-----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, NRH8gHE5WTMMKhvr01IiR7caaHqgBJiI5nJrI8FWApUuQnjJbFVf/MzbR5jjLXq6 NGiaSjR8no3y+N1IAn5l3Q== 0000867579-02-000214.txt : 20021106 0000867579-02-000214.hdr.sgml : 20021106 20021106155959 ACCESSION NUMBER: 0000867579-02-000214 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06563 FILM NUMBER: 02811239 BUSINESS ADDRESS: STREET 1: 4333 BROOKLYN AVE NE STREET 2: SAFECO PLAZA CITY: SEATTLE STATE: WA ZIP: 98185 BUSINESS PHONE: 2065455000 MAIL ADDRESS: STREET 1: 4333 BROOKLYN AVE NE CITY: SEATTLE STATE: WA ZIP: 98185 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICA CORP DATE OF NAME CHANGE: 19680529 10-Q 1 en0427.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------- FORM 10-Q - ------------------------------------------------------------------------------- [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2002 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _____ to _____. Commission File Number 1-6563 SAFECO CORPORATION State of Incorporation: Washington I.R.S. Employer I.D. No.: 91-0742146 Address of Principal Executive Offices: SAFECO Plaza, Seattle, Washington 98185 Telephone: 206-545-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]. NO [ ]. Common Stock, No Par Value: 127,743,059 shares were outstanding at October 31, 2002 SAFECO Corporation and Subsidiaries - ---------------------------------------------------------------------------------------------------------- CONTENTS - ---------------------------------------------------------------------------------------------------------- Item Description Page - ---------------------------------------------------------------------------------------------------------- Part I Financial Information 1 Financial Statements Consolidated Balance Sheets September 30, 2002 and December 31, 2001 2 Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2002 and 2001 4 Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2002 and 2001 5 Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2002 and 2001 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 6 Condensed Notes to Consolidated Financial Statements 8 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 4 Controls and Procedures 35 Part II Other Information 1 Legal Proceedings 37 5 Other Information 37 6 Exhibits and Reports on Form 8-K 38 Signatures 39 Certifications 40 ' Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------- PART I Item 1 - FINANCIAL INFORMATION - ----------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets - ----------------------------------------------------------------------------------------------------------- September 30 December 31 2002 2001 - ----------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- (In Millions) (Unaudited) ASSETS Investments Fixed Maturities, at Fair Value (Cost or amortized cost: $22,045.4; $20,677.1) $23,657.8 $21,444.1 Marketable Equity Securities, at Fair Value (Cost: $828.0; $940.5) 1,037.7 1,596.4 Mortgage Loans 921.1 924.2 Other Investment Assets 212.5 236.9 Short-Term Investments 511.0 672.9 --------------------------- Total Investments 26,340.1 24,874.5 Cash 181.3 269.3 Accrued Investment Income 350.2 323.8 Premiums and Service Fees Receivable 1,086.0 973.0 Other Notes and Accounts Receivable 309.0 163.4 Current Income Tax Recoverable 5.5 -- Deferred Income Tax Recoverable 170.6 319.0 Reinsurance Recoverables 604.5 523.2 Deferred Policy Acquisition Costs 640.6 626.8 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 525.7 552.0 Intangibles and Goodwill (Note 8) (Accumulated amortization: $97.7; $85.9) 193.5 149.4 Other Assets 124.6 110.0 Securities Lending Collateral (Note 1) 2,358.1 1,636.2 Separate Account Assets 853.2 1,208.1 --------------------------- Total Assets $33,742.9 $31,728.7 - ----------------------------------------------------------------------------------------------------------- See condensed notes to consolidated financial statements. SAFECO Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets - ----------------------------------------------------------------------------------------------------------- September 30 December 31 2002 2001 - ----------------------------------------------------------------------------------------------------------- (In Millions) (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Losses and Loss Adjustment Expenses $ 5,227.2 $ 5,118.4 Life Policy Liabilities 342.6 327.1 Unearned Premiums 1,884.5 1,782.2 Funds Held Under Deposit Contracts 15,453.0 14,624.2 Debt (Note 3) 1,127.8 1,096.6 Other Liabilities 1,594.6 1,423.0 Current Income Taxes -- 34.9 Securities Lending Payable (Note 1) 2,358.1 1,636.2 Separate Account Liabilities 853.2 1,208.1 --------------------------- Total Liabilities 28,841.0 27,250.7 --------------------------- Commitments and Contingencies -- -- Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation (Capital Securities) 843.7 843.4 --------------------------- Preferred Stock, No Par Value Shares Authorized: 10 Shares Issued and Outstanding: None -- -- Common Stock, No Par Value Shares Authorized: 300 Shares Reserved for Options: 12.1; 6.4 Shares Issued and Outstanding: 127.8; 127.7 847.6 841.9 Retained Earnings 2,042.7 1,875.9 Accumulated Other Comprehensive Income, Net of Taxes 1,167.9 916.8 --------------------------- Total Shareholders' Equity 4,058.2 3,634.6 --------------------------- Total Liabilities and Shareholders' Equity $33,742.9 $31,728.7 - ----------------------------------------------------------------------------------------------------------- See condensed notes to consolidated financial statements. SAFECO Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------- Consolidated Statements of Income (Loss) - ----------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- (In Millions Except Per Share Amounts) (Unaudited) (Unaudited) REVENUES Insurance Property & Casualty Earned Premiums $ 1,135.2 $1,118.5 $ 3,356.7 $3,355.4 Life & Investments Premiums and Other Revenues 223.3 158.8 554.5 479.6 ------------------------------------------------- Total 1,358.5 1,277.3 3,911.2 3,835.0 Other 3.2 3.4 7.9 8.8 Net Investment Income 420.4 408.9 1,247.9 1,232.2 Net Realized Investment Gains 12.5 18.5 138.5 80.7 ------------------------------------------------- Total 1,794.6 1,708.1 5,305.5 5,156.7 ------------------------------------------------- EXPENSES Losses, Loss Adjustment Expenses and Policy Benefits 1,171.8 1,466.1 3,512.8 3,978.5 Commissions 233.7 213.1 654.0 619.7 Personnel Costs 123.7 125.9 363.4 378.8 Interest 17.9 17.7 50.3 50.0 Intangibles and Goodwill Amortization (Note 8) 4.2 4.2 12.3 23.4 Other 128.5 91.3 352.5 316.9 Amortization of Deferred Policy Acquisition Costs 220.1 207.8 642.0 615.5 Deferral of Policy Acquisition Costs (230.4) (205.5) (672.8) (634.0) Restructuring Charges (Note 7) 3.0 31.8 15.1 31.8 Goodwill Write-off (Note 8) -- -- -- 1,201.0 ------------------------------------------------- Total 1,672.5 1,952.4 4,929.6 6,581.6 ------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes And Change in Accounting Principle 122.1 (244.3) 375.9 (1,424.9) ------------------------------------------------- Provision (Benefit) for Income Taxes Current 27.7 (45.6) 82.2 (28.1) Deferred 7.9 (54.0) 16.0 (376.6) ------------------------------------------------- Total 35.6 (99.6) 98.2 (404.7) ------------------------------------------------- Income (Loss) from Continuing Operations before Distributions on Before Distributions on Capital Securities Capital Securities and Change in Accounting Principle 86.5 (144.7) 277.7 (1,020.2) Distributions on Capital Securities, Net of Taxes (11.3) (11.3) (33.7) (33.7) ------------------------------------------------- Income (Loss) from Continuing Operations Before Change in Accounting Principle 75.2 (156.0) 244.0 (1,053.9) ------------------------------------------------- Income from Discontinued Credit Operations, Net of Taxes (Note 6) -- 1.4 -- 4.2 Gain from Sale of SAFECO Credit Operations, Net of Taxes -- 54.0 -- 54.0 ------------------------------------------------- Total -- 55.4 -- 58.2 ------------------------------------------------- Income (Loss) before Cumulative Effect of Change in Accounting 75.2 (100.6) 244.0 (995.7) Principle Cumulative Effect of Change in Accounting Principle - SFAS 133, Net -- -- -- (2.1) of Taxes ------------------------------------------------- Net Income (Loss) (Note 8) $ 75.2 $ (100.6) $ 244.0 $ (997.8) - ---------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) PER SHARE OF COMMON STOCK Income (Loss) from Continuing Operations Before Change in Accounting Principle $ 0.59 $ (1.22) $ 1.91 $ (8.24) Income from Discontinued Credit Operations, Net of Taxes (Note 6) -- 0.01 -- 0.03 Gain from Sale of SAFECO Credit Operations, Net of Taxes -- 0.42 -- 0.42 ------------------------------------------------- Income (Loss) before Cumulative Effect of Change in Accounting 0.59 (0.79) 1.91 (7.79) Principle Cumulative Effect of Change in Accounting Principle- SFAS 133, Net -- -- -- (0.02) of Taxes ------------------------------------------------- Net Income (Loss) Per Share of Common Stock - Diluted & Basic (Note $ 0.59 $ (0.79) $ 1.91 $ (7.81) 8) - ---------------------------------------------------------------------------------------------------------------------- Dividends Paid to Common Shareholders $ 0.185 $ 0.185 $ 0.555 $ 0.740 - ---------------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding During the Period:(Note 1)Diluted 128.1 128.0 128.1 127.9 Basic 127.8 127.8 127.8 127.7 - ---------------------------------------------------------------------------------------------------------------------- See condensed notes to consolidated financial statements. SAFECO Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity - ----------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 2002 2001 - ---------------------------------------------------------------------------------------------------------- (In Millions) (Unaudited) COMMON STOCK Balance at Beginning of Period $ 841.9 $ 834.5 Stock Issued for Options and Rights 6.7 6.9 Common Stock Reacquired (1.5) (1.0) Other 0.5 0.4 ------------------------ Balance at End of Period 847.6 840.8 ------------------------ RETAINED EARNINGS Balance at Beginning of Period 1,875.9 2,966.4 Net Income (Loss) 244.0 (997.8) Amortization of Underwriting Compensation on Capital (0.3) (0.3) Securities Dividends Declared (70.9) (70.9) Common Stock Reacquired (6.0) (3.7) ------------------------ Balance at End of Period 2,042.7 1,893.7 ------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES Balance at Beginning of Period 916.8 894.9 Other Comprehensive Income 251.1 134.9 ------------------------ Balance at End of Period 1,167.9 1,029.8 ------------------------ Shareholders' Equity $ 4,058.2 $ 3,764.3 - ---------------------------------------------------------------------------------------------------------- See condensed notes to consolidated financial statements. - --------------------------------------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income (Loss) - --------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------ (In Millions) (Unaudited) (Unaudited) Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8) ----------------------------------------------------- Other Comprehensive Income, Net of Taxes Increase in Unrealized Appreciation of Investment Securities 327.8 203.1 349.5 202.5 Less Reclassification Adjustment for Net Realized Investment Gains Included in Net Income (Loss) (7.8) (12.8) (89.9) (53.3) Deferred Policy Acquisition Costs Valuation (11.0) (6.8) (15.4) (8.6) Allowance Foreign Currency and Other Adjustments 5.5 8.7 6.9 (5.7) ----------------------------------------------------- Other Comprehensive Income 314.5 192.2 251.1 134.9 ----------------------------------------------------- Comprehensive Income (Loss) $ 389.7 $ 91.6 $ 495.1 $ (862.9) - ------------------------------------------------------------------------------------------------------------ See condensed notes to consolidated financial statements. SAFECO Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - ----------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 2002 2001 - ------------------------------------------------------------------------------------------------------------ (In Millions) (Unaudited) OPERATING ACTIVITIES Insurance Premiums Received $ 3,679.6 $ 3,665.6 Dividends and Interest Received 1,152.3 1,150.7 Other Operating Receipts 148.8 150.0 Insurance Claims and Policy Benefits Paid (2,857.5) (3,097.1) Underwriting, Acquisition and Insurance Operating Costs Paid (1,203.6) (1,219.3) Interest Paid and Distributions on Capital Securities (120.3) (128.8) Other Operating Costs Paid (93.1) (82.3) Income Taxes Paid (117.3) (47.2) ------------------------- Net Cash Provided by Operating Activities 588.9 391.6 ------------------------- INVESTING ACTIVITIES Purchases of Fixed Maturities (4,798.3) (2,511.0) Equities (246.9) (206.5) Other Investment Assets (187.8) (219.6) Maturities of Fixed Maturities 1,236.9 1,030.5 Sales of Fixed Maturities 2,289.4 1,834.5 Equities 537.5 279.1 Other Investment Assets 113.7 121.7 Net Decrease (Increase) in Short-Term Investments 161.9 (849.9) Proceeds from Sale of SAFECO Credit Operations -- 250.0 Other 30.5 (55.4) ------------------------- Net Cash Used in Investing Activities (863.1) (326.6) ------------------------- FINANCING ACTIVITIES Funds Received Under Deposit Contracts 1,010.1 716.3 Return of Funds Held under Deposit Contracts (778.8) (976.1) Proceeds from Notes and Mortgage Borrowings 371.8 -- Repayment of Notes and Mortgage Borrowings (46.2) (4.3) Repayment of Short-Term Borrowings (299.0) (74.4) Common Stock Reacquired (7.5) (4.7) Dividends Paid to Shareholders (70.9) (94.5) Other 6.7 9.9 ------------------------- Net Cash Provided by (Used in) Financing Activities 186.2 (427.8) ------------------------- Cash Provided by Discontinued Credit Operations -- 328.2 ------------------------- Net Decrease in Cash (88.0) (34.6) Cash at Beginning of Period 269.3 186.3 ------------------------- Cash at End of Period $ 181.3 $ 151.7 - ------------------------------------------------------------------------------------------------------------ See condensed notes to consolidated financial statements. SAFECO Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities - ----------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 2002 2001 - ----------------------------------------------------------------------------------------------------------- (In Millions) (Unaudited) Net Income (Loss) $ 244.0 $ (997.8) ------------------------ ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Realized Investment Gains (138.5) (80.7) Amortization and Depreciation 64.7 65.7 Amortization of Fixed Maturity Investments (39.5) (47.5) Deferred Income Tax Provision (Benefit) 16.0 (376.6) Interest Expense on Deposit Contracts 566.6 474.0 Other Adjustments 6.0 (1.6) Goodwill Write-Off -- 1,201.0 Income from Discontinued Credit Operations, Net of Taxes -- (4.2) Gain from Sale of SAFECO Credit Operations, Net of Taxes -- (54.0) Cumulative Effect of Change in Accounting Principle, Net of Taxes -- 2.1 Changes in Losses and Loss Adjustment Expenses 7.0 328.2 Life Policy Liabilities 12.8 (13.2) Unearned Premiums 101.4 11.9 Accrued Income Taxes (53.9) (6.1) Accrued Interest on Accrual Bonds (33.5) (31.4) Accrued Investment Income (26.4) 2.9 Deferred Policy Acquisition Costs (37.4) (18.5) Other Assets and Liabilities (100.4) (62.6) ------------------------ Total Adjustments 344.9 1,389.4 ------------------------ Net Cash Provided by Operating Activities $ 588.9 $ 391.6 - ----------------------------------------------------------------------------------------------------------- There were no significant non-cash financing or investing activities for the nine months ended September 30, 2002 and 2001. See condensed notes to consolidated financial statements.
SAFECO Corporation and Subsidiaries - -------------------------------------------------------------------------------- Condensed Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (Dollar amounts in millions except per share data, unless noted otherwise) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Basis of Consolidation and Reporting SAFECO Corporation (SAFECO) is a Washington State corporation that owns operating subsidiaries engaged in property and casualty insurance and surety operations, life insurance and asset management. These operations generate virtually all of SAFECO's revenues. SAFECO's businesses operate on a nationwide basis. Non-U.S. operations are not significant to overall operations. SAFECO and its subsidiaries are collectively referred to as "SAFECO." The property and casualty insurance and surety operations are collectively referred to as "Property & Casualty." The life insurance and asset management operations are collectively referred to as "Life & Investments." Other operations not included in either Property & Casualty or Life & Investments are collectively referred to as "Corporate." The accompanying unaudited consolidated financial statements and condensed notes have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q. Certain financial information, which is required in the annual financial statements prepared in conformity with GAAP, may not be required for interim financial reporting purposes and has been condensed or omitted. In the opinion of SAFECO's management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of results for the interim periods have been included. The results of operations for the period ended September 30, 2002 are not necessarily indicative of the results expected for the full year. These consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes in SAFECO's 2001 Annual Report on Form 10-K/A, which has been previously filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with GAAP requires SAFECO's management to make estimates and assumptions that affect amounts reported in these consolidated financial statements. Actual results could differ from those estimates. The consolidated financial statements include SAFECO Corporation and its subsidiaries. SAFECO has no material unconsolidated subsidiaries and no interests in off-balance sheet special purpose entities. All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements. Certain reclassifications have been made to the prior year information to conform to the current year presentation. Earnings Per Share Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if options granted under SAFECO's stock-based compensation plans were exercised resulting in the issuance of common shares that would then share in SAFECO's earnings. Due to the net loss for the three and nine months ended September 30, 2001, SAFECO used basic weighted-average shares outstanding to calculate earnings (loss) per share of common stock. Using diluted weighted-average shares outstanding would have resulted in a lower net loss per share of common stock. Securities Lending SAFECO engages in securities lending whereby certain securities from its investment portfolio are loaned to other institutions for short periods of time. Initial collateral is required from the borrower at a rate of 102% of the market value of a loaned security. The collateral is deposited by the borrower with a lending agent and retained and invested by the lending agent to generate additional income according to SAFECO's guidelines. The market value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. The fair value of the collateral deposited by the borrowers at September 30, 2002 and December 31, 2001 was $2,358.1 and $1,636.2, respectively. The securities lending collateral and the corresponding securities lending payable are reported on the Consolidated Balance Sheets as assets and liabilities, respectively. New Accounting Standards FASB Statement 142, "Goodwill and Other Intangible Assets" The Financial Accounting Standards Board (FASB) issued Statement 142 (SFAS 142), "Goodwill and Other Intangible Assets" in July 2001. Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in fiscal years beginning after December 15, 2001. SAFECO adopted SFAS 142 effective January 1, 2002 with no material impact on its consolidated financial statements. See Note 8 for additional information. NOTE 2 - FINANCIAL INSTRUMENTS Fair Value Hedges SAFECO uses interest rate swaps to offset the change in value of certain fixed rate assets and liabilities. In calculating the effective portion of the fair value hedges, the changes in the fair value of the hedge and the hedged item are recognized in net realized investment gains in the Consolidated Statements of Income (Loss). Differences between the changes in the fair value of the hedge and the hedged item represent hedge ineffectiveness and are recognized in net realized investment gains/losses. For the three and nine months ended September 30, 2002, a gain of $0.9 and a gain of $0.6, respectively, was recognized in net realized investment gains due to hedge ineffectiveness. Fair value hedge ineffectiveness for the three and nine months ended September 30, 2001 resulted in a loss of $2.5 and gain of $0.8, respectively. Cash Flow Hedges SAFECO also uses interest rate swaps to hedge the variability of future cash flows associated with certain variable rate assets and debt. The changes in the fair value of the hedged item and the related interest rate swap are recognized in accumulated other comprehensive income (AOCI). Differences between the changes in the fair value of the hedge and the hedged items represent hedge ineffectiveness and are recognized in interest expense. For the three months ended September 30, 2002, there was no ineffectiveness. For the nine months ended September 30, 2002 cash flow hedge ineffectiveness resulted in a decrease of $0.5 to interest expense. Cash flow hedge ineffectiveness related to continuing operations for the three and nine months ended September 30, 2001 resulted in an increase in interest expense of $2.2 and $1.3, respectively. During the third quarter of 2002, $18.7 was reclassified from AOCI to realized loss relating to a cash flow hedge that was terminated in connection with the retirement of the underlying commercial paper borrowings. There were no other cash flow hedges or fair value hedges discontinued during the three and nine months ended September 30, 2002 or 2001. Other Derivatives In 1997, Life & Investments introduced an equity indexed annuity (EIA) product that credits the policyholder based on a percentage of the gain in the S&P 500 Index. SAFECO has a hedging program with the objective to hedge the exposure to changes in the S&P 500 Index. The program consists of buying and writing S&P 500 index options, buying Treasury interest rate futures and trading S&P 500 futures and swaps. Sales of the EIA product were suspended in the fourth quarter of 1998. As permitted under a grandfathering clause in FASB Statement 133 (SFAS 133) Accounting for Derivative Instruments and Hedging Activities, SAFECO elected not to apply the fair value adjustment requirement of this statement to the embedded derivatives contained in the liability related to EIA products sold prior to January 1, 1999. The change in fair value of the options, futures and swaps used to hedge the EIA liability is recognized as an adjustment to net realized investment gains in the Consolidated Statements of Income (Loss). SAFECO's wholly-owned subsidiary, SAFECO Financial Products, Inc. (SFP) was incorporated in 2000 to write S&P 500 index options to mitigate the risk associated with the EIA. Since 2001, SFP has engaged in limited trading for its own account by selling single name credit default swaps, writing and hedging S&P 500 index options and investing in and hedging convertible bonds. SFP's activities are not designated as hedging activities for purposes of SFAS 133. Consequently, mark-to-market adjustments of these instruments and any default losses realized are recorded in realized gains or losses in the Consolidated Statements of Income (Loss). NOTE 3 - DEBT The total amount, current portions and maturities of debt and capital securities at September 30, 2002 and December 31, 2001 are as follows: September 30, 2002 December 31, 2001 - ----------------------------------------------------------------------------------------------------------- Total Current Long-Term Total Current Long-Term --------------------------------------------------------------------- Commercial Paper $ -- $ -- $ -- $ 299.0$ 299.0 $ -- 7.875% Medium-Term Notes Due 2003 307.5 307.5 -- 323.0 -- 323.0 7.875% Notes Due 2005 200.0 -- 200.0 200.0 -- 200.0 6.875% Notes Due 2007 200.0 -- 200.0 200.0 -- 200.0 7.25% Notes Due 2012 389.1 -- 389.1 -- -- -- Medium-Term Notes, Due 2002 and 2003 7.7 7.7 -- 50.0 42.9 7.1 Other Notes and Loans Payable 23.5 4.4 19.1 24.6 5.9 18.7 --------------------------------------------------------------------- Total Debt (Excluding Capital 1,127.8 319.6 808.2 1,096.6 347.8 748.8 Securities) 8.072% Capital Securities Due 2037 843.7 -- 843.7 843.4 -- 843.4 --------------------------------------------------------------------- Total Debt and Capital Securities $ 1,971.5$ 319.6 $ 1,651.9 $ 1,940.0$ 347.8 $ 1,592.2 - -----------------------------------------------------------------------------------------------------------
On August 23, 2002, SAFECO issued $375.0 of senior notes with a coupon of 7.25% that mature in 2012. The proceeds of the notes were used for the repayment of $299.0 of commercial paper borrowings, $18.7 for the termination of related interest rate swaps and $28.4 for repayment of medium-term notes. The balance is expected to be used to repay upcoming debt maturities and for general corporate purposes. SAFECO simultaneously entered into a $375.0 notional interest rate swap to effectively convert the fixed rate senior note obligation into a Libor-based floating rate obligation. The fair value of the interest rate swap is marked-to-market on the balance sheet with the offsetting corresponding asset or liability included in the face value of the debt. SAFECO also has $300.0 of 7.875% medium term note agreements that mature in March 2003. These notes are hedged with $300.0 notional interest rate swaps to effectively convert the fixed rate obligation into a Libor-based floating rate obligation. The fair value of the interest rate swaps are marked to market on the balance sheet with the offsetting corresponding asset or liability included in the face value of the debt. SAFECO renewed its bank credit facility in September 2002 with $500.0 available through September 2005. This replaced the $800.0 facility that expired in September 2002. SAFECO pays a fee to have the facility available and does not maintain deposits as compensating balances. Similar to its previous facility, the new facility carries certain covenants that require SAFECO to maintain a specified minimum level of shareholders' equity and a maximum debt-to-capitalization ratio. There were no borrowings under either facility as of September 30, 2002 and December 31, 2001 and SAFECO was in compliance with all covenants. NOTE 4 - ACQUISITIONS In July 2002, SAFECO completed its acquisition of the medical excess loss and group life business of Swiss Re Life & Health America Holding Company (Swiss Re). The primary purpose of the acquisition is to build a greater presence in the medical excess loss market and leverage SAFECO's expertise in this line of business. The transaction was in the form of an indemnity coinsurance agreement, with total assets acquired of $137.0 including the acquisition of Fort Wayne Risk Management Services, and resulted in the recognition of $25.8 of other intangible assets and $26.2 of goodwill. Nearly all of the other intangible assets are comprised of the value of the reinsurance contracts (and the related customer relationships) and are being amortized over a useful life of 20 years. The assets and liabilities acquired from Swiss Re are included in the Consolidated Balance Sheets as of September 30, 2002 and beginning in July 2002, the results of these operations were included in the Consolidated Statements of Income (Loss). The acquired business generated written premiums of $60.1 and pretax operating income of $12.6 in the third quarter of 2002. For segment reporting purposes, these operations are included with the results of Life & Investments in the Group segment. NOTE 5 - RUNOFF OF LONDON OPERATIONS In the third quarter of 2002, SAFECO made the decision to put its London operations into run off, resulting in an after-tax charge of $17.1 in the quarter. This charge reflects the write-off of SAFECO's investment in its U.K. subsidiary, R.F. Bailey (Underwriting Agencies) Ltd. It also includes strengthening reserves to provide for higher-than-anticipated losses as the business is run off. NOTE 6 - DISCONTINUED OPERATIONS SAFECO Credit Company, Inc. (SAFECO Credit) provided loans and equipment financing and leasing to commercial businesses, insurance agents and affiliated companies. In March 2001, SAFECO decided to sell SAFECO Credit. A plan of disposal was formalized establishing the measurement date as March 31, 2001; as a result, SAFECO Credit was accounted for as a discontinued operation effective March 31, 2001. On July 24, 2001 SAFECO reached a definitive agreement to sell SAFECO Credit to General Electric Capital Corporation (GECC). The sale was completed on August 15, 2001 (effective as of July 31, 2001) for total cash proceeds of $918.9. This included the repayment of loans to SAFECO Credit and settlement of other affiliated transactions between SAFECO Credit and SAFECO totaling $668.9. The sale resulted in net proceeds of $250.0 and a pretax gain of $97.0. The after-tax gain on the sale of $54.0 is reported in the Consolidated Statements of Income (Loss). NOTE 7 - RESTRUCTURING CHARGES In July 2001, SAFECO announced that it would eliminate approximately 1,200 jobs by the end of 2003. Since the beginning of 2001, SAFECO's total employment has decreased by approximately 1,200, excluding the reduction due to the sale of SAFECO Credit, concluding the planned job eliminations. Positions eliminated have been in the corporate headquarters and regional property and casualty operations. Restructuring charges and period costs associated with these changes are expected to total approximately $65 through the end of 2002. Restructuring charges incurred for the nine months ended September 30, 2002 totaled $15.1. Restructuring charges from July 2001 through September 30, 2002 totaled $59.4 (exit costs totaled $18.0 and were accrued in the third quarter of 2001; period costs totaled $41.4). The accrued exit costs of $18.0 included severance costs and lease termination costs that were recognized and accrued as a restructuring charge (exit costs) in the third quarter of 2001. Other charges not meeting the definition of exit costs have been expensed as restructuring charges in the period incurred. These period costs include stay bonuses, employee transfer costs, recruiting and training expenses, related consulting fees and certain office closure costs. The remaining charges are expected to be incurred over the balance of 2002. The activity related to the accrued restructuring charges at September 30, 2002 was as follows: Restructuring Charge Liability - --------------------------------------------------------------------------------------------------------- Accrual in the Third Quarter of 2001 $ 18.0 Amounts Paid During the Three Months Ended: September 30, 2001 (3.9) December 31, 2001 (5.6) March 31, 2002 (7.8) June 30, 2002 (0.7) September 30, 2002 -- ---------------- Balance at September 30, 2002 $ -- - ---------------------------------------------------------------------------------------------------------
NOTE 8 - INTANGIBLES AND GOODWILL SAFECO adopted SFAS 142 on January 1, 2002. Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). As a result of adopting SFAS 142, $28.0 of other intangibles was reclassified as goodwill. The adoption had minimal impact on net income. The following table presents the intangibles and goodwill at September 30, 2002 and December 31, 2001. The purchase of Swiss Re's group medical excess loss business (see Note 4) increased intangible and goodwill assets by $25.8 and $26.2, respectively, from the prior quarter. September 30 December 31 INTANGIBLES AND GOODWILL 2002 2001 - ------------------------------------------------------------------------------------------------------------ Other Amortizable Intangibles $ 135.7 $ 146.5 Goodwill 57.8 2.9 ------------------------------ Total Intangibles and Goodwill $ 193.5 $ 149.4 - ------------------------------------------------------------------------------------------------------------
In accordance with the disclosure requirements of SFAS 142, the following table reverses the effect of the intangibles and goodwill amortization on the reported net income (loss) for the three months and nine months ended September 30, 2002 and 2001 to show comparability between the periods presented. Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------ Reported Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8) Add back: Intangibles and Goodwill Amortization -- -- -- 9.5 --------------------------------------------------- Adjusted Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (988.3) --------------------------------------------------- INCOME (LOSS) PER SHARE - DILUTED AND BASIC Reported Net Income (Loss) $ 0.59 $ (0.79) $ 1.91 $ (7.81) Add back: Intangibles and Goodwill Amortization -- -- -- 0.07 --------------------------------------------------- Adjusted Net Income (Loss) $ 0.59 $ (0.79) $ 1.91 $ (7.74) - ------------------------------------------------------------------------------------------------------------
Effective March 31, 2001, SAFECO elected to change its accounting policy for assessing goodwill from one based on undiscounted cash flows to one based on a market-value method. The market-value method was determined to be a preferable way to assess the current value of goodwill. As a result, we recorded a goodwill write-off of $1,201.0 ($916.9 after-tax) in the first quarter of 2001. The market value method used to assess the recoverability of goodwill compared SAFECO's market capitalization (stock price multiplied by shares outstanding) to its reported book value (total shareholders' equity). Given the extent of the shortfall of market capitalization compared to the reported book value as of March 31, 2001 and the fact that a similar shortfall had existed for almost two years, SAFECO concluded that under the new method the entire goodwill asset was impaired and a write-off of the full amount was necessary. The majority of this goodwill (97%) resulted from the 1997 acquisition of American States Financial Corporation whose operations have been fully integrated into those of SAFECO. NOTE 9 - SEGMENT INFORMATION The operating segments presented are based on SAFECO's internal reporting structure and how our management analyzes the operating results. These segments generally represent groups of related products or markets. Property & Casualty's operations include four reportable underwriting segments. The underwriting segments are SAFECO Personal Insurance (SPI), SAFECO Business Insurance (SBI), Surety and Property & Casualty Other. SPI is further split into Personal Auto, Homeowners and Specialty. SBI is further split into SBI Regular, Special Accounts Facility and Run-off. SBI Regular is SAFECO's core commercial segment, focused on underwriting commercial insurance for small-to-medium sized businesses. Special Accounts Facility underwrites specialty commercial programs and larger commercial accounts. Run-off includes results for the larger commercial business accounts and the specialty programs that SAFECO is currently exiting. Property & Casualty Other includes assumed reinsurance business, non-voluntary property and casualty business for personal lines, results from SAFECO's Lloyds of London operation and discontinued product lines. Life & Investments' operations include six reportable segments: Retirement Services, Income Annuities, Group, Individual, Asset Management and Life & Investments Other. The discontinued SAFECO Credit operation provided loans and equipment financing and leasing to commercial business, insurance agents and affiliated companies. As disclosed in Note 6, the sale of SAFECO Credit was completed on August 15, 2001. This segment is accounted for as a discontinued operation. The Corporate segment includes operating results for the parent company, SAFECO Financial Products, Inc., SAFECO Properties and intercompany transactions. Pretax Premium Underwriting Net Pretax Net Realized Net THREE MONTHS ENDED and Other Income Investment Income Investment Income Total SEPTEMBER 30, 2002 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets - ----------------------------------------------------------------------------------------------------------- PROPERTY & CASUALTY SPI Personal Auto $ 497.4 $ (6.2) $ 32.8 $ 26.6 $ 23.2 $3,528.4 Homeowners 192.7 5.5 14.1 19.6 10.5 1,618.7 Specialty 51.1 9.6 5.0 14.6 4.3 541.0 SBI SBI Regular 255.4 (11.9) 29.1 17.2 17.9 3,323.4 Special Accounts Facility 75.2 3.9 1.5 5.4 2.8 216.9 Run-off 24.2 (15.4) 23.5 8.1 8.2 2,804.7 Surety 32.7 2.7 3.0 5.7 3.9 308.9 Other 6.5 (33.6) 5.5 (28.1) 0.4 240.2 Restructuring Charges -- -- -- (3.0) -- -- ----------------------------------------------------------- ----------- Total 1,135.2 $ (45.4) 114.5 66.1 71.2 $ 97.4 12,582.2 ----------------------------------------------------------- ----------- LIFE & INVESTMENTS Retirement Services 5.6 90.7 1.4 (30.2) 7,228.6 Income Annuities -- 134.0 11.5 10.7 7,471.4 Group 147.9 1.4 22.4 0.3 340.7 Individual 35.6 60.6 3.5 4.2 4,283.2 Asset Management 6.7 0.3 0.9 (0.2) 63.7 Other 27.5 20.1 19.9 2.2 1,795.5 ------------- ---------- -------------------------------------- Total 223.3 307.1 59.6 (13.0) 30.0 21,183.1 ---------- -------------------------------------- ------------- Corporate 3.2 (1.2) (16.1) (45.7) (52.2) (22.4) ---------- --------------------------------------------------------------- Consolidated Totals $ 1,361.7 $ 420.4 $ 109.6 $ 12.5 $ 75.2 $33,742.9 - ----------------------------------------------------------------------------------------------------------- * Pretax Income (Loss) before net realized investment gains (losses), distributions on capital securities and income taxes. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Pretax Premium Underwriting Net Pretax Net Realized Net THREE MONTHS ENDED and Other Income Investment Income Investment Income Total SEPTEMBER 30, 2001 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets - ----------------------------------------------------------------------------------------------------------- PROPERTY & CASUALTY SPI Personal Auto $ 446.5 $ 3.0 $ 28.9 $ 31.9 $ 10.9 $3,183.3 Homeowners 186.9 (43.7) 12.6 (31.1) 5.1 1,399.1 Specialty 51.0 3.0 4.2 7.2 2.0 424.8 SBI SBI Regular 254.2 (87.8) 31.2 (56.6) 8.8 3,387.3 Special Accounts Facility 30.5 (2.0) 1.5 (0.5) 1.1 185.9 Run-off 120.9 (153.8) 23.3 (130.5) 4.1 2,808.1 Surety 27.0 6.4 1.8 8.2 1.7 139.6 Other 1.5 (95.9) 7.7 (88.2) 0.4 409.9 Goodwill Amortization -- -- -- -- -- -- Goodwill Write-off -- -- -- -- -- -- Restructuring Charges -- -- -- (31.8) -- -- ----------------------------------------------------------- ------------- Total 1,118.5 $ (370.8) 111.2 (291.4) 34.1 $ (153.8) 11,938.0 ----------------------------------------------------------- ------------- LIFE & INVESTMENTS Retirement Services 6.2 86.1 4.3 (4.5) 6,203.4 Income Annuities 0.1 130.8 10.3 2.3 7,029.6 Group 84.8 0.9 3.3 (0.5) 171.4 Individual 34.5 57.4 4.8 0.2 3,937.4 Asset Management 8.3 0.5 1.6 -- 68.1 Other 24.9 19.4 18.7 (6.4) 1,653.0 Goodwill Write-off -- -- -- -- -- ------------- ---------- -------------------------------------- Total 158.8 295.1 43.0 (8.9) 22.5 19,062.9 ---------- -------------------------------------- ------------- Discontinued Credit Operations -- -- -- -- 1.4 -- Gain on Sale of Credit Operations -- -- -- -- 54.0 -- Corporate 3.4 2.6 (14.4) (6.7) (24.7) 462.2 ---------- --------------------------------------------------------------- Consolidated Totals $ 1,280.7 $ 408.9 $ (262.8) $ 18.5 $ (100.6) $31,463.1 - ----------------------------------------------------------------------------------------------------------- * Pretax Income (Loss) before net realized investment gains (losses), distributions on capital securities, income taxes, discontinued Credit operations and cumulative effect of change in accounting principle. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Pretax Premium Underwriting Net Pretax Net Realized Net NINE MONTHS ENDED and Other Income Investment Income Investment Income Total SEPTEMBER 30, 2002 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets - ----------------------------------------------------------------------------------------------------------- PROPERTY & CASUALTY SPI Personal Auto $ 1,424.1 $ (33.8) $ 100.3 $ 66.5 $ 100.9 $3,528.4 Homeowners 565.3 (49.6) 43.8 (5.8) 45.1 1,618.7 Specialty 152.3 20.6 15.0 35.6 18.2 541.0 SBI SBI Regular 751.8 (59.5) 89.3 29.8 76.5 3,323.4 Special Accounts Facility 186.8 10.3 6.8 17.1 16.0 216.9 Run-off 162.8 (74.5) 62.9 (11.6) 24.5 2,804.7 Surety 93.6 11.6 8.9 20.5 17.1 308.9 Other 20.0 (46.0) 18.0 (28.0) 4.4 240.2 Restructuring Charges -- -- -- (15.1) -- -- ----------------------------------------------------------- ------------- Total 3,356.7 $ (220.9) 345.0 109.0 302.7 $ 300.6 12,582.2 ----------------------------------------------------------- ------------- LIFE & INVESTMENTS Retirement Services 18.5 265.6 13.4 (76.7) 7,228.6 Income Annuities 0.1 392.5 27.6 (17.0) 7,471.4 Group 324.0 3.6 46.7 0.1 340.7 Individual 106.6 176.2 17.7 (2.4) 4,283.2 Asset Management 22.3 0.9 4.9 (0.9) 63.7 Other 83.0 58.9 60.4 (3.0) 1,795.5 ------------- ---------- -------------------------------------- Total 554.5 897.7 170.7 (99.9) 46.6 21,183.1 ---------- -------------------------------------- ------------- Corporate 7.9 5.2 (42.3) (64.3) (103.2) (22.4) ---------- --------------------------------------------------------------- Consolidated Totals $ 3,919.1 $1,247.9 $ 237.4 $ 138.5 $ 244.0 $33,742.9 - ----------------------------------------------------------------------------------------------------------- * Pretax Income (Loss) before net realized investment gains (losses), distributions on capital securities and income taxes. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Pretax Premium Underwriting Net Pretax Net Realized Net NINE MONTHS ENDED and Other Income Investment Income Investment Income Total SEPTEMBER 30, 2001 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets - ----------------------------------------------------------------------------------------------------------- PROPERTY & CASUALTY SPI Personal Auto $ 1,312.2 $ (62.4) $ 91.2 $ 28.8 $ 32.9 $3,183.3 Homeowners 553.7 (172.4) 39.9 (132.5) 15.4 1,399.1 Specialty 150.5 2.8 12.8 15.6 6.2 424.8 SBI SBI Regular 787.8 (149.9) 97.1 (52.8) 28.0 3,387.3 Special Accounts Facility 92.8 2.0 4.6 6.6 3.3 185.9 Run-off 386.3 (248.3) 70.0 (178.3) 13.3 2,808.1 Surety 67.6 13.2 4.6 17.8 4.4 139.6 Other 4.5 (96.2) 20.5 (75.7) 1.4 409.9 Goodwill Amortization -- -- -- (11.0) -- -- Goodwill Write-off -- -- -- (1,152.1) -- -- Restructuring Charges -- -- -- (31.8) -- -- ----------------------------------------------------------- ------------- Total 3,355.4 $ (711.2) 340.7 (1,565.4) 104.9 $(1,036.8) 11,938.0 ----------------------------------------------------------- ------------- LIFE & INVESTMENTS Retirement Services 20.4 255.8 9.6 (19.1) 6,203.4 Income Annuities 0.3 394.6 33.0 13.1 7,029.6 Group 249.6 2.7 22.1 (1.2) 171.4 Individual 106.1 169.5 21.1 (1.5) 3,937.4 Asset Management 25.5 1.7 5.4 -- 68.1 Other 77.7 59.9 59.4 4.8 1,653.0 Goodwill Write-off -- -- (48.9) -- -- ---------- -------------------------------------- ------------- Total 479.6 884.2 101.7 (3.9) 54.6 19,062.9 ---------- -------------------------------------- ------------- Discontinued Credit Operations -- -- -- -- 4.2 -- Gain on Sale of Credit Operations -- -- -- -- 54.0 -- Corporate 8.8 7.3 (41.9) (20.3) (73.8) 462.2 ---------- --------------------------------------------------------------- Consolidated Totals $ 3,843.8 $1,232.2 $(1,505.6) $ 80.7 $ (997.8) $31,463.1 - ----------------------------------------------------------------------------------------------------------- * Pretax Income (Loss) before net realized investment gains (losses), distributions on capital securities, income taxes, discontinued Credit operations and cumulative effect of change in accounting principle. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Amounts include the March 31, 2001 goodwill write-off for Property & Casualty of $1,152.1 and Life & Investments of $48.9 totaling $1,201.0.
