-----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, PoBoqYcIA+d6sAQO6XHvqC5vWGDAi54rJGhh6PVBPcBiDdEgl1qN4E/8KaOBc6jh WV5buKAYGn7B9s3TFjWD/A== 0000893220-02-000393.txt : 20020415 0000893220-02-000393.hdr.sgml : 20020415 ACCESSION NUMBER: 0000893220-02-000393 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIAN GROUP INC CENTRAL INDEX KEY: 0000890926 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 232691170 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11356 FILM NUMBER: 02595605 BUSINESS ADDRESS: STREET 1: 1601 MARKET STREET STREET 2: 12TH FLOOR CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2155646600 MAIL ADDRESS: STREET 1: 1601 MARKET ST STREET 2: 12TH FLOOR CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: CMAC INVESTMENT CORP DATE OF NAME CHANGE: 19960126 10-K 1 w56746e10-k.txt FORM 10-K RADIAN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] 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 1-11356 ------------------------ RADIAN GROUP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 23-2691170 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1601 MARKET STREET, PHILADELPHIA, PA 19103 (Address of principal executive offices) (zip code)
(215) 564-6600 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) $4,462,225,944 as of March 22, 2002 which amount excludes the value of all shares beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by officers and directors of the registrant (however this does not constitute a representation or acknowledgment that any such individuals is an affiliate of the registrant). (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 94,578,761 shares of Common Stock, $.001 par value, outstanding on March 22, 2002. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
DOCUMENT FORM 10-K REFERENCE - -------- ------------------- Annual Report to security holders for fiscal year ended Part II, December 31, 2001......................................... Items 5-8 Definitive Proxy Statement relating to the Registrant's 2002 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A not later than 120 days following the end Part III, of the Registrant's last fiscal year...................... Items 10-13
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Radian Group Inc. (the "Company") provides through its subsidiaries and affiliates, credit-based insurance and mortgage services to financial institutions in the United States and globally. The principal business segments of the Company are mortgage insurance, financial guaranty and mortgage services. The following table shows the percentage contributions to total revenues and net income of these businesses for 2001:
REVENUES NET INCOME -------- ---------- Mortgage Insurance.......................................... 76.8% 77.7% Financial Guaranty.......................................... 16.7% 15.6% Mortgage Services........................................... 6.5% 6.7%
The Company was formed on June 9, 1999 by the merger of CMAC Investment Corporation ("CMAC") and Amerin Corporation ("Amerin"). At that time the Company's sole product was mortgage insurance. Since that time, the Company has diversified its revenue and net income by expanding its mortgage service business and expanding into other areas such as internet-based mortgage services and financial guaranty insurance and reinsurance. This diversification has been achieved primarily through the acquisition of other businesses, including RadianExpress.com, ("RadianExpress", formerly ExpressClose.com, Inc.) and Enhance Financial Services Group Inc. ("Financial Guaranty"). For selected financial information about each segment, see note 1 of the Notes to Consolidated Financial Statements under the caption "Segment Reporting". The Notes to Consolidated Financial Statements are incorporated by reference into this report from the 2001 Annual Report to Stockholders and included as an exhibit to this report. MORTGAGE INSURANCE BUSINESS The Company provides, through its wholly owned subsidiaries, Radian Guaranty Inc. and Amerin Guaranty Corporation (individually referred to as "Radian Guaranty" and "Amerin Guaranty," and together referred to as "Mortgage Insurance"), private mortgage insurance and risk management services to mortgage lending institutions located throughout the United States and globally. Private mortgage insurance protects mortgage lenders and investors from default related losses on residential first mortgage loans made primarily to home buyers who make down payments of less than 20% of the home's purchase price. Private mortgage insurance also facilitates the sale of such mortgage loans in the secondary mortgage market, principally to Freddie Mac and Fannie Mae (Government Sponsored Entities, "GSEs"). Radian Guaranty is restricted to providing insurance on residential first mortgage loans only. Beginning October 1, 2001, Amerin Guaranty was licensed to conduct second mortgage insurance and most likely, any second mortgage insurance issued by the Company will be written in Amerin Guaranty. Mortgage Insurance offers two principal types of private mortgage insurance coverage, primary and pool. At December 31, 2001, primary insurance comprised 94.3% of total