not recoverable until the Reinsured's Net Liability has been ascertained "PREMIUM ACCOUNT" shall mean the premium fiduciary account maintained by the Underwriting Manager in the name and on behalf of the Reinsured pursuant to and in accordance with the Underwriting Management Agreement "SNIS" shall mean SN Insurance Services, Inc. "TPA" shall mean the third party administrator under the Claims Services Agreement. "UNDERWRITING MANAGER" shall mean the entity acting as underwriting manager for the Reinsured with respect to the Policies pursuant to the Underwriting Management Agreement. The initial Underwriting Manager shall be SNIS. "UNDERWRITING MANAGEMENT AGREEMENT" shall mean that certain Underwriting Management Agreement entered into and effective on the Effective Date between the Reinsured and the Underwriting Manager. ARTICLE 9 - EXCESS OF ORIGINAL POLICY LIMITS LOSS 4 This Agreement shall indemnify the Reinsured where the Net Liability includes any Excess of Original Policy Limits Loss. Notwithstanding the foregoing, in no event shall indemnification be provided to the extent such indemnification is not permitted under New York law. "EXCESS OF POLICY LIMITS LOSS" shall mean any loss of the Reinsured in excess of the limit of its Policy that has been incurred because of failure by it to settle within the Policy limit or by reason of its alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. For the purposes of this Article, the word "LOSS" shall mean any amounts for which the Reinsured would have been contractually liable to pay had it not been for the limit of the Policy. ARTICLE 10 - EXTRA CONTRACTUAL, OBLIGATIONS This Agreement shall protect the Reinsured where the Net Liability includes any Extra Contractual Obligations. Notwithstanding the foregoing, in no event shall coverage be provided to the extent such coverage is not permitted under New York law. "EXTRA CONTRACTUAL OBLIGATIONS" shall mean those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim under any of the Policies, including, but not limited to, liabilities arising because of the following: failure by the Reinsured to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Reinsured shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster, loss, event or occurrence (or, if there is a question or dispute about the applicable date, the date established by the Reinsured). ARTICLE 11 - SALVAGE AND SUBROGATION The Reinsured shall pay to or credit the Reinsurer with any recovery connected with a Paid Net Liability which is obtained from salvage, subrogation, or other insurance or any other recovery, after charging the Reinsurer with the expenses incurred by the Reinsured in obtaining any such recovery. Any such recoveries received subsequent to any loss or claim settlement hereunder shall be applied as if received prior to the aforesaid loss or claim settlement and all necessary adjustments in such regard shall be made accordingly. ARTICLE 12 - LATE PAYMENTS Any late payment by either party shall accrue simple interest at the rate of 1% per month. ARTICLE 13 - ACCESS TO RECORDS Each of the parties and their respective duly appointed representatives shall have access to the books, records and papers of the other party and such other party's agents at all reasonable times during the term of this Agreement or until the natural expiration of the Policies or until all claims, losses or disputes arising 5 out of the Policies have been finally resolved, whichever is later, for the purpose of obtaining information concerning this Agreement or the subject matter hereof. ARTICLE 14 - ARBITRATION Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration must be in writing and sent certified or registered mail, return receipt requested. One arbitrator shall be chosen by each party, and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator (the "UMPIRE") who shall preside at the hearing. If either party fails to appoint its arbitrator within 30 days after being requested to do so by the other party, the latter, after 10 days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the Umpire within 30 days of their appointment, each of the arbitrators shall nominate three individuals. Each arbitrator shall then decline two of the nominations presented by the other arbitrator, and the Umpire shall then be chosen from the remaining two individuals by drawing of lots by the two arbitrators. The Umpire shall promptly notify in writing all parties to the arbitration of his selection. The arbitrators shall be active or former officers of insurance or reinsurance companies, who shall not have a personal or financial interest in the result of the arbitration Within 30 days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in New York, New York, but the venue may be changed when deemed by the panel to be in the best interest of the arbitration proceeding. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate but shall not be authorized to award any punitive or exemplary damages. In reaching its decision, the panel shall apply the laws of the State of New York, without giving effect to the conflict of laws principles thereof, and shall keep in mind the purpose of this Agreement. To the extent, and only to the extent, that the provisions of this Agreement arc ambiguous or unclear, the panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business. The panel shall render its decision within 60 days following the termination of hearings, which decision shall be in writing, stating the reasons thereof. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the Umpire. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to, attorneys fees, to the extent permitted by law. ARTICLE 15 - ERRORS AND OMISSIONS The Reinsurer shall not be relieved of liability because of an error or accidental omission by the Reinsured, provided that the error or omission is rectified promptly after discovery. 6 ARTICLE 16 - TAXES The Reinsured shall be liable to the appropriate governmental authorities for all taxes on premiums paid to the Reinsurer under this Agreement, except income or profit taxes of the Reinsurer. ARTICLE 17 - INSOLVENCY In the event of insolvency and the appointment of a conservator, liquidator, or statutory successor of the Reinsured, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Reinsured having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims. Payments by the Reinsurer as set forth in this subdivision shall be made directly to the Reinsured or to its conservator, liquidator, or statutory successor, except where the Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Reinsured. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Reinsured shall give written notice to the Reinsurer of the pendency of a claim against the Reinsured involving a possible liability on the part of the Reinsurer (indicating the Policy under which such claim arises) within a reasonable time after such claim is filed in the conservation or liquidation proceeding or the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Reinsured or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval or the court, against the Reinsured as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Reinsured solely as a result of the defense undertaken by the Reinsurer. As to all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement, the reinsurance shall be payable as set forth above by the Reinsurer to the Reinsured or to its liquidator, receiver, conservator, or statutory successor (except as provided by Sections 4118(a) (1) (A) and 1114 (c) of the New York Insurance Law or the Delaware Insurance Law or other similar applicable state insurance laws relating to Fidelity and Surety risks or) except (1) where the Policy specifically provides another payee in the event of the insolvency of the Reinsured, and (2) where the Reinsurer with the consent of the direct insured or insured has assumed such Policy obligations of the Reinsured as direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Reinsured to the payees. Then, and in that event only, the Reinsured with the prior approval of the certificate of assumption on New York risks by the Superintendent of Insurance of the State of New York and the Delaware Department of Insurance, is entirely released from its obligation and the Reinsurer pays any loss directly to payees under such Policies. ARTICLE 18 - OFFSET Subject to applicable laws governing offset entitlement, the Reinsured and the Reinsurer may offset any balance or amount due from one party to the other under this Agreement. ARTICLE 19 - CURRENCY Whenever the word "DOLLARS" or the "$" sign appear in this Agreement, they shall be construed to mean United States Dollars, and all transactions under this Agreement shall be in United States Dollars. 7 ARTICLE 20- NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, assigns and legal representatives. Neither this Agreement, not any right hereunder, may be assigned by any party without the written consent of the other party hereto. This Agreement is not intended to, and shall not be construed to, confer rights on any persons other than the signatories to this Agreement and their respective successors and permitted assigns. ARTICLE 21 - AMENDMENTS This Agreement shall not be amended in whole or in part except by written agreement executed by the Reinsured and the Reinsurer. ARTICLE 22 - SECURITY Promptly after the receipt of the first Monthly Report, and every third Monthly Report thereafter, the Reinsurer shall provide security in an amount equal to the Reserves, to secure the Reinsurer's performance of its obligations under this Agreement (the "Reinsurer's Obligations") by trust agreement, cash advances or a Letter of Credit. Subject to the consent of the Reinsured, which shall not be unreasonably withheld, the Reinsurer shall have the option of determining the method of security, provided it is in a form acceptable to the applicable insurance regulatory authorities. When providing security by a Letter of Credit, the Reinsurer agrees to apply for and secure timely delivery to the Reinsured of a "clean", irrevocable and unconditional Letter of Credit issued by a bank and containing provisions acceptable to the applicable insurance regulatory authorities in an amount equal to such Reserves. Such Letter of Credit shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days (sixty (60) days where required by any insurance regulatory authorities) prior to any expiration date, the issuing bank shall notify the Reinsured by certified or registered mail that the issuing bank elects not to extend or renew the Letter of Credit for any additional period. The Letters of Credit provided by the Reinsurer pursuant to the provisions of this Agreement may be drawn upon at any time, notwithstanding any other provision of this Agreement, and be utilized by the Reinsured or any successor, by operation of law, of the Reinsured including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Reinsured for the following purposes, unless otherwise provided for in a separate Trust Agreement: (a) to reimburse the Reinsured an amount equal to the Paid Net Liability for which the Reinsurer has not reimbursed the Reinsured; (b) to make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's Obligations under this Agreement; (c) to fund an account with the Reinsured for the Reinsurer's Obligations. Such cash deposit shall be held in an interest bearing account separate from the Reinsured's other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the Reinsurer; (d) to pay the Reinsures share of any other amounts the Reinsured claims are due under this Agreement. 