- -------------------------------------------------------------------------------- PART I Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- (Dollar amounts in millions unless noted otherwise) SAFECO Corporation (SAFECO) is a Washington State corporation that owns operating subsidiaries engaged in property and casualty insurance and surety operations, life insurance and asset management. These operations generate virtually all of SAFECO's revenues. SAFECO and its subsidiaries are collectively referred to as "SAFECO." Our property and casualty insurance and surety operations are collectively referred to as "Property & Casualty." Our life insurance and asset management operations are collectively referred to as "Life & Investments." Other operations not included in either Property & Casualty or Life & Investments are collectively referred to as "Corporate." Strategic Summary SAFECO remains on track with the focused efforts started in 2001 to return to profitability. In 2001 management undertook a comprehensive review of SAFECO's operations and determined that our core strengths were in personal auto, small-to-medium commercial insurance, life insurance and asset management. In the Property & Casualty operations, specific actions were taken in 2001 to raise rates, eliminate unprofitable accounts and exit non-core lines of business. The significant actions we have taken to improve the fundamentals of our homeowners business have begun to show in improved underwriting results. We are continuing our efforts to secure sufficient rates for risks accepted and reduce our exposures to catastrophe and weather losses. We are more optimistic now than in the recent past that the homeowners line may achieve acceptable underwriting returns in the future. Additional efforts in 2002, particularly for SAFECO's Property & Casualty operations, include improving sales growth through independent agents and improving service and claims handling processes. SAFECO's financial results through the first three quarters of 2002 are showing meaningful improvement. The main drivers have been our focused efforts on raising rates, eliminating unprofitable accounts and re-underwriting business in property and casualty insurance lines. Our homeowners and small business lines have also benefited significantly from lower than anticipated weather and catastrophe losses in 2002. In addition, continued strong results in Life & Investments operations in the first nine months of 2002 contributed to improved 2002 results. Summary of Financial Information The following summarized financial information should be read in conjunction with the Segment Footnote (Note 9) in the Condensed Notes to Consolidated Financial Statements in this report. Detailed discussions of Property & Casualty, Life & Investments and Corporate operations follow in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- INCOME (LOSS) Property & Casualty* $ 66.1 $ (291.4) $ 109.0 $(1,565.4) Life & Investments* 59.6 43.0 170.7 101.7 Corporate (16.1) (14.4) (42.3) (41.9) ------------------------------------------------- Income (Loss) from Continuing Operations before Net Realized Investment Gains and Income Taxes 109.6 (262.8) 237.4 (1,505.6) Income Tax Provision (Benefit) 30.9 (105.2) 49.6 (432.1) ------------------------------------------------- Income (Loss) from Continuing Operations before Distributions on Capital Securities and Net Realized Investment Gains 78.7 (157.6) 187.8 (1,073.5) Net Realized Investment Gains, Net of Taxes 7.8 12.9 89.9 53.3 Distributions on Capital Securities, Net of Taxes (11.3) (11.3) (33.7) (33.7) ------------------------------------------------- Income (Loss) from Continuing Operations 75.2 (156.0) 244.0 (1,053.9) ------------------------------------------------- Income from Discontinued Credit Operations, Net of Taxes -- 1.4 -- 4.2 Gain from Sale of SAFECO Credit, Net of Taxes -- 54.0 -- 54.0 ------------------------------------------------- Total -- 55.4 -- 58.2 ------------------------------------------------- Income (Loss) before Cumulative Effect of Change in Accounting Principle 75.2 (100.6) 244.0 (995.7) -- -- Cumulative Effect of Change in Accounting Principle, Net of Taxes -- (2.1) ------------------------------------------------- Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8) ------------------------------------------------- Per Share of Common Stock Income (Loss) Before Net Realized Investment Gains* $ 0.53 $ (1.32)$ 1.21 $ (1.49) Goodwill Write-off -- -- -- (7.17) Net Realized Investment Gains 0.06 0.10 0.70 0.42 ----------------------------------------------- Income (Loss) from Continuing Operations* 0.59 (1.22) 1.91 (8.24) ----------------------------------------------- Income from Discontinued Credit Operations, Net of Taxes -- 0.01 -- 0.03 Gain from Sale of SAFECO Credit, Net of Taxes -- 0.42 -- 0.42 ----------------------------------------------- Total -- 0.43 -- 0.45 ----------------------------------------------- Income (Loss) before Cumulative Effect of Change in Accounting Principle 0.59 (0.79) 1.91 (7.79) Cumulative Effect of Change in Accounting Principle -- -- -- (0.02) ----------------------------------------------- Net Income (Loss) $ 0.59 $ (0.79)$ 1.91 $ (7.81) - ---------------------------------------------------------------------------------------------------------
* Pretax amounts for the nine months ended September 30, 2001 include the pretax goodwill write-off in March 2001 discussed in Note 8. Property & Casualty pretax amounts for the three and nine months ended September 31, 2001 include the loss reserve strengthening of $240.0. The following is a summary of highlights for the first nine months of 2002: Property & Casualty o Improved the combined ratio to 106.6 for the nine months ended September 30, 2002, from 121.2 in the comparable period in 2001 (114.0 in 2001 excluding Property & Casualty loss reserve strengthening of $240.0 in the third quarter of 2001). Third quarter 2002 combined ratio of 104.0 improved from 107.5 in the second quarter of 2002. o Improved homeowners results by $49.2 and reduced SAFECO Business Insurance underwriting losses by $65.2 in the third quarter of 2002 compared to the third quarter of 2001, excluding the 2001 loss reserve strengthening. Both lines were positively impacted by milder than anticipated weather and minimal catastrophe losses in 2002, as well as our continued rate increases and underwriting actions. o Personal auto policies in force increased reflecting early success of our new auto product. o Charge of $26.3 ($17.1 after-tax) in the third quarter of 2002, reflecting the write-off of our London operations. It also includes strengthening reserves to provide for higher-than-anticipated losses as the business is run off. o Recognized year-to-date restructuring charges of $15.1 ($9.8 after-tax) compared to $31.8 ($20.7 after-tax) for the nine months ended September 30, 2001. Life & Investments o Generated pretax income of $59.6 for the quarter ended September 30, 2002, compared to $43.0 in the third quarter of 2001. o Closed the acquisition of Swiss Re's group medical excess loss and group life insurance businesses in July 2002, which contributed $12.6 pretax income to Life & Investment results in the third quarter of 2002. o Year-to-date deposits of fixed annuity products totaled $807 compared to $575 for the nine months ended September 30, 2001. Property & Casualty - Operations Property & Casualty writes personal, commercial and surety lines of insurance through independent agents. The lines of insurance written include personal and commercial auto, homeowners, fire, commercial multi-peril, workers' compensation, general liability, property, surety and fidelity. Operating Statistics Income (Loss) before Net Realized Investment Gains and Income Taxes -------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Earned Premiums $ 1,135.2 $ 1,118.5 $ 3,356.7 $ 3,355.4 -------------------------------------------------- Underwriting Loss* $ (45.4) $ (370.8) $ (220.9) $ (711.2) Net Investment Income 114.5 111.2 345.0 340.7 Goodwill Amortization -- -- -- (11.0) Goodwill Write-off -- -- -- (1,152.1) Restructuring Charges (3.0) (31.8) (15.1) (31.8) -------------------------------------------------- Income (Loss) Before Net Realized Investment Gains and Income Taxes $ 66.1 $ (291.4) $ 109.0 $(1,565.4) - ----------------------------------------------------------------------------------------------------------- * Underwriting income or loss is a standard industry measurement used by management to analyze core Property & Casualty operations. This measurement represents the net amount of earned premiums less underwriting losses and expenses; it does not include net realized investment gains and losses, goodwill amortization, goodwill write-off, restructuring charges, net investment income or taxes. This measurement does not replace net income as a measure of profitability, but is presented to supplement the other financial measurements provided.
Total earned premiums for Property & Casualty lines for the third quarter of 2002 increased by 1.5% compared to the same period of 2001. Earned premiums for the nine months ended September 30, 2002 were flat compared to the same period of 2001 due to efforts begun in 2001 to re-underwrite business, eliminate unprofitable accounts and exit non-core lines of business. On a net written basis, premiums increased 6.1% for the third quarter of 2002 compared to 2001 and increased 2% for the nine months ending September 30, 2002 compared to the same period of 2001. Increases over the prior year were driven by rate increases across the Property & Casualty businesses and growth in policies in force in the personal auto line. Property & Casualty pretax net investment income increased slightly in the first nine months of 2002 compared to the same period of 2001. The repositioning of the Property & Casualty investment portfolio begun in the second quarter of 2002 has shifted the allocation to taxable bonds from nontaxable bonds, resulting in higher pretax investment income. Property & Casualty after-tax net investment income for the nine months ended September 30, 2002 was $260.3, down 2.7% from the same period in 2001. See additional discussion in the Investment Summary section of this Management's Discussion and Analysis. In the first quarter of 2001, SAFECO wrote off all the goodwill related to its 1997 American States Financial Corporation acquisition resulting in a pretax charge of $1,152.1 ($878.2 after-tax). The 2002 restructuring charges related to the consolidation of the commercial property and casualty operations started in the third quarter of 2001. See Note 7 - Restructuring Charges for additional information. In the second quarter of 2002 the previously identified elimination of 1,200 positions was completed. During the third quarter of 2001, SAFECO completed a review of Property & Casualty's loss reserve adequacy. As a result of this review, which included an independent actuarial study, management concluded that ultimate losses for certain lines would be higher in the range of possible outcomes than previously estimated. The total reserve addition was $240.0 pretax and was included in SAFECO's reported Property & Casualty segments as follows: SBI Regular of $65.0, SBI Runoff of $90.0 and Other of $85.0. The $240.0 reserve addition related to developments in prior year claims is as follows: $80.0 for workers' compensation, $90.0 for construction defect and $70.0 for other claims including asbestos and environmental. For workers' compensation, the $80.0 was due to unexpected development of prior year claims, continued increases in medical costs and unfavorable administrative rulings that were more favorable to plaintiffs' compensation claims. For construction defect and asbestos and environmental, the reserve additions were due to continued emergence of adverse loss experience due to newly emerging trends including the expansion of defendants in connection with asbestos and environmental claims and the expansion of construction defect claims beyond California. GAAP Operating Ratios* ------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------------- 2002 2001+ 2002 2001+ - ----------------------------------------------------------------------------------------------------------- Loss Ratio 59.1% 84.2% 63.3% 76.5% Loss Adjustment Expense Ratio 13.0 18.8 12.4 14.6 Expense Ratio 31.9 30.1 30.9 30.1 ------------------------------------------------- Combined Ratio 104.0% 133.1% 106.6% 121.2% - ----------------------------------------------------------------------------------------------------------- * Operating ratios represent major components of expense expressed as a percentage of earned premiums and are standard industry measurements used by management to analyze Property & Casualty's profitability. Ratios exclude intangibles and goodwill amortization, goodwill write-off and restructuring charges. + Includes loss reserve strengthening of $240.0 in 2001. For the three months ended September 30, 2001 excluding this adjustment, the Combined Ratio was 111.7,; the Loss Ratio was 69.0% and Loss Adjustment Expense Ratio was 12.6%. For the nine months ended September 30, 2001, the adjusted Combined Ratio was 114.0%, the Loss Ratio was 71.5% and Loss Adjustment Expense Ratio was 12.4%.
The loss ratio for Property & Casualty operations improved by 25.1% points to 59.1% for the third quarter of 2002 from 84.2% a year ago. (Excluding the impact of the third quarter 2001 loss reserve strengthening of $240.0, the 2001 loss ratio was 69.0%.) This improvement reflects lower catastrophe and weather-related losses in 2002 as well as aggressive actions to increase rates, re-underwrite business and terminate contracts with agents writing unprofitable business for us. These actions also reduced premium levels, resulting in a higher expense ratio. As revenue growth begins to return, the expense ratio is expected to improve. The higher expense ratio also reflects, in part, higher commission ratios as our mix of business changes and low commission workers' compensation business represents a smaller portion of our business. It also reflects costs associated with putting our London operations into run off. Underwriting Income (Loss)* --------------------------------------------------- 2002 2001+ --------------------------------------------------- Combined Combined THREE MONTHS ENDED SEPTEMBER 30 Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- PERSONAL INSURANCE Personal Auto $ (6.2) 101.2% $ 3.0 99.3% Homeowners 5.5 97.1 (43.7) 123.4 Specialty 9.6 81.2 3.0 94.1 SAFECO BUSINESS INSURANCE SBI Regular (11.9) 104.7 (87.8) 134.6 Special Accounts Facility 3.9 94.8 (2.0) 106.6 Run-off (15.4) 163.6 (153.8) 232.0 Surety 2.7 91.8 6.4 76.5 Other (33.6) -- (95.9) -- --------------------------------------------------- Total Property & Casualty Operations $ (45.4) 104.0% $ (370.8) 133.1% - ---------------------------------------------------------------------------------------------------------- * Catastrophe losses for all lines, net of reinsurance, totaled $(9.9) and $56.3 in the third quarter of 2002 and 2001, respectively. The reduction in losses on catastrophes in the third quarter 2002 was due to lower third quarter catastrophe losses and the reduction of reserves associated with Southwest wild fires burning at the end of the second quarter of 2002. Catastrophes are defined as events resulting in losses greater than $0.5 involving multiple claims and policyholders. + Includes loss reserve strengthening of $240.0 in 2001. For the three months ended September 30, 2001 excluding this adjustment, the Combined Ratio was 111.7%, the Loss Ratio was 69.0% and Loss Adjustment Expense Ratio was 12.6%. Underwriting Income (Loss)* --------------------------------------------------- 2002 2001+ --------------------------------------------------- Combined Combined NINE MONTHS ENDED SEPTEMBER 30 Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- PERSONAL INSURANCE Personal Auto $ (33.8) 102.4% $ (62.4) 104.8% Homeowners (49.6) 108.8 (172.4) 131.1 Specialty 20.6 86.4 2.8 98.1 SAFECO BUSINESS INSURANCE SBI Regular (59.5) 107.9 (149.9) 119.0 Special Accounts Facility 10.3 94.5 2.0 97.9 Run-off (74.5) 145.8 (248.3) 166.5 Surety 11.6 87.6 13.2 80.5 Other (46.0) -- (96.2) -- --------------------------------------------------- Total Property & Casualty Operations $ (220.9) 106.6% $ (711.2) 121.2% - ---------------------------------------------------------------------------------------------------------- * Catastrophe losses for all lines, net of reinsurance, totaled $82.5 and $216.9 in the nine months ended September 30, 2002 and 2001, respectively. Catastrophes are defined as events resulting in losses greater than $0.5, involving multiple claims and policyholders. + Includes loss reserve strengthening of $240.0 in 2001. For the nine months ended September 30, 2001, the adjusted Combined Ratio was 114.0%, the Loss Ratio was 71.5% and Loss Adjustment Expense Ratio was 12.4%. Personal Insurance - Auto Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net Written Premium $ 536.4 $ 456.2 $ 1,502.7 $ 1,338.1 Underwriting Income (Loss) (6.2) 3.0 (33.8) (62.4) Combined Ratio 101.2% 99.3% 102.4% 104.8%
The underwriting loss for the third quarter of 2002 of $6.2 compared to the gain in the comparable quarter in 2001 reflects the unusually low number of customer claims filed in September 2001. The 2002 year-to-date improvement in underwriting loss of $28.6 reflects the actions taken in 2001 to increase rates, cancel contracts with agencies producing unprofitable business for us and tighten underwriting standards. Personal auto policies in force (PIF) at September 30, 2002 increased by 4.7% compared to a year ago. This growth reflects the introduction of our new auto insurance product with additional pricing tiers to both provide more refined price points and to make insurance available to a broader range of drivers, as well as the implementation of point-of-sale technology in early 2002 which makes it easier for our agents to write business with SAFECO. The new auto product has been introduced in 17 states and is expected to be available in 23 states in total by year-end 2002. Net written premium increased by 17.6% in the third quarter of 2002 compared to the same period a year ago, primarily reflecting price increases as well as the PIF growth noted above. In 2002, SPI - Personal Auto expanded its use of "insurance-scoring" underwriting techniques, which use multiple variants to classify auto insurance risks. These techniques are used by several competitors. Management believes the use of insurance scoring, along with stricter underwriting standards, has resulted in better matching of rates with risk. The use of these techniques has been the subject of both legislative and regulatory review, resulting in some instances in the limitations on these techniques. In addition to using these new underwriting techniques, SPI - Personal Auto completed the launch of its new automated underwriting system with point of sale technology. This system allows SAFECO's agents to more efficiently quote and sell policies. The automation initiative, new product introduction, rate increases, stricter underwriting standards and increased agent commissions on new auto business are all expected to contribute to improved profitability and policy growth in this line of business. Personal Insurance - Homeowners Three Months Ended Nine Months Ended September 30 September 30 --------------------------------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------ Net Written Premium $ 212.1 $ 201.2 $ 592.4 $ 564.7 Underwriting Income (Loss) 5.5 (43.7) (49.6) (172.4) Combined Ratio 97.1% 123.4% 108.8% 131.1%
The underwriting income (loss) for SPI - Homeowners improved by $49.2 and $122.8 in the three and nine months ended September 30, 2002, respectively, compared to the 2001 comparable periods. Similarly the combined ratio improved to 97.1% and 108.8% for the three and nine months ended September 30, 2002, respectively, compared to 123.4% and 131.1% in the comparable periods in 2001. These improvements were due to lower catastrophe and weather-related losses due to milder than anticipated weather conditions during the first nine months of 2002 compared to the same period of 2001, and continued rate increases. SPI - -Homeowners catastrophe losses were $(6.6) in the third quarter of 2002 compared to $22.0 a year ago. For the nine months ended September 30, 2002 and 2001 homeowner catastrophe losses were $50.6 and $112.3, respectively. Midwest catastrophic hailstorms and Tropical Storm Allison impacted the homeowners line in the third quarter of 2001. The reduction in losses on catastrophes in the third quarter of 2002 was due to lower weather and catastrophe losses as well as a reduction of reserves associated with second-quarter Southwest wildfires. These fires were burning out of control at the end of the second quarter of 2002, preventing adjusters from compiling precise estimates of customer losses at that time. Catastrophes are defined by SAFECO as events resulting in losses greater than $0.5, involving multiple claims and policyholders. In addition, our aggressive actions to increase rates and tighten underwriting standards contributed to lower losses in this line of business. We also reduced agent commissions for new monoline homeowners business during the first quarter of 2002. Homeowners PIF at September 30, 2002 decreased 8.2% from a year ago due to these actions. Net written premiums increased 5.4% in the third quarter of 2002 compared to a year ago due to price increases. Homeowner average renewal premiums have increased 14.5% in the third quarter 2002 when compared to the same period in 2001. We launched a new tiered pricing structure for homeowners in the first quarter of 2002 that more accurately prices business based on risk characteristics. This approach, which matches rates more closely to risks, is currently in place in 17 states, and we expect to have it in place in approximately 23 states in total by year-end 2002. SAFECO has continued raising prices, tightening terms and conditions and reducing monoline homeowners commissions to improve SPI - Homeowners underwriting results. In addition, in states where we have been unable to secure sufficient rates to cover the cost of providing insurance, we have instituted a moratorium on new homeowners business. Currently, there are moratoriums on writing new business in 12 states. Moratoriums will be lifted in other states as we secure approval to implement changes to move this product toward profitability. As announced in July 2001, we will continue to decrease the amount of homeowners insurance written in states where we cannot achieve profitability. In addition, SAFECO is introducing new language into homeowners policies sold in storm-prone Midwest states. Already in place in Illinois, this change requires individuals to pay a deductible of 1 percent of their home's value before insurance covers repair costs for wind and hail damage. Personal Insurance - Specialty Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net Written Premium $ 54.4 $ 53.4 $ 158.4 $ 158.0 Underwriting Income 9.6 3.0 20.6 2.8 Combined Ratio 81.2% 94.1% 86.4% 98.1%
SPI - Specialty lines include earthquake, dwelling fire, inland marine and boat insurance for individuals. Underwriting results for this business line improved by $6.6 and $17.8 for the three and nine months ended September 30, 2002, respectively, compared to the same periods in 2001. The improvement for the third quarter of 2002 over the same 2001 period was primarily due to a reduction in personal umbrella loss costs. For the nine months ended September 30, 2002 compared to the same period in 2001, the improvement was due to lower catastrophe and weather loss costs as well as a reduction in personal umbrella loss costs. SAFECO Business Insurance Consistent with our decision to focus on commercial lines insurance for small-to-medium businesses, we began to consolidate our small-to-medium (formerly Business Insurance) and large commercial lines (formerly Commercial Insurance) operations in May 2001. For reporting purposes, these consolidated commercial lines are now reported as SAFECO Business Insurance (SBI). Within SBI, operations are managed and reported as SBI Regular, Special Accounts Facility and Run-off. SBI - Regular Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net Written Premium $ 253.5 $ 236.9 $ 797.1 $ 763.1 Underwriting Loss (11.9) (87.8) (59.5) (149.9) Combined Ratio 104.7% 134.6% 107.9% 119.0%
SBI - Regular is the core commercial segment writing commercial lines insurance for small-to-medium sized businesses. Underwriting losses were $75.9 and $90.4 lower in the three and nine months ended September 30, 2002, respectively, compared to the 2001 comparable periods. Excluding the impact of loss reserve strengthening on this line in the third quarter of 2001, the improvement in underwriting losses for the three and nine months ended September 30, 2002 was $11.0 and $25.5, respectively, compared to the 2001 comparable periods. The combined ratio improved to 104.7% and 107.9% for the three and nine months ended September 30, 2002, respectively, compared to 134.6% and 119.0% for the 2001 comparable periods. Excluding the impact of loss reserve strengthening, the combined ratios for the 2001 comparable periods were 109.0% and 110.7%. The improvements were due to the aggressive actions taken in 2001 to re-underwrite existing business, apply stricter underwriting standards and increase rates, as well as lower claim costs from catastrophe and weather losses. Net written premiums increased 7.0% and 4.4% for the three and nine months ended September 30, 2002, respectively, compared to the 2001 periods, reflecting rate increases partially offset by declines in PIF. SBI - Regular's average renewal premiums have increased 13.0% in the third quarter 2002 when compared to the same period in 2001. SBI-Regular is introducing a redesigned business model to support sales growth, deliver pricing more accurately matched to risk characteristics and improve customer service. The suite of technology services being introduced includes an automated underwriting platform, a business service center and a new business agency interface system. The underwriting platform and service center were launched during the first and second quarters of 2002 and the new business agency interface module is expected to launch in the fourth quarter of 2002. SBI - Special Accounts Facility Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net Written Premium $ 88.2 $ 33.3 $ 249.7 $ 99.4 Underwriting Income (Loss) 3.9 (2.0) 10.3 2.0 Combined Ratio 94.8% 106.6% 94.5% 97.9%
SBI - Special Accounts Facility writes continuing business for four specialty commercial programs and larger commercial accounts written for key SAFECO agents. Underwriting income was $5.9 higher in the three months ended September 30, 2002, compared to the same period in 2001 and $8.3 higher for the comparable nine month period ended September 30. The combined ratio was 94.8% and 94.5% for the three and nine months ended September 30, 2002, respectively, compared to 106.6% and 97.9% in the comparable periods in 2001. SBI took aggressive actions in 2001 to re-underwrite existing business, apply stricter underwriting standards and increase rates. These actions drove the underwriting improvements as well as profits from our acquisition in September 2001 of a lender-placed property business. Net written premium for the SBI - Special Accounts Facility increased 164.9% and 151.2% for the three and nine months ended September 30, 2002 over comparable 2001 periods due to this new lender-placed business, combined with increased rates. SBI - Run-off Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net Written Premium $ (2.2) $ 98.8 $ 28.8 $ 339.8 Underwriting Loss (15.4) (153.8) (74.5) (248.3) Combined Ratio 163.6% 232.0% 145.8% 166.5%
SBI - Run-off includes large commercial business accounts and 15 specialty programs that SAFECO is exiting. We continue to run off poor-performing large accounts and have established programs to focus on growth in the core small-to-medium commercial business market. Underwriting losses were $138.4 and $173.8 lower in the three and nine months ended September 30, 2002, respectively, compared to the 2001 comparable periods. Excluding the impact of loss reserve strengthening in the third quarter of 2001, improvement in underwriting losses was $48.4 and $83.8 in the three and nine months ended September 30, 2002, respectively, compared to the 2001 comparable periods. These improvements reflect the actions taken to reduce this unprofitable business. SBI - Runoff net written premium for the quarter ended September 30, 2002 included a reduction of $3.0 for estimated unbilled premiums for workers' compensation reflecting lower estimated audit premiums due to the significant decrease in workers' compensation business in this segment. The underwriting loss for the nine months ended September 30, 2002 included a $10.0 addition to reserves in the first quarter of 2002 for prior year development in workers' compensation for large business accounts in SBI - Run-off. The workers' compensation line continues to be unprofitable and SBI - Run-off has substantially reduced its writing of this business and has not renewed workers' compensation coverage in unprofitable markets. The lower underwriting loss in the three and nine months ended September 30, 2002 reflects the reduction of business volume as insurance policies are not renewed. Surety Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net Written Premium $ 38.4 $ 33.2 $ 101.2 $ 101.4 Underwriting Income 2.7 6.4 11.6 13.2 Combined Ratio 91.8% 76.5% 87.6% 80.5%
The combined ratio was 91.8% and 87.7% for the three and nine months ended September 30, 2002, respectively, compared to 76.5% and 80.5% in the comparable periods in 2001. Lower underwriting income for the three and nine months ended September 30, 2002 reflected higher loss experience in the quarter. Other Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Underwriting Loss $ (33.6) $ (95.9) $ (46.0) $ (96.2)
Property & Casualty Other includes assumed reinsurance business, non-voluntary property and casualty business for personal lines, results from SAFECO's Lloyds of London operation and discontinued product lines. In the third quarter of 2002, SAFECO made the decision to put its London operations into run off, resulting in an after-tax charge of $17.1 in the quarter. This charge reflects the write-off of SAFECO's investment in its U.K. subsidiary, R.F. Bailey (Underwriting Agencies) Ltd. It also includes strengthening reserves to provide for higher-than-anticipated losses as the business is run off. Reserve strengthening of $85.0 was included in the underwriting loss reported for the three and nine months ended September 30, 2001. Life & Investments - Operations Life & Investments offers individual and group insurance products, retirement services, annuity products, mutual funds and investment advisory services. The most significant product lines in terms of premium and deposit volume include single premium immediate and deferred annuities, group medical excess loss insurance, business owned life insurance, variable annuities, tax-sheltered annuities, corporate retirement plans, and individual life insurance. Income before net realized investment losses and income taxes (pretax income) for all lines combined was $59.6 and $170.7 in the three and nine months ended September 30, 2002, respectively, compared to $43.0 and $101.7 ($150.6 before goodwill write-off) in the 2001 comparable periods. The primary reason for the higher pretax income amounts in 2002 compared to 2001 (excluding goodwill write-down) is the additional income from the acquisition of the Swiss Re group medical excess loss and group life insurance business in July 2002, as well as continued favorable group medical excess loss ratios. The premiums from the acquired Swiss Re business are the main reason for the increase in Life & Investments Premiums and Other Revenues, in the Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2002 compared to the same periods in 2001. SAFECO's ratings downgrades in early 2001 continued to affect Life & Investments' ability to sell certain of its products. The impact of the ratings downgrades and other information about the lines of business are discussed further below. The following table summarizes the pretax income for Life & Investments major product lines: Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------------ PRETAX INCOME 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Retirement Services $ 1.4 $ 4.3 $ 13.4 $ 9.6 Income Annuities 11.5 10.3 27.6 33.0 Group 22.4 3.3 46.7 22.1 Individual 3.5 4.8 17.7 21.1 Asset Management 0.9 1.6 4.9 5.4 Other 19.9 18.7 60.4 59.4 Goodwill Write-off -- -- -- (48.9) ------------------------------------------------ Income Before Net Realized Investment Losses and Income $ 59.6 $ 43.0 $ 170.7 $ 101.7 Taxes - -----------------------------------------------------------------------------------------------------------
Retirement Services Pretax income decreased by $2.9 and increased by $3.8 for the three and nine months ended September 30, 2002, respectively, compared to the 2001 corresponding periods. The decrease in the third quarter of 2002 was due primarily to bond defaults that lowered investment income and the declining equity markets that resulted in additional amortization of deferred acquisition costs, higher guaranteed minimum death benefit reserves on variable annuity products and lower fee revenue. These factors also impacted retirement services results for the nine months ended September 30, 2002. Results for the comparable period in 2001 were impacted by losses on our discontinued equity index annuity product of $10.7, compared with losses of $3.2 for the nine months ended September 30, 2002. Retirement services deposits increased by $282 for the first nine months of 2002 to $1,019 from $737 in 2001 largely due to sales of the SAFECO Select fixed deferred annuity product, which totaled $712 through September 30, 2002 compared to $482 in the first nine months of 2001. Sales of this new product slowed in the third quarter of 2002 to $147 due to the low interest rate environment. The declining equity markets is the primary reason for the decrease in Separate Account Assets and Liabilities in the Consolidated Balance Sheets. Assets under management increased to $6.6 billion at September 30, 2002 compared to $6.0 billion a year ago. Income Annuities Pretax income increased by $1.2 and decreased by $5.4 in the three and nine months ended September 30, 2002, respectively, compared to the 2001 corresponding periods. The income fluctuations were due primarily to repayments and changes in anticipated repayments of collateralized mortgage obligation investments driven by lower interest rates. The impact of actual or anticipated repayment rates may lower future investment income should interest rates rise. Total income annuity assets of $6.3 billion at September 30, 2002 were up slightly compared to a year ago. The primary product in this business line is the single-premium immediate annuity that is sold to fund third-party personal injury settlements. This product is extremely sensitive to financial strength ratings and SAFECO's ratings downgrades during the first quarter of 2001 significantly curtailed the volume of new income annuity deposits. Deposits for income annuities were $70.0 for the nine months ended September 30, 2002 compared to $58.0 for the same period in 2001. Group The primary product offering in this business line is excess loss insurance sold to employers with self-insured employee medical plans. In July 2002, we completed our acquisition of the medical excess loss and group life business of Swiss Re Life & Health America Holding Company (Swiss Re). The primary purpose of the acquisition is to build greater presence in the medical excess loss market and leverage SAFECO's expertise in this line. The acquired business generated written premiums of $60.1 and pretax operating income of $12.6 in the third quarter of 2002. See Note 4 for additional information. Pretax income increased by $19.1 and $24.6 in the three and nine months ended September 30, 2002, respectively, compared to the 2001 comparable periods. These improvements included the additional income of $12.6 in the third quarter of 2002 from the acquired Swiss Re business and reflected continued low loss ratios. The medical loss ratio in the third quarter of 2002 was 58%, compared to 68% in the third quarter of 2001. The current low loss ratios may be difficult to achieve in future quarters. Individual Individual products include term, universal and variable universal life and business owned life insurance (BOLI). BOLI is universal life insurance sold to banks and is extremely sensitive to financial strength ratings. SAFECO's ratings downgrades during the first quarter of 2001 significantly curtailed the volume of new BOLI deposits. Pretax income decreased by $1.3 and $3.4 in the three and nine months ended September 30, 2002, respectively, compared to the 2001 corresponding periods. These decreases were due primarily to increased claims experience in BOLI and other universal life products, and lower investment income due to bond defaults in 2002. Asset Management SAFECO Asset Management Company is the investment advisor for the SAFECO mutual funds, variable annuity portfolios and a number of outside pension and trust accounts. Pretax income decreased by $0.7 and $0.5 in the three and nine months ended September 30, 2002, respectively, compared to the 2001 corresponding periods. The decreases in income were due to lower investment advisory fees on reduced assets under management. Assets under management totaled $3.7 billion at September 30, 2002 compared to $4.6 billion at September 30, 2001 and reflected lower asset values. Other The Life & Investments Other line is comprised mainly of investment income from the investment of capital and prior years' earnings of the operating lines of business, as well as pretax earnings from Talbot Financial Corporation (Talbot), a wholly-owned subsidiary. Talbot is an insurance agency that distributes both property and casualty and life insurance products. Talbot's revenues and pretax income increased in the third quarter of 2002 due to higher commission revenues. Pretax income for the Other line increased $1.2 and $1.0 for the three and nine months ended September 30, 2002, compared to the 2001 corresponding periods. Corporate Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Loss before Net Realized Investment Gains (Losses) and Income Taxes $ (16.1) $ (14.4) $ (42.3) $ (41.9)