risk in force and pool insurance comprised 5.7% of total risk in force. During the third quarter of 2000, the Company commenced operations in Radian Insurance Inc., a subsidiary of Radian Guaranty, which writes credit insurance on non-traditional mortgage related assets, such as second mortgages and manufactured housing, and provides credit enhancement to mortgage related capital market transactions. The Company also recently began offering an alternative to title insurance, Radian Lien Protection ("RLP"), providing lien protection insurance on refinanced second mortgages and home equity loans. Primary Insurance Primary insurance provides mortgage default protection on individual loans at a specified coverage percentage, which is applied to the unpaid loan principal, delinquent interest and certain expenses, associated with the default and subsequent foreclosure (collectively, the "claim amount"). The Company's obligation to an insured lender in respect of a claim is determined by applying the appropriate coverage percentage to the claim amount. The Company's "risk" on each insured loan is the unpaid loan principal multiplied by the coverage percentage. Much of the Company's current business is written with 30% coverage on loans with a loan-to-value ("LTV") ratio between 90.01% and 95% ("95s") and 25% coverage on loans with an LTV ratio 2 between 85.01% and 90% ("90s"). As of December 31, 2001, approximately 57% of the Company's primary insurance in force outstanding had such coverages. In January 1999, Fannie Mae announced a program that allows for lower levels of required mortgage insurance for certain low down payment loans approved through its "Desktop Underwriter" automated underwriting system. In March 1999, Freddie Mac announced a similar program for loans approved through its "Loan Prospector" automated underwriting system. Through the end of 2001, a minimal amount of insurance was written in these programs. For more information on these developments, see "Other Direct Regulation -- Freddie Mac and Fannie Mae" on page 33. Under the Company's master policy, upon a default, the Company has the option of paying the entire claim amount and taking title to the mortgage property (at which time it is typically sold quickly), or paying the coverage percentage in full satisfaction of its obligations under the insurance written. In 2001, the entire claim amount was paid in approximately 4% of filed claims because of the expected economic advantage associated with that choice. Similar to 2000, this percentage is significantly higher than in past years and is due to the good economic conditions experienced over the past few years in which property values have remained generally strong. However, housing values may not remain strong in the future. Pool Insurance Pool insurance differs from primary insurance in that the exposure on pool insurance is not limited to a specific coverage percentage on each individual loan. Because of this feature and the generally lower premium rates associated with pool insurance, the rating agency capital requirements for the product are more restrictive than primary insurance. There is an aggregate exposure limit ("stop loss") on a "pool" of loans that is generally between 1% and 10% of the initial aggregate loan balance. Modified pool insurance has a stop loss like pool insurance, but also has exposure limits on each individual loan. The Company offers pool insurance on a selected basis to various state housing finance agencies on the collateral for their bond issues, as a credit enhancement to mortgage loans included in mortgage-backed securities or in whole loan sales, and in certain other structured transactions. Since 1996, the Company has offered pool insurance on mortgage product sold to Freddie Mac and Fannie Mae by the Company's primary insurance customers ("GSE Pool"). This pool insurance has a very low stop loss, generally 1.0% to 1.5%, and the insured pools contain loans with and without primary insurance. Loans without primary insurance have an LTV ratio of 80.0% or below. Premium rates on this business are significantly lower than primary insurance rates and the expected profitability on this business is lower than that of primary insurance. During 2001, the Company had pool risk written of $255 million or 2.3% of the Company's total risk written, consisting primarily of GSE Pool business, compared to $188 million in 2000 and $421 million in 1999. The Company expects Mortgage Insurance to continue to write a limited amount of GSE Pool insurance in 2002, and will continue to write other forms of pool or modified pool insurance as market opportunities arise. Structured Transactions The Company, from time to time, engages in structured transactions that may include either primary insurance, pool insurance or some combination thereof. A structured transaction generally involves insuring a large group of seasoned or unseasoned loans or issuing a commitment to insure new loan originations under negotiated terms. Some structured transactions contain a risk-sharing component under which the insured or a third party assumes a first-loss position or shares in losses in some other manner. Opportunities for structured