8 In the event the amount drawn by the Reinsured on any Letter of Credit is in excess of the actual amount required for (a), (c), and (d), the Reinsured shall promptly return to the Reinsurer the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Reinsured or the Reinsurer. The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Reinsured or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Reinsured. At quarterly intervals (i.e. upon receipt of every third Monthly Report), the Reinsured or the Reinsurer (as the case may be) shall cause the Letter of Credit to be amended in the following manner. (a) If the Monthly Report shows that the Reserves exceed the balance of the Letter of Credit as of the Monthly Report date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Reinsured of an amendment to the Letter of Credit increasing the amount of the Letter of Credit by the amount of such difference (b) If, however, the Monthly Report shows that the Reserves are less than the balance of the Letter of Credit as of the Monthly Report date, the Reinsured shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of the Letter of Credit available by the amount of such excess. ARTICLE 23 - GOVERNING LAW This Agreement shall be governed by the laws of the State of New York, without giving effect to the conflict of laws principles thereof, and of the United States, including the United States Arbitration Act, 9 U.S.C. Section I ET SEQ. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this _______ day of December, 1998. For and on behalf of: BUSINESS INSURANCE COMPANY /s/ J. CHRIS SEAMAN - --------------------------------- Name: J. Chris Seaman Vice President For and on behalf of: CALIFORNIA COMPENSATION INSURANCE COMPANY /s/ J. CHRIS SEAMAN - --------------------------------- Name: J. Chris Seaman Title: Vice President 9 EX-10.74 14 EXHIBIT 10.74 AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT between THE INSURANCE SUBSIDIARIES OF BUSINESS INSURANCE GROUP, INC., ACTING SOLELY ON BEHALF OF THE FOLLOWING SUBSIDIARIES: CALIFORNIA COMPENSATION INSURANCE COMPANY BUSINESS INSURANCE COMPANY COMBINED BENEFITS INSURANCE COMPANY COMMERCIAL COMPENSATION INSURANCE COMPANY and INTER-OCEAN REINSURANCE COMPANY LTD. INDEX ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. AGGREGATE RETENTION, NET RETENTION AND AGGREGATE LIMIT . 3 ARTICLE III. REPORTS . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE IV. REMITTANCES . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE V. PREMIUM . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE VI. COMMUTATIONS OF CEDED REINSURANCE . . . . . . . . . . . 6 ARTICLE VII. CREDIT FOR REINSURANCE . . . . . . . . . . . . . . . . . 6 ARTICLE VIII. FUNDS WITHHELD . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IX. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . .10 ARTICLE X. RESERVING, TAXES, RIGHT OF INSPECTION AND PARTICIPATION, CLAIMS MANAGEMENT, TERRITORY . . . . . .10 ARTICLE XI. EXCLUSIONS . . . . . . . . . . . . . . . . . . . . . .11 ARTICLE XII. EXTRA CONTRACTUAL OBLIGATIONS; LOSSES IN EXCESS OF POLICY LIMITS . . . . . . . . . . . . . . .12 ARTICLE XIII. DECLARATORY JUDGMENT EXPENSES . . . . . . . . . . . . .13 ARTICLE XIV. ERRORS AND OMISSIONS . . . . . . . . . . . . . . . . . .13 ARTICLE XV. INSOLVENCY . . . . . . . . . . . . . . . . . . . . . . .13 ARTICLE XVI. TERM AND TERMINATION . . . . . . . . . . . . . . . . . .14 ARTICLE XVII. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . .14 ARTICLE XVIII. NOTICES . . . . . . . . . . . . . . . . . . . . . . . .14 ARTICLE XIX. ASSIGNMENTS AND SURVIVAL . . . . . . . . . . . . . . . .15 ARTICLE XX. FEDERAL EXCISE TAX . . . . . . . . . . . . . . . . . . .15 ARTICLE XXI. CURRENCY . . . . . . . . . . . . . . . . . . . . . . . .15 ARTICLE XXII. ACTUARIAL REVIEW CLAUSE . . . . . . . . . . . . . . . .15 ARTICLE XXIII. ARBITRATION . . . . . . . . . . . . . . . . . . . . . .16 ARTICLE XXIV. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . .17 SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 ATTACHMENT A . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT THIS AGREEMENT is made and entered into as of September 3, 1998 by and between BUSINESS INSURANCE GROUP, INC. (the "Company") solely on behalf of its subsidiaries CALIFORNIA COMPENSATION INSURANCE COMPANY, BUSINESS INSURANCE COMPANY, COMBINED BENEFITS INSURANCE COMPANY, COMMERCIAL COMPENSATION INSURANCE COMPANY (hereinafter collectively referred to as the "Reinsured") and INTER-OCEAN REINSURANCE COMPANY LTD., a Bermuda stock insurance company (the "Reinsurer"). WHEREAS, the Reinsurer desires to reinsure the Reinsured, and the Company desires that the Reinsurer reinsure the Reinsured, to the extent and upon the terms and conditions set forth herein; and NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS As used herein, the following terms shall have the following respective meanings: "ACCIDENT YEAR" as used herein shall refer to each 12-month period commencing January 1 and ending December 31 in which covered claims occur. For purposes of this Agreement, the period from the immediately preceding January 1 to, but not including the Effective Date also shall be considered an Accident Year. "AGGREGATE ULTIMATE NET LOSSES" shall mean the aggregate sums paid or to be paid by the Reinsured in settlement of losses under contracts and policies that are the Subject Business reinsured hereunder, including Allocated Loss Adjustment Expenses, plus any Extra Contractual Obligations and Losses in Excess of Policy Limits and any Declaratory Judgment Expenses, all as respects covered losses attributable to claims made (for claims made policies) and losses occurring during the Accident Years prior to the Effective Date and paid or payable by the Reinsured while the Agreement is in effect for which the Reinsured is liable, after making proper deductions for, all Ceded Reinsurance, whether collectible or not, and all salvages, and all recoveries of every nature. Aggregate Ultimate Net Losses does not include any of the following: (i) all net losses or ALAE paid by the Reinsured before the Effective Date, (ii) all net losses or ALAE incurred by the Reinsured for losses occurring, on or after the Effective Date, (iii) all net losses or ALAE under insurance or reinsurance contracts and policies written by the Reinsured on or 1 after the Effective Date, (iv) all net losses or ALAE under contracts and policies written by the Reinsured before the Effective Date but amended, effective on or after the Effective Date but only to the extent that such losses would not have been covered prior to the effective date of such amendments, (v) all net losses or ALAE for which the Reinsured becomes obligated to pay as a result of a merger with or acquisition of any other insurance or reinsurance company, (vi) all unallocated loss adjustment expenses of the Reinsured, and (vii) all costs and expenses of the Reinsured incurred in connection with Ceded Reinsurance collection activities. "AGGREGATE RETENTION" shall have the meaning and be determined as set forth in Attachment A. "ALLOCATED LOSS ADJUSTMENT EXPENSES" or "ALAE" shall mean all expenses including but not limited to court costs, attorney fees, medical cost containment expenses, outside adjuster fees, and prejudgment and postjudgment interest that are incurred by the Reinsured and are allocable to specific losses that are or would be covered under this Agreement in each case as determined in accordance with the Company's standard practice in effect as of the Effective Date of this Agreement. However, such amounts shall not include office expenses of the Reinsured, including salaries of their officials and employees, and loss adjustment expenses unallocable to claims recoverable under contracts and policies reinsured hereunder. "CEDED REINSURANCE" shall mean those contracts of reinsurance in effect on the Effective Date as to which the Reinsured is a party as a ceding insurer and that reinsures the obligations of the Reinsured with respect to any portion of Aggregate Ultimate Net Losses hereunder. Ceded Reinsurance shall specifically not include the Quota Share Reinsurance Contract entered into by the Reinsured with affiliates of Superior National Insurance Group, Inc. effective May 1, 1998. "COMMUTATION" shall mean a commutation, release of liability, loss portfolio transfer or other similar transaction, which is consummated or is effective on or after the Effective Date with respect to any Ceded Reinsurance. "DECLARATORY JUDGMENT EXPENSES" shall have the meaning set forth in Article XIII hereof. "EFFECTIVE DATE" shall mean the date of consummation of the closing of a private sale of the Company. "EXTRA CONTRACTUAL OBLIGATIONS" shall have the meaning set forth in Article XII hereof. "INCURRED BUT NOT REPORTED" or "IBNR" shall refer to that amount of reserves for outstanding losses and Allocated Loss Adjustment Expenses arising from insured losses that have already occurred prior to the Effective Date but have not yet been reported to and/or recorded as losses recoverable under contracts and policies reinsured hereunder by the Reinsured. 