The Corporate segment includes operating results for the parent company, SAFECO Financial Products, Inc. (SFP), SAFECO Properties and intercompany elimination transactions. The parent company's primary expense is interest expense on borrowings, totaling $17.9 and $17.7 for the third quarter of 2002 and 2001, respectively, and totaling $50.3 and $50.0 for the nine months ended September 30, 2002 and 2001, respectively. These amounts do not include the expense for the distributions on SAFECO's Capital Securities which is presented net of tax on the Consolidated Statements of Income (Loss). SFP, a wholly-owned subsidiary, engages in limited activity for its own account by selling single name credit default swaps (credit swaps), writing and hedging S&P 500 index options and investing in and hedging convertible bonds. The third quarter 2002 pretax operating loss of $5.4 and the third quarter 2001 pretax operating gain of $2.0 reflect the significant change in the levels of market volatility between the two periods. At September 30, 2002, SFP had credit swaps with notional amounts outstanding totaling $835.0. These credit swaps involved selling credit protection for a fee that covers certain credit events on assets owned by the buyer (financial institutions and investment banks) such that if a credit event occurs SFP would make a payment to the buyer. Approximately 96% of the credit swap's underlying issuers were rated investment grade by Standard and Poor's (BBB- or higher), with 60% of the portfolio rated A- or higher. The credit swaps are marked-to-market and this adjustment is recorded in net realized investment gains and losses on the income statement. The third quarter 2002 SFP losses of $27.3 included a $8.6 realized loss arising from the WorldCom bankruptcy. The fair value of SFP's written S&P 500 index options liability was $21.4 and $29.9 at September 30, 2002 and 2001, respectively. SFP's investment portfolio included investment grade convertible bonds with market values totaling $50.1 at September 30, 2002. There were no convertible bonds at September 30, 2001. Capital Resources and Liquidity Sources and Uses of Funds SAFECO's operations have liquidity requirements that vary among the segments and principal product lines. Life insurance, retirement services and annuity product reserves are primarily longer-duration liabilities that are typically predictable in nature and are supported by investments that are generally longer-duration. Property & Casualty liabilities are both short-term and long-term. These liabilities are less predictable in nature and generally require greater liquidity in the investment portfolio. SAFECO's liquidity needs are met by dividends from our subsidiary operations, the sale and maturity of invested assets and external borrowings. Our subsidiaries' primary sources of cash from operations are insurance premiums, funds received under deposit contracts, dividends, interest and asset management fees. SAFECO has not engaged in the sale by securitization of any investments or other assets. SAFECO's liquidity needs are being met and the successful achievement of our goals will enhance our liquidity position; conversely, an inability to sustain adequate profitability may adversely affect our capital resources and liquidity position. SAFECO uses funds to support operations, service and pay down debt, pay dividends to SAFECO shareholders and grow the investment portfolio. Cash from insurance operations is used primarily to pay claims and claim adjustment expenses. Most insurance premiums are received before or at the time premium revenues are recognized, while related claims are incurred and paid in subsequent months or years. Catastrophe claims, the timing and amount of which are inherently unpredictable, may create increased liquidity requirements. In order to better match invested asset duration to the duration of related liabilities, during 2002 we have repositioned our Property & Casualty investment portfolio to reduce the bond investment portfolio duration from approximately 7 to approximately 5. As of September 30, 2002, the bond investment portfolio's duration was 4.9 compared to 5.7 at June 30, 2002 and 7 at March 31, 2002. The Property & Casualty asset allocation mix also has been adjusted to reduce volatility, by lowering the exposure to equity securities. Equity securities comprised approximately 10% of this investment portfolio at September 30, 2002 compared to approximately 18% at December 31, 2001. As a result of executing this strategy, this portfolio's allocation to taxable bonds has increased relative to its tax-exempt holdings. As a result, pretax investment income for the Property & Casualty investment portfolio has increased compared to 2001 while after-tax investment income has declined for the three months ended September 30, 2002 compared to the three months ended September 30, 2001. Total cash provided by operating activities for the nine months ended September 30, 2002 and 2001 was $588.9 and $391.6, respectively (see Consolidated Statements of Cash Flows for additional information). The main reason for the improved operating cash flow is lower Property & Casualty claims payments, due primarily to lower catastrophe and weather losses as well as the effect of our re-underwriting and pricing efforts begun in 2001. After tax investment income has declined during 2002 and is expected to be lower for the remainder of 2002 due to lower interest rates and changes in SAFECO's investment strategy as discussed above. There will be no changes in our dividend policy for the remainder of 2002. The higher level of proceeds from the sale of fixed maturities and equities and the higher level of purchases of fixed maturities for the nine months ending September 30, 2002 compared to the corresponding period in 2001 were due to the portfolio repositioning discussed above. On August 23, 2002, SAFECO issued $375.0 of senior notes with a coupon of 7.25% that mature in 2012. These notes were issued under a universal shelf registration that was filed with the Securities and Exchange Commission in the second quarter of 2002, that allows SAFECO to issue up to $900 in securities. The proceeds of the notes were used for the repayment of $299.0 of commercial paper borrowings, $18.7 for the termination of related interest rate swaps and $28.4 for repayment of medium-term notes. The balance is expected to be used to repay upcoming debt maturities and for general corporate purposes. SAFECO simultaneously entered into a $375.0 notional interest rate swap to effectively convert the fixed rate senior note obligation into a Libor-based floating rate obligation. The fair value of the interest rate swap is marked-to-market on the balance sheet with the offsetting corresponding asset or liability included in the face value of the debt. SAFECO renewed its bank credit facility in September 2002 with $500.0 available through September 2005. This replaced the $800.0 facility that expired in September 2002. SAFECO pays a fee to have the facility available and does not maintain deposits as compensating balances. Similar to its previous facility, the new facility carries certain covenants that require SAFECO to maintain a specified minimum level of shareholders' equity and a maximum debt-to-capitalization ratio. There were no borrowings under either facility as of September 30, 2002 and December 31, 2001 and SAFECO was in compliance with all covenants. The $900 universal shelf registration described above has $525 available for issuance, after our third quarter 2002 issuance of $375 of senior notes. Ratings The claims paying abilities of insurers are rated to provide both insurance consumers and industry participants with comparative information on specific insurance companies. Claims paying and financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Claims-paying ratings are important for the marketing of certain insurance products, for example, structured settlement annuities and BOLI. Higher ratings generally indicate greater financial strength and a stronger ability to pay claims. Ratings focus on factors such as results of operations, capital resources, debt-to-capital ratio, demonstrated management expertise in the insurance business, marketing, investment operations, minimum policyholders' surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy. Lower ratings could, among other things, significantly affect our ability to sell certain life insurance and investment products, materially increase the number of policy surrenders and withdrawals by policyholders of cash value from their policies, adversely affect relationships with broker-dealers, banks, agents and other distributors of our products and services, adversely affect new sales, significantly affect borrowing costs or limit our access to capital, and adversely affect our ability to compete. As a consequence, any of these factors could have a material adverse affect on our business, results of operations and financial condition. Due primarily to Property & Casualty's poor underwriting results in 2000 and 2001, our claims paying and corporate credit ratings were lowered, most recently in the first half of 2001. All rating agencies except for A.M. Best maintain a stable outlook on their ratings of SAFECO. As of September 30, 2002, A.M. Best maintained a negative outlook on Property & Casualty's financial strength rating and SAFECO's debt ratings while maintaining a stable outlook on the Life & Investments companies. On August 13, 2002, Standard & Poor's (S&P) affirmed its ratings on SAFECO and our property and casualty subsidiaries. At the same time, S&P lowered its ratings on our life insurance subsidiaries because of a change in S&P group methodology criteria, which modified the rating provided to subsidiaries. The new criteria generally limits the rating given to a subsidiary that S&P deems "strategically important" to the parent to within one notch of the rating of the parent's core group. Lower operating results in 2000 and 2001 combined with increased operating leverage in Property & Casualty contributed to lower debt service coverage for SAFECO. In addition, the interest rates on short-term borrowings increased due to the ratings downgrades. We believe our financial position is sound and continue to execute our action plans to improve Property & Casualty results. The effect of our action plans is being reflected in improved operating results and SAFECO's debt service coverage has improved during the first nine months of 2002. It is, however, possible that further negative ratings actions may occur. Lower ratings have significantly affected Life & Investments ability to sell income annuities and BOLI. If ratings are further lowered, SAFECO may incur higher borrowing costs, may have more limited means to access capital, and may have additional difficulties marketing certain of its insurance products that are dependent upon ratings being at or above a particular level. The following table summarizes SAFECO's current ratings: Standard A.M. Best Fitch Moody's & Poor's - ----------------------------------------------------------------------------------------------------------- SAFECO Corporation Senior Debt bbb+ A- Baa1 BBB+ Capital Securities bbb BBB+ baa1 BBB- Commercial Paper AMB-2 F-2 P-2 A-2 Financial Strength/Claims-Paying Ability Property & Casualty Subsidiaries A AA- A1 A+ Life Subsidiaries A AA- A1 A - -----------------------------------------------------------------------------------------------------------
Investment Summary Net Investment Income SAFECO's consolidated pretax investment income was $420.4 and $408.9 for the third quarter of 2002 and 2001, respectively, and was $1,247.9 and $1,232.2 for the nine months ended September 30, 2002 and 2001, respectively. The investment portfolios of Property & Casualty and Life & Investments produced substantially all of this investment income. The net investment income detail is presented below: Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------------- PRETAX INVESTMENT INCOME 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------- Property & Casualty $ 114.5 $ 111.2 $ 345.0 $ 340.7 Life & Investments 307.1 295.1 897.7 884.2 Corporate (1.2) 2.6 5.2 7.3 ----------------------- ------------------------ Total $ 420.4 $ 408.9 $ 1,247.9 $ 1,232.2 - ---------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------------- PRETAX INVESTMENT RETURNS 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------- Property & Casualty 5.9% 6.2% 5.9% 6.3% Life & Investments 7.5% 7.6% 7.4% 7.6%
Life & Investments pretax investment income has increased slightly for the three months and nine months ended September 30, 2002 compared to 2001 corresponding periods due primarily to the higher invested assets base in the current period. The increased income due to the growth in the investment portfolio was partially offset by losses from bond defaults. Although Property & Casualty's pretax investment income has increased slightly in 2002 compared to 2001, after-tax investment income declined for the nine months ended September 30, 2002 compared to the 2001 corresponding period due to the portfolio repositioning discussed below and to lower interest rates. After-tax investment income for the remainder of 2002 is expected to be lower due to lower interest rates and this repositioning of the investment portfolio. In order to better match invested asset duration to the duration of related liabilities, during 2002 we have repositioned our Property & Casualty investment portfolio to reduce the bond investment portfolio duration from approximately 7 to approximately 5. As of September 30, 2002, the bond investment portfolio's duration was 4.9 compared to 5.7 at June 30, 2002 and 7 at March 31, 2002. The Property & Casualty asset allocation mix also has been adjusted to reduce volatility, by lowering the exposure to equity securities. Equity securities comprised approximately 10% of this investment portfolio at September 30, 2002 compared to approximately 18% at December 31, 2001. As a result of executing this strategy, this portfolio's allocation to taxable bonds has increased relative to its tax-exempt holdings. As a result, pretax investment income for the Property & Casualty investment portfolio has increased compared to 2001 while after-tax investment income has declined for the three months ended September 30, 2002 compared to the three months ended September 30, 2001. Net Realized Investment Gains (Losses) Consolidated pretax net realized investment gains totaled $12.5 and $18.5 for the three months ended September 30, 2002 and 2001, respectively, and $138.5 and $80.7 for the first nine months ended September 30, 2002 and 2001, respectively. The significant net gains realized for the nine months in 2002 compared to the corresponding period of 2001 were due primarily to gains of $203.0 from the repositioning of the Property & Casualty investment portfolio. Pretax net realized gains/losses by major segment were as follows: Three Months Ended Nine Months Ended September 30 September 30 ---------------------------------------------------- PRETAX NET REALIZED GAINS (LOSSES) 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------- Property & Casualty $ 71.2 $ 34.1 $ 302.7 $ 104.9 Life & Investments (13.0) (8.9) (99.9) (3.9) Corporate (45.7) (6.7) (64.3) (20.3) ---------------------------------------------------- Total $ 12.5 $ 18.5 $ 138.5 $ 80.7 - -----------------------------------------------------------------------------------------------------------
Included in the consolidated totals above are net losses from the write-down of certain investments. Each investment that has declined in fair value below cost is monitored and if the decline is judged to be other than temporary, the security is written down to fair value. Pretax consolidated investment write-downs were $38.0 and $14.4 for the three months ended September 30, 2002 and 2001, respectively, and $152.1 and $64.5 for the nine months ended September 30, 2002 and 2001, respectively. The write-downs in 2002 were due to credit deterioration and corporate failures of fixed-maturity issuers, primarily in the telecommunications and energy sectors. The consolidated totals also include derivative activity related to SFP's credit default swaps activity as well as the reclassification from accumulated other comprehensive income to realized loss of $18.7 related to the termination of an interest rate swap in the third quarter of 2002 discussed in Note 2 - Financial Instruments. The losses on credit default swaps totaled $43.6 for the nine months ended September 30, 2002 and $27.3 for the third quarter of 2002. Consequently, mark-to-market adjustments of these instruments and any default losses realized are recorded in realized gains or losses in the Consolidated Statements of Income (Loss). - -------------------------------------------------------------------------------- PART I Item 4 - CONTROLS AND PROCEDURES - -------------------------------------------------------------------------------- Item 4 - Controls and Procedures Within 90 days before the filing of this Form 10-Q, under the supervision and with the participation of SAFECO management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of SAFECO's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that SAFECO's disclosure controls and procedures are effective in timely alerting them to material information relating to SAFECO, required to be included in SAFECO's periodic SEC filings. There have been no significant changes in SAFECO's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Forward-looking information is subject to risk and uncertainty Statements made in this report that relate to anticipated financial performance, business prospects and plans, regulatory developments and similar matters are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Statements in this report that are not historical information are forward-looking. The operations, performance and development of our business are subject to certain risks and uncertainties that may cause actual results to differ materially from those contained in or suggested by the forward-looking statements in this report. The risks and uncertainties include, but are not limited to: o the ability to obtain rate increases and decline or non-renew underpriced insurance accounts; o achievement of premium targets and profitability; o realization of growth and business retention estimates; o achievement of overall expense goals; o success in implementing a new business entry model for personal and commercial lines; o success in obtaining regulatory approval of price-tiered products and the use of insurance scores; o the ability to freely enter and exit lines of business; o changes in the mix of SAFECO's book of business; o driving patterns; o the competitive pricing environment, initiatives by competitors and other changes in competition; o weather conditions, including the severity and frequency of storms, hurricanes, snowfalls, hail and winter conditions; o the occurrence of significant natural disasters, including earthquakes; o the occurrence of significant man-made disasters, such as the attack on September 11, 2001; o the occurrence of bankruptcies that result in losses under surety bonds, investment losses or lower investment income; o the adequacy of loss and benefit reserves for the Property & Casualty and Life & Investments businesses; o the availability of, pricing of, and ability to collect reinsurance; o the ability to run off the Lloyd's of London business without incurring material unexpected charges; o the ability to exclude and to reinsure the risk of loss from terrorism; o interpretation of insurance policy provisions by courts, court decisions regarding coverage and theories of liability, trends in litigation and changes in claims settlement practices; o the outcome of any litigation against us; o legislative and regulatory developments affecting the actions of insurers, including requirements regarding rates and availability of coverage; o changes in tax laws and regulations that affect the favorable taxation of certain life insurance products or that decrease the usefulness of life insurance products for estate planning purposes; o negative changes to our ratings by rating agencies; o the effect of current insurance and credit ratings levels on business production; o inflationary pressures on medical care costs, auto parts and repair, construction costs and other economic sectors that increase the severity of claims; o availability of bank credit facilities; o the profitability of the use of derivative securities by SAFECO Financial Products; o fluctuations in interest rates; o performance of financial markets; and o general economic and market conditions. Because insurance rates in some jurisdictions are subject to regulatory review and approval, the achievement of rate increases may occur in amounts and on a time schedule different than planned, which may affect the efforts to restore earnings in the property and casualty lines. - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION - Item 1 - LEGAL PROCEEDINGS & Item 5 - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1 - Legal Proceedings Because of the nature of their businesses, SAFECO's insurance and other subsidiaries are subject to legal actions filed or threatened in the ordinary course of their business operations, generally as liability insurers defending third-party claims brought against their insureds or as insurers defending policy coverage claims brought against them. SAFECO does not believe that such litigation will have a material adverse effect on its financial condition, future operating results or liquidity. The property and casualty insurance subsidiaries of SAFECO are parties to a number of lawsuits for liability coverages related to environmental claims. Although estimation of reserves for environmental claims is difficult, the loss and loss adjustment expenses with respect to any such lawsuit, or all lawsuits related to a single incident combined, are not expected to be material to Safeco's financial condition. For more information regarding the liability of such subsidiaries for environmental claims and the difficult process of estimating environmental reserves see the Property & Casualty - Loss Reserve section under Part I, Item 1 in SAFECO's 2001 Annual Report on Form 10-K/A. The SAFECO property and casualty insurance companies were sued on July 18, 2001 in U.S. District Court for the Northern District of Ohio and on August 10, 2001 in California state court by plaintiffs who purport to represent classes of present and former claims adjusters. The plaintiffs claim that claims adjusters should have been considered non-exempt employees under the labor laws, and seek damages representing back overtime pay for certain hours worked. SAFECO intends to vigorously defend against these allegations. On August 6, 2002, General Insurance Company of America was voluntarily dismissed by the plaintiffs as a defendant in Hobbs v. State Farm Mutual Automobile Insurance Co., et al., a putative class-action lawsuit filed in 1999 in Illinois state court against seven property and casualty insurance groups. Item 5 - Other Information Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as amended by Section 202 of the Sarbanes-Oxley Act of 2002, SAFECO is responsible for disclosing the non-audit services approved by SAFECO's audit committee to be performed by our external auditors, Ernst & Young LLP, during the third quarter. During the quarterly period covered by this report, the Audit Committee approved the engagement of Ernst & Young, LLP to review the reserves and related accounting for SAFECO's investment in its U.K. subsidiary, R.F. Bailey (Underwriting Agencies) Ltd., and related operations. PART II OTHER INFORMATION - Item 6 - EXHIBITS AND REPORTS ON FORM 8-K Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Separation Agreement between SAFECO Corporation and H. Paul Lowber dated July 31, 2002. 10.2 Credit Agreement dated as of September 18, 2002 among SAFECO Corporation, as the Borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JPMorgan Chase Bank and US Bank, as Co-Syndication Agents, Keybank National Association, as Documentation Agent, and the other lenders party thereto. 99.1 Certification of Chief Executive Officer of SAFECO Corporation, dated November 6, 2002, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer of SAFECO Corporation, dated November 6, 2002, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The registrant filed the following Form 8-K's during the quarter ended September 30, 2002 and for the period up to the filing date of this Form 10-Q. Filing dated Under Filing related to: ----------------------------------------------------------------------- July 5, 2002 Item 5 (Other Items) Announcement of SAFECO's finance group appointments. July 23, 2002 Item 5 (Other Items) Earnings press release for quarter ended June 30, 2002. August 1, 2002 Item 5 (Other Items) Announcement of closing of Swiss Re group medical excess loss acquisition. August 14, 2002 Item 9 (FD Statements under Oath by CEO Disclosures) & CFO; Certifications by CEO & CFO. August 21, 2002 Item 5(Other Items) Information and agreements Item 7 (Financial for Form S-3 originally Statements) filed on May 7, 2002. September 24, 2002 Item 5 (Other Items) Announcement of SAFECO renewal of credit facility agreements. October 28, 2002 Item 5 (Other Items) Earnings press release for quarter ended September 30, 2002. ----------------------------------------------------------------------- - -------------------------------------------------------------------------------- SAFECO Corporation and Subsidiaries - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAFECO CORPORATION ------------------------------------------------- Registrant Dated: November 6, 2002 /s/ CHRISTINE B. MEAD ------------------------------------------------- Christine B. Mead Senior Vice President, Chief Financial Officer and Secretary Dated: November 6, 2002 /s/ RICHARD M. LEVY ------------------------------------------------- Richard M. Levy Vice President, Controller and Chief Accounting Officer SAFECO Corporation and Subsidiaries - -------------------------------------------------------------------------------- Certification of Chief Executive Officer - -------------------------------------------------------------------------------- I, Michael S. McGavick, certify that: 1. I have reviewed this quarterly report on Form 10-Q of SAFECO Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ MICHAEL S. MCGAVICK ----------------------- Michael S. McGavick President and Chief Executive Officer SAFECO Corporation and Subsidiaries Certification of Chief Financial Officer I, Chrstine B. Mead, certify that: 1. I have reviewed this quarterly report on Form 10-Q of SAFECO Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ CHRISTINE B. MEAD --------------------- Christine B. Mead Senior Vice President, Chief Financial Officer and Secretary EX-10.1 3 en0427b.txt EX-10.1 SEPARATION AGREEMENT This Separation Agreement is made and entered into this 31 day of July, 2002 by and between H. Paul Lowber ("Lowber") and SAFECO Corporation (the "Company"). RECITALS A. Lowber is employed as a Vice President, Controller and Principal Accounting Officer of the Company. B. This Agreement sets forth the complete understanding between Lowber and the Company regarding Lowber's resignation as an officer of the Company and its affiliates effective July 8, 2002 and his resignation as an employee effective December 31, 2002, and the commitments and obligations arising out of the termination of the employment relationship between Lowber and the Company. AGREEMENT 1. Continued Employment. 1.1 Employment Transition Period. Under the terms and subject to the conditions of this Agreement, Lowber's employment status with the Company shall continue through December 31, 2002. During the period from and after July 22, 2002 Lowber shall not be required to report regularly to the Company for any work and shall be considered an "employee" of the Company for the limited purposes of the employee benefit plan coverages available to employees of the Company and under the SAFECO Incentive Stock Option Plan of 1987 and the SAFECO Long-Term Incentive Plan of 1997. 1.2 Group Benefits Coverage. The Company shall continue to provide coverage under any group benefits plan under which Lowber and/or his dependents were covered on the date hereof, through and including December 31, 2002. Lowber shall be responsible to pay any amounts chargeable as "employee premium contribution" amounts with respect to any such coverage. From and after January 1, 2003, the Company shall provide Lowber and/or his dependents with such benefits continuation or conversion coverage as may be available or required under the terms of the Company's benefits plans or policies, or required under the group health plan provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as subsequently amended (COBRA), or other applicable federal or state law. 1.3 Payment for Accrued Sick Leave and Vacation Units. On or before January 15, 2003, the Company shall pay Lowber for any vested sick leave units and vacation pay accrued but unused at December 31, 2002, but only to the extent compensable under the Company's normal sick leave and vacation policies and procedures. 1.4 Reimbursement for Expenses Incurred. The Company shall reimburse Lowber for reasonable and necessary business expenses incurred by him on or before July 22, 2002, but not submitted for reimbursement at such date, to the extent reimbursable under the Company's normal expense reimbursement policies and procedures and submitted for payment by July 31, 2002. 1.5 Stock Options and Restricted Stock Rights. Lowber acknowledges and agrees that as a consequence of his SAFECO employment ending on December 31, 2002, and pursuant to the terms of each stock option for SAFECO Corporation common stock ("Stock Option") that has been granted to him under either the SAFECO Incentive Plan of 1987 or the SAFECO Long-Term Incentive Plan of 1997, he will have through March 31, 2003 or, if sooner, the stated term of any stock option, to exercise each Stock Option to the extent each Stock Option was vested on December 31, 2002, and after March 31, 2003 he will lose all rights under each such Stock Option. Contingent upon Lowber's execution of this Agreement and the expiration of the Revocation Period stated in Section 13.3 of this Agreement, the Company shall agree to vest each of Lowber's outstanding unvested stock options such that each such stock option shall be fully vested, fully exercisable, and wholly non-forfeitable as of December 31, 2002 and to agree to amend the terms of all Company unvested stock options that have been granted to Lowber to so provide. Lowber acknowledges and agrees that pursuant to the terms of each restricted stock right granted to him under the SAFECO Long-Term Incentive Plan of 1997 shall expire as of December 31, 2002 and that he shall not be entitled to any payment as respects any RSR that remains unvested at such date. 2. Payments; Contributions. 2.1 Severance and Release Payments. As compensation to Lowber, and in consideration of his resignation as an employee and resignation as an officer of the Company and its affiliates, his release granted in Section 5 and other agreements made herein, in addition to the benefits provided under Section 1 above and the further consideration provided under Section 3 below, the Company agrees to pay Lowber a total sum of $95,000.00 plus an amount equal to 1,235 multiplied by the closing price of SAFECO common stock on December 31, 2002 ("Calculated Amount") in severance and release payments as follows: (a) $70,000.00 of such amount shall be allocated and paid as severance benefits ("Severance Pay") for lost wages. All Severance Pay shall be subject to withholding and deduction for payroll taxes and other deductions as are required by federal and state law. The Severance Pay shall be paid in two equal semi-monthly installment payments of $35,000.00 each, made on the Company's normal payroll dates beginning January 15, 2003 and ending January 31, 2003. (b) $25,000.00 of such amount shall be allocated and paid as consideration for Lowber's release of claims as set forth in Section 5 of this Agreement (the "Release Payment") and shall be paid on or about January 15, 2003. The Release Payment shall be subject to withholding and deduction for payroll taxes and other deductions as are required by federal and state law. Lowber and the Company agree that the Release Payment represents sufficient consideration for the potential claims being released. (c) The Calculated Amount shall be allocated and paid as consideration in consideration of the agreements stated in Section 8 and shall be paid on January 15, 2003. The Calculated Amount payment shall be subject to withholding and deduction for payroll taxes and other deductions as are required by federal and state law. 2.2 Benefit Plan Contributions. Lowber shall continue to be eligible as an "employee" of the Company through December 31, 2002 for employer contributions paid under the Company's employee benefit plans. Lowber shall be eligible to participate in and shall receive pro rata contributions to the SAFECO 401(k)/Profit Sharing Retirement Plan, as the same may be available to other employees of the Company. Lowber acknowledges that any employer contributions to, or interest or other income credited to, any of the SAFECO 401(k)/Profit Sharing Retirement Plan or SAFECO Employees' Cash Balance Plan shall be additional compensation to him in excess of the total Severance Pay amount described above. 3. Further Consideration. As further consideration to Lowber for the release granted under Section 5 of this Agreement, the Company agrees to provide Lowber the following: 3.1 Outplacement Services. The Company agrees to provide Lowber up to six months' outplacement services through either Lee Hecht Harrison or David Nelson Associates, as Lowber chooses, at the Company's expense. 3.2 Attorney's Fees. The Company agrees to pay up to $500 of the attorney's fees incurred by Lowber for a review of this Agreement. 3.3 COBRA Benefit. The Company agrees to pay on Lowber's behalf the full cost plus the administrative fee for the first six (6) months that Lowber receives coverage under applicable group benefit plans provided that the Company receives notice from Lowber of his decision to continue coverage under COBRA within 60 days of Lowber's termination date. 4. Resignation. 4.1 Resignation. In consideration of the payments and other compensation described above, Lowber tenders his resignation as an officer of the Company and its affiliates effective July 8, 2002, and agrees that his employment shall terminate December 31, 2002. 4.2 No Authority To Act. From and after July 8, 2002, Lowber shall neither have authority to bind the Company to any contract or agreement, nor to act on behalf of the Company. The Company shall have no obligation to reimburse Lowber for any expenses incurred by him on or after July 22, 2002, except as expressly stated in this Agreement. 4.3 Return of Materials. By July 31, 2002, Lowber shall return all equipment, devices and materials, including but not limited to any and all documents (whether existing in paper or electronic/digital media), compilations of data, files, manuals, letters, notebooks, reports, diskettes and all other materials and records of any kind, and any copies or other reproductions thereof, owned by the Company or its affiliates and used by Lowber in the course of his employment. 5. Release and Settlement. 5.1 Release Payment. For the purposes of this Agreement "Release Payment" means the payment by the Company of the amounts referenced in paragraph 2.1(b) above. 5.2 Release. In consideration of the Company's delivery of the Release Payment to Lowber under the terms of this Agreement, Lowber hereby releases the Company and its affiliated companies, and the employees, agents, officers, directors and shareholders of any of them, from all claims, demands, actions or causes of action of any kind or nature whatsoever which Lowber may now have or may ever have had against any of them, whether such claims are known or unknown, and including but not limited to the Claims described in paragraph 5.3 below. However, nothing in this Separation Agreement shall create or imply any waiver by Lowber of any claims (a) with respect to his entitlement to compensation for vested benefits arising under any Company pension, retirement or welfare benefit plan, program or agreement, in accordance with the terms and conditions of such plans, (b) arising under any insurance or investor account or similar client relationship, (c) with respect to any breach by the Company of its obligations under this Agreement, all of which rights shall be preserved and unaffected by this release, or (d) with respect to indemnification by the Company, to the extent that such indemnification rights may arise or be provided under the Company's articles of incorporation or bylaws, in connection with Lowber's official actions (or omissions) on behalf of the Company during the period he served as an officer of the Company. 5.3 The Claims. For the purposes of this Agreement, "Claims" shall mean and include claims with respect to any of the following: (i) breach of contract; (ii) discrimination, retaliation, or constructive or wrongful discharge; (iii) lost wages, lost employee benefits, physical and personal injury, stress, mental distress, or impaired reputation; (iv) claims arising under the Age Discrimination in Employment Act ("ADEA"), Title VII of the Civil Rights Act, the Equal Pay Act, or any other federal, state or local laws or regulations prohibiting employment discrimination; (v) attorneys' fees; and (vi) any other claim arising from or relating to Lowber's employment with the Company and/or his separation from service, including claims with respect to the Severance Agreement dated November 7, 2001, which the Parties agree is terminated by mutual consent as of the date of the expiration of the seven day revocation period described in Section 13.3 of this Agreement; provided, however, that the term "Claims" shall not include any claims reserved by Lowber pursuant to Section 5.2 of this Agreement. 5.4 Consideration for Release. The Company represents, and Lowber acknowledges, that the Release Payment and the further consideration described in Section 3 exceed any amount the Company may arguably be required to pay under any agreement or arrangement to which Lowber is a party or under which he claims some benefit, or under the standard policies and procedures of the Company, and represents valuable consideration to him for the release of his ADEA and other claims described above. 6. Confidential Information. 