transactions have increased during the last three years and this trend is expected to continue, however the Company competes with other mortgage insurers as well as capital market executions such as senior/subordinated security structures to obtain such business. Most structured transactions involve non-traditional mortgage or mortgage related assets such as Alternative A or A- ("Non-Prime") mortgages. Alternative A or A- mortgages are known as our nonprime business. Competition for this business is generally based upon price and is also based on the percentage of a given pool of loans that the Company is willing to insure. In 2001, the Company wrote $8.7 billion of primary insurance in structured transactions, which represented 19.3% of primary new insurance written. All of the pool risk written in 2001 and substantially all of the $3.4 billion of new insurance written in Radian Insurance was written in structured transactions. 3 Revenue Sharing Products The Company, like other mortgage insurers, offers financial products to its mortgage lending customers that are designed to allow the customer to participate in the risks and rewards of the mortgage insurance business. The most common product is captive reinsurance, in which a lender sets up a reinsurance company that assumes part of the risk associated with that lender's insured book of business. In most cases, the risk assumed by the reinsurer is an excess layer of aggregate losses that would be penetrated only in a situation of adverse loss development. The Company had approximately 30 active captive reinsurance agreements in place at December 31, 2001 and could enter into several new agreements or modify existing agreements in 2002, some with large national lenders. Premiums ceded to captive reinsurance companies in 2001 were $55.7 million, representing 9.1% of total mortgage insurance premiums earned, as compared to $39.6 million, or 7.0% of total premiums earned in 2000. Primary insurance written in 2001 that had captive reinsurance associated with it was $14.7 billion, or 32.9% of the Company's total primary insurance written as compared to $8.1 billion or 32.6% in 2000. During 2000, Freddie Mac issued standards for captive reinsurance through its mortgage insurance eligibility requirements. Additionally, a task force consisting of lenders, mortgage insurers and accounting firms has been set up to study risk transfer and the appropriate accounting treatment for captive reinsurance. In addition to captive reinsurance, the Company has entered into revenue sharing arrangements with the GSEs whereby the primary insurance coverage amount on certain loans is recast and the overall risk to the Company is reduced in return for a payment made to the GSE. Premiums ceded under such programs in 2001 were not significant. Radian Insurance Inc. Radian Insurance was reorganized and rated in September 2000 to write credit insurance on non-traditional mortgage related assets such as second mortgages and manufactured housing and to provide credit enhancement to mortgage related capital market transactions. The Company feels that there are many opportunities to take advantage of its expertise in credit underwriting and evaluation of asset performance to write business that it is precluded from writing in its monoline mortgage guaranty companies, Radian Guaranty and Amerin Guaranty. Radian Insurance obtained a AA rating from Standard & Poor's Rating Services ("S&P") and Fitch Ratings ("Fitch") and a Aa3 rating from Moody's Investors Service, Inc. ("Moody's") based on a prudent business plan and a Net Worth and Liquidity Maintenance Agreement from Radian Guaranty, which obligates Radian Guaranty to maintain at least $30 million of capital in Radian Insurance. The insurance structures typically used in Radian Insurance are pool insurance or modified pool insurance that can have a reserve or first loss position in front of Radian Insurance's layer of risk. In addition to the Net Worth and Liquidity Maintenance Agreement, the Company intends to capitalize Radian Insurance at all times in an amount that would support the existing risk in force. As of October 1, 2001, much of the business written in Radian Insurance was reinsured by Radian Asset Assurance, thereby leaving Radian Insurance with most of its net risk in second mortgage insurance. Because the Company anticipates that Radian Asset Assurance will be the primary writer of most of the Company's future financial guaranty business and that Amerin Guaranty will be the primary writer of second mortgage insurance in the future, the business written by Radian Insurance will likely be substantially reduced in 2002. FINANCIAL GUARANTY INSURANCE BUSINESS On February 28, 2001, the Company acquired the financial guaranty and other businesses of Financial Guaranty, a New York based insurance holding company that primarily insures and reinsures credit-based risks at a purchase price of approximately $581.5 million. The financial guaranty insurance business is conducted primarily through two insurance subsidiaries, Radian Reinsurance Inc. ("Radian Re", formerly Enhance Reinsurance Company) and Radian Asset Assurance Inc. ("Radian Asset Assurance", formerly Asset