2 Such amounts shall contemplate the ultimate valuation of such losses and Allocated Loss Adjustment Expenses. "LOSSES IN EXCESS OF POLICY LIMITS" shall have the meaning set forth in Article XII hereof. "PREMIUM" shall have the meaning set forth in Article V hereof. "QUARTERLY REPORT" shall have the meaning set forth in Article III hereof. "SUBJECT BUSINESS" shall mean all contracts and policies where the related insurance and reinsurance premium has been written and earned by the Reinsured before the Effective Date for claims made, or losses occurring, during all Accident Years prior thereto, subject to the exclusions set forth in Article XI herein. "SUBJECT NET EARNED PREMIUM" shall mean gross premium earned by the Reinsured less earned premium ceded for Ceded Reinsurance that inures to the benefit of this Agreement, and less earned premium derived from any Pool, Association, Syndicate, Exchange Plan, Fund or other facility described in Article XI, from January 1, 1998 through and including the Effective Date. "YEARLY REPORT" shall have the meaning set forth in Article III hereof. ARTICLE II. AGGREGATE RETENTION, NET RETENTION AND AGGREGATE LIMIT (a) COVER. Commencing on the Effective Date, the Reinsurer hereby agrees to indemnify the Reinsured in respect of all Aggregate Ultimate Net Losses in excess of the Aggregate Retention up to but not exceeding the Aggregate Limit. (b) AGGREGATE RETENTION. The Reinsured shall retain all Aggregate Ultimate Net Losses in an amount equal to the Aggregate Retention. The Reinsured shall first pay the entire amount of its Aggregate Retention under Subject Business and the Reinsurer shall thereafter pay its Aggregate Limit on Subject Business to the extent Aggregate Ultimate Net Losses exceed the Reinsured's Aggregate Retention. (c) AGGREGATE LIMIT. THE MAXIMUM AMOUNT OF AGGREGATE ULTIMATE NET LOSSES THAT MAY BE CEDED UNDER THIS AGREEMENT SHALL NOT EXCEED $175,000,000. UNDER NO CIRCUMSTANCES WILL THE REINSURER'S INDEMNITY OBLIGATION HEREUNDER EXCEED $175,000,000 IN TOTAL IN EXCESS OF THE REINSURED'S AGGREGATE RETENTION. 3 ARTICLE III. REPORTS (a) YEARLY REPORTS. During the term of this Agreement, the Reinsured shall deliver to the Reinsurer, within ninety-five (95) calendar days after the end of each calendar year, a report (a "Yearly Report") setting forth (i) its calculation of Aggregate Ultimate Net Losses cumulative to date, (ii) the annual convention statements of the Reinsured as filed hereafter with the appropriate insurance regulatory authority, and (iii) if applicable, a statement of any amount payable by the Reinsurer pursuant to Articles II and IV hereof and a demand for payment of such amount. Paid and outstanding losses including a provision for Incurred But Not Reported losses, contemplating the ultimate valuation of losses and ALAE shall be provided by reserve category, line of business and Accident Year. (b) QUARTERLY REPORTS. During the term of this Agreement, the Reinsured shall deliver to the Reinsurer, within sixty (60) calendar days after the end of each calendar quarter, a report (a "Quarterly Report") setting forth (i) its calculation of Aggregate Ultimate Net Losses cumulative to date, and (ii) if applicable, a statement of any amount payable by the Reinsurer pursuant to Articles II and IV hereof and a demand for payment of such amount. Paid and outstanding losses including a provision for Incurred But Not Reported losses, contemplating the ultimate valuation of losses and ALAE shall be provided by reserve category, line of business and Accident Year. (c) ADDITIONAL REPORTS. In addition, the Reinsured shall include in Quarterly Reports or any Yearly Reports during the term of this Agreement such additional information and documentation as the Reinsurer may reasonably request and specify (including, but not limited to, data supporting reserve reviews (to the extent available in the ordinary course of business of the Reinsured), Ceded Reinsurance monitoring and collection activity, Commutations, loss activity on asbestos, pollution and other categories with respect to Incurred But Not Reported loss calculations, and all adjustments to net losses). (d) CONFIDENTIALITY OF REPORTS. Except as otherwise required by law, by governmental or regulatory authorities, or in response to a court order, or upon the prior written consent of the Reinsured, all non-public information included in all Yearly Reports, Quarterly Reports and Additional Reports and amendments thereto shall be kept confidential by the Reinsurer and its directors, officers, employees, agents and representatives, shall not be disclosed to any other person or entity, and shall only be used for the purposes provided herein. Notwithstanding the foregoing, non-public information included in a Yearly Report, Quarterly Report and Additional Reports or amendments thereto may be disclosed to any retrocessionaire of the Reinsurer to the extent such disclosure is necessary for the Reinsurer to retrocede any of its liabilities hereunder to such retrocessionaire. ARTICLE IV. REMITTANCES (a) COVERAGE PAYMENTS. Except as provided in paragraph (b) of this Article IV, the Reinsurer shall pay to the Company on behalf of the Reinsured any and all amounts 4 payable hereunder, as shown and demanded in each Yearly Report, Quarterly Report or amendments thereto, within thirty (30) calendar days following receipt by the Reinsurer of each such Yearly Report, Quarterly Report or amendments thereto from the Reinsured. Any payments by the Reinsurer to the Company or other entity or person designated by the Reinsured to receive payment of amounts due hereunder on behalf of the Reinsured shall constitute payment to the Reinsured under this Agreement. (b) NO SETTLEMENTS UNTIL PAYMENT BY REINSURED. Except in the event of insolvency of the Reinsured as described in Article XV, no settlements shall be payable by the Reinsurer to the Reinsured for Aggregate Ultimate Net Losses recoverable hereunder until the Reinsured has effected cumulative payments of Aggregate Ultimate Net Losses during the term of this Agreement in an amount equal to the Aggregate Retention hereunder. (c) REPAYMENT TO REINSURER. If the Reinsurer shall have paid any amounts under this Agreement that are subsequently deemed not to be due by the Reinsurer, then the Reinsured shall promptly remit such amounts to the Reinsurer. ARTICLE V. PREMIUM A premium in the amount of twenty eight million five hundred thousand dollars ($28,500,000) in immediately available funds shall be paid to the Reinsurer in consideration of the coverage provided hereunder as follows: (i) a nonrefundable premium installment of $300,000 will have been paid within five (5) days after the binders pertaining to this Agreement shall have been signed by the Reinsurer and delivered to the Reinsured, and an additional non-refundable premium installment of $300,000 will have been paid on or before August 10,1998, and (ii) the remaining premium of $27,900,000 on the Effective Date. This Agreement will automatically expire if the Effective Date does not occur on or before September 30, 1998. On September 30, 1998, the Agreement shall automatically extend for an additional period expiring on December 31, 1998 upon receipt of an additional non-refundable payment of $300,000 in which case the remaining premium due on the Effective Date will be $27,850,000. On the last day of each of the 4 calendar quarters subsequent to September 30, 1998, the Agreement shall automatically extend for an additional quarter upon receipt of an additional non-refundable premium installment of $50,000 for each quarterly extension. The premium installments for each extension shall be due and payable five (5) days prior to each extension. The remaining premium due on the Effective Date will be reduced by the cumulative amount of premium installments paid for all extensions other than the payment for the extension from September 30, 1998 to December 31, 1998, which payment shall reduce the remaining premium due to the Reinsurer by only $50,000. In no event will the premium due on the Effective Date ever be reduced below $27,650,000. This Agreement will automatically expire if the Effective Date does not occur on or before December 31, 1999. 5 ARTICLE VI. COMMUTATIONS OF CEDED REINSURANCE In the event that the Reinsured commutes, amends or terminates any reinsurance agreement which was in place as of the Effective Date pertaining to the Subject Business, the parties hereto will amend this Agreement in such a manner so as to put each party in the same relative economic position as it would have been in the absence of any such commutation, amendment or termination. For example, a reinsurance agreement pertaining to the Subject Business which was in place as of the Effective Date may be deemed to remain in place irrespective of any commutation, release of liability, loss portfolio transfer or other similar transaction with respect thereto. ARTICLE VII. CREDIT FOR REINSURANCE (a) As regards contracts and policies or bonds issued by the Reinsured coming within the scope of this Agreement, the Reinsured agrees that when it shall file with the insurance regulatory authority or set up on its books, reserves for losses covered hereunder which it shall be required by law to set up, it will forward to the Reinsurer a statement showing reserves ceded to the Reinsurer. Within fifteen (15) days of its receipt of an Annual Report or a Quarterly Report, the Reinsurer hereby agrees that it will apply for and secure delivery to the Reinsured of a clean, irrevocable and unconditional Letter of Credit, issued by a qualified bank acceptable to insurance regulatory authorities having jurisdiction over the Reinsured, or establish a Trust Account for the benefit of the Reinsured, in each case containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Reinsured in an amount equal to the Aggregate Ultimate Net Losses including IBNR ceded to the Reinsurer, as shown in the statement prepared by the Reinsured (hereinafter referred to as "Reinsurer's Obligations"). (b) If a Letter of Credit is to be used to satisfy the requirements of this Article VII, the Letter of Credit shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date. The Letter of Credit shall remain in effect to the extent necessary to fulfill the Reinsurer's Obligations as described in paragraph (a) above; however, Reinsurer may substitute a Letter of Credit from a new qualified bank if, thirty (30) days prior to any expiration date, the issuing bank shall notify the Reinsured by certified or registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period and the new qualified bank simultaneously confirms that it will issue a Letter of Credit under the same terms upon expiration of the existing Letter of Credit. (c) The Reinsurer and Reinsured agree that the Letters of Credit or Trust Account provided by the Reinsurer pursuant to the provisions of this Agreement may be drawn upon at any time, and be utilized by the Reinsured or any successor of the Reinsured including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Reinsured. Notwithstanding the unconditional nature of the obligation represented by the Letter of Credit or the Trust Account, the Reinsurer and the Reinsured agree that the Letter of Credit or Trust Account proceeds be used only as follows: 6 (i) to reimburse the Reinsured for the Reinsurer's Obligations, the payment of which is due under the terms of this Agreement and which has not been otherwise paid; (ii) to make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's Obligations under this Agreement; and (iii) to fund an account with the Reinsured for the Reinsurer's Obligations. Such cash deposit shall be held in an interest bearing account separate from the Reinsured's other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the Reinsurer. (d) With respect to the Reinsurer's Obligations, to the extent that any special security deposits are required of the Reinsured to be maintained with state insurance regulatory authorities under the laws of any jurisdiction in which the Reinsured is licensed to issue contracts and policies or bonds, the Reinsurer shall provide, at the expense of the Reinsurer, a Letter of Credit to or a Trust Account deposit for the benefit of the state insurance regulatory authorities in an amount equal to such special security deposit requirement ("Special Deposit Requirement"). Upon notification by the Reinsured that such Special Deposit Requirement exists, the Reinsurer shall promptly establish such special security deposit and provide evidence on the date of such establishment and within forty-five (45) days of the expiration of each calendar quarter thereafter that the Reinsurer or an affiliate of the Reinsurer has satisfied such Special Deposit Requirement. In addition, upon establishing the security deposit, the Reinsurer shall provide written confirmation that the insurance regulatory authority has accepted such security deposit in lieu of the Reinsured providing such security deposit. In the event that any insurance regulatory authority denies or rejects any such security deposit, the Reinsured shall have the right to immediately draw down the Letter of Credit held by the Reinsured or Trust Account established for the benefit of the Reinsured, issued in each case pursuant to Article VII (a)-(c) above for the purpose of satisfying such Special Deposit Requirement. The Reinsurer shall immediately thereafter replace the Letter of Credit or Trust Account to secure the entirety of Reinsurer's Obligations without diminution for the funding of the Special Deposit Requirement, if required by the applicable insurance regulatory authority. (e) In the event the amount drawn by the Reinsured or any insurance regulatory authority on any Letter of Credit or Trust Account is in excess of the actual amount of the Reinsurer's Obligations, the Reinsured shall be deemed to be holding such funds in trust for the benefit of the Reinsurer and shall promptly return to the Reinsurer the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Reinsured or the Reinsurer. (f) The issuing or trustee bank shall have no responsibility whatsoever in connection with the priority of withdrawals made by the Reinsured or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Reinsured. 7 (g) At annual intervals, or more frequently as agreed but never more frequently than semi-annually, the Reinsured shall prepare a specific statement of the Reinsurer's Obligations, for the sole purpose of amending the Letter of Credit or adjusting the Trust Account balance, in the following manner: (i) If the statement shows that the cumulative balance of the Reinsurer's Obligations and any Special Deposit Requirement exceed the balance of the Letter of Credit or market value of the eligible assets held in the Trust Account as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Reinsured of an amendment to the Letter of Credit increasing the amount of credit by the amount of such difference or add eligible assets to the Trust Account with a market value equal to such difference. (ii) If, however, the statement shows that the Reinsurer's Obligations and any Special Deposit Requirement are less than the balance of the Letter of Credit or market value of the eligible assets held in the Trust Account as of the statement date, the Reinsured shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit or excess assets by agreement to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit or withdraw assets from the Trust Account with such excess value and deliver them to the Reinsurer. ARTICLE VIII. FUNDS WITHHELD (a) It is hereby agreed that the Reinsurer shall be allowed to pay to the Reinsured, and the Reinsured shall thereafter retain, Aggregate Ultimate Net Losses, in whole or in part, in advance of the date due and payable hereunder. The advance Aggregate Ultimate Net Losses so retained shall be defined as Funds Withheld under this Agreement, and the cumulative amount of retained advance Aggregate Ultimate Net Losses, subject to the adjustments described below, shall be referred to as the Funds Withheld Balance. The Reinsurer may terminate this Funds Withheld provision in whole or in part, at its sole option, at any time, subject to the re-institution, in advance of such termination, of all security and deposit requirements set forth elsewhere in this Agreement. This Funds Withheld provision does not relieve the Reinsurer of its obligations to provide security and/or make deposits required elsewhere in this Agreement to the extent that Funds Withheld are insufficient to satisfy such requirements. (b) The Reinsured agrees that any Funds Withheld under this Agreement shall be applied to satisfy, in whole or in part, to the maximum extent possible given the amount of the Funds Withheld Balance, any security and deposit requirements associated with this Agreement imposed by any regulatory authority having jurisdiction over the Reinsured. If 8 this Funds Withheld provision is not acceptable to any such regulatory authority, upon receipt of a written demand from such regulatory authority to eliminate all or part of the Funds Withheld Balance, the Reinsurer agrees that the Reinsured shall have the right to return to the Reinsurer that part of the then current Funds Withheld Balance that is at issue, at which time the Reinsurer shall provide security for the reinsurance herein, and other statutorily prescribed security deposits, satisfactory to the regulatory authorities, at the Reinsurer's expense. At the end of each calendar quarter the Funds Withheld Balance shall be equal to: (i) The Funds Withheld Balance at the end of the prior quarter plus, (ii) Increases in Aggregate Ultimate Net Losses ceded under this Agreement that the Reinsurer chooses to pay in advance as Funds Withheld, minus (iii) Decreases in Aggregate Ultimate Net Losses ceded under this Agreement that the Reinsurer chooses to apply as a credit against Funds Withheld, minus (iv) Aggregate Ultimate Net Losses paid by Reinsurer's Set-Off (as defined below) for the quarter, minus (v) Funds Withheld Balance repaid, if any, by the Reinsured to the Reinsurer, plus (vi) Interest at the rate of interest actually earned (gross of taxes) by the Reinsured on the Funds Withheld Balance during the quarter. (c) The Reinsured agrees that the Funds Withheld Balance may, at the Reinsurer's option, be set off by the Reinsurer (the "Reinsurer's Set-Off") against liability of any nature whatsoever (whether then contingent, due and payable, or in the future becoming due) that it may then have, or in the future may have under this Agreement, and such set off shall occur as a condition precedent to any further payments by the Reinsurer hereunder. The Reinsurer shall have no obligation whatsoever to pay Aggregate Ultimate Net Losses ceded under this Agreement directly to the Reinsured to the extent of the Funds Withheld Balance already held by the Reinsured. (d) To secure its obligations hereunder, the Reinsured agrees to pay the Funds Withheld into the Reinsured's statutory workers' compensation pledged asset trust account (or such other account as may be agreed from time to time by the Reinsurer), and that the Funds Withheld shall be maintained in a segregated account and shall not be co-mingled with the Reinsured's general account assets. The Reinsured agrees that the Funds Withheld Balance shall be invested pursuant to investment guidelines agreed to from time to time by the Reinsurer. Funds Withheld paid to the Reinsured through the 9 Reinsurer's Set-Off shall be immediately transferred from the segregated account to the Reinsured's general accounts. To the extent the Funds Withheld Balance exceeds the Aggregate Ultimate Net Losses ceded under this Agreement, the Reinsured shall, on five (5) days advance written notice from the Reinsurer, pay such excess to the Reinsurer in accordance with the Reinsurer's instructions. ARTICLE IX. REPRESENTATIONS AND WARRANTIES The Reinsured represents and warrants to the Reinsurer as of the Effective Date that (i) there are no discounted reserves held by the Reinsured, and (ii) all Subject Net Earned Premium will have been recorded on the Reinsured's books within 60 days after the Effective Date. ARTICLE X. RESERVING, TAXES, RIGHT OF INSPECTION AND PARTICIPATION, CLAIMS MANAGEMENT, TERRITORY (a) RESERVING. For insurance regulatory accounting purposes, (i) the Reinsured shall determine the amount of its reserves and those of its subsidiaries on the Subject