6.1 Possession of Non-Public Information. Lowber recognizes that by virtue of his employment by the Company, Lowber has acquired significant non-public information with respect to the Company and its affiliated companies, and their operations (the "Confidential Information"). Lowber recognizes and acknowledges that the Confidential Information constitutes valuable, special and unique assets of the Company and its affiliates, access to and knowledge of which were essential to the performance of Lowber's duties during his employment. 6.2 Non-Disclosure. Lowber agrees to hold the Confidential Information in trust and confidence. Lowber agrees not to (i) directly or indirectly make use of the Confidential Information, (ii) reveal any Confidential Information to any other party, or (iii) divulge or use any Confidential Information for any purpose other than for the benefit of the Company, except and to the extent Lowber may be required to disclose by lawful order or process of a court (in which event Lowber will provide reasonable advance notice of such disclosure to the Company and will cooperate with the Company's efforts to obtain protective treatment for such information). 6.3 Materials. Unless the Company otherwise agrees, Lowber shall not remove from the Company's premises or possession any documents, compilations of data or other files or records of any nature, or any copy or reproduction thereof, that contain Confidential Information or that belong to the Company. 7. No Admission. Lowber understands and acknowledges that neither the Release Payment nor the execution and delivery of this Agreement by the Company constitutes an admission by the Company to (i) any breach of an agreement with Lowber, (ii) any violation of a federal, state or local statute, regulation or ordinance, or (iii) any other wrongdoing. 8. No Competing Employment; No Solicitation of Employees; Non-Disparagement. 8.1 No Competing Employment. Lowber agrees that until July 1, 2003, without the prior written consent of the chief executive officer of the Company, he shall not work for, or consult with any person or entity that competes directly and materially with the Company. 8.2 No Solicitation of Employees. Lowber agrees that until July 1, 2003, without the prior written consent of the chief executive officer of the Company, he shall not solicit, directly or indirectly, any individual who he knows is then an employee of the Company or any of its affiliates to leave such employment and/or to become an employee, officer or consultant of or to any other enterprise. Anything to the contrary notwithstanding, the Company agrees that neither (a) Lowber's responding to an unsolicited request from an employee of the Company or any of its affiliates nor (b) Lowber responding to an unsolicited request for an employment reference regarding an employee of the Company or any of its affiliates from such employee, or from a third party, by providing a reference setting forth his personal views about such employee, shall be deemed a violation of this Section 8.2. 8.3 Non-Disparagement. Lowber agrees that he shall not make any statement that is intended to criticize or disparage the Company, its affiliates or any of its or their directors, officers or employees. This Section 8.3 shall not be construed to prohibit Lowber from responding publicly to incorrect public statements or from making truthful statements when required by law or order of a court or other person or body having jurisdiction. 9. Legal Action. 9.1 No Action on Released Claims. Lowber agrees not to sue or pursue any court or administrative action against the Company or any of its affiliates, or any of their employees, agents, officers, directors or shareholders, regarding any Claims released herein or otherwise arising from Lowber's employment with the Company or his separation from service, except with respect to any breach by the Company of its obligations under this Agreement. 9.2 Liability for Defense Costs. If, notwithstanding this Agreement, Lowber should file any lawsuit or other proceeding based on legal claims that Lowber has released herein, Lowber agrees that he will pay or reimburse the Company for all reasonable costs which it, or its employees, agents, officers or directors, incur in defending against Lowber's claims. This paragraph shall not apply to any claimed breach by the Company of any of the terms or conditions of this Agreement. 10. Arbitration. 10.1 Notice and Selection of Arbitrator. The parties agree that any dispute arising under this Agreement, other than an action by the Company to seek injunctive relief against breaches of Sections 6 or 8 of this Agreement, shall be submitted to arbitration in Seattle, Washington, before a disinterested arbitrator. Arbitration shall be commenced by service on the other party to the dispute by a written request for arbitration, containing a brief description of the matter at issue and the names and addresses of three arbitrators acceptable to the petitioner. The other party shall within thirty (30) days following receipt of such notice either select one of the proposed arbitrators or provide the names and addresses of three other arbitrators acceptable to the proposing party. If the parties are unable to select an arbitrator from those proposed, or, if they are unable to select a third arbitrator, an arbitrator shall be chosen impartially by the American Arbitration Association. 10.2 Rules of Proceeding. Arbitration proceedings shall be conducted under the commercial rules then prevailing of the American Arbitration Association. The arbitrator shall not be bound to any formal rules of evidence or procedure, and may consider such matters as a reasonable business person would take into account in decision-making. 10.3 Decision Final and Binding. The decision of the arbitrator shall be final and binding on the parties, and may be entered and enforced in any court of competent jurisdiction. 10.4 Expenses. Each party shall share equally the expenses of the arbitrator and other arbitration expenses. Attorney fees, witness fees and other expenses incurred by a party in preparing for the arbitration are not "arbitration expenses" and shall be paid by the party incurring them. 11. Agreement Confidential. 11.1 Terms of Agreement. Lowber and the Company agree that neither of them shall publicize the existence of this Agreement or its terms, including but not limited to the amount of the Severance Pay or the Release Payment, except under compulsion of law or as required under the rules and regulations of the Securities and Exchange Commission ("SEC"). Lowber acknowledges that a copy of this Agreement will be filed as an exhibit to a filing made by the Company with the SEC. Further, the parties agree that they shall not discuss with or make to the public at large or to any individual person or persons any statements with regard to this Agreement, or matters relating to its terms. Notwithstanding the provisions of this paragraph 11.1, the parties may discuss the existence and terms of this Agreement with their respective attorneys, accountants and financial advisors to the extent necessary to obtain their counsel and advice. Lowber may also disclose the terms of this Agreement in confidence to his spouse and may discuss the Agreement in confidence with any prospective employer. 11.2 Employment References. In the event a prospective employer contacts the Company for an employment reference with respect to Lowber, the Company shall not provide any information relating to Lowber or his employment history or performance with the Company except for Lowber's dates of employment and title and salary at December 31, 2002. 12. Costs. Except for the Company's agreement to pay a portion of Lowber's attorney's fees, as stated and limited in paragraph 3.2, each party shall bear its own costs and expenses incurred in connection with the negotiation of this Agreement and the preparation of this Agreement. 13. Acknowledgment. 13.1 Informed Agreement. Lowber declares that he has read and fully understands the terms of this Agreement, and its significance and consequence. Lowber further declares that this Agreement is the product of good faith negotiations between himself and the Company, and that he voluntarily accepts the same for the purpose of resolving arrangements with respect to his separation from service. Lowber understands and acknowledges that, except as specifically reserved herein, in exchange for the Release Payment he is waiving and giving up every possible claim arising out of his employment with the Company and/or his separation from service. 13.2 Attorney. Lowber acknowledges that the Company has advised him to review the terms of this Agreement with an attorney of his own choosing and that he has done so or knowingly waived his right to do so. 13.3 Review and Revocation Periods. Lowber acknowledges that the Company has given him at least 21 days during which to consider this Agreement prior to signing, and understands that he has seven days after signing in which he may revoke this Agreement. This Agreement shall not become effective or enforceable until such seven-day period has expired. Lowber understands that he may revoke this Agreement by delivering a written notice to Allie Mysliwy at 4333 Brooklyn Avenue N.E., SAFECO Plaza, Seattle, WA 98185, no later than the close of business on the seventh day after he signs this Agreement. Lowber understands and acknowledges that if he revokes this Agreement it will not be effective or enforceable and he will not receive the payments described herein. 14. Entire Agreement. This is the entire agreement between Lowber and the Company. Neither the Company nor any affiliate has made any promises to Lowber other than those included within this Agreement. 15. Governing Law. The parties acknowledge that this Settlement Agreement shall be interpreted under and enforced by and consistent with the laws of the State of Washington. /s/ Paul Lowber H. Paul Lowber SAFECO Corporation By /s/ Michael McGavick Michael S. McGavick, President EX-10.2 4 en0427a.txt EX-10.2 =============================================================================== CREDIT AGREEMENT Dated as of September 18, 2002 among SAFECO CORPORATION, as the Borrower, BANK OF AMERICA, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JPMORGAN CHASE BANK and US BANK, as Co-Syndication Agents, KEYBANK NATIONAL ASSOCIATION as Documentation Agent, and The Other Lenders Party Hereto =============================================================================== BANC OF AMERICA SECURITIES LLC, as Sole Lead Arranger and Sole Book Manager TABLE OF CONTENTS Section Page iii ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS 1.01 Defined Terms...............................................................................1 1.02 Other Interpretive Provisions..............................................................16 1.03 Accounting Terms...........................................................................16 1.04 Rounding...................................................................................17 1.05 References to Agreements and Laws..........................................................17 1.06 Times of Day...............................................................................17 1.07 Letter of Credit Amounts...................................................................17 ARTICLE II. the COMMITMENTS and Credit Extensions 2.01 Revolving Loans............................................................................18 2.02 Borrowings, Conversions and Continuations of Revolving Loans...............................18 2.03 Letters of Credit..........................................................................20 2.04 Swing Line Loans...........................................................................29 2.05 Prepayments................................................................................32 2.06 Termination or Reduction of Commitments....................................................34 2.07 Repayment of Loans.........................................................................34 2.08 Interest...................................................................................34 2.09 Fees.......................................................................................35 2.10 Computation of Interest and Fees...........................................................36 2.11 Evidence of Debt...........................................................................36 2.12 Payments Generally.........................................................................37 2.13 Sharing of Payments........................................................................38 ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 Taxes......................................................................................39 3.02 Illegality.................................................................................41 3.03 Inability to Determine Rates...............................................................41 3.04 Increased Cost and Reduced Return; Capital Adequacy; Reserves on Eurodollar Rate Loans....41 3.05 Funding Losses.............................................................................42 3.06 Matters Applicable to all Requests for Compensation........................................43 3.07 Survival...................................................................................43 ARTICLE IV. CONDITIONS PRECEDENT TO Credit Extensions 4.01 Conditions of Initial Credit Extension.....................................................43 4.02 Conditions to all Credit Extensions........................................................45 ARTICLE V. REPRESENTATIONS AND WARRANTIES 5.01 Existence, Qualification and Power; Compliance with Laws...................................45 5.02 Authorization; No Contravention............................................................46 5.03 Governmental Authorization; Other Consents.................................................46 5.04 Binding Effect.............................................................................46 5.05 Financial Statements; No Material Adverse Effect...........................................46 5.06 Litigation.................................................................................47 5.07 No Default.................................................................................47 5.08 Ownership of Property; Liens...............................................................47 5.09 Environmental Compliance...................................................................47 5.10 Insurance..................................................................................48 5.11 Taxes......................................................................................48 5.12 ERISA Compliance...........................................................................48 5.13 Subsidiaries...............................................................................49 5.14 Margin Regulations; Investment Company Act; Public Utility Holding Company Act.............49 5.15 Disclosure.................................................................................49 5.16 Compliance with Laws.......................................................................50 5.17 Solvent....................................................................................50 5.18 Licenses...................................................................................50 5.19 Employee Matters...........................................................................50 5.20 Business...................................................................................50 ARTICLE VI. AFFIRMATIVE COVENANTS 6.01 Financial Statements.......................................................................50 6.02 Certificates; Other Information............................................................52 6.03 Notices....................................................................................53 6.04 Payment of Obligations.....................................................................54 6.05 Preservation of Existence, Etc.............................................................54 6.06 Maintenance of Properties..................................................................54 6.07 Maintenance of Insurance...................................................................54 6.08 Compliance with Laws.......................................................................54 6.09 Books and Records..........................................................................55 6.10 Inspection Rights..........................................................................55 6.11 Use of Proceeds............................................................................55 ARTICLE VII. NEGATIVE COVENANTS 7.01 Liens......................................................................................55 7.02 Indebtedness...............................................................................57 7.03 Fundamental Changes........................................................................57 7.04 Dispositions...............................................................................57 7.05 Change in Nature of Business...............................................................57 7.06 Transactions with Affiliates...............................................................58 7.07 Burdensome Agreements......................................................................58 7.08 Use of Proceeds............................................................................58 7.09 Shareholders' Equity.......................................................................58 7.10 Debt to Capitalization Ratio...............................................................58 7.11 ERISA......................................................................................58 7.12 Accounting Changes.........................................................................59 ARTICLE VIII. EVENTS OF DEFAULT AND REMEDIES 8.01 Events of Default..........................................................................59 8.02 Remedies Upon Event of Default.............................................................62 8.03 Application of Funds.......................................................................62 ARTICLE IX. ADMINISTRATIVE AGENT 9.01 Appointment and Authorization of Administrative Agent......................................63 9.02 Delegation of Duties.......................................................................64 9.03 Liability of Administrative Agent..........................................................64 9.04 Reliance by Administrative Agent...........................................................64 9.05 Notice of Default..........................................................................65 9.06 Credit Decision; Disclosure of Information by Administrative Agent.........................65 9.07 Indemnification of Administrative Agent....................................................66 9.08 Administrative Agent in its Individual Capacity............................................66 9.09 Successor Administrative Agent.............................................................67 9.10 Administrative Agent May File Proofs of Claim..............................................68 9.11 Other Agents; Arrangers and Managers.......................................................68 ARTICLE X. MISCELLANEOUS 10.01 Amendments, Etc............................................................................69 10.02 Notices and Other Communications; Facsimile Copies.........................................70 10.03 No Waiver; Cumulative Remedies.............................................................71 10.04 Attorney Costs, Expenses and Taxes.........................................................71 10.05 Indemnification by the Borrower............................................................72 10.06 Payments Set Aside.........................................................................73 10.07 Successors and Assigns.....................................................................73 10.08 Confidentiality............................................................................77 10.09 Set-off....................................................................................78 10.10 Interest Rate Limitation...................................................................79 10.11 Counterparts...............................................................................79 10.12 Integration................................................................................79 10.13 Survival of Representations and Warranties.................................................79 10.14 Severability...............................................................................79 10.15 Tax Forms..................................................................................80 10.16 Replacement of Lenders.....................................................................82 10.17 Governing Law..............................................................................82 10.18 Waiver of Right to Trial by Jury...........................................................83 10.19 Entire Agreement...........................................................................83
SCHEDULES 2.01 Commitments and Pro Rata Shares 5.05 Supplement to Interim Financial Statements 5.06 Existing Litigation 10.02 Administrative Agent's Office, Certain Addresses for Notices EXHIBITS Form of A Revolving Loan Notice B Swing Line Loan Notice C Revolving Loan Note D Swing Line Note E Compliance Certificate F Assignment and Assumption CREDIT AGREEMENT This CREDIT AGREEMENT ("Agreement") is entered into as of September 18, 2002, among SAFECO CORPORATION, a Washington corporation (the "Borrower"), each lender from time to time party hereto (collectively, the "Lenders" and individually, a "Lender"), and BANK OF AMERICA, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. The Borrower has requested that the Lenders provide a revolving credit facility, and the Lenders are willing to do so on the terms and conditions set forth herein. In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.01 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below: "Additional Trust Securities" means any trust securities issued after the Closing Date which are of a type similar to the Existing Trust Securities and which are guaranteed by the Borrower. "Administrative Agent" means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent. "Administrative Agent's Office" means the Administrative Agent's address and, as appropriate, account as set forth on Schedule 10.02, or such other address or account as the Administrative Agent may from time to time notify the Borrower and the Lenders. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. Without limiting the generality of the foregoing, a Person shall be deemed to be Controlled by another Person if such other Person possesses, directly or indirectly, power to vote 10% or more of the securities having ordinary voting power for the election of directors, managing general partners or the equivalent. "Agent-Related Persons" means the Administrative Agent, together with its Affiliates (including, in the case of Bank of America in its capacity as the Administrative Agent, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Aggregate Commitments" means the Commitments of all the Lenders. "Agreement" means this Credit Agreement. "A.M. Best" means A.M. Best Company and any successor thereto. "Annual Statement" means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary's jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing annual statutory financial statements and shall contain the type of information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Applicable Law" means (a) in respect of any Person, all provisions of Laws applicable to such Person, and all orders and decrees of all courts and determinations of arbitrators applicable to such Person and (b) in respect of contracts made or performed in the State of Texas, "Applicable Law" shall also mean the Laws of the United States of America, including, without limitation the foregoing, 12 USC Sections 85 and 86, as amended to the date hereof and as the same may be amended at any time and from time to time hereafter, and any other statute of the United States of America now or at any time hereafter prescribing the maximum rates of interest on loans and extensions of credit, and the Laws of the State of Texas. "Applicable Rate" means, from time to time, the following percentages per annum, based upon the Debt Rating as set forth below: Applicable Rate Eurodollar Rate + Base Rate Pricing Debt Ratings Facility Fee Utilization + Level S&P/Moody's Fee ------------------ Letters of Credit ------------- --------------------- -------------- --------------- ------------------ ------------- 1 A/A2 or better 0.100 0.125 0.400 0.000 2 A-/A3 0.125 0.125 0.500 0.000 3 BBB+/Baa1 0.150 0.125 0.600 0.000 4 BBB/Baa2 0.200 0.250 0.800 0.000 5 BBB-/Baa3 or 0.250 0.250 1.000 0.000 worse
"Debt Rating" means, as of any date of determination, the rating as determined by either S&P or Moody's (collectively, the "Debt Ratings") of the Borrower's non-credit-enhanced, senior unsecured long-term debt; provided that if a Debt Rating is issued by each of the foregoing rating agencies, then the higher of such Debt Ratings shall apply (with the Debt Rating for Pricing Level 1 being the highest and the Debt Rating for Pricing Level 5 being the lowest), unless there is a split in Debt Ratings of more than one level, in which case the Pricing Level that is one level lower than the Pricing Level of the higher Debt Rating shall apply. Initially, the Applicable Rate shall be determined based upon the Debt Rating specified in the certificate delivered pursuant to Section 4.01(a)(vii). Thereafter, each change in the Applicable Rate resulting from a publicly announced change in the Debt Rating shall be effective, in the case of an upgrade, during the period commencing on the date of delivery by the Borrower to the Administrative Agent of notice thereof pursuant to Section 6.03(f) and ending on the date immediately preceding the effective date of the next such change and, in the case of a downgrade, during the period commencing on the date of the public announcement thereof and ending on the date immediately preceding the effective date of the next such change. "Arranger" means Banc of America Securities LLC, in its capacity as sole lead arranger and sole book manager. "Assignment and Assumption" means an Assignment and Assumption substantially in the form of Exhibit F. "Attorney Costs" means and includes all fees, expenses and disbursements of any Law firm or other external counsel. "Attributable Indebtedness" means, on any date, (a) in respect of any Capital Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease. "Audited Financial Statements" means the audited consolidated balance sheet of the Borrower and its Subsidiaries for the fiscal year ended December 31, 2001, and the related consolidated statements of income or operations, shareholders' equity and cash flows for such fiscal year of the Borrower and its Subsidiaries, including the notes thereto. "Availability Period" means the period from and including the Closing Date to the Maturity Date. "Bank of America" means Bank of America, N.A. and its successors. "Base Rate" means for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its "prime rate." The "prime rate" is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "Borrower" has the meaning specified in the introductory paragraph hereto. "Borrowing" means a Revolving Borrowing or a Swing Line Borrowing, as the context may require. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Administrative Agent's Office is located and, if such day relates to any Eurodollar Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market. "Capital Lease" means, as of any date, any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on the balance sheet of the lessee. "Capital Stock" means, as to any Person, the equity interests in such Person, including, without limitation, the shares of each class of capital stock in any Person that is a corporation, each class of partnership interest in any Person that is a partnership, and each class of membership interest in any Person that is a limited liability company, and any warrants or options to purchase or otherwise acquire any such equity interests. "Cash Collateralize" has the meaning specified in Section 2.03(g). "Change of Control" means, with respect to any Person, an event or series of events by which: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have "beneficial ownership" of all securities that such person or group has the right to acquire (such right, an "option right"), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 20% or more of the equity securities of such Person entitled to vote for members of the board of directors or equivalent governing body of such Person on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); or (b) during any period of 25 consecutive calendar months, a majority of the members of the board of directors or other equivalent governing body of such Person cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors). "Closing Date" means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 4.01 (or, in the case of Section 4.01(b), waived by the Person entitled to receive the applicable payment). "Code" means the Internal Revenue Code of 1986. "Commitment" means, as to each Lender, its obligation to (a) make Revolving Loans to the Borrower pursuant to Section 2.01, (b) purchase participations in L/C Obligations, and (c) purchase participations in Swing Line Loans, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement. "Compliance Certificate" means a certificate substantially in the form of Exhibit E. "Consolidated Indebtedness" means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, the Indebtedness of the Borrower and its Subsidiaries as of such date. "Consolidated Net Income" means, for any period, for the Borrower and its Subsidiaries on a consolidated basis, the net income of the Borrower and its Subsidiaries (but excluding the effect of any extraordinary or other non-recurring gain or loss outside the ordinary course of business) for that period. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Control" has the meaning specified in the definition of "Affiliate." "Credit Extension" means each of the following: (a) a Revolving Borrowing, (b) a Swing Line Borrowing and (c) an L/C Credit Extension. "Debt Rating" has the meaning set forth in the definition of "Applicable Rate." "Debt to Capitalization Ratio" means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, the ratio of (a) Indebtedness of the Borrower and its Subsidiaries as of such date to (b) the sum of (i) Indebtedness of the Borrower and its Subsidiaries as of such date and (ii) Shareholders' Equity as of such date. "Debtor Relief Laws" means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally. "Default" means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default. "Default Rate" means an interest rate equal to (a) the Base Rate plus (b) the Applicable Rate, if any, applicable to Base Rate Loans plus (c) 2% per annum; provided, however, that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Rate) otherwise applicable to such Loan plus 2% per annum, in each case to the fullest extent permitted by Applicable Laws. "Defaulting Lender" means any Lender that (a) has failed to fund any portion of the Revolving Loans, participations in L/C Obligations or participations in Swing Line Loans required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding. "Disposition" or "Dispose" means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith. "Dividends", in respect of any Person, means (a) cash dividends or any other distributions of property, or otherwise, on, or in respect of, any class of Capital Stock of such Person (other than dividends or other distributions payable solely in common stock of such Person or options, warrants or other rights to purchase common stock of such Person), and (b) any and all funds, cash or other payments made in respect of the redemption, repurchase or acquisition of such Capital Stock (specifically including, without limitation, a treasury stock purchase), unless such Capital Stock shall be redeemed or acquired through the exchange of such Capital Stock with Capital Stock of the same class or options or warrants to purchase such Capital Stock. "Dollar" and "$" mean lawful money of the United States. "Eligible Assignee" has the meaning specified in Section 10.07(g). "Environmental Laws" means any and all Federal, state, local, and foreign statutes, Laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any of its Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate. "Eurodollar Rate" means for any Interest Period with respect to any Eurodollar Rate Loan: (a) the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate that appears on the page of the Telerate screen (or any successor thereto) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) if the rate referenced in the preceding clause (a) does not appear on such page or service or such page or service shall not be available, the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) if the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum determined by the Administrative Agent as the rate of interest at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by Bank of America and with a term equivalent to such Interest Period would be offered by Bank of America's London Branch to major banks in the London interbank eurodollar market at their request at approximately 4:00 p.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Rate Loan" means a Revolving Loan that bears interest at a rate based on the Eurodollar Rate. "Event of Default" has the meaning specified in Section 8.01. "Existing Trust Securities" means the 8.072% Series A Capital Securities, dated July 15, 1997, in the initial aggregate amount of $ 850,000,000, and common securities related thereto, all of which are guaranteed by the Borrower, and which are outstanding on the Closing Date. "Existing Credit Agreement" means that certain Five-Year Credit Agreement dated as of September 24, 1997 among the Borrower, Bank of America, N.A., as agent, and a syndicate of lenders, as amended. "Facility Fee" has the meaning specified in Section 2.09(a). "Federal Funds Rate" means, for any day, the 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 on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent. "Fee Letter" means the letter agreement, dated as of May 29, 2002, among the Borrower, the Administrative Agent and the Arranger. "Foreign Lender" has the meaning specified in Section 10.15(a)(i). "FRB" means the Board of Governors of the Federal Reserve System of the United States. "GAAP" means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, administrative tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" means, as to any Person, any (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person. The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The term "Guarantee" as a verb has a corresponding meaning. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Highest Lawful Rate" means at the particular time in question the maximum rate of interest which, under Applicable Law, any Lender is then permitted to charge on the Obligations. If the maximum rate of interest which, under Applicable Law, any Lender is permitted to charge on the Obligations shall change after the date hereof, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, from time to time as of the effective time of each change in the Highest Lawful Rate without notice to the Borrower. For purposes of determining the Highest Lawful Rate under Applicable Law, the indicated rate ceiling shall be the lesser of (a)(i) the "weekly ceiling", as that expression is defined in Section 303.003 of the Texas Finance Code, as amended, or (ii) if available in accordance with the terms thereof and at the Administrative Agent's option after notice to the Borrower and otherwise in accordance with the terms of Section 303.103 of the Texas Finance Code, as amended, the "annualized ceiling" and (b)(i) if the amount outstanding under this Agreement is less than $250,000, twenty-four percent (24%), or (ii) if the amount under this Agreement is equal to or greater than $250,000, twenty-eight percent (28%) per annum. "Indebtedness" means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers' acceptances, bank guaranties, surety bonds and similar instruments; (c) net obligations of such Person under any Swap Contract and any Securities Lending Arrangement; (d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business); (e) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (f) Capital Leases and Synthetic Lease Obligations; (g) obligations in respect of Redeemable Stock of such Person; (h) Receivables Facility Attributed Indebtedness; and (i) all Guarantees of such Person in respect of any of the foregoing. For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any Capital Lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date. "Indebtedness" shall not include amounts owing under insurance policies or contracts or Surety Instruments issued by Insurance Subsidiaries in the ordinary course of business. For purposes of calculating Indebtedness for the Debt to Capitalization Ratio, (a) 25% of the amount of the Existing Trust Securities shall be treated as Indebtedness and (b) 100% of the amount of any Additional Trust Securities shall be treated as Indebtedness unless with respect to clause (b) the Required Lenders determine otherwise. "Indemnified Liabilities" has the meaning set forth in Section 10.05. "Indemnitees" has the meaning set forth in Section 10.05. "Insurance Subsidiary" means any Subsidiary which is engaged in the business of underwriting insurance products. "Interest Payment Date" means, (a) as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and the Maturity Date; provided, however, that if any Interest Period for a Eurodollar Rate Loan exceeds three months, the respective dates that fall every three months after the beginning of such Interest Period shall also be Interest Payment Dates; and (b) as to any Base Rate Loan (including a Swing Line Loan), the last Business Day of each March, June, September and December and the Maturity Date. "Interest Period" means, as to each Eurodollar Rate Loan, the period commencing on the date such Eurodollar Rate Loan is disbursed or converted to or continued as a Eurodollar Rate Loan and ending on the date one, two, three or six months thereafter, as selected by the Borrower in its Revolving Loan Notice; provided that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period shall extend beyond the Maturity Date. "IRS" means the United States Internal Revenue Service. "Laws" means, collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of Law. "L/C Advance" means, with respect to each Lender, such Lender's funding of its participation in any L/C Borrowing in accordance with its Pro Rata Share. "L/C Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on the date when made or refinanced as a Revolving Borrowing. "L/C Credit Extension" means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the renewal or increase of the amount thereof. "L/C Issuer" means Bank of America in its capacity as issuer of Letters of Credit hereunder, or any successor issuer of Letters of Credit hereunder. "L/C Obligations" means, as at any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit plus the aggregate of all Unreimbursed Amounts, including all L/C Borrowings. "Lender" has the meaning specified in the introductory paragraph hereto and, as the context requires, includes the L/C Issuer and the Swing Line Lender. "Lending Office" means, as to any Lender, the office or offices of such Lender described as such in such Lender's Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent. "Letter of Credit" means any letter of credit issued hereunder. "Letter of Credit Application" means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by the L/C Issuer. "Letter of Credit Expiration Date" means the day that is seven days prior to the Maturity Date then in effect (or, if such day is not a Business Day, the next preceding Business Day). "Letter of Credit Sublimit" means an amount equal to $25,000,000. The Letter of Credit Sublimit is part of, and not in addition to, the Aggregate Commitments. "License" means any license, certificate of authority, permit, franchise or other authorization which is required to be obtained from any Governmental Authority in connection with the operation, ownership or transaction of insurance business. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, and any financing lease having substantially the same economic effect as any of the foregoing). "Loan" means an extension of credit by a Lender to the Borrower under Article II in the form of a Revolving Loan or a Swing Line Loan. "Loan Documents" means this Agreement, each Note, the Fee Letter, and all other documents executed and delivered by the Borrower to the Administrative Agent or any Lender in connection herewith. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Borrower to perform its obligations under any Loan Document to which it is a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Borrower of any Loan Document to which it is a party. "Material Insurance Subsidiary" means any Insurance Subsidiary which is a Material Subsidiary. "Material Subsidiary" means, at any time, any Subsidiary having at such time either (a) total (gross) revenues for the preceding four fiscal quarter period in excess of 10% of the total (gross) revenues of the Borrower and its Subsidiaries for such period or (b) a shareholder's equity, as of the last day of the preceding fiscal quarter, having a book value in excess of 10% of Shareholders' Equity, in each case, based upon the Borrower's most recent annual or quarterly financial statements delivered to the Administrative Agent under Section 6.01. "Maturity Date" means the earliest of (a) September ___, 2005 or (b) the date of termination of the Aggregate Commitments pursuant to Section 2.06, and (c) the date of termination of the commitment of each Lender to make Loans and of the obligation of the L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02. "Moody's" means Moody's Investors Service, Inc. and any successor thereto. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions. "NAIC" means the National Association of Insurance Commissioners or any successor thereto, or in absence of the National Association of Insurance Commissioners or such successor, any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissioners and similar Governmental Authorities of the various states of the United States toward the promotion of uniformity in the practices of such Governmental Authorities. "Net Cash Proceeds" means, with respect to the issuance of any Capital Stock by or of any Person, the excess of (a) cash proceeds and cash equivalents received by such Person in connection with such issuance (including any cash received in respect of non-cash proceeds, but only and as when received) over (b) the underwriting discounts and commissions, and other reasonable out-of-pocket expenses incurred by such Person in connection with such issuance. "Notes" means, collectively, the Revolving Loan Notes and the Swing Line Note. "Obligations" means all advances to, and debts, liabilities, obligations, covenants and duties of, the Borrower arising under any Loan Document or otherwise with respect to any Loan or Letter of Credit, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against the Borrower or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding. "Organization Documents" means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity. "Outstanding Amount" means (i) with respect to Revolving Loans and Swing Line Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Revolving Loans and Swing Line Loans, as the case may be, occurring on such date; and (ii) with respect to any L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements of outstanding unpaid drawings under any Letters of Credit or any reductions in the maximum amount available for drawing under Letters of Credit taking effect on such date. "Participant" has the meaning specified in Section 10.07(d). "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Borrower or any ERISA Affiliate or to which the Borrower or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years. "Permitted Liens" has the meaning specified in Section 7.01. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) established by the Borrower or, with respect to any such plan that is subject to Section 412 of the Code or Title IV of ERISA, any ERISA Affiliate. "Pro Rata Share" means, with respect to each Lender at any time, a fraction (expressed as a percentage, carried out to the ninth decimal place), the numerator of which is the amount of the Commitment of such Lender at such time and the denominator of which is the amount of the Aggregate Commitments at such time; provided that if the commitment of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02, then the Pro Rata Share of each Lender shall be determined based on the Pro Rata Share of such Lender immediately prior to such termination and after giving effect to any subsequent assignments made pursuant to the terms hereof. The initial Pro Rata Share of each Lender is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable. "Quarterly Statement" means the quarterly statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing quarterly statutory financial statements and shall contain the type of financial information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Receivables Facility Attributed Indebtedness" means the amount of obligations outstanding under a receivables purchase facility on any date of determination that would be characterized as principal if such facility were structured as a secured lending transaction other than a purchase. "Redeemable Stock" means any Capital Stock of the Borrower or any of its Subsidiaries which prior to October 18, 2005 is or may be (a) mandatorily redeemable, (b) redeemable at the option of the holder thereof or (c) convertible into Indebtedness. "Register" has the meaning set forth in Section 10.07(c). "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30 day notice period has been waived. "Request for Credit Extension" means (a) with respect to a Revolving Borrowing, conversion or continuation of Revolving Loans, a Revolving Loan Notice, (b) with respect to an L/C Credit Extension, a Letter of Credit Application, and (c) with respect to a Swing Line Loan, a Swing Line Loan Notice. "Required Lenders" means, as of any date of determination, at least two Lenders having more than 50% of the Aggregate Commitments or, if the commitment of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02, at least two Lenders holding in the aggregate more than 50% of the Total Outstandings (with the aggregate amount of each Lender's risk participation and funded participation in L/C Obligations and Swing Line Loans being deemed "held" by such Lender for purposes of this definition); provided that the Commitment of, and the portion of the Total Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders. "Responsible Officer" means the chief executive officer, president, chief financial officer, treasurer, controller or assistant secretary of the Borrower. Any document delivered hereunder that is signed by a Responsible Officer of the Borrower shall be conclusively presumed to have been authorized by all necessary corporate action on the part of the Borrower and such Responsible Officer shall be conclusively presumed to have acted on behalf of the Borrower. "Revolving Borrowing" means a borrowing consisting of simultaneous Revolving Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Lenders pursuant to Section 2.01. "Revolving Loan" has the meaning specified in Section 2.01. "Revolving Loan Note" means a promissory note made by the Borrower in favor of a Lender evidencing Revolving Loans made by such Lender, substantially in the form of Exhibit C. "Revolving Loan Notice" means a notice of (a) a Revolving Borrowing, (b) a conversion of Revolving Loans from one Type to the other, or (c) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a), which, if in writing, shall be substantially in the form of Exhibit A. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. and any successor thereto. "SAP" means, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) in the jurisdiction of such Person for the preparation of annual statements and other financial reports by insurance companies of the same type as such Person, which are applicable to the circumstances as of the date of determination. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Securities Lending Arrangement" means an arrangement whereby a Person, as a securities lender, transfers assets to a borrower counterparty for a premium, and such Person, as a securities lender, agrees to repurchase or redeem the transferred assets from the borrower counterparty before their maturity. "Shareholders' Equity" means, as of any date of determination, consolidated shareholders' equity of the Borrower and its Subsidiaries as of that date determined in accordance with GAAP, but excluding the effect of any adjustment under Statement of Financial Accounting Standards No. 115; provided, however, for purposes of calculating Shareholder's Equity for the Debt to Capitalization Ratio and Section 7.09, (a) 75% of the value of the Existing Trust Securities shall be treated as equity and (b) no equity value shall be attributed to any Additional Trust Securities unless with respect to clause (b) the Required Lenders determine otherwise. "Solvent" means, with respect to any Person, as of any date of determination, that the fair value of the assets of such Person (at fair valuation) is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date, that the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the probable liability of such Person on its debts as such debts become absolute and matured, and that, as of such date, such Person will be able to pay all liabilities of such Person as such liabilities mature and such Person does not have unreasonably small capital with which to carry on its business. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability discounted to present value at rates believed to be reasonable by such Person. "Subsidiary" of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a "Subsidiary" or to "Subsidiaries" shall refer to a Subsidiary or Subsidiaries of the Borrower. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Swap Contract" means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a "Master Agreement"), including any such obligations or liabilities under any Master Agreement. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender). "Swing Line" means the revolving credit facility made available by the Swing Line Lender pursuant to Section 2.04. "Swing Line Borrowing" means a borrowing of a Swing Line Loan pursuant to Section 2.04. "Swing Line Lender" means Bank of America in its capacity as provider of Swing Line Loans, or any successor swing line lender hereunder. "Swing Line Loan" has the meaning specified in Section 2.04(a). "Swing Line Loan Notice" means a notice of a Swing Line Borrowing pursuant to Section 2.04(b), which, if in writing, shall be substantially in the form of Exhibit B. "Swing Line Note" means a promissory note made by the Borrower in favor of the Swing Line Lender evidencing Swing Line Loans made by such Lender, substantially in the form of Exhibit D. "Swing Line Sublimit" means an amount equal to the lesser of (a) $25,000,000 and (b) the Aggregate Commitments. The Swing Line Sublimit is part of, and not in addition to, the Aggregate Commitments. "Synthetic Lease Obligation" means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). "Total Outstandings" means the aggregate Outstanding Amount of all Loans and all L/C Obligations. "Type" means, with respect to a Revolving Loan, its character as a Base Rate Loan or a Eurodollar Rate Loan. "UCC" means the Uniform Commercial Code of Texas or, where applicable to specific Collateral, any other relevant state. "Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." mean the United States of America. "Unreimbursed Amount" has the meaning set forth in Section 2.03(c)(i). "Unused Portion" means an amount equal to the remainder of (a) the Aggregate Commitments minus (b) the Total Outstandings. "Utilization Fee" has the meaning specified in Section 2.09(b). 1.02 Other Interpretive Provisions. With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document: (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) (i) The words "herein," "hereto," "hereof" and "hereunder" and words of similar import when used in any Loan Document shall refer to such Loan Document as a whole and not to any particular provision thereof. (ii) Article, Section, Exhibit and Schedule references are to the Loan Document in which such reference appears. (iii) The term "including" is by way of example and not limitation. (iv) The term "documents" includes any and all instruments, documents, agreements, certificates, notices, reports, financialstatements and other writings, however evidenced, whether in physical or electronic form. (c) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including;" the words "to" and "until" each mean "to but excluding;" and the word "through" means "to and including." (d) Section headings herein and in the other Loan Documents are included for convenience of reference only and shall not affect the interpretation of this Agreement or any other Loan Document. 1.03 Accounting Terms. (a) All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with, GAAP or SAP, as applicable, applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein. (b) If at any time any change in GAAP or SAP or any change in accounting treatment or practices required by any Governmental Authority, as applicable, would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Required Lenders shall so request, the Administrative Agent, the Lenders and the Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP or SAP or required by any Governmental Authority, as applicable (subject to the approval of the Required Lenders); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP or SAP, as applicable, prior to such change therein and (ii) the Borrower shall provide to the Administrative Agent and the Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP or SAP or required by any Governmental Authority, as applicable. 1.04 Rounding. Any financial ratios required to be maintained by the Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number). 1.05 References to Agreements and Laws. Unless otherwise expressly provided herein, (a) references to Organization Documents, agreements (including the Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Loan Document; and (b) references to any Law shall include all statutory and regulatory provisions and rulings consolidating, amending, replacing, supplementing or interpreting such Law. 1.06 Times of Day. Unless otherwise specified, all references herein to times of day shall be references to Pacific time (daylight or standard, as applicable). 1.07 Letter of Credit Amounts. Unless otherwise specified, all references herein to the amount of a Letter of Credit at any time shall be deemed to mean the maximum face amount of such Letter of Credit after giving effect to all increases thereof contemplated by such Letter of Credit or the Letter of Credit Application therefor, whether or not such maximum face amount is in effect at such time. ARTICLE II. The Commitments and Credit Extensions 2.01 Revolving Loans. Subject to the terms and conditions set forth herein, each Lender severally agrees to make loans (each such loan, a "Revolving Loan") to the Borrower from time to time, on any Business Day during the Availability Period, in an aggregate amount not to exceed at any time outstanding the amount of such Lender's Commitment; provided, however, that after giving effect to any Revolving Borrowing, (i) the Total Outstandings shall not exceed the Aggregate Commitments, and (ii) the aggregate Outstanding Amount of the Revolving Loans of any Lender, plus such Lender's Pro Rata Share of the Outstanding Amount of all L/C Obligations, plus such Lender's Pro Rata Share of the Outstanding Amount of all Swing Line Loans shall not exceed such Lender's Commitment. Within the limits of each Lender's Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.01, prepay under Section 2.05, and reborrow under this Section 2.01. Revolving Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein. 2.02 Borrowings, Conversions and Continuations of Revolving Loans. (a) Each Revolving Borrowing, each conversion of Revolving Loans from one Type to the other, and each continuation of Eurodollar Rate Loans shall be made upon the Borrower's irrevocable notice to the Administrative Agent, which may be given by telephone. Each such notice must be received by the Administrative Agent not later than 11:00 a.m. (i) three Business Days prior to the requested date of any Borrowing of, conversion to or continuation of Eurodollar Rate Loans or of any conversion of Eurodollar Rate Loans to Base Rate Revolving Loans, and (ii) on the requested date of any Borrowing of Base Rate Revolving Loans. Each telephonic notice by the Borrower pursuant to this Section 2.02(b) must be confirmed promptly by delivery to the Administrative Agent of a written Revolving Loan Notice, appropriately completed and signed by two Responsible Officers of the Borrower. Each Borrowing of, conversion to or continuation of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Except as provided in Sections 2.03(c) and 2.04(c), each Borrowing of or conversion to Base Rate Revolving Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof. Each Revolving Loan Notice (whether telephonic or written) shall specify (i) whether the Borrower is requesting a Revolving Borrowing, a conversion of Revolving Loans from one Type to the other, or a continuation of Eurodollar Rate Loans, (ii) the requested date of the Borrowing, conversion or continuation, as the case may be (which shall be a Business Day), (iii) the principal amount of Revolving Loans to be borrowed, converted or continued, (iv) the Type of Revolving Loans to be borrowed or to which existing Revolving Loans are to be converted, and (v) if applicable, the duration of the Interest Period with respect thereto. If the Borrower fails to specify a Type of Revolving Loan in a Revolving Loan Notice or if the Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Revolving Loans shall be made as, or converted to, Base Rate Loans. Any such automatic conversion to Base Rate Loans shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Rate Loans. If the Borrower requests a Borrowing of, conversion to, or continuation of Eurodollar Rate Loans in any such Revolving Loan Notice, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month. (b) Following receipt of a Revolving Loan Notice, the Administrative Agent shall promptly notify each Lender of the amount of its Pro Rata Share of the applicable Revolving Loans, and if no timely notice of a conversion or continuation is provided by the Borrower, the Administrative Agent shall notify each Lender of the details of any automatic conversion to Base Rate Loans described in the preceding subsection. In the case of a Revolving Borrowing, each Lender shall make the amount of its Revolving Loan available to the Administrative Agent in immediately available funds at the Administrative Agent's Office not later than 1:00 p.m. on the Business Day specified in the applicable Revolving Loan Notice. Upon satisfaction of the applicable conditions set forth in Section 4.02 (and, if such Borrowing is the initial Credit Extension, Section 4.01), the Administrative Agent shall make all funds so received available to the Borrower in like funds as received by the Administrative Agent either by (i) crediting the account of the Borrower on the books of Bank of America with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by the Borrower; provided, however, that if, on the date the Revolving Loan Notice with respect to such Borrowing is given by the Borrower, there are Swing Line Loans or L/C Borrowings outstanding, then the proceeds of such Borrowing shall be applied, first, to the payment in full of any such L/C Borrowings, second, to the payment in full of any such Swing Line Loans, and third, to the Borrower as provided above. (c) Except as otherwise provided herein, a Eurodollar Rate Loan may be continued or converted only on the last day of an Interest Period for such Eurodollar Rate Loan. During the existence of a Default, no Loans may be requested as, converted to or continued as Eurodollar Rate Loans without the consent of the Required Lenders. (d) The Administrative Agent shall promptly notify the Borrower and the Lenders of the interest rate applicable to any Interest Period for Eurodollar Rate Loans upon determination of such interest rate. The determination of the Eurodollar Rate by the Administrative Agent shall be conclusive in the absence of manifest error. At any time that Base Rate Loans are outstanding, the Administrative Agent shall notify the Borrower and the Lenders of any change in Bank of America's prime rate used in determining the Base Rate promptly following the public announcement of such change. (e) After giving effect to all Revolving Borrowings, all conversions of Revolving Loans from one Type to the other, and all continuations of Revolving Loans as the same Type, there shall not be more than ten Interest Periods in effect with respect to Revolving Loans. 2.03 Letters of Credit. (a) The Letter of Credit Commitment. (i) Subject to the terms and conditions set forth herein, (A) the L/C Issuer agrees, in reliance upon the agreements of the other Lenders set forth in this Section 2.03, (1) from time to time on any Business Day during the period from the Closing Date until the Letter of Credit Expiration Date, to issue Letters of Credit for the account of the Borrower or certain Subsidiaries, and to amend or renew Letters of Credit previously issued by it, in accordance with subsection (b) below, and (2) to honor drafts under the Letters of Credit; and (B) the Lenders severally agree to participate in Letters of Credit issued for the account of the Borrower; provided that the L/C Issuer shall not be obligated to make any L/C Credit Extension with respect to any Letter of Credit, and no Lender shall be obligated to participate in any Letter of Credit if as of the date of such L/C Credit Extension, (x) the Total Outstandings would exceed the Aggregate Commitments, (y) the aggregate Outstanding Amount of the Revolving Loans of any Lender, plus such Lender's Pro Rata Share of the Outstanding Amount of all L/C Obligations, plus such Lender's Pro Rata Share of the Outstanding Amount of all Swing Line Loans would exceed such Lender's Commitment, or (z) the Outstanding Amount of the L/C Obligations would exceed the Letter of Credit Sublimit. Within the foregoing limits, and subject to the terms and conditions hereof, the Borrower's ability to obtain Letters of Credit shall be fully revolving, and accordingly the Borrower may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit that have expired or that have been drawn upon and reimbursed. (ii) The L/C Issuer shall be under no obligation to issue any Letter of Credit if: (A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the L/C Issuer from issuing such Letter of Credit, or any Law applicable to the L/C Issuer or any request or directive (whether or not having the force of Law) from any Governmental Authority with jurisdiction over the L/C Issuer shall prohibit, or request that the L/C Issuer refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the L/C Issuer with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the L/C Issuer is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the L/C Issuer any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the L/C Issuer in good faith deems material to it; (B) subject to Section 2.03(b)(iii), the expiry date of such requested Letter of Credit would occur more than twelve months after the date of issuance or last renewal, unless the Required Lenders have approved such expiry date; (C) the expiry date of such requested Letter of Credit would occur after the Letter of Credit Expiration Date, unless all the Lenders have approved such expiry date; (D) the issuance of such Letter of Credit would violate one or more policies of the L/C Issuer; or (E) such Letter of Credit is in an initial amount less than $100,000, in the case of a commercial Letter of Credit, or $500,000, in the case of a standby Letter of Credit, or is to be denominated in a currency other than Dollars. (iii)The L/C Issuer shall be under no obligation to amend any Letter of Credit if (A) the L/C Issuer would have no obligation at such time to issue such Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of such Letter of Credit does not accept the proposed amendment to such Letter of Credit. (b) Procedures for Issuance and Amendment of Letters of Credit; Auto-Renewal Letters of Credit. (i) Each Letter of Credit shall be issued or amended, as the case may be, upon the request of the Borrower delivered to the L/C Issuer (with a copy to the Administrative Agent) in the form of a Letter of Credit Application, appropriately completed and signed by a Responsible Officer of the Borrower. Such Letter of Credit Application must be received by the L/C Issuer and the Administrative Agent not later than 11:00 a.m. at least two Business Days (or such later date and time as the L/C Issuer may agree in a particular instance in its sole discretion) prior to the proposed issuance date or date of amendment, as the case may be. In the case of a request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer: (A) the proposed issuance date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder; and (G) such other matters as the L/C Issuer may require. In the case of a request for an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer (A) the Letter of Credit to be amended; (B) the proposed date of amendment thereof (which shall be a Business Day); (C) the nature of the proposed amendment; and (D) such other matters as the L/C Issuer may require. (ii) Promptly after receipt of any Letter of Credit Application, the L/C Issuer will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received a copy of such Letter of Credit Application from the Borrower and, if not, the L/C Issuer will provide the Administrative Agent with a copy thereof. Upon receipt by the L/C Issuer of confirmation from the Administrative Agent that the requested issuance or amendment is permitted in accordance with the terms hereof, then, subject to the terms and conditions hereof, the L/C Issuer shall, on the requested date, issue a Letter of Credit for the account of the Borrower or enter into the applicable amendment, as the case may be, in each case in accordance with the L/C Issuer's usual and customary business practices. Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the L/C Issuer a risk participation in such Letter of Credit in an amount equal to the product of such Lender's Pro Rata Share times the amount of such Letter of Credit. (iii) If the Borrower so requests in any applicable Letter of Credit Application, the L/C Issuer may, in its sole and absolute discretion, agree to issue a Letter of Credit that has automatic renewal provisions (each, an "Auto-Renewal Letter of Credit"); provided that any such Auto-Renewal Letter of Credit must permit the L/C Issuer to prevent any such renewal at least once in each twelve-month period (commencing with the date of issuance of such Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the "Nonrenewal Notice Date") in each such twelve-month period to be agreed upon at the time such Letter of Credit is issued. Unless otherwise directed by the L/C Issuer, the Borrower shall not be required to make a specific request to the L/C Issuer for any such renewal. Once an Auto-Renewal Letter of Credit has been issued, the Lenders shall be deemed to have authorized (but may not require) the L/C Issuer to permit the renewal of such Letter of Credit at any time to an expiry date not later than the Letter of Credit Expiration Date; provided, however, that the L/C Issuer shall not permit any such renewal if (A) the L/C Issuer has determined that it would have no obligation at such time to issue such Letter of Credit in its renewed form under the terms hereof (by reason of the provisions of Section 2.03(a)(ii) or otherwise), or (B) it has received notice (which may be by telephone or in writing) on or before the day that is two Business Days before the Nonrenewal Notice Date (1) from the Administrative Agent that the Required Lenders have elected not to permit such renewal or (2) from the Administrative Agent, any Lender or the Borrower that one or more of the applicable conditions specified in Section 4.02 is not then satisfied. (iv) Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising bank with respect thereto or to the beneficiary thereof, the L/C Issuer will also deliver to the Borrower and the Administrative Agent a true and complete copy of such Letter of Credit or amendment. (c) Drawings and Reimbursements; Funding of Participations. (i) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the L/C Issuer shall notify the Borrower and the Administrative Agent thereof. Not later than 11:00 a.m. on the date of any payment by the L/C Issuer under a Letter of Credit (each such date, an "Honor Date"), the Borrower shall reimburse the L/C Issuer through the Administrative Agent in an amount equal to the amount of such drawing. If the Borrower fails to so reimburse the L/C Issuer by such time, the Administrative Agent shall promptly notify each Lender of the Honor Date, the amount of the unreimbursed drawing (the "Unreimbursed Amount"), and the amount of such Lender's Pro Rata Share thereof. In such event, the Borrower shall be deemed to have requested a Revolving Borrowing of Base Rate Loans to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, without regard to the minimum and multiples specified in Section 2.02 for the principal amount of Base Rate Loans, but subject to the amount of the unutilized portion of the Aggregate Commitments and the conditions set forth in Section 4.02 (other than the delivery of a Revolving Loan Notice). Any notice given by the L/C Issuer or the Administrative Agent pursuant to this Section 2.03(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (ii) Each Lender (including the Lender acting as L/C Issuer) shall upon any notice pursuant to Section 2.03(c)(i) make funds available to the Administrative Agent for the account of the L/C Issuer at the Administrative Agent's Office in an amount equal to its Pro Rata Share of the Unreimbursed Amount not later than 1:00 p.m. on the Business Day specified in such notice by the Administrative Agent, whereupon, subject to the provisions of Section 2.03(c)(iii), each Lender that so makes funds available shall be deemed to have made a Base Rate Revolving Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the L/C Issuer. (iii) With respect to any Unreimbursed Amount that is not fully refinanced by a Revolving Borrowing of Base Rate Loans because the conditions set forth in Section 4.02 cannot be satisfied or for any other reason, the Borrower shall be deemed to have incurred from the L/C Issuer an L/C Borrowing in the amount of the Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the Default Rate. In such event, each Lender's payment to the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(ii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.03. (iv) Until each Lender funds its Revolving Loan or L/C Advance pursuant to this Section 2.03(c) to reimburse the L/C Issuer for any amount drawn under any Letter of Credit, interest in respect of such Lender's Pro Rata Share of such amount shall be solely for the account of the L/C Issuer. (v) Each Lender's obligation to make Revolving Loans or L/C Advances to reimburse the L/C Issuer for amounts drawn under Letters of Credit, as contemplated by this Section 2.03(c), shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the L/C Issuer, the Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing, including whether or not the conditions set forth in Section 4.02 shall have been satisfied. No such making of an L/C Advance shall relieve or otherwise impair the obligation of the Borrower to reimburse the L/C Issuer for the amount of any payment made by the L/C Issuer under any Letter of Credit, together with interest as provided herein. (vi) If any Lender fails to make available to the Administrative Agent for the account of the L/C Issuer any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.03(c) by the time specified in Section 2.03(c)(ii), the L/C Issuer shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the L/C Issuer at a rate per annum equal to the Federal Funds Rate from time to time in effect. A certificate of the L/C Issuer submitted to any Lender (through the Administrative Agent) with respect to any amounts owing under this clause (vi) shall be conclusive absent manifest error. (d) Repayment of Participations. (i) At any time after the L/C Issuer has made a payment under any Letter of Credit and has received from any Lender such Lender's L/C Advance in respect of such payment in accordance with Section 2.03(c), if the Administrative Agent receives for the account of the L/C Issuer any payment in respect of the related Unreimbursed Amount or interest thereon (whether directly from the Borrower or otherwise, including proceeds of Cash Collateral applied thereto by the Administrative Agent), the Administrative Agent will distribute to such Lender its Pro Rata Share thereof (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's L/C Advance was outstanding) in the same funds as those received by the Administrative Agent. (ii) If any payment received by the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(i) is required to be returned under any of the circumstances described in Section 10.06 (including pursuant to any settlement entered into by the L/C Issuer in its discretion), each Lender shall pay to the Administrative Agent for the account of the L/C Issuer its Pro Rata Share thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Lender, at a rate per annum equal to the Federal Funds Rate from time to time in effect. (e) Obligations Absolute. The obligation of the Borrower to reimburse the L/C Issuer for each drawing under each Letter of Credit and to repay each L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following: (i) any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (ii) the existence of any claim, counterclaim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the L/C Issuer or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit; (iv) any payment by the L/C Issuer under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the L/C Issuer under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law; or (v) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower. The Borrower shall promptly examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with the Borrower's instructions or other irregularity, the Borrower will immediately notify the L/C Issuer.The Borrower shall be conclusively deemed to have waived any such claim against the L/C Issuer and its correspondents unless such notice is given as aforesaid. (f) Role of L/C Issuer. Each Lender and the Borrower agree that, in paying any drawing under a Letter of Credit, the L/C Issuer shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. None of the L/C Issuer, any Agent-Related Person nor any of the respective correspondents, participants or assignees of the L/C Issuer shall be liable to any Lender for (i) any action taken or omitted in connection herewith at the request or with the approval of the Lenders or the Required Lenders, as applicable; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Letter of Credit Application. The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Borrower's pursuing such rights and remedies as it may have against the beneficiary or transferee at Law or under any other agreement. None of the L/C Issuer, any Agent-Related Person, nor any of the respective correspondents, participants or assignees of the L/C Issuer, shall be liable or responsible for any of the matters described in clauses (i) through (v) of Section 2.03(e); provided, however, that anything in such clauses to the contrary notwithstanding, the Borrower may have a claim against the L/C Issuer, and the L/C Issuer may be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Borrower which the Borrower proves were caused by the L/C Issuer's willful misconduct or gross negligence or the L/C Issuer's willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing, the L/C Issuer may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and the L/C Issuer shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. (g) Cash Collateral. Upon the request of the Administrative Agent, (i) if the L/C Issuer has honored any full or partial drawing request under any Letter of Credit and such drawing has resulted in an L/C Borrowing, or (ii) if, as of the Letter of Credit Expiration Date, any Letter of Credit may for any reason remain outstanding and partially or wholly undrawn, the Borrower shall immediately Cash Collateralize the then Outstanding Amount of all L/C Obligations (in an amount equal to such Outstanding Amount determined as of the date of such L/C Borrowing or the Letter of Credit Expiration Date, as the case may be). For purposes hereof, "Cash Collateralize" means to pledge and deposit with or deliver to the Administrative Agent, for the benefit of the L/C Issuer and the Lenders, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Administrative Agent and the L/C Issuer (which documents are hereby consented to by the Lenders). Derivatives of such term have corresponding meanings. The Borrower hereby grants to the Administrative Agent, for the benefit of the L/C Issuer and the Lenders, a security interest in all such cash, deposit accounts and all balances therein and all proceeds of the foregoing. Cash collateral shall be maintained in blocked, non-interest bearing deposit accounts at Bank of America. (h) Applicability of ISP98 and UCP. Unless otherwise expressly agreed by the L/C Issuer and the Borrower when a Letter of Credit is issued, (i) the rules of the "International Standby Practices 1998" published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance) shall apply to each standby Letter of Credit, and (ii) the rules of the Uniform Customs and Practice for Documentary Credits, as most recently published by the International Chamber of Commerce (the "ICC") at the time of issuance (including the ICC decision published by the Commission on Banking Technique and Practice on April 6, 1998 regarding the European single currency (euro)) shall apply to each commercial Letter of Credit. (i) Letter of Credit Fees. The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Pro Rata Share a Letter of Credit fee for each Letter of Credit equal to the Applicable Rate times the daily maximum amount available to be drawn under such Letter of Credit (whether or not such maximum amount is then in effect under such Letter of Credit). Such letter of credit fees shall be computed on a quarterly basis in arrears. Such letter of credit fees shall be due and payable on the first Business Day after the end of each March, June, September and December, commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on demand. If there is any change in the Applicable Rate during any quarter, the daily maximum amount of each Letter of Credit shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. (j) Fronting Fee and Documentary and Processing Charges Payable to L/C Issuer. The Borrower shall pay directly to the L/C Issuer for its own account a fronting fee with respect to each Letter of Credit equal to 1/8 of 1% per annum times the daily maximum amount available to be drawn under such Letter of Credit (whether or not such maximum amount is then in effect under such Letter of Credit). Such fronting fee shall be computed on a quarterly basis in arrears, and shall be payable on the first Business Day after the end of each March, June, September and December, commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date, and thereafter on demand. In addition, the Borrower shall pay directly to the L/C Issuer for its own account the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the L/C Issuer relating to letters of credit as from time to time in effect. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable. (k) Conflict with Letter of Credit Application. In the event of any conflict between the terms hereof and the terms of any Letter of Credit Application, the terms hereof shall control. 