Guaranty Company) and also to a limited extent through a Class III Bermuda domiciled insurance company, Enhance Reinsurance (Bermuda) Limited. In addition, Financial Guaranty has a partial equity interest in two active credit-based asset businesses: Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and Sherman Financial Services Group LLC, ("Sherman"). Several smaller businesses are either in run-off or have been terminated. The purchase price represented the value of the Company's common stock and stock options issued in connection with the acquisition and other consideration in 4 accordance with an Agreement and Plan of Merger, dated November 13, 2000, by and among the Company, a wholly-owned subsidiary of the Company and Financial Guaranty. The acquisition, which was structured as a merger of a wholly-owned subsidiary of the Company with and into Financial Guaranty, entitled Financial Guaranty stockholders to receive 0.22 shares of the Company's common stock in a tax-free exchange for each share of Financial Guaranty's common stock that they owned at the time of the merger. The acquisition was treated as a purchase for accounting purposes, and accordingly, the assets and liabilities were recorded based on their fair values at the date of acquisition. The fair value of assets acquired was $1,357.9 million. The liabilities assumed were $833.1 million. The excess of purchase price over fair value of net assets acquired of $56.7 million represented the future value of insurance profits, which is being amortized over a period that approximates the future life of the insurance book of business. The results of Financial Guaranty's operations have been included in the Company's financial statements for the period from the date of the acquisition through December 31, 2001. Financial guaranty insurance provides an unconditional and irrevocable guaranty to the holder of a debt obligation of full and timely payment of principal and interest. In the event of a default under the obligation, the insurer has recourse against the issuer and/or any related collateral (which is a component of many insured asset-backed obligations and other non-municipal debt but is not typically a component of municipal obligations) for amounts paid under the terms of the policy. Payments under the insurance policy may not be accelerated by the holder of the debt obligation. Absent payment in full at the option of the insurer, in the event of a default under an insured obligation, the holder continues to receive payments of principal and interest on schedule, as if no default had occurred. Each subsequent purchaser of the obligation generally receives the benefit of such guaranty. The issuer of the obligation pays the premium for financial guaranty insurance either in full at the inception of the policy or in installments on an annual basis. Premium rates are typically calculated as a percentage of either the principal amount of the debt or total exposure (principal and interest). Rate setting reflects such factors as the credit strength of the issuer, type of issue, sources of income, collateral pledged, restrictive covenants, maturity and competition from other insurers. Premiums are generally non-refundable and are earned in proportion to the level amortization of insured principal over the contract period. Premiums written on a monthly basis are primarily earned as they are received. This long and relatively predictable earnings pattern is characteristic of the financial guaranty insurance industry and, along with a conservative investment policy, provides a relatively stable source of future revenues and claims-paying ability to financial guaranty insurers and reinsurers such as Financial Guaranty. The primary financial guaranty insurance market currently consists of two main sectors: municipal bond insurance and structured finance business including insurance on collateralized debt obligations, credit default swaps and asset-backed debt. The following table summarizes the net premiums for the indicated Financial Guaranty lines of business written by Financial Guaranty for 2001 since the date of acquisition of Financial Guaranty by the Company:
DATE OF ACQUISITION THROUGH DECEMBER 31, 2001 ------------------- ($ IN THOUSANDS) NET PREMIUMS WRITTEN: Municipal Direct............................................ $ 35,652 Municipal Reinsurance....................................... 36,773 Non-Municipal Direct........................................ 12,016 Non-Municipal Reinsurance................................... 36,427 Trade Credit Reinsurance.................................... 22,362 -------- Total.................................................. $143,230 --------