Business and may change those reserves from time to time as it, in its sole discretion, deems necessary or appropriate, (ii) the Reinsurer shall determine the amount of its reserves on its liability hereunder and may change those reserves from time to time as it, in its sole discretion, deems necessary or appropriate. Notwithstanding the amount of reserves carried by the Reinsurer, if Reinsurer's Obligations are subject to any special security deposit under which an insurance regulatory authority requires identical assumed and ceded reserves for purpose of computing the amount of the special security deposit, the Reinsurer or Reinsurer's affiliate shall satisfy the special security deposit by reference to the reserve amount required by the insurance regulatory authority. (b) TAXES. The Reinsured will be liable for all taxes on premiums (except Federal Excise Taxes) reported to the Reinsurer hereunder and will reimburse the Reinsurer for such taxes where the Reinsurer is required to pay the same. (c) RIGHT OF INSPECTION. At all reasonable times during the term of this Agreement, the Reinsurer shall have the right to inspect and copy, through its duly authorized representatives, the books, records and accounts of the Reinsured and its subsidiaries pertaining to the Subject Business and the calculation of Aggregate Ultimate Net Losses and all claims under this Agreement. (d) COMPANY CLAIMS MANAGEMENT. The Reinsured shall manage the payment of losses and ALAE and the defense of pending or threatened claims, suits or proceedings relating to the Subject Business in good faith and in accordance with its existing practices on the date of this Agreement and consistent with the Reinsured's payment of its losses and ALAE in general and its defense of claims, suits or proceedings in general. 10 (e) CERTAIN RIGHTS OF PARTICIPATION IN EXTRAORDINARY CLAIMS. During the term of this Agreement, the Reinsured shall advise the Reinsurer of any claim or group of related claims pertaining to the Subject Business which exceeds or is reasonably likely to exceed seven hundred fifty thousand dollars ($750,000) on a net basis, and any material subsequent developments pertaining thereto. In each case, the Reinsured shall furnish to the Reinsurer within thirty (30) days of receipt of notice of such claim, dispute, litigation or other matter, a written statement setting forth a reasonable amount of pertinent information respecting the same; provided, however, that a failure to furnish such written statement to Reinsurer within such thirty (30) day period shall not relieve Reinsurer of its obligations under the Agreement. Upon the written request of the Reinsurer, the Reinsured will afford the Reinsurer an opportunity to participate with the Reinsured, at the sole expense of the Reinsurer, in the settlement of such claim, and the Reinsured and the Reinsurer shall cooperate in every respect in such settlement. Notwithstanding the foregoing, all final determinations as to the handling, defense, settlement or any other matter relating to any such claim shall be made by the Reinsured, in its reasonable discretion. (f) TERRITORY. The Reinsurer's liability shall be limited to losses occurring within the territorial limits covered by the original contracts and policies reinsured hereunder. ARTICLE XI. EXCLUSIONS This Agreement does not apply to and specifically excludes: (a) Business derived from any Pool, Association, including Joint Underwriting Association, Syndicate, Exchange, Plan, Fund or other facility directly as a member, subscriber or participant, or indirectly by way of reinsurance or assessments. This exclusion shall not apply to intercompany reinsurances among the Reinsured and affiliated and/or member companies of the Reinsured. (b) Liability of the Reinsured arising from its participation or membership, whether voluntary or involuntary, in any insolvency fund, including any guarantee fund, association, pool, plan or other facility which provides for the assessment of, payment by, or assumption by the Reinsured of a part or the whole of any claim, debt, charge, fee or other obligations of an insurer, or its successors or assigns, which has been declared insolvent by any authority having jurisdiction. (c) Liability excluded by the provisions of the following clauses attached hereto. The word "Reassured" used therein means "Reinsured." Nuclear Incident Exclusion Clause Liability - Reinsurance - No. 1B Nuclear Incident Exclusion Clauses - Physical Damage - Reinsurance - No. 2 Nuclear Incident Exclusion Clause - Reinsurance - No. 4 11 (d) The Reinsured's liability for punitive, exemplary or consequential damages or compensatory damages, including incurred expenses, resulting from a legal action of the Insured or assignee against the Reinsured, other than an action arising from insurance coverage or claim handling. (e) Losses arising from the perils of earthquake, landslide and other earth movement. (f) Contracts and policies issued by the Reinsured to insurance or reinsurance companies (each hereafter referred to as the "insurer") which provides insurance against liability of the insurer for any damages resulting from the alleged or actual tortious conduct of the insurer in the handling of claims made by any of its policyholders or in the handling of any other business matters with any of its policyholders. ARTICLE XII. EXTRA CONTRACTUAL OBLIGATIONS; LOSSES IN EXCESS OF POLICY LIMITS (a) This Agreement shall protect the Reinsured within the limits hereof, where its Aggregate Ultimate Net Losses include any Extra Contractual Obligations. "Extra Contractual Obligations" shall mean those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on Subject Business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Reinsured to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial or any action against its insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action, but only to the extent that liability for such failure, negligence, bad faith, etc. arose from acts or omissions by the Reinsured taking place prior to the Effective Date. (b) This Agreement shall also protect the Reinsured, within the limits hereof, where Aggregate Ultimate Net Losses include Losses in Excess of Policy Limits. Losses in Excess of Policy Limits shall mean those losses in excess of policy limits, but otherwise within the coverage terms of the policy reinsured hereunder, including legal costs and expenses in connection therewith, incurred by the Reinsured as a result of an action against it by its insured or its insured's assignee to recover damages awarded by a court of competent jurisdiction to a third party claimant because of alleged failure by the Reinsured to settle within the policy limit or by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation of prosecution of an appeal consequent upon such action but only to the extent that such failure, negligence, fraud, etc. occurred prior to the Effective Date. (c) However, coverage under this Agreement shall not apply where any Extra Contractual Obligation or Loss in Excess of Policy Limits has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Reinsured acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. 12 ARTICLE XIII. DECLARATORY JUDGMENT EXPENSES (a) This Agreement shall indemnify the Reinsured, within the limits of this Agreement, for Declaratory Judgment Expenses paid by the Reinsured that arise from the business reinsured hereunder. (b) "Declaratory Judgment Expenses" shall mean legal expenses paid by the Reinsured for the investigation, analysis, evaluation, and/or resolution of litigation of coverage issues between the Reinsured and any other party to determine the Reinsured's obligation to defend, indemnify and/or pay on behalf of its insured(s) under contracts and policies reinsured hereunder arising from a specific claim or claims. (c) The date on which Declaratory Judgment Expenses are incurred by the Reinsured shall be deemed, in all circumstances, to be the same date as the specific claim or claims under the policy reinsured hereunder. (d) Recoveries from any form of insurance and/or reinsurance that protect the Reinsured against claims the subject matter of this clause will inure to the benefit of the Reinsurer and shall be deducted from the total amount of Declaratory Judgment Expenses for purposes of determining the amount recoverable hereunder. ARTICLE XIV. ERRORS AND OMISSIONS Errors or omissions on the part of the Reinsured shall not invalidate the reinsurance under this Agreement, provided such errors; or omissions are corrected promptly after discovery thereof, but the liability of the Reinsurer under this Agreement or any exhibits or endorsements attached thereto shall in no event exceed the limits specified herein or therein, nor be extended to cover any risks, perils or classes of insurance generally or specifically excluded therein. ARTICLE XV. INSOLVENCY In the event of the insolvency of any of the Reinsured and the appointment of a conservator, liquidator or statutory successor, the appropriate amount of reinsurance provided by this Agreement shall be payable by the Reinsurer directly to such Reinsured or to its liquidator, receiver or statutory successor on the basis of the liability of the Reinsured under the contract or contracts reinsured. Subject to the right of offset and the verification of coverage, the Reinsurer shall pay its share of the loss without diminution because of the insolvency of such Reinsured. The liquidator, receiver or statutory successor of such subsidiary shall give written notice of the pendency of each claim against such Reinsured on a policy or bond reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, 13 the Reinsurer may, at its own expense, investigate such claim and interpose in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to such Reinsured, its liquidator or receiver or statutory successor. Subject to court approval, any expense thus incurred by the Reinsurer shall be chargeable against such Reinsured as part of the expense of liquidation to the extent of such proportionate share of the benefit as shall accrue to the Reinsured solely as a result of the defense undertaken by the Reinsurer. The reinsurance shall be payable as set forth above except where this Agreement specifically provides for the payment of reinsurance proceeds to another party in the event of the insolvency of such subsidiary. The provisions of this Article XV shall only apply to the insolvent company or companies that are the Reinsured hereunder. ARTICLE XVI. TERM AND TERMINATION This Agreement shall be binding as of the date hereof and shall remain bound until the natural expiry or prior termination of all liabilities on the Subject Business, unless it shall have automatically expired in accordance Article V of this Agreement. ARTICLE XVII. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to its principles of choice of law. The provision for choice of law in this Agreement is being made pursuant to Section 5-1401 of the General Obligations Law of the State of New York. ARTICLE XVIII. NOTICES Any notice or other communication hereunder shall be in writing and delivered in person or by courier, telegraphed, telexed or by facsimile transmission or mailed by certified mail, postage prepaid, return receipt requested, as follows: If to the Company: BUSINESS INSURANCE GROUP 11171 Sun Center Drive Rancho Cordova, CA 95670 Attention: Vice President Finance If to the Reinsurer: INTER-OCEAN REINSURANCE COMPANY LTD. 12 Wesley Street, P.O. Box HM 1204 Hamilton, HM FX Bermuda Attention: President or to such other place as the Reinsurer or the Reinsured may designate as to the Reinsurer or the Reinsured, respectively, by written notice to the other. 14 ARTICLE XIX. ASSIGNMENTS AND SURVIVAL (a) ASSIGNMENTS AND DELEGATIONS. Except as otherwise provided herein, this Agreement is not intended to confer any rights upon any person or persons other than the parties hereto. This Agreement may not be assigned or delegated, in whole or in part, by the Reinsurer without the prior written consent of the Reinsured. With the prior written consent of the Reinsurer (which shall not be unreasonably withheld), the terms, conditions, rights and obligations under the Agreement shall be fully assignable in the event the Reinsured cedes, sells or otherwise transfers all or part of the reserves which are subject of the Agreement. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. (b) SURVIVAL. Notwithstanding anything herein to the contrary, the provisions of this Agreement shall survive any direct or indirect sale or exchange of capital stock, merger, consolidation, sale or transfer of substantially all assets, business combination or other change in control of, or change in the form of business conducted by, the Reinsured or the Reinsurer. ARTICLE XX. FEDERAL EXCISE TAX (a) The Reinsurer agrees to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. (b) In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Reinsured or its agent is responsible for recovering the tax from the United States Government. ARTICLE XXI. CURRENCY Whenever the word "Dollar" or the "$" sign appears in this Agreement, they shall be construed to mean United States Dollars and all transactions under this Agreement shall be in United States Dollars. ARTICLE XXII. ACTUARIAL REVIEW CLAUSE (a) After the Effective Date the Reinsurer shall have the right to review the Reinsured's determination of the Aggregate Ultimate Net Losses. If the Reinsurer does not agree with the Reinsured's determination, and if the difference between the Reinsured's determination of Aggregate Ultimate Net Losses and the Reinsurer's determination of Aggregate Ultimate Net Losses is irreconcilable between the parties to this Agreement, such difference shall be referred 15 to an independent actuarial firm to be agreed upon by the parties to this Agreement. To the extent that the parties fail to mutually agree on an independent actuarial firm, they may agree to settle any difference by using a panel of three actuaries, one to be chosen by each party and the third by the two so chosen. The determinations of the three actuaries will be averaged and the result shall be final and binding on the parties hereto. The cost of any independent actuarial firm or firms shall be shared equally by the Reinsurer and the Reinsured. (b) Notwithstanding paragraph (a) above, in the event that any regulatory authority having jurisdiction over the Reinsured requires in writing that the Reinsured to establish reserves for any particular amount of Aggregate Ultimate Net Losses, or adjusts the Reinsured's Aggregate Ultimate Net Losses under an examination of the Reinsured's financial condition, the reserves established for Aggregate Ultimate Net Losses as determined by the regulatory authority shall be deemed by the Reinsured and Reinsurer to be the Aggregate Ultimate Net Losses for the purposes of determining the sufficiency of security deposits to be established by the Reinsurer and of funds withheld from the Reinsurer under this Agreement. ARTICLE XXIII. ARBITRATION (a) As a condition precedent to any right of action hereunder, any dispute arising out of this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in New York, New York or such other place as the parties may agree. (b) The members of the board of arbitration shall be active or retired disinterested officials of property and casualty insurance or reinsurance companies other than the parties or their affiliates. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within two weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within two weeks after their nominations, each of them shall name three, of whom the other shall decline two and the decision shall be made by drawing lots. If either arbiter shall fail to submit three names to the other within the allowed time, the other may choose the third arbiter without further consultation with the arbiter that failed to submit names. (c) The claimant shall submit its initial statement within twenty (20) days from appointment of the umpire. The respondent shall submit its statement within twenty (20) days after receipt of the claimant's statement, and the claimant may submit a reply statement within ten (10) days after receipt of the respondent's statement. (d) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing upon evidence introduced at a hearing or by other means of submitting evidence in which strict rules of evidence need not be followed, but in which cross examination and rebuttal shall be allowed if requested. The board shall make its decision within forty-five (45) days following the 16 termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof (e) Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. (f) This Article shall survive the termination of this Agreement. ARTICLE XXIV. MISCELLANEOUS (a) ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement, together with the Aggregate Excess of Loss Retrocession Agreement and the Assignment Agreement of even date herewith, constitute the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, between the parties hereto. No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. (b) COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. (c) HEADINGS. The headings of the Articles and the paragraphs herein are inserted for convenience of reference only, and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. (d) SEVERABILITY. In the event any term or provision of this Agreement shall to any extent be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby and each term of this Agreement shall be valid and enforceable to the fullest extent permitted by law. Further, any change to any term or provision of this Agreement required by any insurance regulator having jurisdiction over any party shall be incorporated into this Agreement and shall not invalidate the Agreement. 17 SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their respective officers hereunto duly authorized as of the date first written above. INTER-OCEAN REINSURANCE COMPANY LTD. By: /s/ Michael P. Sullivan --------------------------------------------- Name: Michael P. Sullivan ------------------------------------------ Title: Vice President ------------------------------------------ BUSINESS INSURANCE GROUP, INC., On behalf of each of the following subsidiaries: CALIFORNIA COMPENSATION INSURANCE COMPANY BUSINESS INSURANCE COMPANY COMBINED BENEFITS INSURANCE COMPANY COMMERCIAL COMPENSATION INSURANCE COMPANY By: /s/ Maurice Costa --------------------------------------------- Name: Maurice Costa ------------------------------------------ Title: President ------------------------------------------ 18 ATTACHMENT A "AGGREGATE RETENTION" shall mean Aggregate Ultimate Net Losses equal to $495,000,000 as the sum of the Reinsured's carried loss and ALAE reserves (including in each case IBNR) as of December 31, 1997, plus Aggregate Ultimate Net Losses equal to 75.70% multiplied by Subject Net Earned Premium for the period beginning January 1, 1998 and ending at the Effective Date of the Agreement, less paid losses and ALAE for Subject Business for all Accident Years through the Effective Date. The Aggregate Retention shall be determined in accordance with Statutory Accounting Principles (SAP) and applied on a basis consistent with past Reinsured practices. 19 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - NO. 1B (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurer formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (now, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to ( INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION ( bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to ( INJURY SICKNESS, DISEASE, DEATH ( OR DESTRUCTION ( Bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to ( IMMEDIATE MEDICAL OR SURGICAL to expenses incurred with ( RELIEF, respect first aid, to ( BODILY INJURY, SICKNESS, resulting from the hazardous ( DISEASE OR DEATH properties of bodily injury, nuclear material and arising out of the operation of nuclear facility by any person or organization. III. Under any Liability Coverage, to ( INJURY, SICKNESS, DISEASE, DEATH ( OR DESTRUCTION bodily injury or ( property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the (INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION (bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to (INJURY TO OR DESTRUCTION OF PROPERTY AT SUCH NUCLEAR FACILITY. (property damage to such nuclear facility and any property (thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIALS" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; WITH RESPECT TO INJURY TO OR DESTRUCTION OF PROPERTY, THE WORD "INJURY" OR "DESTRUCTION" INCLUDES ALL FORMS OF RADIOACTIVE CONTAMINATION OF PROPERTY "Property damage" includes all forms of radioactive contamination of property. V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. - ------------------------------------------------------------------------------- * NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - NO. 2 (1) This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. (2) Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. (3) Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate: (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. (6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. (7) Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. NOTE.--Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that: (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply, (b) With respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4 (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operations of Nuclear Incident Exclusion Clause No. 1B - Liability, No. 2 - Physical Damage, No. 3 - Boiler and Machinery and paragraph (1) of this clause, it is understood and agreed that for all purposes as respects the reinsurance assumed by the Reinsurer from the Reassured, all original insurance policies or contracts of the Reassured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau. Reinsurance Assignment Agreement REINSURANCE ASSIGNMENT AGREEMENT REINSURANCE ASSIGNMENT AGREEMENT, dated as of September 3, 1998 (this "Assignment Agreement") between Inter-Ocean Reinsurance Company Ltd., a Bermuda insurance company (the "Assignor"), and BUSINESS INSURANCE GROUP, INC., ACTING SOLELY on behalf of its subsidiaries CALIFORNIA COMPENSATION INSURANCE COMPANY, BUSINESS INSURANCE COMPANY, COMBINED BENEFITS INSURANCE COMPANY, COMMERCIAL COMPENSATION INSURANCE COMPANY, (collectively the "Assignee"). WHEREAS the Assignee and the Assignor are parties to an Aggregate Excess of Loss Reinsurance Agreement (the "Original Contract"), dated as of September 3, 1998, a copy of which is attached hereto as Appendix A, whereby the Assignor has undertaken to make certain payments to the Assignee as described in the Original Contract; WHEREAS, the Assignor and American Re-Insurance Company ("American Re") have entered into a retrocessional contract of reinsurance (the "Retrocession Agreement"), a copy of which is attached hereto as Appendix B, whereby American Re has undertaken to indemnify, in whole or in part, the Assignor for amounts due by the Assignor to the Assignee pursuant to the Original Contract; WHEREAS, to secure the payment of all obligations of Assignor now or hereafter existing under the Original Contract, the Assignor wishes to assign to the Assignee the Assignor's rights of recovery from American Re under the Retrocession Agreement dated the date hereof; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Assignor and the Assignee agree as follows: 1. ASSIGNMENT. The Assignor hereby assigns to the Assignee all of the Assignor's right, title and interest in and to any and all payments by American Re under the Retrocession Agreement (the "Payments") as security for the payment of all obligations of Assignor now or hereafter existing under the Original Contract (the "Assignment"). As of the date hereof, the Assignment vests and thereafter at all times will vest in the Assignee full right and title in and to any of the Payments by American Re purported to be conveyed hereby and such conveyance of the right, title and interest in and to such Payments will constitute a valid assignment of such Payments enforceable against the Assignor and all successors, assigns and creditors of the Assignor. 2. ACCEPTANCE. Assignee hereby accepts the Assignment. 1 of 6 Reinsurance Assignment Agreement 3. APPOINTMENT OF BUSINESS INSURANCE GROUP, INC. AS AGENT. BUSINESS INSURANCE GROUP, INC. is appointed agent to act on behalf of each and every company herein collectively referred to as "Assignee" and the Assignor and American Re are entitled to rely upon the instructions of BUSINESS INSURANCE GROUP, INC. pertaining to all matters governed by this Assignment Agreement. 4. ASSIGNOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (a) the Assignor shall remain liable under the Original Contract to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Assignment Agreement had not been executed, (b) the exercise by the Assignee of any of the rights hereunder shall not release the Assignor from any of its duties or obligations under the Original Contract, and (c) the Assignee shall not have any obligation or liability under the Original Contract by reason of this Assignment Agreement, nor shall the Assignee be obligated to perform any of the obligations or duties of the Assignor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 5. REASSIGNMENT. All of the Assignor's right, title and interest in and to the Payments conveyed hereby to the Assignee may be reconveyed by the Assignee upon written notice of assignment to the Assignor and American Re. 6. APPOINTMENT. The Assignee and its agents and representatives are hereby irrevocably constituted and designated as the Assignor's attorney-in-fact, which irrevocable power of attorney, coupled with an interest, (a) to endorse or sign any of the Assignor's name to remittances, invoices, assignments, checks, drafts, notices or other instruments in respect of the Payments, (b) to notify American Re to make the Payments directly to the Assignee pursuant to this Assignment Agreement; provided that, Assignee shall simultaneously notify Assignor of its notification to American Re to make payment hereunder, (c) to bring suit and to settle or compromise such Payments as the Assignee may, in its sole discretion, deem appropriate, and (d) to initiate and prosecute or defend, as the case maybe, arbitration proceedings under the Retrocession Agreement. 7. SATISFACTION OF OBLIGATIONS. American Re is directed to make all payments due under the Retrocession Agreement to BUSINESS INSURANCE GROUP, INC. as agent for the Assignee. Payments to BUSINESS INSURANCE GROUP, INC. pursuant this Assignment Agreement constitute appropriate payment to each and every company herein collectively referred to as "Assignee". 8. NOTICE TO AMERICAN RE. By executing the "Acknowledgment and Consent" on the signature page hereof, American Re accepts notification of this Assignment Agreement and consents to the terms and conditions hereof. 9. JURISDICTION. Without limiting Section 10 hereof, in relation to any legal action or proceedings arising out of or in connection with this Assignment Agreement each party irrevocably submits to the jurisdiction of the courts of the State of New York and the United 2 of 6 Reinsurance Assignment Agreement States District Court located in the Borough of Manhattan in New York City and waives any objection to proceedings in any such court on the grounds of venue or on the grounds that the proceedings have been brought in an inconvenient forum. The provision for choice of forum in this Assignment Agreement is being made pursuant to Section 5-1402 of the General Obligations Law of the State of New York. 10. ARBITRATION CLAUSE. Any and all disputes and disagreements arising out of or relating to this Agreement shall be submitted for resolution to an independent arbitrator, mutually agreed to by the Assignee and the Assignor, upon the written request of the Assignee or the Assignor. If the parties are unable to mutually agree upon an arbitrator within ten (10) calendar days after delivery of a written request for arbitration, the Assignee and the Assignor shall each nominate three individuals of whom the other party shall decline two of the three individuals nominated by the other, and the list of the remaining two nominees shall be submitted to a court of competent jurisdiction and the court shall select the third arbitrator from among the names submitted. If a party fails to nominate three individuals within thirty (30) calendar days after being requested to do so, the other party shall also appoint the second arbitrator and the two arbitrators shall select the third arbitrator. If the two arbitrators fail to agree upon the appointment of a third arbitrator within thirty (30) calendar days after their nominations, each of them shall name three (3), of whom the other shall decline two (2) and the decision shall be made by drawing lots. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies who have never been affiliated with the Assignor or Assignee, respectively. SUCH ARBITRATION PROCEEDING SHALL BE HELD IN NEW YORK, NEW YORK UNLESS OTHERWISE AGREED BY THE PARTIES HERETO. Each party shall submit its case to the arbitrator(s) within thirty (30) calendar days after the date of appointment of the arbitrator(s). The arbitrator(s) shall make its determination with regard to the custom and usage of the insurance and reinsurance business and render a written decision solely as to the issue presented in the notice of arbitration within sixty (60) calendar days after such submission. The majority decision of the arbitrators shall be final and binding in all respects upon all parties hereto. Judgment upon any award may only be entered in a Federal court of competent jurisdiction located in the City, County and State of New York; PROVIDED, HOWEVER, that if such judgment cannot be entered in such a Federal court expeditiously, such judgment only then may be entered in a state court of competent jurisdiction located in the City, County and State of New York. Arbitration hereunder shall take place in New York unless the Assignee and the Assignor agree otherwise. Except as otherwise provided herein, the Assignee and the Assignor shall jointly and equally bear the costs, fees, disbursements and other expenses of the arbitrator. It is agreed that the jurisdiction of the arbitrators to make or render any decision or award shall be limited by the limit of liability expressly set forth in the Original Contract and in the Retrocession Agreement, and that the arbitrators shall have no jurisdiction to make any decision or render any award exceeding such expressly stated limits of liability, nor do they have the 3 of 6 Reinsurance Assignment Agreement jurisdiction to authorize any punitive, exemplary or consequential damage awards between the parties hereto. 