2.04 Swing Line Loans. (a) The Swing Line. Subject to the terms and conditions set forth herein, the Swing Line Lender agrees to make loans (each such loan, a "Swing Line Loan") to the Borrower from time to time on any Business Day during the Availability Period in an aggregate amount not to exceed at any time outstanding the amount of the Swing Line Sublimit, notwithstanding the fact that such Swing Line Loans, when aggregated with the Pro Rata Share of the Outstanding Amount of Revolving Loans and L/C Obligations of the Lender acting as Swing Line Lender, may exceed the amount of such Lender's Commitment; provided, however, that after giving effect to any Swing Line Loan, (i) the Total Outstandings shall not exceed the Aggregate Commitments, and (ii) the aggregate Outstanding Amount of the Revolving Loans of any Lender, plus such Lender's Pro Rata Share of the Outstanding Amount of all L/C Obligations, plus such Lender's Pro Rata Share of the Outstanding Amount of all Swing Line Loans shall not exceed such Lender's Commitment, and provided, further, that the Borrower shall not use the proceeds of any Swing Line Loan to refinance any outstanding Swing Line Loan. Within the foregoing limits, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.04, prepay under Section 2.05, and reborrow under this Section 2.04. Each Swing Line Loan shall be a Base Rate Loan. Immediately upon the making of a Swing Line Loan, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Swing Line Lender a risk participation in such Swing Line Loan in an amount equal to the product of such Lender's Pro Rata Share times the amount of such Swing Line Loan. (b) Borrowing Procedures. Each Swing Line Borrowing shall be made upon the Borrower's irrevocable notice to the Swing Line Lender and the Administrative Agent, which may be given by telephone. Each such notice must be received by the Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on the requested borrowing date, and shall specify (i) the amount to be borrowed, which shall be a minimum of $1,000,000 or a whole multiple of $100,000 in excess thereof), and (ii) the requested borrowing date, which shall be a Business Day. Each such telephonic notice must be confirmed promptly by delivery to the Swing Line Lender and the Administrative Agent of a written Swing Line Loan Notice, appropriately completed and signed by two Responsible Officers of the Borrower. Promptly after receipt by the Swing Line Lender of any telephonic Swing Line Loan Notice, the Swing Line Lender will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has also received such Swing Line Loan Notice and, if not, the Swing Line Lender will notify the Administrative Agent (by telephone or in writing) of the contents thereof. Unless the Swing Line Lender has received notice (by telephone or in writing) from the Administrative Agent (including at the request of any Lender) prior to 2:00 p.m. on the date of the proposed Swing Line Borrowing (A) directing the Swing Line Lender not to make such Swing Line Loan as a result of the limitations set forth in the proviso to the first sentence of Section 2.04(a), or (B) that one or more of the applicable conditions specified in Article IV is not then satisfied, then, subject to the terms and conditions hereof, the Swing Line Lender will, not later than 3:00 p.m. on the borrowing date specified in such Swing Line Loan Notice, make the amount of its Swing Line Loan available to the Borrower at its office by crediting the account of the Borrower on the books of the Swing Line Lender in immediately available funds. (c) Refinancing of Swing Line Loans. (i) The Swing Line Lender at any time in its sole and absolute discretion may request, on behalf of the Borrower (which hereby irrevocably authorizes the Swing Line Lender to so request on its behalf), that each Lender make a Base Rate Revolving Loan in an amount equal to such Lender's Pro Rata Share of the amount of Swing Line Loans then outstanding. Such request shall be made in writing (which written request shall be deemed to be a Revolving Loan Notice for purposes hereof) and in accordance with the requirements of Section 2.02, without regard to the minimum and multiples specified therein for the principal amount of Base Rate Loans, but subject to the unutilized portion of the Aggregate Commitments and the conditions set forth in Section 4.02. The Swing Line Lender shall furnish the Borrower with a copy of the applicable Revolving Loan Notice promptly after delivering such notice to the Administrative Agent. Each Lender shall make an amount equal to its Pro Rata Share of the amount specified in such Revolving Loan Notice available to the Administrative Agent in immediately available funds for the account of the Swing Line Lender at the Administrative Agent's Office not later than 1:00 p.m. on the day specified in such Revolving Loan Notice, whereupon, subject to Section 2.04(c)(ii), each Lender that so makes funds available shall be deemed to have made a Base Rate Revolving Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the Swing Line Lender. (ii) If for any reason any Swing Line Loan cannot be refinanced by such a Revolving Borrowing in accordance with Section 2.04(c)(i), the request for Base Rate Revolving Loans submitted by the Swing Line Lender as set forth herein shall be deemed to be a request by the Swing Line Lender that each of the Lenders fund its risk participation in the relevant Swing Line Loan and each Lender's payment to the Administrative Agent for the account of the Swing Line Lender pursuant to Section 2.04(c)(i) shall be deemed payment in respect of such participation. (iii) If any Lender fails to make available to the Administrative Agent for the account of the Swing Line Lender any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.04(c) by the time specified in Section 2.04(c)(i), the Swing Line Lender shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Swing Line Lender at a rate per annum equal to the Federal Funds Rate from time to time in effect. A certificate of the Swing Line Lender submitted to any Lender (through the Administrative Agent) with respect to any amounts owing under this clause (iii) shall be conclusive absent manifest error. (iv) Each Lender's obligation to make Revolving Loans or to purchase and fund risk participations in Swing Line Loans pursuant to this Section 2.04(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever, (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing, including whether or not the conditions set forth in Section 4.02 shall have been satisfied. No such funding of risk participations shall relieve or otherwise impair the obligation of the Borrower to repay Swing Line Loans, together with interest as provided herein. (d) Repayment of Participations. (i) At any time after any Lender has purchased and funded a risk participation in a Swing Line Loan, if the Swing Line Lender receives any payment on account of such Swing Line Loan, the Swing Line Lender will distribute to such Lender its Pro Rata Share of such payment (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's risk participation was funded) in the same funds as those received by the Swing Line Lender. (ii) If any payment received by the Swing Line Lender in respect of principal or interest on any Swing Line Loan is required to be returned by the Swing Line Lender under any of the circumstances described in Section 10.06 (including pursuant to any settlement entered into by the Swing Line Lender in its discretion), each Lender shall pay to the Swing Line Lender its Pro Rata Share thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned, at a rate per annum equal to the Federal Funds Rate. The Administrative Agent will make such demand upon the request of the Swing Line Lender. (e) Interest for Account of Swing Line Lender. The Swing Line Lender shall be responsible for invoicing the Borrower for interest on the Swing Line Loans. Until each Lender funds its Base Rate Revolving Loan or risk participation pursuant to this Section 2.04 to refinance such Lender's Pro Rata Share of any Swing Line Loan, interest in respect of such Pro Rata Share shall be solely for the account of the Swing Line Lender. (f) Payments Directly to Swing Line Lender. The Borrower shall make all payments of principal and interest in respect of the Swing Line Loans directly to the Swing Line Lender. 2.05 Prepayments. (a) The Borrower may, upon notice to the Administrative Agent, at any time or from time to time voluntarily prepay Revolving Loans in whole or in part without premium or penalty; provided that (i) such notice must be received by the Administrative Agent not later than 11:00 a.m. (A) three Business Days prior to any date of prepayment of Eurodollar Rate Loans and (B) on the date of prepayment of Base Rate Revolving Loans; (ii) any prepayment of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof; and (iii) any prepayment of Base Rate Revolving Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof or, in each case, if less, the entire principal amount thereof then outstanding. Each such notice shall specify the date and amount of such prepayment and the Type(s) of Revolving Loans to be prepaid. The Administrative Agent will promptly notify each Lender of its receipt of each such notice, and of the amount of such Lender's Pro Rata Share of such prepayment. If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of a Eurodollar Rate Loan shall be accompanied by all accrued interest thereon, together with any additional amounts required pursuant to Section 3.05. Each such prepayment shall be applied to the Revolving Loans of the Lenders in accordance with their respective Pro Rata Shares. (b) The Borrower may, upon notice to the Swing Line Lender (with a copy to the Administrative Agent), at any time or from time to time, voluntarily prepay Swing Line Loans in whole or in part without premium or penalty; provided that (i) such notice must be received by the Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on the date of the prepayment, and (ii) any such prepayment shall be in a minimum principal amount of $100,000, or, if less, the entire principal amount thereof then outstanding. Each such notice shall specify the date and amount of such prepayment. If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. (c) If for any reason the Total Outstandings at any time exceed the Aggregate Commitments then in effect, the Borrower shall immediately prepay Loans and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided, however, that the Borrower shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.05(c) unless after the prepayment in full of the Revolving Loans and Swing Line Loans the Total Outstandings exceed the Aggregate Commitments then in effect. 2.06 Termination or Reduction of Commitments. The Borrower may, upon notice to the Administrative Agent, terminate the Aggregate Commitments, or from time to time permanently reduce the Aggregate Commitments; provided that (i) any such notice shall be received by the Administrative Agent not later than 11:00 a.m. five Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $10,000,000 or any whole multiple of $1,000,000 in excess thereof, (iii) the Borrower shall not terminate or reduce the Aggregate Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the Total Outstandings would exceed the Aggregate Commitments, and (iv) if, after giving effect to any reduction of the Aggregate Commitments, the Letter of Credit Sublimit or the Swing Line Sublimit exceeds the amount of the Aggregate Commitments, such Sublimit shall be automatically reduced by the amount of such excess. The Administrative Agent will promptly notify the Lenders of any such notice of termination or reduction of the Aggregate Commitments. Any reduction of the Aggregate Commitments shall be applied to the Commitment of each Lender according to its Pro Rata Share. All Facility and Utilization Fees accrued until the effective date of any termination of the Aggregate Commitments shall be paid on the effective date of such termination. 2.07 Repayment of Loans. (a) The Borrower shall repay to the Lenders on the Maturity Date the aggregate principal amount of Revolving Loans outstanding on such date. (b) The Borrower shall repay each Swing Line Loan on the earlier to occur of (i) the date five Business Days after such Loan is made and (ii) the Maturity Date. 2.08 Interest. (a) Subject to the provisions of subsection (b) below, (i) each Eurodollar Rate Loan shall bear interest on the outstanding principal amount thereof for each Interest Period at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Rate; (ii) each Base Rate Revolving Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate; and (iii) each Swing Line Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate. (b) If any amount payable by the Borrower under any Loan Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws. Furthermore, upon the request of the Required Lenders, while any Event of Default exists, the Borrower shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand. (c) Interest on each Loan shall be due and payable in arrears on each Interest Payment Date applicable thereto and at such other times as may be specified herein. Interest hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law. 2.09 Fees. In addition to certain fees described in subsections (i) and (j) of Section 2.03: (a) Facility Fee. The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Pro Rata Share, a facility fee ("Facility Fee") equal to the Applicable Rate times the actual daily amount of the Aggregate Commitments (or, if the Aggregate Commitments have terminated, on the Outstanding Amount of all Revolving Loans, Swing Line Loans and L/C Obligations), regardless of usage. The Facility Fee shall accrue at all times during the Availability Period (and thereafter so long as any Revolving Loans, Swing Line Loans or L/C Obligations remain outstanding), including at any time during which one or more of the conditions in Article IV is not met, and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the Closing Date, and on the Maturity Date (and, if applicable, thereafter on demand). The Facility Fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Rate during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. (b) Utilization Fee. The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Pro Rata Share, a utilization fee ("Utilization Fee") equal to the Applicable Rate times the Total Outstandings on each day that the Total Outstandings exceed 33% of the actual daily amount of the Aggregate Commitments. The Utilization Fee shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the Closing Date, and on the Maturity Date. The Utilization Fee shall be calculated quarterly in arrears and if there is any change in the Applicable Rate during any quarter, the daily amount shall be computed and multiplied by the Applicable Rate for each period during which such Applicable Rate was in effect. The Utilization Fee shall accrue at all times, including at any time during which one or more of the conditions in Article IV is not met. (c) Other Fees. (i) The Borrower shall pay to the Arranger and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Fee Letter. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever. (ii) The Borrower shall pay to the Lenders such fees as shall have been separately agreed upon in writing in the amounts and at the times so specified. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever. 2.10 Computation of Interest and Fees. All computations of interest for Base Rate Loans when the Base Rate is determined by Bank of America's "prime rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. Subject to Section 10.10, all other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year). Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall, subject to Section 2.12(a), bear interest for one day. 2.11 Evidence of Debt. (a) The Credit Extensions made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Credit Extensions made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through the Administrative Agent) a Revolving Loan Note and/or a Swing Line Note, as applicable, which shall evidence such Lender's Loans in addition to such accounts or records. Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto. (b) In addition to the accounts and records referred to in subsection (a), each Lender and the Administrative Agent shall maintain in accordance with its usual practice accounts or records evidencing the purchases and sales by such Lender of participations in Letters of Credit and Swing Line Loans. In the event of any conflict between the accounts and records maintained by the Administrative Agent and the accounts and records of any Lender in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. 2.12 Payments Generally. (a) All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the Administrative Agent's Office in Dollars and in immediately available funds not later than 2:00 p.m. on the date specified herein. The Administrative Agent will promptly distribute to each Lender its Pro Rata Share (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender's Lending Office. All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. (b) If any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be. (c) Unless the Borrower or any Lender has notified the Administrative Agent, prior to the date any payment is required to be made by it to the Administrative Agent hereunder, that the Borrower or such Lender, as the case may be, will not make such payment, the Administrative Agent may assume that the Borrower or such Lender, as the case may be, has timely made such payment and may (but shall not be so required to), in reliance thereon, make available a corresponding amount to the Person entitled thereto. If and to the extent that such payment was not in fact made to the Administrative Agent in immediately available funds, then: (i) if the Borrower failed to make such payment, each Lender shall forthwith on demand repay to the Administrative Agent the portion of such assumed payment that was made available to such Lender in immediately available funds, together with interest thereon in respect of each day from and including the date such amount was made available by the Administrative Agent to such Lender to the date such amount is repaid to the Administrative Agent in immediately available funds at the Federal Funds Rate from time to time in effect; and (ii) if any Lender failed to make such payment, such Lender shall forthwith on demand pay to the Administrative Agent the amount thereof in immediately available funds, together with interest thereon for the period from the date such amount was made available by the Administrative Agent to the Borrower to the date such amount is recovered by the Administrative Agent (the "Compensation Period") at a rate per annum equal to the Federal Funds Rate from time to time in effect. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Revolving Loan included in the applicable Borrowing. If such Lender does not pay such amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent may make a demand therefor upon the Borrower, and the Borrower shall pay such amount to the Administrative Agent, together with interest thereon for the Compensation Period at a rate per annum equal to the rate of interest applicable to the applicable Borrowing. Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitment or to prejudice any rights which the Administrative Agent or the Borrower may have against any Lender as a result of any default by such Lender hereunder. A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount owing under this subsection (c) shall be conclusive, absent manifest error. (d) If any Lender makes available to the Administrative Agent funds for any Loan to be made by such Lender as provided in the foregoing provisions of this Article II, and such funds are not made available to the Borrower by the Administrative Agent because the conditions to the applicable Credit Extension set forth in Article IV are not satisfied or waived in accordance with the terms hereof, the Administrative Agent shall return such funds (in like funds as received from such Lender) to such Lender, without interest. (e) The obligations of the Lenders hereunder to make Revolving Loans and to fund participations in Letters of Credit and Swing Line Loans are several and not joint. The failure of any Lender to make any Revolving Loan or to fund any such participation on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Revolving Loan or purchase its participation. (f) Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner. 2.13 Sharing of Payments. If, other than as expressly provided elsewhere herein, any Lender shall obtain on account of the Revolving Loans made by it, or the participations in L/C Obligations or in Swing Line Loans held by it, any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder) thereof, such Lender shall immediately (a) notify the Administrative Agent of such fact, and (b) purchase from the other Lenders such participations in the Revolving Loans made by them and/or such subparticipations in the participations in L/C Obligations or Swing Line Loans held by them, as the case may be, as shall be necessary to cause such purchasing Lender to share the excess payment in respect of such Revolving Loans or such participations, as the case may be, pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Lender under any of the circumstances described in Section 10.06 (including pursuant to any settlement entered into by the purchasing Lender in its discretion), such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender's ratable share (according to the proportion of (i) the amount of such paying Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered, without further interest thereon. The Borrower agrees that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by Law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.09) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. The Administrative Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Lenders following any such purchases or repayments. Each Lender that purchases a participation pursuant to this Section shall from and after such purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Lender were the original owner of the Obligations purchased. ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 Taxes. (a) Any and all payments by the Borrower to or for the account of the Administrative Agent or any Lender under any Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of the Administrative Agent and each Lender, taxes imposed on or measured by its overall net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which the Administrative Agent or such Lender, as the case may be, is organized or maintains a lending office (all such non-excluded taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Loan Document to the Administrative Agent or any Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), each of the Administrative Agent and such Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Laws, and (iv) within 30 days after the date of such payment, the Borrower shall furnish to the Administrative Agent (which shall forward the same to such Lender) the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document (hereinafter referred to as "Other Taxes"). (c) If the Borrower shall be required to deduct or pay any Taxes or Other Taxes from or in respect of any sum payable under any Loan Document to the Administrative Agent or any Lender, the Borrower shall also pay to the Administrative Agent or to such Lender, as the case may be, at the time interest is paid, such additional amount that the Administrative Agent or such Lender specifies is necessary to preserve the after-tax yield (after factoring in all taxes, including taxes imposed on or measured by net income) that the Administrative Agent or such Lender would have received if such Taxes or Other Taxes had not been imposed. (d) The Borrower agrees to indemnify the Administrative Agent and each Lender for (i) the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by the Administrative Agent and such Lender, (ii) amounts payable under Section 3.01(c) and (iii) any liability (including additions to tax, penalties, interest and expenses) arising therefrom or with respect thereto, in each case whether or not such Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. Payment under this subsection (d) shall be made within 30 days after the date the Lender or the Administrative Agent makes a demand therefor. 3.02 Illegality. If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Eurodollar Rate Loans, or to determine or charge interest rates based upon the Eurodollar Rate, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, any obligation of such Lender to make or continue Eurodollar Rate Loans or to convert Base Rate Revolving Loans to Eurodollar Rate Loans shall be suspended until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Rate Loans of such Lender to Base Rate Loans, either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Loans. Upon any such prepayment or conversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted. Each Lender agrees to designate a different Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of such Lender, otherwise be materially disadvantageous to such Lender. 3.03 Inability to Determine Rates. If the Required Lenders determine that for any reason adequate and reasonable means do not exist for determining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or that the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, the Administrative Agent will promptly so notify the Borrower and each Lender. Thereafter, the obligation of the Lenders to make or maintain Eurodollar Rate Loans shall be suspended until the Administrative Agent (upon the instruction of the Required Lenders) revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for a Borrowing of, conversion to or continuation of Eurodollar Rate Loans or, failing that, will be deemed to have converted such request into a request for a Revolving Borrowing of Base Rate Loans in the amount specified therein. 3.04 Increased Cost and Reduced Return; Capital Adequacy; Reserves on Eurodollar Rate Loans. (a) If any Lender determines that as a result of the introduction of or any change in or in the interpretation of any Law, or such Lender's compliance therewith, there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Loans or (as the case may be) issuing or participating in Letters of Credit, or a reduction in the amount received or receivable by such Lender in connection with any of the foregoing (excluding for purposes of this subsection (a) any such increased costs or reduction in amount resulting from (i) Taxes or Other Taxes (as to which Section 3.01 shall govern), (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or any foreign jurisdiction or any political subdivision of either thereof under the Laws of which such Lender is organized or has its Lending Office, and (iii) reserve requirements contemplated by Section 3.04(c)), then from time to time upon demand of such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such increased cost or reduction. (b) If any Lender determines that the introduction of any Law regarding capital adequacy or any change therein or in the interpretation thereof, or compliance by such Lender (or its Lending Office) therewith, has the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender's obligations hereunder (taking into consideration its policies with respect to capital adequacy and such Lender's desired return on capital), then from time to time upon demand of such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such reduction. (c) The Borrower shall pay to each Lender, as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as "Eurocurrency liabilities"), additional interest on the unpaid principal amount of each Eurodollar Rate Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive), which shall be due and payable on each date on which interest is payable on such Loan, provided the Borrower shall have received at least 15 days' prior notice (with a copy to the Administrative Agent) of such additional interest from such Lender. If a Lender fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be due and payable 15 days from receipt of such notice. 3.05 Funding Losses. Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, setting forth in reasonable detail the amount payable to such Lender, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of: (a) any continuation, conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); (b) any failure by the Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, continue or convert any Loan other than a Base Rate Loan on the date or in the amount notified by the Borrower; or (c) any assignment of a Eurodollar Rate Loan on a day other than the last day of the Interest Period therefor as a result of a request by the Borrower pursuant to Section 10.16; including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. The Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing. For purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.05, each Lender shall be deemed to have funded each Eurodollar Rate Loan made by it at the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the London interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan was in fact so funded. 3.06 Matters Applicable to all Requests for Compensation. (a) A certificate of the Administrative Agent or any Lender claiming compensation under this Article III and setting forth in reasonable detail the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Administrative Agent or such Lender may use any reasonable averaging and attribution methods. (b) Upon any Lender's making a claim for compensation under Section 3.01 or 3.04, the Borrower may replace such Lender in accordance with Section 10.16. 3.07 Survival. All of the Borrower's obligations under this Article III shall survive termination of the Aggregate Commitments and repayment of all other Obligations hereunder. ARTICLE IV. CONDITIONS PRECEDENT TO CREDIT EXTENSIONS 4.01 Conditions of Initial Credit Extension. The obligation of each Lender to make its initial Credit Extension hereunder is subject to satisfaction of the following conditions precedent: (a) The Administrative Agent's receipt of the following, each of which shall be originals or facsimiles (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the Borrower, each dated the Closing Date (or, in the case of certificates of governmental officials, a recent date before the Closing Date) and each in form and substance satisfactory to the Administrative Agent and its legal counsel: (i) executed counterparts of this Agreement, sufficient in number for distribution to the Administrative Agent, each Lender and the Borrower; (ii) a Note executed by the Borrower in favor of each Lender requesting a Note; (iii) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of the Borrower as the Administrative Agent may require evidencing the identity, authority and capacity of each such Responsible Officer authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents to which the Borrower is a party; (iv) such documents and certifications as the Administrative Agent may reasonably require to evidence that the Borrower is duly organized or formed, and that the Borrower and each Material Insurance Subsidiary is validly existing and in good standing in its state of incorporation and/or domicile; (v) a favorable opinion of counsel to the Borrower, addressed to the Administrative Agent and each Lender, as to matters concerning the Borrower and the Loan Documents as the Required Lenders may reasonably request; (vi) a certificate of a Responsible Officer of the Borrower either (A) attaching copies of all consents, licenses and approvals required in connection with the execution, delivery and performance by the Borrower and the validity against the Borrower of the Loan Documents to which it is a party, and such consents, licenses and approvals shall be in full force and effect, or (B) stating that no such consents, licenses or approvals are so required; (vii) a certificate signed by a Responsible Officer of the Borrower certifying (A) that the conditions specified in Sections 4.02(a) and (b) have been satisfied, and (B) that there has been no event or circumstance since the date of the Audited Financial Statements that has had or could be reasonably expected to have, either individually or in the aggregate, a Material Adverse Effect; and (C) the current Debt Ratings; (viii) evidence that the Existing Credit Agreement has been or concurrently with the Closing Date is being terminated and that obligations under the Existing Credit Agreement have been or concurrently with the Closing Date are being satisfied; and (ix) such other assurances, certificates, documents, consents or opinions as the Administrative Agent, the L/C Issuer, the Swing Line Lender or the Required Lenders reasonably may require. (b) Any fees required to be paid on or before the Closing Date shall have been paid. (c) Unless waived by the Administrative Agent, the Borrower shall have paid all Attorney Costs of the Administrative Agent to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute its reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude a final settling of accounts between the Borrower and the Administrative Agent). (d) The Closing Date shall have occurred on or before September 30, 2002. 4.02 Conditions to all Credit Extensions. The obligation of each Lender to honor any Request for Credit Extension (other than a Revolving Loan Notice requesting only a conversion of Revolving Loans to the other Type, or a continuation of Eurodollar Rate Loans) is subject to the following conditions precedent: (a) The representations and warranties of the Borrower contained in Article V or any other Loan Document, or which are contained in any document furnished at any time under or in connection herewith or therewith, shall be true and correct on and as of the date of such Credit Extension, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, and except that for purposes of this Section 4.02, the representations and warranties contained in subsections (a), (b) and (c) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a), (b) and (c), respectively, of Section 6.01. (b) No Default shall exist, or would result from such proposed Credit Extension. (c) The Administrative Agent and, if applicable, the L/C Issuer or the Swing Line Lender shall have received a Request for Credit Extension in accordance with the requirements hereof. Each Request for Credit Extension (other than a Revolving Loan Notice requesting only a conversion of Revolving Loans to the other Type or a continuation of Eurodollar Rate Loans) submitted by the Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.02(a) and (b) have been satisfied on and as of the date of the applicable Credit Extension. ARTICLE V. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Administrative Agent and the Lenders that: 5.01 Existence, Qualification and Power; Compliance with Laws. The Borrower and each of its Material Subsidiaries (a) is a corporation duly organized or formed, validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, (c) is duly qualified and is licensed and in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license, and (d) is in compliance with all Laws; except in each case referred to in clause (b)(i), (c) or (d), to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.02 Authorization; No Contravention. The execution, delivery and performance by the Borrower of each Loan Document to which it is party, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of the Borrower's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, (i) any Contractual Obligation to which the Borrower is a party or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which the Borrower or its property is subject; or (c) violate any Law. 5.03 Governmental Authorization; Other Consents. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower of this Agreement or any other Loan Document. 5.04 Binding Effect. This Agreement has been, and each other Loan Document to which the Borrower is a party, when delivered hereunder, will have been, duly executed and delivered by the Borrower. This Agreement constitutes, and each other Loan Document to which the Borrower is a party when so delivered will constitute, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by Debtor Relief Laws. 5.05 Financial Statements; No Material Adverse Effect. (a) The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Borrower and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness. (b) The unaudited consolidated balance sheet of the Borrower and its Subsidiaries dated June 30, 2002, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal quarter ended on that date (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments. Schedule 5.05 sets forth all material indebtedness and other material liabilities, direct or contingent, of the Borrower and its consolidated Subsidiaries not reflected on the June 30, 2002 financial statements referred to above, incurred after the date of such financial statements but prior to the Closing Date, including liabilities for material commitments and Indebtedness. (c) The December 31, 2001 Annual Statement of each Material Insurance Subsidiary and the June 30, 2002 Quarterly Statements of each Material Insurance Subsidiary (i) were prepared in accordance with SAP consistently applied through the periods covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of each Material Insurance Subsidiary as of the date thereof and their results of operations for the period covered thereby, subject, in the case of such Quarterly Statements for clauses (i) and (ii), to the absence of footnotes and normal year-end adjustments; and (iii) show all material indebtedness and other liabilities, direct or contingent, of each Material Insurance Subsidiary as of the date of such financial statements, including liabilities for taxes, material commitments and Indebtedness. (d) Since the date of the Audited Financial Statements, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect. 5.06 Litigation. Except as set forth in Schedule 5.06, there are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Borrower, threatened or contemplated, at Law, in equity, in arbitration or before any Governmental Authority, by or against the Borrower or any of its Subsidiaries or against any of their respective properties or revenues that (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby, or (b) either individually or in the aggregate, if determined adversely, could reasonably be expected to have a Material Adverse Effect. 5.07 No Default. Neither the Borrower nor any Subsidiary is in default under or with respect to any Contractual Obligation that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document. 5.08 Ownership of Property; Liens. Each of the Borrower and each Subsidiary has good record and indefeasible title to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The property of the Borrower and its Material Subsidiaries is subject to no Liens, other than Permitted Liens. 5.09 Environmental Compliance. To the Borrower's knowledge, the Borrower and its Subsidiaries have complied with all Environmental Laws except for any Environmental Liability as a result of any non-compliance therewith which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.10 Insurance. The properties of the Borrower and its Material Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Borrower, in such amounts, with such deductibles and covering such risks as are customarily carried by companies of similar size engaged in similar businesses and owning similar properties in localities where the Borrower or the applicable Subsidiary operates. 5.11 Taxes. The Borrower and its Subsidiaries have filed all Federal, state and other material tax returns and reports required to be filed, and have paid all Federal, state and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves have been provided in accordance with GAAP or SAP, as applicable. There is no proposed tax assessment against the Borrower or any Subsidiary that would, if made, have a Material Adverse Effect. 5.12 ERISA Compliance. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state Laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of the Borrower, nothing has occurred which would prevent, or cause the loss of, such qualification. The Borrower and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of the Borrower, threatened claims, actions or Lawsuits, or action by any Governmental Authority, with respect to any Plan that could be reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability which has resulted or which could reasonably be expected to have a Material Adverse Effect; (iii) neither the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA) which has resulted or which could reasonably be expected to have a Material Adverse Effect; (iv) neither the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan which has resulted or which could reasonably be expected to have a Material Adverse Effect; and (v) neither the Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA which has resulted or which could reasonably be expected to have a Material Adverse Effect. 