Municipal Bond Market. Municipal bond insurance provides credit enhancement of bonds, notes and other evidences of indebtedness issued by states and their political subdivisions (for example, counties, cities, or towns), utility districts, public universities and hospitals, public housing and transportation authorities, and 5 other public and quasi-public entities. Municipal bonds are supported by the issuer's taxing power in the case of general obligation or special tax-supported bonds, or by its ability to impose and collect fees and charges for public services or specific projects in the case of most revenue bonds. Insurance provided to the municipal bond market has been and continues to be a major source of revenue for the financial guaranty insurance industry. Non-Municipal Bond Market. Asset-backed transactions or securitizations constitute a form of structured financing that is distinguished from unsecured debt issues by being secured by a specific pool of assets held by the issuing entity, rather than relying on the general unsecured creditworthiness of the issuer of the obligation. While most asset-backed debt obligations represent interests in pools of assets, such as residential and commercial mortgages and credit card and auto loan receivables, financial guarantors have also insured asset-backed debt obligations secured by one or a few assets, such as utility mortgage bonds and multi-family housing bonds and obligations under credit default swaps, both funded and synthetic. A synthetic credit default swap involves the transfer of credit risk without the removal of assets from the issuer's balance sheet. The asset-backed securities market including both synthetic and funded collateralized debt obligations has grown significantly in recent years although consensus estimates are lacking as to the insured volume. The Company anticipates Financial Guaranty's increased participation in this market on a global basis in 2002. Financial Guaranty Reinsurance Reinsurance is the commitment by one insurance company, the "reinsurer", to reimburse another insurance company, the "ceding company," for a specified portion of the insurance risks underwritten by the ceding company. Because the insured party contracts for coverage solely with the ceding company, the failure of the reinsurer to perform does not relieve the ceding company of its obligation to the insured party under the terms of the insurance contract. Similarly, the failure of the ceding company to perform does not diminish the reinsurer's obligations under the reinsurance contract to the ceding company. While reinsurance provides various benefits to the ceding company, more important is that it enables a primary insurer to write greater single risks and greater aggregate risks without contravening the capital requirements of applicable state insurance laws and rating agency guidelines. State insurance regulators allow primary insurers to reduce the liabilities appearing on their balance sheets to the extent of reinsurance coverage obtained from licensed reinsurers or from unlicensed reinsurers meeting certain solvency and other financial criteria. Similarly, the rating agencies permit such a reduction for reinsurance in an amount that depends on the claims-paying ability or financial strength rating of the reinsurer. The principal forms of reinsurance are treaty and facultative. Under a treaty arrangement the ceding company is obligated to cede, and the reinsurer is correspondingly obligated to assume, a specified portion of a specified type of risk or risks insured by the ceding company during the term of the treaty (although the reinsurance risk thereafter extends for the life of the respective underlying obligations). Under a facultative agreement, the ceding company from time to time during the term of the agreement offers a portion of specific risks to the reinsurer, usually in connection with particular debt obligations. A facultative arrangement further differs from a treaty arrangement in that under a facultative arrangement the reinsurer oftentimes performs its own underwriting credit analysis to determine whether to accept a particular risk, while in a treaty arrangement the reinsurer generally relies on the ceding company's credit analysis. Both treaty and facultative agreements are typically entered into for a term of one year, subject to a right of termination under certain circumstances. Treaty and facultative reinsurance are typically written on either a proportional or non-proportional basis. Proportional relationships are those in which the ceding company and the reinsurer share the premiums, as well as the losses and expenses, of a single risk or group of risks in an agreed percentage. In addition, the reinsurer generally pays the ceding company a ceding commission, which is typically related to the ceding company's cost of obtaining the business being reinsured. Non-proportional reinsurance relationships are typically on an excess-of-loss basis. An excess-of-loss relationship provides coverage to a ceding company up to a specified dollar limit for losses, if any, incurred by the ceding company in excess of a specified threshold amount. Reinsurers may also, in turn, purchase reinsurance under retrocessional agreements to cover all or a portion of their own exposure for reasons similar to those that cause primary insurers to purchase reinsurance. 