11. COUNTERPARTS. This Assignment Agreement may be executed in counterpart, each of which shall be an original, but both of which shall constitute one instrument. 12. OTHER AGREEMENTS. Assignor and Assignee, on behalf of themselves and their respective heirs, representatives, successors and assigns shall execute, acknowledge or verify, and deliver any and all agreements, documents, instruments, reports or filings, and take any and all other actions, which from time to time may be reasonably requested by any other party to this Assignment Agreement to carry out the purposes and intent of this Assignment Agreement. 13. ENTIRE AGREEMENT. This Assignment Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof, and supersedes all prior agreements and understandings, written or oral, among the parties with respect to the matters which are the subject hereof. 14. AMENDMENT. Any term of this Assignment Agreement may be amended or modified in whole or in part and the observance of any term of this Assignment Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only by an instrument in writing and signed by the party against whom such amendment or waiver is sought to be enforced. 15. RETROCESSION AGREEMENT AND ORIGINAL CONTRACT. The Retrocession Agreement shall not be amended, modified or terminated by the Assignor without the prior written consent of the Assignee. Notwithstanding Section 6 of this Assignment Agreement, the Assignee agrees not to consent to the amendment, modification or termination of the Original Contract without the prior written consent of the Assignor. 16. THIRD PARTIES. Except as otherwise expressly provided herein, the terms and conditions of this Assignment Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and permitted assigns. Nothing in the Assignment Agreement, express or implied, is intended to confer upon any person or entity other than the parties hereto or their respective successors and permitted assigns any rights, remedies, obligations, or liabilities under or by reason of this Assignment Agreement, except as may be expressly provided in this Assignment Agreement. 17. INVALIDITY. If any provisions of this Assignment Agreement as applied to any party or to any circumstance shall be adjudged by a court to be invalid or unenforceable, the same shall in no way affect any other provision of this Assignment Agreement, the application of such provision in any other circumstances or the validity or enforceability of this Assignment Agreement. 4 of 6 Reinsurance Assignment Agreement 18. CONFIDENTIALITY. Each party agrees to keep the terms of this Assignment Agreement confidential and not to divulge any of the same to any third party; provided that nothing herein shall limit the disclosure of any such information, (a) to the extent required by statute, rule, regulation, financial reporting standards applicable to either party or by judicial process, (b) to the extent requested by any regulatory agency having jurisdiction over either party or (c) to the extent deemed appropriate by either party in any reports required to be filed under securities or banking laws. 20. TERMINATION. This Assignment Agreement shall terminate upon the termination of all obligations of Assignor under the Original Contract. 21. FILINGS. The Assignor hereby consents to any filings or other steps reasonably taken to implement or perfect any charge or security interest of the Assignee to effectuate and secure this Assignment Agreement. [THIS SPACE IS INTENTIONALLY LEFT BLANK] 5 of 6 Reinsurance Assignment Agreement IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be duly executed as of the date first above written. INTER-OCEAN REINSURANCE COMPANY LTD. By: /s/ Michael P. Sullivan ------------------------------------ Name: Michael P. Sullivan ---------------------------------- Title: Vice President --------------------------------- BUSINESS INSURANCE GROUP, INC. on behalf of its subsidiaries CALIFORNIA COMPENSATION INSURANCE COMPANY BUSINESS INSURANCE COMPANY COMBINED BENEFITS INSURANCE COMPANY COMMERCIAL COMPENSATION INSURANCE COMPANY By: /s/ Maurice Costa ------------------------------------ Name: Maurice Costa ---------------------------------- Title: President --------------------------------- ACKNOWLEDGMENT AND CONSENT AMERICAN RE-INSURANCE COMPANY By: /s/ Jeffrey Smith ------------------------------------ Name: Jeffrey Smith ---------------------------------- Title: Senior Vice President --------------------------------- 6 of 6 EX-23.1 15 EXHIBIT 23.1 To the Board of Directors of Superior National Insurance Group, Inc.: We consent to the incorporation by reference in this Form 8-K of Superior National Insurance Group, Inc. of our report, dated June 19, 1998 (August 24, 1998 as to Note 16), on our audit of the combined financial statements of the Insurance Operations of Business Insurance Group, Inc. appearing in Amendment No. 3 to Registration Statement No. 333-58579 on Form S-3. /s/ Deloitte & Touche LLP San Francisco, California December 23, 1998 EX-99.1 16 EXHIBIT 99.1 Superior National Insurance Group, Inc. Announces Completion of Business Insurance Group, Inc. Acquisition CALABASAS, Calif.--Dec. 10, 1998--Superior National Group, Inc. (Nasdaq:SNTL) announced the completion of its previously announced acquisition of Business Insurance Group, Inc. from Foundation Health Systems, Inc. (NYSE:FHS) for $285 million. The sale includes California Compensation Insurance Company, California's largest private workers' compensation insurance carrier, Business Insurance Company, which offers workers' compensation coverage in 12 states outside of California, and Combined Benefits Insurance Company, which is licensed in California for both workers' compensation and accident and health insurance. SNTL will complete the acquisition of New York-domiciled Commercial Compensation Insurance Company upon receipt of New York approval, which is expected shortly. In connection with acquisition of Commercial Compensation Insurance Company SNTL has placed approximately $6.8 million in an escrow account, which will be released to FHS upon receipt of regulatory approval and completion of the sale. As previously announced, SNTL plans to transfer the business and employees of Business Insurance Company ("BICO") to an affiliate, and then sell BICO to Zurich Centre Group, LLC ("Zurich"), a subsidiary of the Zurich Insurance Group, upon receipt of required regulatory approval. The sale of BICO to Zurich is expected to occur in the near future. William L. Gentz, SNTL President and Chief Executive Officer, stated, "The combined Superior National and Business Insurance Group operations are now a reality, something both parties have worked hard to achieve over the past seven months. Our new organization is the largest private workers' compensation writer in California, and the ninth largest writer of workers' compensation insurance in the nation. The assets of our new group are expected to exceed $1.6 billion, written premiums during 1999 should be over $750 million, and policyholders' surplus exceeds $360 million. Superior National is now responsible for the workers' compensation insurance needs of nearly 55,000 policyholders, and for the care, safety, and health of more than one million working people." Prior to the acquisition of Business Insurance Group, Superior National Insurance Group was the parent company of Superior National Insurance Company and Superior Pacific Casualty Company, specialty workers' compensation insurers operating in California through branch offices located in Sacramento, Pleasanton, Fresno, Calabasas, Woodland Hills, Irvine, San Diego, and in Phoenix, Arizona. The Superior National group of companies now also includes California Compensation Insurance Company, founded in 1932 and the largest private sector workers' compensation insurance company in California, and Combined Benefits Insurance Company, a specialist in 24-hour cover workers' compensation and accident and health insurance products. Upon receipt of New York regulatory approval, Commercial Compensation Insurance Company will be acquired from FHS as well, enhancing SNTL's ability to underwrite workers' compensation insurance across the nation. This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. --30-- CONTACT: Superior National Insurance Group, Inc., Calabasas J. Chris Seaman, 828/878-2240 EX-99.2 17 EXHIBIT 99.2 Superior National Insurance Group, Inc. Announces Completion of Sale of Business Insurance Company to Centre Solutions and Completion of Acquisition of Commercial Compensation Insurance Company CALABASAS, Calif. --Dec. 18, 1998--Superior National Insurance Group, Inc. (Nasdaq:SNTL) announced the completion of the previously announced sale of Business Insurance Company to Centre Solutions Holdings (Delaware) Limited, and completion of the previously announced acquisition of Commercial Compensation Insurance Company ("CCIC") from Foundation Health Corporation. SNTL received regulatory approval for the CCIC acquisition on December 16, 1998, completing SNTL's acquisition of Business Insurance Group, Inc. ("BIG") and BIG's insurance subsidiaries. Prior to the acquisition of Business Insurance Group on December 10, 1998, Superior National Insurance Group was the parent company of Superior National Insurance Company and Superior Pacific Casualty Company, specialty workers' compensation insurers operating in California through branch offices located in Sacramento, Pleasanton, Fresno, Calabasas, Woodland Hills, Irvine, San Diego, and in Phoenix, Arizona. The Superior National group of companies now also includes California Compensation Insurance Company, founded in 1932 and the largest private sector workers' compensation insurance company in California, Combined Benefits Insurance Company, a specialist in 24-hour cover workers' compensation and accident and health insurance products, and Commercial Compensation Insurance Company, a widely-licensed insurance company that will replace BICO as Superior National's vehicle for underwriting workers' compensation insurance outside of California. --30-- CONTACT: Superior National Insurance Group Inc., Calabasas J. Chris Seaman, Chief Financial Officer, 818/878-2240 -----END PRIVACY-ENHANCED MESSAGE-----