5.13 Subsidiaries. As of the Closing Date, the Borrower has no Material Subsidiaries other than SAFECO Insurance Company of America, General Insurance Company of America, American States Insurance Company of Indiana, American Economy Insurance Company of Indiana and SAFECO Life Insurance Company. 5.14 Margin Regulations; Investment Company Act; Public Utility Holding Company Act. (a) The Borrower is not engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the FRB), or extending credit for the purpose of purchasing or carrying margin stock. Following the application of the proceeds of each Borrowing or drawing under each Letter of Credit, not more than 25% of the value of the assets (either of the Borrower only or of the Borrower and its Subsidiaries on a consolidated basis) subject to the provisions of Section 7.01 or Section 7.05 or subject to any restriction contained in any agreement or instrument between the Borrower and any Lender or any Affiliate of any Lender relating to Indebtedness and within the scope of Section 8.01(e) will be margin stock. (b) None of the Borrower, any Person Controlling the Borrower, or any Subsidiary (i) 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, or (ii) is or is required to be registered as an "investment company" under the Investment Company Act of 1940. 5.15 Disclosure. The Borrower has disclosed to the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. No report, financial statement, certificate or other information furnished (whether in writing or orally) by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. 5.16 Compliance with Laws. Each of the Borrower and each Material Subsidiary is in compliance in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 5.17 Solvent. The Borrower is, and the Borrower and its Subsidiaries are on a consolidated basis, Solvent. 5.18 Licenses. No License, the loss of which could reasonably be expected to have a Material Adverse Effect, is the subject of a proceeding for suspension or revocation. To the Borrower's knowledge, there is no sustainable basis for such suspension or revocation, and no such suspension or revocation has been threatened by any Governmental Authority. 5.19 Employee Matters. As of the Closing Date, there are no strikes, work stoppages, election or decertification petitions or proceedings, unfair labor charges, equal employment opportunity proceedings, wage payment or material unemployment compensation proceedings, material workers' compensation proceedings or other material labor/employee related controversies pending or, to the knowledge of the Borrower, threatened between the Borrower or any of its Subsidiaries and any of their respective employees, other than employee grievances which could not in the aggregate reasonably be expected to have a Material Adverse Effect. 5.20 Business. The Borrower is presently engaged directly or through Subsidiaries in the following business: property and casualty insurance, surety, life insurance and asset management. ARTICLE VI. AFFIRMATIVE COVENANTS So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, the Borrower shall, and shall (except in the case of the covenants set forth in Sections 6.01, 6.02, 6.03 and 6.11) cause each Material Subsidiary to: 6.01 Financial Statements. Deliver to the Administrative Agent with sufficient copies for each Lender, in form and detail satisfactory to the Administrative Agent and the Required Lenders: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income or operations, shareholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and prepared in accordance with GAAP, audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing reasonably acceptable to the Required Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any "going concern" or like qualification or exception or any qualification or exception as to the scope of such audit; (b) as soon as available, but in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated statements of income or operations, shareholders' equity and cash flows for such fiscal quarter and for the portion of the Borrower's fiscal year then ended, setting forth in each case in comparative form (other than with respect to the balance sheet) the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, all in reasonable detail and certified by a Responsible Officer of the Borrower as fairly presenting the financial condition, results of operations, shareholders' equity and cash flows of the Borrower and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes; (c) upon the earlier of (i) 15 days after the regulatory filing date or (ii) 75 days after the close of each fiscal year of each Material Insurance Subsidiary, copies of the unaudited Annual Statement of such Material Insurance Subsidiary, certified by the secretary or treasurer of such Material Insurance Subsidiary, all such statements to be prepared in accordance with SAP consistently applied throughout the periods reflected therein and, if required by the applicable Governmental Authority, audited and certified by independent certified public accountants of recognized national standing; and (d) upon the earlier of (i) 10 days after the regulatory filing date or (ii) 60 days after the close of each of the first three (3) fiscal quarters of each fiscal year of each Material Insurance Subsidiary, copies of the Quarterly Statement of each of the Material Insurance Subsidiaries, certified by the secretary or treasurer of such Material Insurance Subsidiary, all such statements to be prepared in accordance with SAP consistently applied through the period reflected herein. As to any information contained in materials furnished pursuant to Section 6.02(d), the Borrower shall not be separately required to furnish such information under clause (a) or (b) above, but the foregoing shall not be in derogation of the obligation of the Borrower to furnish the information and materials described in subsections (a) and (b) above at the times specified therein. 6.02 Certificates; Other Information. Deliver to the Administrative Agent, in form and detail satisfactory to the Administrative Agent and the Required Lenders: (a) concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of the Borrower; (b) promptly after any request by the Administrative Agent or any Lender, copies of any detailed audit reports of the Borrower by independent accountants in connection with the accounts or books of the Borrower or any Subsidiary, or any audit of any of them; (c) promptly after the same are available, copies of each (i) annual report, proxy or financial statement or, at the Administrative Agent's request, copies of each other report or communication sent to the stockholders of the Borrower, and copies of all annual, regular, periodic and special reports (including Forms 10K, 10Q and 8K) and registration statements which the Borrower may file or be required to file with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to the Administrative Agent pursuant hereto other than such financial statements relating to SAFECO mutual funds and (ii) without duplication, copies of any certifications or affidavits required by the SEC in connection with the filing of Forms 10K, 10Q and 8K; and (d) promptly, such additional information regarding the business, financial or corporate affairs of the Borrower or any Subsidiary, or compliance with the terms of the Loan Documents, as the Administrative Agent or any Lender may from time to time reasonably request. Documents required to be delivered pursuant to Section 6.01(a), (b), (c) or (d) or Section 6.02(c) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower's website on the Internet at the website address listed on Schedule 10.02; or (ii) on which such documents are posted on the Borrower's behalf on IntraLinks/IntraAgency or another relevant website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent for any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify (which may be by facsimile or electronic mail) the Administrative Agent and each Lender of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the Compliance Certificates required by Section 6.02(a) to the Administrative Agent and each of the Lenders. Except for such Compliance Certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents. 6.03 Notices. Promptly notify the Administrative Agent: (a) of the occurrence of any Default; (b) of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Borrower or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Borrower or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Borrower or any Subsidiary, including pursuant to any applicable Environmental Laws; (c) of the occurrence of any ERISA Event; (d) of an increase in Unfunded Pension Liabilities of any Pension Plan that would cause the Unfunded Pension Liabilities of all Pension Plans to have increased by more than $50,000,000 in the aggregate after the Closing Date; (e) of any material change in accounting policies or financial reporting practices by the Borrower or any Subsidiary; (f) of any announcement by Moody's or S&P of any change in a Debt Rating; (g) of any announcement by A.M. Best of any change in the rating of any Material Insurance Subsidiary; (h) the receipt of any notice from any Governmental Authority of the expiration without renewal, revocation or suspension of, or the institution of any proceedings to revoke or suspend, any License now or thereafter held by any Insurance Subsidiary which is required to conduct insurance business in compliance with all applicable Laws and regulations and the expiration, revocation or suspension of which could reasonably be expected to have a Material Adverse Effect; (i) the receipt of any notice from any Governmental Authority of the institution of any disciplinary proceedings against or in respect of any Insurance Subsidiary, or the issuance of any order, the taking of any action or any request for an extraordinary audit for cause by any Governmental Authority which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; or (j) any judicial or administrative order limiting or controlling the insurance business of any Insurance Subsidiary (and not the insurance industry generally) which has been issued or adopted and which has had, or which could reasonably be expected to have, a Material Adverse Effect. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken and proposes to take with respect thereto. Each notice pursuant to Section 6.03(a) shall describe with particularity any and all provisions of this Agreement and any other Loan Document that have been breached. 6.04 Payment of Obligations. Pay and discharge as the same shall become due and payable, all its material obligations and liabilities, including (a) all material tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP or SAP, as applicable, are being maintained by the Borrower or such Material Subsidiary; (b) all lawful claims which, if unpaid, would by Law become a Lien upon its property, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP or SAP, as applicable, are being maintained by the Borrower or such Material Subsidiary; and (c) all material Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. 6.05 Preservation of Existence, Etc. (a) Preserve, renew and maintain in full force and effect its legal existence and good standing under the Laws of the jurisdiction of its organization except in a transaction permitted by Section 7.04 or 7.05; (b) take all reasonable action to maintain all rights, privileges, permits, licenses and franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (c) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. 6.06 Maintenance of Properties. (a) Maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good working order and condition, ordinary wear and tear excepted and except in connection with transactions permitted by Sections 7.04 and 7.05; and (b) make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. 6.07 Maintenance of Insurance. Maintain with financially sound and reputable insurance companies not Affiliates of the Borrower, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons. 6.08 Compliance with Laws. Comply in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its business or property, except in such instances in which (a) such requirement of Law or order, write, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted; or (b) the failure to comply therewith could not reasonably be expected to have a Material Adverse Effect. 6.09 Books and Records. (a) Maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP or SAP, as applicable, consistently applied shall be made of all financial transactions and matters involving the assets and business of the Borrower or such Material Subsidiary, as the case may be; and (b) maintain such books of record and account in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over the Borrower or such Material Subsidiary, as the case may be. 6.10 Inspection Rights. Permit representatives and independent contractors of the Administrative Agent and each Lender to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Borrower; provided, however, that when an Event of Default exists the Administrative Agent or any Lender (or any of their respective representatives or independent contractors) may do any of the foregoing at the expense of the Borrower at any time during normal business hours upon no less than two days advance notice. 6.11 Use of Proceeds. Use the proceeds of the Credit Extensions for general corporate purposes not in contravention of any Law or of any Loan Document. ARTICLE VII. NEGATIVE COVENANTS So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding: 7.01 Liens. The Borrower shall not, nor shall it permit any Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) Liens existing on property of the Borrower or any Subsidiary (other than SAFECO Properties, Inc.) on the Closing Date securing Indebtedness with an aggregate principal amount not to exceed $10,000,000 outstanding on such date; (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 6.04; provided, that no notice of Lien has been filed or recorded; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens on the property of the Borrower or any Subsidiary securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business, provided all such Liens in the aggregate could not (even if enforced) reasonably be expected to cause a Material Adverse Effect. (g) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Borrower and its Subsidiaries; (h) Liens arising solely by virtue of any statutory or common Law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided, that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Borrower in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Borrower or any Subsidiary to provide collateral to the depository institution; (i) Liens consisting of deposits made by any Insurance Subsidiary with the insurance regulatory authority in its jurisdiction of domicile or other statutory Liens or Liens or claims imposed or required by applicable insurance Law or regulation against the assets of any Insurance Subsidiary, in each case in favor of all policyholders of such Insurance Subsidiary and in the ordinary course of such Insurance Subsidiary's business; (j) Liens securing obligations of SAFECO Properties, Inc. and their Subsidiaries incurred in the ordinary course of business and attaching solely to the property of such Persons; (k) Liens securing obligations owed to the Borrower or owed by any Subsidiary of the Borrower to any of its other Subsidiaries; and (l) Liens securing other Obligations of the Borrower and its Subsidiaries not to exceed $100,000,000 in the aggregate at any one time outstanding. 7.02 Indebtedness. The Borrower shall not, nor shall it permit any Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Indebtedness, if an Event of Default exists or would result therefrom. 7.03 Fundamental Changes. The Borrower shall not, directly or indirectly, merge, dissolve, liquidate, consolidate with or into another Person, or 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) to or in favor of any Person, except that, the Borrower may merge with an entity organized under the Laws of the United States so long as (a) no Default exists or would result therefrom, (b) the Borrower is the surviving entity in such merger and (c) all applicable regulatory requirements have been satisfied. No Material Insurance Subsidiary shall change its country of domicile without the prior written consent of the Required Lenders, which consent shall not be unreasonably withheld. 7.04 Dispositions. The Borrower shall not, nor shall it permit any Subsidiary to, directly or indirectly, make any Disposition or enter into any agreement to make any Disposition, except: (a) Dispositions of used, worn-out or surplus equipment in the ordinary course of business and other Dispositions of immaterial property (including charitable donations) made in the ordinary course of business; (b) Dispositions of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; (c) Dispositions of investments by any Insurance Subsidiary; (d) Dispositions of property by SAFECO Properties, Inc. and its Subsidiaries in the ordinary course of business so long as such proceeds are promptly used by such Persons to purchase other property or repay Indebtedness of such Persons; (e) Dispositions of property to the Borrower or any of its Subsidiaries; and (f) Dispositions not otherwise permitted hereunder which are made for fair market value; provided, that (i) at the time of any disposition, no Default shall exist or shall result from such Disposition and (ii) the aggregate value of all assets Disposed of pursuant to this subsection 7.04(f) by the Borrower and its Subsidiaries, together, shall not exceed 25% of Shareholders' Equity (determined as of the last day of the preceding fiscal year) in any fiscal year. 7.05 Change in Nature of Business. The Borrower shall not, and shall not permit any Subsidiary to, engage in any material line of business substantially different from those lines of business conducted by the Borrower and its Subsidiaries on the date hereof or any business substantially related or incidental thereto. 7.06 Transactions with Affiliates. The Borrower shall not, and shall not permit any Subsidiary to, enter into any transaction of any kind with any Affiliate of the Borrower, whether or not in the ordinary course of business, other than on fair and reasonable terms 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 an Affiliate. 7.07 Burdensome Agreements. The Borrower shall not, nor shall it permit any Subsidiary to, enter into any Contractual Obligation (other than this Agreement or any other Loan Document) that (a) limits the ability (i) of any Material Subsidiary to make Dividends to the Borrower or to otherwise transfer property to the Borrower, or (ii) of the Borrower or any Subsidiary to create, incur, assume or suffer to exist Liens on property of such Person; provided, however, that this clause (ii) shall not prohibit any negative pledge incurred or provided in favor of any holder of Indebtedness permitted under Section 7.02 solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness; or (b) requires the grant of a Lien to secure an obligation of such Person if a Lien is granted to secure another obligation of such Person. 7.08 Use of Proceeds. The Borrower shall not, nor shall it permit any Subsidiary to, use the proceeds of any Credit Extension, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry margin stock (within the meaning of Regulation U of the FRB) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose. 7.09 Shareholders' Equity. The Borrower shall not permit Shareholders' Equity at any time to be less than the sum of (a) $2,700,000,000, (b) an amount equal to 50% of the Consolidated Net Income earned in each full fiscal quarter ending after July 1, 2002 (with no deduction for a net loss in any such fiscal quarter) and (c) an amount equal to 25% of the Net Cash Proceeds received by the Borrower and its Subsidiaries after the date hereof from the issuance and sale of Capital Stock of the Borrower or any Subsidiary (other than issuances to the Borrower or a wholly-owned Subsidiary), including upon any conversion of debt securities of the Borrower into such Capital Stock. 7.10 Debt to Capitalization Ratio. The Borrower shall not permit the Debt to Capitalization Ratio to be greater than 0.375 to 1.00 at any time. 7.11 ERISA. The Borrower shall not, and shall not suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in liability of the Borrower in an aggregate amount in excess of $50,000,000 or (b) engage in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 7.12 Accounting Changes. The Borrower shall not, and shall not suffer or permit any Material Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by SAP or GAAP or any Governmental Authority, as applicable, or change the fiscal year of the Borrower or of any Material Subsidiary. ARTICLE VIII. EVENTS OF DEFAULT AND REMEDIES 8.01 Events of Default. Any of the following shall constitute an Event of Default: (a) Non-Payment. The Borrower fails to pay (i) when and as required to be paid herein, any amount of principal of any Loan or any L/C Obligation, or (ii) within five days after the same becomes due, any interest on any Loan or on any L/C Obligation, or any Facility Fee, Utilization Fee or other fee due hereunder, or (iii) within five days after the same becomes due, any other amount payable hereunder or under any other Loan Document; or (b) Specific Covenants. The Borrower fails to perform or observe any term, covenant or agreement contained in any of Section 6.03, 6.05, 6.10, or 6.11 or Article VII; or (c) Other Defaults. The Borrower fails to perform or observe any other covenant or agreement (not specified in subsection (a) or (b) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days after the earlier of (i) the date upon which a Responsible Officer knew or reasonably should have known of such failure or (ii) the date upon which written notice thereof is given to the Borrower by the Administrative Agent or any Lender; or (d) Representations and Warranties. Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of the Borrower herein, in any other Loan Document, or in any document delivered in connection herewith or therewith shall be incorrect or misleading in any material respect when made or deemed made; or (e) Cross-Default. (i) The Borrower or any Subsidiary (A) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness or Guarantee (other than Indebtedness hereunder and Indebtedness under Swap Contracts) having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $50,000,000 and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure, or (B) fails to observe or perform any other agreement or condition relating to any such Indebtedness or Guarantee or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness or the beneficiary or beneficiaries of such Guarantee (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to be demanded or to become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity, or such Guarantee to become payable or cash collateral in respect thereof to be demanded; or (ii) there occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (A) any event of default under such Swap Contract as to which the Borrower or any Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (B) any Termination Event (as so defined) under such Swap Contract as to which the Borrower or any Subsidiary is an Affected Party (as so defined) and, in either event, the Swap Termination Value owed by the Borrower or such Subsidiary as a result thereof is greater than $50,000,000; or (f) Insolvency Proceedings, Etc. The Borrower or any Material Subsidiary institutes or consents to the institution of any proceeding under any Debtor Relief Law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its property is instituted without the consent of such Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or any Material Insurance Subsidiary shall become subject to any conservation, rehabilitation or liquidation order, directive or mandate issued by an Governmental Authority; or (g) Inability to Pay Debts; Attachment. (i) The Borrower or any Material Subsidiary becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 60 days after its issue or levy; or (h) Judgments. There is entered against the Borrower or any Subsidiary (i) a final judgment or order for the payment of money in an aggregate amount exceeding $50,000,000 (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage), or (ii) any one or more non-monetary final judgments that have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor upon such judgment or order, or (B) there is a period of 10 consecutive days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or (i) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $50,000,000, (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds $50,000, 000; or (iii) the Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $50,000,000; or (j) Invalidity of Loan Documents. Any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or satisfaction in full of all the Obligations, ceases to be in full force and effect; or the Borrower or any other Person contests in any manner the validity or enforceability of any Loan Document; or the Borrower denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document; or (k) Change of Control. There occurs any Change of Control with respect to the Borrower; or (l) Loss of Licenses. Any Governmental Authority revokes, fails to renew or suspends any License of the Borrower or any Material Insurance Subsidiary, which revocation, failure or suspension has had or could reasonably be expected to have a Material Adverse Effect, or the Borrower or any Material Insurance Subsidiary for any reason loses any License which loss had had or could reasonably be expected to have a Material Adverse Effect, or the Borrower or any Material Insurance Subsidiary suffers the imposition of any restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any License which imposition has or could reasonably be expected to have a Material Adverse Effect; or (m) Adverse Order. Any Material Insurance Subsidiary shall be the subject of a final non-appealable order imposing a fine in an amount in excess of $10,000,000 in any single instance or other such orders imposing fines in excess of $25,000,000 in the aggregate after the date of this Agreement by or at the request of any state insurance regulatory agency as a result of the violation by such Material Insurance Subsidiary of such state's applicable insurance Laws or the regulations promulgated in connection therewith. 8.02 Remedies Upon Event of Default. If any Event of Default occurs and is continuing, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, take any or all of the following actions: (a) declare the commitment of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions to be terminated, whereupon such commitments and obligation shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower; (c) require that the Borrower Cash Collateralize the L/C Obligations (in an amount equal to the then Outstanding Amount thereof); and (d) exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents or applicable Law; provided, however, that upon the occurrence of an actual or deemed entry of an order for relief with respect to the Borrower under the Bankruptcy Code of the United States, the obligation of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, and the obligation of the Borrower to Cash Collateralize the L/C Obligations as aforesaid shall automatically become effective, in each case without further act of the Administrative Agent or any Lender. 8.03 Application of Funds. After the exercise of remedies provided for in Section 8.02 (or after the Loans have automatically become immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in the proviso to Section 8.02), any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order: First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including Attorney Costs and amounts payable under Article III) payable to the Administrative Agent in its capacity as such; Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders (including Attorney Costs and amounts payable under Article III), ratably among them in proportion to the amounts described in this clause Second payable to them; Third, to payment of that portion of the Obligations constituting accrued and unpaid interest on the Loans and L/C Borrowings, ratably among the Lenders in proportion to the respective amounts described in this clause Third payable to them; Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans and L/C Borrowings, ratably among the Lenders in proportion to the respective amounts described in this clause Fourth held by them; Fifth, to the Administrative Agent for the account of the L/C Issuer, to Cash Collateralize that portion of L/C Obligations comprised of the aggregate undrawn amount of Letters of Credit; and Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by Law. Subject to Section 2.03(c), amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fifth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above. ARTICLE IX. ADMINISTRATIVE AGENT 9.01 Appointment and Authorization of Administrative Agent. (a) Each Lender hereby irrevocably appoints, designates and authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere herein or in any other Loan Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" herein and in the other Loan Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) The L/C Issuer shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and the L/C Issuer shall have all of the benefits and immunities (i) provided to the Administrative Agent in this Article IX with respect to any acts taken or omissions suffered by the L/C Issuer in connection with Letters of Credit issued by it or proposed to be issued by it and the applications and agreements for letters of credit pertaining to such Letters of Credit as fully as if the term "Administrative Agent" as used in this Article IX and in the definition of "Agent-Related Person" included the L/C Issuer with respect to such acts or omissions, and (ii) as additionally provided herein with respect to the L/C Issuer. 9.02 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct. 9.03 Liability of Administrative Agent. No Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct in connection with its duties expressly set forth herein), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by the Borrower or any officer thereof, contained herein or in any other Loan 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 Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender or participant to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower or any Affiliate thereof. 9.04 Reliance by Administrative Agent. (a) The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, electronic mail message, statement 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 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 any Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders 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 or any other Loan Document in accordance with a request or consent of the Required Lenders (or such greater number of Lenders as may be expressly required hereby in any instance) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. (b) For purposes of determining compliance with the conditions specified in Section 4.01, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto. 9.05 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of the Lenders, unless the Administrative Agent shall have received written notice from a Lender or the Borrower referring to this Agreement, describing such Default and stating that such notice is a "notice of default." The Administrative Agent will notify the Lenders of its receipt of any such notice. The Administrative Agent shall take such action with respect to such Default as may be directed by the Required Lenders in accordance with Article VIII; provided, however, that unless and until the Administrative Agent has received any such direction, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable or in the best interest of the Lenders. 9.06 Credit Decision; Disclosure of Information by Administrative Agent. Each Lender acknowledges that no Agent-Related Person has made any representation or warranty to it, and that no act by the Administrative Agent hereafter taken, including any consent to and acceptance of any assignment or review of the affairs of the Borrower or any Affiliate thereof, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender as to any matter, including whether Agent-Related Persons have disclosed material information in their possession. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower and its Subsidiaries, and all applicable bank or other regulatory Laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person 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 the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower and its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent herein, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Borrower or any of its Affiliates which may come into the possession of any Agent-Related Person. 9.07 Indemnification of Administrative Agent. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand each Agent-Related Person (to the extent not reimbursed by or on behalf of the Borrower and without limiting the obligation of the Borrower to do so), pro rata, and hold harmless each Agent-Related Person from and against any and all Indemnified Liabilities incurred by it (WHETHER OR NOT ARISING OUT OF THE NEGLIGENCE OF SUCH AGENT-RELATED PERSON); provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities to the extent determined in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Agent-Related Person's own gross negligence or willful misconduct; provided, however, that no action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse the Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Administrative Agent is not reimbursed for such expenses by or on behalf of the Borrower. The undertaking in this Section shall survive termination of the Aggregate Commitments, the payment of all other Obligations and the resignation of the Administrative Agent. THE FOREGOING INDEMNITY SHALL APPLY TO THE NEGLIGENCE OF THE AGENT-RELATED PERSON (BUT NOT THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE AGENT-RELATED PERSON). 9.08 Administrative Agent in its Individual Capacity. Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Borrower and its Affiliates as though Bank of America were not the Administrative Agent or the L/C Issuer hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding the Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Borrower or such Affiliate) and acknowledge that the Administrative Agent shall be under no obligation to provide such information to them. With respect to its Loans, Bank of America shall have the same rights and powers under this Agreement as any other Lender and may exercise such rights and powers as though it were not the Administrative Agent or the L/C Issuer, and the terms "Lender" and "Lenders" include Bank of America in its individual capacity. 9.09 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 30 days' notice to the Lenders; provided that any such resignation by Bank of America shall also constitute its resignation as L/C Issuer and Swing Line Lender. If the Administrative Agent resigns under this Agreement, the Required Lenders shall appoint from among the Lenders a successor administrative agent for the Lenders, which successor administrative agent shall be consented to by the Borrower at all times other than during the existence of an Event of Default (which consent of the Borrower shall not be unreasonably withheld or delayed). If no successor administrative agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Lenders and the Borrower, a successor administrative agent from among the Lenders. Upon the acceptance of its appointment as successor administrative agent hereunder, the Person acting as such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent, L/C Issuer and Swing Line Lender and the respective terms "Administrative Agent," "L/C Issuer" and "Swing Line Lender" shall mean such successor administrative agent, Letter of Credit issuer and swing line lender, and the retiring Administrative Agent's appointment, powers and duties as Administrative Agent shall be terminated and the retiring L/C Issuer's and Swing Line Lender's rights, powers and duties as such shall be terminated, without any other or further act or deed on the part of such retiring L/C Issuer or Swing Line Lender or any other Lender, other than the obligation of the successor L/C Issuer to issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or to make other arrangements satisfactory to the retiring L/C Issuer to effectively assume the obligations of the retiring L/C Issuer with respect to such Letters of Credit. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article IX and Sections 10.04 and 10.05 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. If no successor administrative agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. 9.10 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower, the Administrative Agent (irrespective of whether the principal of any Loan or L/C Obligation shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise (a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, L/C Obligations and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 2.03(i) and (j), 2.09 and 10.04) allowed in such judicial proceeding; and (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.09 and 10.04. Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding. 9.11 Other Agents; Arrangers and Managers. None of the Lenders or other Persons identified on the facing page or signature pages of this Agreement as a "syndication agent," "documentation agent," "co-agent," "book manager," "lead manager," "arranger," "lead arranger" or "co-arranger" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than, in the case of such Lenders, those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders or other Persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders or other Persons so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE X. MISCELLANEOUS 10.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower therefrom, shall be effective unless in writing signed by the Required Lenders and the Borrower and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such amendment, waiver or consent shall: (a) waive any condition set forth in Section 4.01(a) without the written consent of each Lender; (b) extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02) without the written consent of such Lender; (c) postpone any date fixed by this Agreement or any other Loan Document for any payment or mandatory prepayment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; (d) reduce the principal of, or the rate of interest specified herein on, any Loan or L/C Borrowing, or (subject to clause (iv)) of the second proviso to this Section 10.01) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; provided, however, that only the consent of the Required Lenders shall be necessary to amend the definition of "Default Rate" or to waive any obligation of the Borrower to pay interest at the Default Rate; (e) change Section 2.13 or Section 8.03 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender; or (f) change any provision of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the L/C Issuer in addition to the Lenders required above, affect the rights or duties of the L/C Issuer under this Agreement or any Letter of Credit Application relating to any Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless in writing and signed by the Swing Line Lender in addition to the Lenders required above, affect the rights or duties of the Swing Line Lender under this Agreement; (iii) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; and (iv) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender. 10.02 Notices and Other Communications; Facsimile Copies. (a) General. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including by facsimile transmission). All such written notices shall be mailed, faxed or delivered to the applicable address, facsimile number or (subject to subsection (c) below) electronic mail address, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows: (i) if to the Borrower, the Administrative Agent, the L/C Issuer or the Swing Line Lender, to the address, facsimile number, electronic mail address or telephone number specified for such Person on Schedule 10.02 or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the other parties; and (ii) if to any other Lender, to the address, facsimile number, electronic mail address or telephone number specified in its Administrative Questionnaire or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the Borrower, the Administrative Agent, the L/C Issuer and the Swing Line Lender. All such notices and other communications shall be deemed to be given or made upon the earlier to occur of (i) actual receipt by the relevant party hereto and (ii) (A) if delivered by hand or by courier, when signed for by or on behalf of the relevant party hereto; (B) if delivered by mail, four Business Days after deposit in the mails, postage prepaid; (C) if delivered by facsimile, when sent and receipt has been confirmed by telephone; and (D) if delivered by electronic mail (which form of delivery is subject to the provisions of subsection (c) below), when delivered; provided, however, that notices and other communications to the Administrative Agent, the L/C Issuer and the Swing Line Lender pursuant to Article II shall not be effective until actually received by such Person. In no event shall a voicemail message be effective as a notice, communication or confirmation hereunder. (b) Effectiveness of Facsimile Documents and Signatures. Loan Documents may be transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures shall, subject to applicable Law, have the same force and effect as manually-signed originals and shall be binding on all Loan Parties, the Administrative Agent and the Lenders. The Administrative Agent may also require that any such documents and signatures be confirmed by a manually-signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature. (c) Limited Use of Electronic Mail. Electronic mail and Internet and intranet websites may be used only to distribute routine communications, such as financial statements and other information as provided in Section 6.02, and to distribute Loan Documents for execution by the parties thereto, and may not be used for any other purpose. (d) Reliance by Administrative Agent and Lenders. The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices (including telephonic Revolving Loan Notices and Swing Line Loan Notices) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify each Agent-Related Person and each Lender from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording. 10.03 No Waiver; Cumulative Remedies. No failure by any Lender or the Administrative Agent to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by Law. 10.04 Attorney Costs, Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all reasonable out-of-pocket costs and expenses incurred by the Administrative Agent and the Arranger in connection with the development, preparation, negotiation and execution of this Agreement and the other Loan Documents and any amendment, waiver, consent or other modification of the provisions hereof and thereof (whether or not the transactions contemplated hereby or thereby are consummated), and the consummation and administration of the transactions contemplated hereby and thereby, including all Attorney Costs, and (b) to pay or reimburse the Administrative Agent and each Lender for all reasonable costs and expenses incurred in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or the other Loan Documents (including all such costs and expenses incurred during any "workout" or restructuring in respect of the Obligations and during any legal proceeding, including any proceeding under any Debtor Relief Law), including all Attorney Costs. The foregoing costs and expenses shall include all search, filing, recording, title insurance and appraisal charges and fees and taxes related thereto, and other out-of-pocket expenses incurred by the Administrative Agent and the cost of independent public accountants and other outside experts reasonably retained by the Administrative Agent or, with respect to clause (b) above, any Lender. All amounts due under this Section 10.04 shall be payable within ten Business Days after demand therefor, setting forth in reasonable detail the costs and expenses so incurred. The agreements in this Section shall survive the termination of the Aggregate Commitments and repayment of all other Obligations. 10.05 Indemnification by the Borrower. Whether or not the transactions contemplated hereby are consummated, the Borrower shall indemnify and hold harmless each Agent-Related Person, each Lender and their respective Affiliates, directors, officers, employees, counsel, agents and attorneys-in-fact (collectively the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (a) the execution, delivery, enforcement, performance or administration of any Loan Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby, (b) any Commitment, Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the L/C Issuer to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), or (c) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and non-appealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. No Indemnitee shall be liable for any damages arising from the use by others of any information or other materials obtained through IntraLinks or other similar information transmission systems in connection with this Agreement, nor shall any Indemnitee have any liability for any indirect or consequential damages relating to this Agreement or any other Loan Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date). the foregoing indemnity shall apply to the negligence of the indemnitee (but not the gross negligence or willful misconduct of the indemnitee). All amounts due under this Section 10.05 shall be payable within ten Business Days after demand therefor. The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all the other Obligations. 10.06 Payments Set Aside. To the extent that any payment by or on behalf of the Borrower is made to the Administrative Agent or any Lender, or the Administrative Agent or any Lender exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its applicable share of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect. 10.07 Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) or (h) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans (including for purposes of this subsection (b), participations in L/C Obligations and in Swing Line Loans) at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender's Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund (as defined in subsection (g) of this Section) with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $10,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loans or the Commitment assigned, except that this clause (ii) shall not apply to rights in respect of Swing Line Loans; (iii) any assignment of a Commitment must be approved by the Administrative Agent, the L/C Issuer and the Swing Line Lender (each such approval not to be unreasonably withheld or delayed) unless the Person that is the proposed assignee is itself a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption; and (v) the assignor Lender or Eligible Assignee shall have paid the Administrative Agent a processing and recordation fee of $3,500. Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.01, 3.04, 3.05, 10.04 and 10.05 with respect to facts and circumstances occurring prior to the effective date of such assignment). Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section. (c) The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent's Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower's Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender's participations in L/C Obligations and/or Swing Line Loans) owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 10.01 that directly affects such Participant. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.01, 3.04 and 3.05 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by Law, each Participant also shall be entitled to the benefits of Section 10.09 as though it were a Lender, provided such Participant agrees to be subject to Section 2.13 as though it were a Lender. (e) A Participant shall not be entitled to receive any greater payment under Section 3.01 or 3.04 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.01 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 10.15 as though it were a Lender. (f) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. (g) As used herein, the following terms have the following meanings: "Eligible Assignee" means (a) a Lender; (b) an Affiliate of a Lender; (c) an Approved Fund; and (d) any other Person (other than a natural person) approved by (i) the Administrative Agent, the L/C Issuer and the Swing Line Lender, and (ii) unless an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, "Eligible Assignee" shall not include the Borrower or any of the Borrower's Affiliates or Subsidiaries. "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. (h) Notwithstanding anything to the contrary contained herein, any Lender that is a Fund may create a security interest in all or any portion of the Loans owing to it and the Note, if any, held by it to the trustee for holders of obligations owed, or securities issued, by such Fund as security for such obligations or securities, provided that unless and until such trustee actually becomes a Lender in compliance with the other provisions of this Section 10.07, (i) no such pledge shall release the pledging Lender from any of its obligations under the Loan Documents and (ii) such trustee shall not be entitled to exercise any of the rights of a Lender under the Loan Documents even though such trustee may have acquired ownership rights with respect to the pledged interest through foreclosure or otherwise. (i) Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Commitment and Loans pursuant to subsection (b) above, Bank of America may, (i) upon 30 days' notice to the Borrower and the Lenders, resign as L/C Issuer and/or (ii) upon 30 days' notice to the Borrower, resign as Swing Line Lender. In the event of any such resignation as L/C Issuer or Swing Line Lender, the Borrower shall be entitled to appoint from among the Lenders a successor L/C Issuer or Swing Line Lender hereunder; provided, however, that no failure by the Borrower to appoint any such successor shall affect the resignation of Bank of America as L/C Issuer or Swing Line Lender, as the case may be. If Bank of America resigns as L/C Issuer, it shall retain all the rights and obligations of the L/C Issuer hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as L/C Issuer and all L/C Obligations with respect thereto (including the right to require the Lenders to make Base Rate Revolving Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c)). If Bank of America resigns as Swing Line Lender, it shall retain all the rights of the Swing Line Lender provided for hereunder with respect to Swing Line Loans made by it and outstanding as of the effective date of such resignation, including the right to require the Lenders to make Base Rate Revolving Loans or fund risk participations in outstanding Swing Line Loans pursuant to Section 2.04(c). 10.08 Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory authority; (c) to the extent required by applicable Laws or regulations or by any subpoena or similar legal process; (d) to any other party to this Agreement; (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any Eligible Assignee of or Participant in, or any prospective Eligible Assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any direct or indirect contractual counterparty or prospective counterparty (or such contractual counterparty's or prospective counterparty's professional advisor) to any credit derivative transaction relating to obligations of the Borrower; (g) with the consent of the Borrower; (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower; or (i) to the National Association of Insurance Commissioners or any other similar organization. In addition, the Administrative Agent and the Lenders may disclose the existence of this Agreement and information about this Agreement to market data collectors, similar service providers to the lending industry, and service providers to the Administrative Agent and the Lenders in connection with the administration and management of this Agreement, the other Loan Documents, the Commitments, and the Credit Extensions. For the purposes of this Section, "Information" means all information received from the Borrower relating to the Borrower or any Subsidiary or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified in writing at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. 10.09 Set-off. In addition to any rights and remedies of the Lenders provided by Law, upon the occurrence and during the continuance of any Event of Default, each Lender is authorized at any time and from time to time, without prior notice to the Borrower, any such notice being waived by the Borrower to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Lender to or for the credit or the account of the Borrower against any and all Obligations owing to such Lender hereunder or under any other Loan Document, now or hereafter existing, irrespective of whether or not the Administrative Agent or such Lender shall have made demand under this Agreement or any other Loan Document and although such Obligations may be contingent or unmatured or denominated in a currency different from that of the applicable deposit or indebtedness. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.10 Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the Highest Lawful Rate. If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Highest Lawful Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Highest Lawful Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder. 10.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.12 Integration. This Agreement, together with the other Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and thereof and supersedes all prior agreements, written or oral, on such subject matter. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control; provided that the inclusion of supplemental rights or remedies in favor of the Administrative Agent or the Lenders in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 10.13 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Credit Extension, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding. 10.14 Severability. If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.15 Tax Forms. (a) (i) Each Lender that is not a "United States person" within the meaning of Section 7701(a)(30) of the Code (a "Foreign Lender") shall deliver to the Administrative Agent, prior to receipt of any payment subject to withholding under the Code (or upon accepting an assignment of an interest herein), two duly signed completed copies of either IRS Form W-8BEN or any successor thereto (relating to such Foreign Lender and entitling it to an exemption from, or reduction of, withholding tax on all payments to be made to such Foreign Lender by the Borrower pursuant to this Agreement) or IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Foreign Lender by the Borrower pursuant to this Agreement) or such other evidence satisfactory to the Borrower and the Administrative Agent that such Foreign Lender is entitled to an exemption from, or reduction of, U.S. withholding tax, including any exemption pursuant to Section 881(c) of the Code. Thereafter and from time to time, each such Foreign Lender shall (A) promptly submit to the Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States Laws and regulations to avoid, or such evidence as is satisfactory to the Borrower and the Administrative Agent of any available exemption from or reduction of, United States withholding taxes in respect of all payments to be made to such Foreign Lender by the Borrower pursuant to this Agreement, (B) promptly notify the Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction, and (C) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any requirement of applicable Laws that the Borrower make any deduction or withholding for taxes from amounts payable to such Foreign Lender. (ii) Each Foreign Lender, to the extent it does not act or ceases to act for its own account with respect to any portion of any sums paid or payable to such Lender under any of the Loan Documents (for example, in the case of a typical participation by such Lender), shall deliver to the Administrative Agent on the date when such Foreign Lender ceases to act for its own account with respect to any portion of any such sums paid or payable, and at such other times as may be necessary in the determination of the Administrative Agent (in the reasonable exercise of its discretion), (A) two duly signed completed copies of the forms or statements required to be provided by such Lender as set forth above, to establish the portion of any such sums paid or payable with respect to which such Lender acts for its own account that is not subject to U.S. withholding tax, and (B) two duly signed completed copies of IRS Form W-8IMY (or any successor thereto), together with any information such Lender chooses to transmit with such form, and any other certificate or statement of exemption required under the Code, to establish that such Lender is not acting for its own account with respect to a portion of any such sums payable to such Lender. (iii) The Borrower shall not be required to pay any additional amount to any Foreign Lender under Section 3.01 (A) with respect to any Taxes required to be deducted or withheld on the basis of the information, certificates or statements of exemption such Lender transmits with an IRS Form W-8IMY pursuant to this Section -------- 10.15(a) or (B) if such Lender shall have failed to satisfy the foregoing provisions of this Section 10.15(a); provided that if such Lender shall have satisfied the requirement of this Section 10.15(a) on the date such Lender became a Lender or ceased to act for its own account with respect to any payment under any of the Loan Documents, nothing in this Section 10.15(a) shall relieve the Borrower of its obligation to pay any amounts pursuant to Section 3.01 in the event that, as a result of any change in any applicable Law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender or other Person for the account of which such Lender receives any sums payable under any of the Loan Documents is not subject to withholding or is subject to withholding at a reduced rate. (iv) The Administrative Agent may, without reduction, withhold any Taxes required to be deducted and withheld from any payment under any of the Loan Documents with respect to which the Borrower is not required to pay additional amounts under this Section 10.15(a). (b) Upon the request of the Administrative Agent, each Lender that is a "United States person" within the meaning of Section 7701(a)(30) of the Code shall deliver to the Administrative Agent two duly signed completed copies of IRS Form W-9. If such Lender fails to deliver such forms, then the Administrative Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable back-up withholding tax imposed by the Code, without reduction. (c) If any Governmental Authority asserts that the Administrative Agent did not properly withhold or backup withhold, as the case may be, any tax or other amount from payments made to or for the account of any Lender, such Lender shall indemnify the Administrative Agent therefor, including all penalties and interest, any taxes imposed by any jurisdiction on the amounts payable to the Administrative Agent under this Section, and costs and expenses (including Attorney Costs) of the Administrative Agent. The obligation of the Lenders under this Section shall survive the termination of the Aggregate Commitments, repayment of all other Obligations hereunder and the resignation of the Administrative Agent. 10.16 Replacement of Lenders. Under any circumstances set forth herein providing that the Borrower shall have the right to replace a Lender as a party to this Agreement, the Borrower may, upon notice to such Lender and the Administrative Agent, replace such Lender by causing such Lender to assign its Commitment (with the assignment fee to be paid by the Borrower in such instance) pursuant to Section 10.07(b) to one or more other Lenders or Eligible Assignees procured by the Borrower; provided, however, that if the Borrower elects to exercise such right with respect to any Lender pursuant to Section 3.06(b), it shall be obligated to replace all Lenders that have made similar requests for compensation pursuant to Section 3.01 or 3.04. The Borrower shall (x) pay in full all principal, interest, fees and other amounts owing to such Lender through the date of replacement (including any amounts payable pursuant to Section 3.05), (y) provide appropriate assurances and indemnities (which may include letters of credit) to the L/C Issuer and the Swing Line Lender as each may reasonably require with respect to any continuing obligation to fund participation interests in any L/C Obligations or any Swing Line Loans then outstanding, and (z) release such Lender from its obligations under the Loan Documents. Any Lender being replaced shall execute and deliver an Assignment and Assumption with respect to such Lender's Commitment and outstanding Loans and participations in L/C Obligations and Swing Line Loans. 10.17 Governing Law. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, the LAW OF THE STATE OF TEXAS applicable to agreements made and to be performed entirely within such State; PROVIDED THAT THE ADMINISTRATIVE Agent AND EACH LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS SITTING IN DALLAS COUNTY, TEXAS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF SUCH STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER, THE ADMINISTRATIVE Agent AND EACH LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. THE BORROWER, THE ADMINISTRATIVE Agent AND EACH LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER DOCUMENT RELATED THERETO. THE BORROWER, THE ADMINISTRATIVE Agent AND EACH LENDER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF SUCH STATE. 10.18 Waiver of Right to Trial by Jury. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 10.19 Entire Agreement. This Agreement and the other Loan Documents represent the final agreement AMONG the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements AMONG the parties. - -------------------------------------------------------------------------------- REMAINDER OF PAGE LEFT INTENTIONALLY BLANK - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SAFECO CORPORATION By: --------------------------------------------- Name: ------------------------------------- Title: -------------------------------------- BANK OF AMERICA, N.A., as Administrative Agent By: ---------------------------------------------- Name: ------------------------------------- Title: -------------------------------------- BANK OF AMERICA, N.A., as a Lender, L/C Issuer and Swing Line Lender By: ------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------- EXHIBIT A FORM OF REVOLVING LOAN NOTICE Date:_____________,_____ To: Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: Reference is made to that certain Credit Agreement, dated as of September 18, 2002 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined), among SAFECO Corporation, a Washington corporation (the "Borrower"), the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender. The undersigned hereby requests (select one): [] A Borrowing of Revolving Loans [] A conversion or continuation of Revolving Loans 1. On (a Business Day). -------------------------------------------------- 2. In the amount of $ . ---------------------------------- 3. Comprised of . --------------------------------------- [Type of Revolving Loan requested] 4. For Eurodollar Rate Loans: with an Interest Period of months. ------- The Revolving Borrowing requested herein complies with the proviso to the first sentence of Section 2.01 of the Agreement. SAFECO CORPORATION By: ------------------------------- Name: ------------------------- Title: ------------------------- By: -------------------------------- Name: ------------------------- Title: ------------------------- Exhibit B FORM OF SWING LINE LOAN NOTICE Date: ___________, _____ To: Bank of America, N.A., as Swing Line Lender Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: Reference is made to that certain Credit Agreement, dated as of September 18, 2002 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined), among SAFECO Corporation, a Washington corporation (the "Borrower"), the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender. The undersigned hereby requests a Swing Line Loan: 1. On (a Business Day). -------------------------------------------------- 2. In the amount of $ . ---------------------------------- The Swing Line Borrowing requested herein complies with the requirements of the provisos to the first sentence of Section 2.04(a) of the Agreement. SAFECO CORPORATION By: --------------------------------------- Name: --------------------------------------- Title: --------------------------------------- By: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- Exhibit C FORM OF REVOLVING LOAN NOTE $--------------- --------------------- FOR VALUE RECEIVED, SAFECO CORPORATION, a Washington corporation (the "Borrower"), hereby promises to pay to the order of ___________________________ (the "Lender"), on the Maturity Date (as defined in the Credit Agreement referred to below) the principal amount of __________________Dollars ($____________), or such lesser principal amount of Revolving Loans (as defined in such Credit Agreement) due and payable by the Borrower to the Lender on the Maturity Date under that certain Credit Agreement, dated as of September 18, 2002 (as amended, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined), among the Borrower, the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender. The Borrower promises to pay interest on the unpaid principal amount of each Revolving Loan from the date of such Revolving Loan until such principal amount is paid in full, at such interest rates, and at such times as are specified in the Agreement. All payments of principal and interest shall be made to the Administrative Agent for the account of the Lender in Dollars in immediately available funds at the Administrative Agent's Office. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement. This Note is one of the Revolving Loan Notes referred to in the Agreement, is entitled to the benefits thereof and is subject to optional and mandatory prepayment in whole or in part as provided therein. Upon the occurrence of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. Revolving Loans made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business. The Lender may also attach schedules to this Note and endorse thereon the date, amount and maturity of its Revolving Loans and payments with respect thereto. The Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, intent to accelerate, acceleration, dishonor and non-payment of this Note. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. SAFECO CORPORATION By: --------------------------------------- Name: ---------------------------------------- Title: --------------------------------------- By: --------------------------------------- Name: ---------------------------------------- Title: --------------------------------------- REVOLVING LOANS AND PAYMENTS WITH RESPECT THERETO Amount of Outstanding Principal or Principal Type of Loan Amount of Loan End of Interest Interest Paid Balance This Date Made Made Period This Date Date Notation Made By - -------------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
EXHIBIT D FORM OF SWING LINE NOTE $25,000,000 ____________________ FOR VALUE RECEIVED, SAFECO CORPORATION, a Washington corporation (the "Borrower"), hereby promises to pay to the order of BANK OF AMERICA, N.A. ("Swing Line Lender"), on the date when due in accordance with the Credit Agreement referred to below, the aggregate unpaid principal amount of each Swing Line Loan from time to time made by the Swing Line Lender to the Borrower under that certain Credit Agreement, dated as of September 18, 2002 (as amended, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined), among the Borrower, the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender. The Borrower promises to pay interest on the unpaid principal amount of each Swing Line Loan from the date of such Swing Line Loan until such principal amount is paid in full, at such interest rates and at such times as provided in the Agreement. All payments of principal and interest shall be made to the Swing Line Lender in Dollars in immediately available funds at its Lending Office. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement. This Note is the Swing Line Note referred to in the Agreement, is entitled to the benefits thereof and is subject to optional and mandatory prepayment in whole or in part as provided therein. Upon the occurrence of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. Swing Line Loans made by the Swing Line Lender shall be evidenced by one or more loan accounts or records maintained by Swing Line Lender in the ordinary course of business. The Swing Line Lender may also attach schedules to this Note and endorse thereon the date, amount and maturity of the Swing Line Loans and payments with respect thereto. The Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, intent to accelerate, acceleration, dishonor and non-payment of this Note. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. SAFECO CORPORATION By: --------------------------------------- Name: --------------------------------------- Title: --------------------------------------- By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- SWING LINE LOANS AND PAYMENTS WITH RESPECT THERETO Amount of Principal or Interest Paid This Outstanding Principal Date Amount of Loan Made Date Balance This Date Notation Made By - -------------------- ---------------------- --------------------------- ------------------------------ -------------------------
EXHIBIT E FORM OF COMPLIANCE CERTIFICATE Financial Statement Date: , To: Bank of America, N.A., as Administrative Agent Ladies and Gentlemen: Reference is made to that certain Credit Agreement, dated as of September 18, 2002 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined), among SAFECO Corporation, a Washington corporation (the "Borrower"), the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender. The undersigned Responsible Officer hereby certifies as of the date hereof that he/she is the of the Borrower, and that, as such, he/she is authorized to execute and deliver this Certificate to the Administrative Agent on the behalf of the Borrower, and that: [Use following paragraph 1 for fiscal year-end financial statements] 1. Attached hereto as Schedule 1 are the year-end audited financial statements required by Section 6.01(a) of the Agreement for the fiscal year of the Borrower ended as of the above date, together with the report and opinion of an independent certified public accountant required by such section. [Use following paragraph 1 for fiscal quarter-end financial statements] 1. Attached hereto as Schedule 1 are the unaudited financial statements required by Section 6.01(b) of the Agreement for the fiscal quarter of the Borrower ended as of the above date. Such financial statements fairly present the financial condition, results of operations and cash flows of the Borrower and its Subsidiaries in accordance with GAAP as at such date and for such period, subject only to normal year-end audit adjustments and the absence of footnotes. 2. The undersigned has reviewed and is familiar with the terms of the Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and condition (financial or otherwise) of the Borrower during the accounting period covered by the attached financial statements. 3. A review of the activities of the Borrower during such fiscal period has been made under the supervision of the undersigned with a view to determining whether during such fiscal period the Borrower performed and observed all its Obligations under the Loan Documents, and [select one:] [to the best knowledge of the undersigned during such fiscal period, the Borrower performed and observed each covenant and condition of the Loan Documents applicable to it.] --or-- [the following covenants or conditions have not been performed or observed and the following is a list of each such Default and its nature and status:] 4. The representations and warranties of the Borrower contained in Article V of the Agreement, or which are contained in any document furnished at any time under or in connection with the Loan Documents, are true and correct on and as of thedate hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Compliance Certificate, the representations and warranties contained in subsections (a) and (b) of Section 5.05 of the Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 of the Agreement, including the statements in connection with which this Compliance Certificate is delivered. 5. The financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of ---------- the date of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of , . ------------------------ --------------- SAFECO CORPORATION By: ----------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- For the Quarter/Year ended ___________________("Statement Date") SCHEDULE 2 to the Compliance Certificate ($ in 000's) I. Section 7.09 - Shareholders' Equity A. Actual Shareholders' Equity at Statement Date (excluding the effect of any $__________ adjustment under Statement of Financial Accounting Standards No. 115): B. 75% of the value of the Existing Trust Securities: $__________ C. 50% of Consolidated Net Income for each full fiscal quarter ending after $__________ July 1, 2002 (no deduction for losses): D. 25% of Net Cash Proceeds from the issuance and sale of Capital Stock: $__________ E. Minimum required Shareholders' Equity (Lines I.C. + I.D. plus $2,700,000,000) $__________ E. Excess (deficit) for covenant compliance (Line I.E. - (I.A. + I.B.) $__________ II. Section 7.10 - Debt to Capitalization Ratio A. Indebtedness at Statement Date: (1) All obligations for borrowed money and all obligations evidenced by $__________ bonds, debentures, notes, loan agreements or other similar instruments: (2) All direct or contingent obligations arising under letters of credit $__________ (including standby and commercial), bankers' acceptances, bank guaranties, surety bonds and similar instruments (not including amounts owing under insurance policies or contracts or Surety Instruments issued by Insurance Subsidiaries in the ordinary course of business): (3) Net obligations under any Swap Contract and any Securities Lending $__________ Arrangement: (4) All obligations to pay the deferred purchase price of property or $__________ services (excluding trade accounts payable in the ordinary course of business): (5) Indebtedness (excluding prepaid interest thereof) secured by a Lien on $__________ property owned or being purchased (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed or is limited in recourse: (6) Obligations under Capital Leases: $__________ (7) Synthetic Lease Obligations: $__________ (8) Obligations in respect of Redeemable Stock: $__________ (9) Any Receivables Facility Attributed Indebtedness: $__________ (10) All Guaranties in respect of any of the foregoing: $__________ (11) 25% of the amount of the Existing Trust Securities: $__________ (12) 100% of the amount of any Additional Trust Securities: $__________ (13) Total (Lines II.A.(1) + (2) + (3) + (4) + (5) + (6) + (7) + (8) + (9) $__________ + (10) + (11) + (12)) B. Capitalization at Statement Date (1) Line II.A.(13): $__________ (2) Shareholders' Equity (excluding the effect of any adjustment under $__________ Statement of Financial Accounting Standards No. 115): (3) 75% of the value of the Existing Trust Securities: $__________ (4) Capitalization (Line II.B.(1) + Line II.B.(2) + Line II.B.(3)) $__________ C. Debt to Capitalization Ratio (Line II.A.(13)) / (Line II.B.(4)) _____ to 1 Maximum Allowed 0.375 to 1
EXHIBIT F ASSIGNMENT AND ASSUMPTION This Assignment and Assumption (this "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full. For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignor's rights and obligations as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including, without limitation, Letters of Credit, Guarantees and Swing Line Loans included in such facilities) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as, the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor. 1. Assignor: ______________________________ 2. Assignee: ______________________________ [and is an Affiliate/Approved Fund of [identify Lender]1] 3. Borrower(s): ______________________________ 4. Administrative Agent: Bank of America, N.A., as the administrative agent under the Credit Agreement 1 Select as applicable 5. Credit Agreement: The Credit Agreement, dated as of September 18, 2002, among SAFECO Corporation, the Lenders parties thereto, and Bank of America, N.A., as Administrative Agent, and the other agents parties thereto 6. Assigned Interest: ----------------------------------- ------------------------------ -------------------------------- Aggregate Amount of Percentage Amount of Commitment Assigned of Commitment Assigned* Commitment2 for all Lenders* --------- ---------- --------------- $---------------- $---------------- --------------% $---------------- $---------------- --------------% $---------------- $---------------- --------------% [7. Trade Date: __________________]3 Effective Date: __________________, 20__ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.] * Amount to be adjusted by the couterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. 2 Set forth, to at least 9 decimals, as a percentage of the Commitment of all Lenders thereunder. 3 To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date. The terms set forth in this Assignment and Assumption are hereby agreed to: ASSIGNOR -------- [NAME OF ASSIGNOR] By: ------------------------------------------------------------------ Title: ASSIGNEE -------- [NAME OF ASSIGNEE] By: ------------------------------------------------------------------ Title: [Consented to and]4 Accepted: [NAME OF ADMINISTRATIVE AGENT], as Administrative Agent By: _________________________________ Title: [Consented to:]5 By: _________________________________ Title: 4 To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement. 5 To be added only if the consent of the Borrower and/or other parties (e.g. Swing Line Lender, L/C Issuer) is required by the terms of the Credit Agreement.
ANNEX 1 TO ASSIGNMENT AND ASSUMPTION Credit Agreement, dated as of September 18, 2002, among SAFECO Corporation, the Lenders parties thereto, and Bank of America, N.A., as Administrative Agent STANDARD TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION 1. Representations and Warranties. 1.1. Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document. 1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all requirements of an Eligible Assignee under the Credit Agreement (subject to receipt of such consents as may be required under the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.01(a) thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached hereto is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. 2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned interest (including payments of principal, interest, fees and other amounts) to the Assignee whether such amounts have accrued prior to or on or after the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves. 3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of Texas. EX-99.1 5 en0427c.txt EX-99.1 Safeco Corporation Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Michael S. McGavick, President and Chief Executive Officer of SAFECO Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2002 /s/ MICHAEL S. MCGAVICK ------------------------ Michael S. McGavick President and Chief Executive Officer EX-99.2 6 en0427d.txt EX-99.2 SAFECO Corporation Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Christine B. Mead, Senior Vice President, Chief Financial Officer and Secretary of SAFECO Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 6, 2002 /s/ CHRISTINE B. MEAD -------------------------- Christine B. Mead Senior Vice President, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----