6 Other Financial Guaranty Insurance Businesses Radian Asset Assurance provides trade credit reinsurance, which protects sellers of goods under certain circumstances against non-payment of the receivables they hold from buyers of those goods. Financial Guaranty covers receivables both where the buyer and seller are in the same country as well as cross-border receivables. Sometimes in the latter instance, the coverage extends to certain political risks (foreign currency controls, expropriation, etc.) that interfere with the payment from the buyer. As of December 31, 2001, the Company through its ownership of Financial Guaranty, owned an indirect 36.5% equity interest in EIC Corporation Ltd. ("Exporters"), an insurance holding company which through its wholly-owned insurance subsidiary licensed in Bermuda, insures primarily foreign trade receivables for multinational companies. Financial Guaranty provides significant reinsurance capacity to this joint venture on a quota-share, surplus share and excess-of-loss basis. Financial Guaranty also provides surety and credit insurance to securities firms mostly in the United States and to exchanges throughout the world. A primary example of such coverage is excess Securities Investor Protection Corporation ("SIPC") insurance, whereby Financial Guaranty covers non-investment related losses (as a result of securities and in some cases cash missing from a customer's account) of a securities firm's customers covered by SIPC in excess of the $500,000 covered currently provided by SIPC in the United States. Premiums written on these types of insurance were $2.8 million during 2001. MORTGAGE SERVICES RadianExpress.com Acquisition On November 9, 2000, the Company acquired RadianExpress, an Iowa Corporation engaged in the business of Internet-based mortgage processing, closing and settlement services for approximately $8.0 million, consisting of cash, the Company's common stock, stock options and other consideration. This transaction has allowed the Company to expand further into the mortgage service business, which is considered an important adjunct to both the primary mortgage insurance business and the second mortgage activities of the Company. RadianExpress had $16.0 million of other income and $17.4 million of operating expense, for 2001. RadianExpress processed approximately 402,000 applications during 2001 with approximately 37,000 of the transactions related to net funding services, whereby RadianExpress receives and disburses mortgages funded on behalf of its customers. Asset-Based Businesses The Company is engaged in certain asset-based businesses, including the purchase, servicing and/or securitization of special assets, including sub-performing/non-performing and seller-financed residential mortgages and delinquent unsecured consumer assets, which utilizes the Company's expertise in performing sophisticated analysis of complex, credit-based risks. The most significant of the asset-based businesses is the Company's 46% interest in C-BASS, a mortgage investment and servicing firm specializing in credit sensitive, single-family residential mortgage assets and residential mortgage-backed securities. C-BASS invests in whole loans, single-family residential properties that have been, or are being, foreclosed, subordinated securities, known as "B pieces," collateralized by residential loans and seller-financed notes. By using sophisticated analytics, C-BASS essentially seeks to take advantage of what it believes to be the mispricing of credit risk for certain of these assets in the marketplace. In addition, its residential mortgage servicing company, Litton Loan Servicing LP, which specializes in loss mitigation, default collection, collection of insurance claims and guaranty collections under government-sponsored mortgage programs, services whole loans and real estate. Litton Loan Servicing's subsidiaries service seller-financed loans and buy and sell seller-financed loans. As part of its investment strategy, C-BASS holds some assets on its books, securitizes certain assets and sells other assets directly into the secondary market. The Company also owns a 45.5% interest in Sherman, a consumer asset and servicing firm specializing in purchases of and services related to charged off and bankruptcy plan consumer assets and charged off high loan to value mortgage receivables from national financial institutions and major retail corporations. The consumer assets and mortgage receivables are purchased at deep discounts to their original face value. 7 In 2000, Financial Guaranty decided to wind down, sell or otherwise dispose of, its purchase, servicing and/or securitization of state lottery awards, structured settlements and viatical (life insurance payment) businesses of Singer Asset Finance Company, L.L.C. and a related subsidiary Enhance Consumer Services LLC (collectively, "Singer", an entity acquired in connection with the acquisition of Financed Guaranty. In connection therewith, in October 2000, Financial Guaranty sold certain assets and intangibles of its viatical settlements business and in December 2000 and July 2001 it sold to the prior management thereof certain of its balance sheet and off-balance sheet assets, including its pipeline of lottery and structured settlement transactions and certain intangibles. Singer is currently operating on a run-off basis. Its operations consist of servicing and/or disposing of Singer's prior originations of non-consolidated special purpose vehicles. CUSTOMERS Mortgage originators, such as mortgage bankers, mortgage brokers, commercial banks and savings institutions, are the Company's principal customers, although individual mortgage borrowers generally incur the cost of primary insurance coverage. The Company does offer lender-paid mortgage insurance whereby mortgage insurance premiums are charged to the mortgage lender or loan servicer. On the lender-paid product, the interest rate to the borrower is usually higher to compensate for the mortgage insurance premium that the lender is paying. In 2001, approximately 43% of the Company's primary mortgage insurance was originated on a lender-paid basis. This lender-paid business is highly concentrated among a few large mortgage lender customers. To obtain primary insurance from the Company, a mortgage lender must first apply for and receive a master policy from the Company. The Company's approval of a lender as a master policyholder is based, among other factors, upon an evaluation of the lender's financial position and its management's demonstrated adherence to sound loan origination practices. The Company's quality control function then monitors the master policyholder based on a number of criteria. The number of primary individual mortgage insurance policies the Company had in force was 891,693 at December 31, 2001, 858,413 at December 31, 2000, and 807,286 at December 31, 1999. The top 10 mortgage insurance customers were responsible for 45.0% of the Company's primary new insurance written in 2001 compared to 43.4% in 2000 and 44.6% in 1999. The largest single mortgage insurance customer (including branches and affiliates of such customer), measured by primary new insurance written, accounted for 12.6% of primary new insurance written during 2001 compared to 11.2 % in 2000 and 12.2% in 1999. Financial Guaranty's insurance customers consist of many of the major global financial institutions that participate in municipal bond transactions, asset-backed securities and other structured products such as collateralized debt obligations. These institutions are typically large commercial banks or investment banks. It is the Company's intention to establish a broad relationship with a limited number of such institutions to help ensure consistent, high quality deals in the structured product and municipal areas. Financial Guaranty's reinsurance customers consist primarily of the Major Monolines-MBIA Insurance Corporation; Ambac Assurance Corporation; Financial Guaranty Insurance Company; and Financial Security Assurance Inc. In June 2000, The Dexia Group acquired the corporate parent of Financial Security Assurance. The Major Monolines were responsible for 42.0% of Financial Guaranty's gross premiums written in 2001, compared to 43.0% in 2000 and 45.0% in 1999. The largest single customer of Financial Guaranty, measured by gross premiums written, accounted for 18.8% of gross premiums written during 2001 compared to 17% in 2000 and 20% in 1999. This customer concentration results from the small number of primary insurance companies that are licensed to write financial guaranty insurance. Financial Guaranty has maintained close and long-standing relationships with the Major Monolines, dating from either Financial Guaranty's or the given primary insurer's inception. In the Company's opinion, these relationships provide Financial Guaranty with a comprehensive understanding of their procedures and 8 reinsurance requirements and allow the clients to utilize Financial Guaranty's underwriting expertise effectively, thus improving the service they receive. Financial Guaranty is a party to facultative and treaty agreements with all the Major Monolines. Financial Guaranty's facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) at the option of the primary insurer if Financial Guaranty fails to maintain certain financial, regulatory and rating agency criteria that are equivalent to or more stringent than those Financial Guaranty's operating subsidiaries are otherwise required to maintain for their own compliance with the New York Insurance Law and to maintain a specified claims-paying ability or financial strength rating for the particular operating subsidiary or (iii) upon certain changes of control. The Company obtained a waiver of these provisions for the merger transaction between the Company and Financial Guaranty. Upon termination under the conditions set forth in (ii) and (iii) above, the Company may be required (under some of their reinsurance agreements) to return to the primary insurer all unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements. Upon the occurrence of the conditions set forth in (ii) above, unless the agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under that agreement. In addition, a substantial portion of Radian Asset Assurance's written business is subject to similar provisions with respect to any downgrade of its financial strength rating. SALES, MARKETING AND COMPETITION Sales and Marketing The Company employs a mortgage insurance field sales force of approximately eighty-four (84) persons, organized into three regions, providing local sales representation throughout the United States. Each of the three regions is supervised by a regional business manager who is directly responsible for several area sales managers and several service centers where underwriting and application processing are performed. The regional business managers are responsible for managing the profitability of business in their regions including premiums, losses and expenses. The area sales managers are responsible for managing a small sales force in different areas within the region. In addition, a new position of key account manager ("KAM") was created in 2000. KAMs are intended to manage specific accounts within a region that are not national accounts but that need more targeted oversight and attention. Mortgage insurance sales personnel are compensated by salary, commissions on new insurance written and a production incentive based on the achievement of various goals. During 2001, these goals were related to volume and market share and this is generally expected to continue in 2002. In addition to securing business from small and mid-size regional customers, the mortgage insurance business regions provide support to the national account effort in the field. National Accounts. In recognition of the increased consolidation in the mortgage lending business and the large proportional amount of mortgage business done by large national accounts, the Company has a focused national accounts team consisting of five national account managers ("NAM") and a dedicated "A Team" that is directly and solely responsible for supporting national accounts. Each NAM is responsible for a select group of dedicated accounts and is compensated on the results for those accounts as well as the results of the Company. There has been a trend among national accounts to move to a more centralized decision about mortgage insurance based on revenue sharing products and other value added services provided by the mortgage insurance companies. The Company also has a dedicated NAM who is primarily responsible for relations with and programs implemented with Fannie Mae and Freddie Mac. National accounts business represented approximately 52% of the Company's primary new insurance written in 2001 and is expected to provide a similar percentage in 2002. The financial guaranty insurance business is derived from relationships Financial Guaranty has established and maintains with many global financial institutions and primary insurance companies. These relationships provide business for Financial Guaranty in the following major areas: (1) deal flow on municipal bond trading transactions, asset-backed securities and other structured products; (2) reinsurance for municipal bonds and asset-backed securities (in which area one or both of Radian Re and Radian Asset Assurance currently has either treaty or facultative agreements with all but one of the highest rated monoline primary companies); (3) trade credit reinsurance; and (4) reinsurance for affiliated-companies (including 9 Exporters). Financial Guaranty markets directly to the monoline insurers writing credit enhancement business and has direct relationships with their affiliated primary insurers. Specialist reinsurance intermediaries, most of whom are located in London, usually present to Financial Guaranty reinsurance opportunities in the credit insurance sector. These brokers work with Financial Guaranty marketing personnel in introducing Financial Guaranty to the primary credit insurance markets and in structuring reinsurance to meet the needs of the primary insurers. Intermediaries are typically compensated by the reinsurer based on a percentage of premium assumed, which varies from agreement to agreement. Competition The Company competes directly with six other private mortgage insurers and with various federal government agencies, principally the Federal Housing Administration ("FHA"). In addition, the Company and other private mortgage insurers face competition from state-supported mortgage insurance funds. The private mortgage insurance industry consists of the Company and six other active mortgage insurance companies. During 2001, the Company was the fourth largest private mortgage insurer, measured by market share and had, according to industry data, a market share of new primary mortgage insurance written of 15.6% as compared to 15.2% in 2000. The Company believes that the market share increase was due, in part, to an increase in its share of new insurance written under structured transactions that are included in industry new insurance written figures. Financial Guaranty is subject to competition from companies that specialize in financial guaranty reinsurance including ACE Limited, Axa Reassurance Finance, S.A. and RAM Reinsurance Co. Ltd. In addition, several multiline insurers have recently increased their participation in financial guaranty reinsurance. Certain of these multiline insurers have formed strategic alliances with some of the U.S. primary financial guaranty insurers. Competition in the financial guaranty reinsurance business is based upon many factors, including overall financial strength, pricing, service and evaluation by the rating agencies of claims-paying ability or financial strength. The agencies allow credit to a ceding primary insurer's capital requirements and single-risk limits for reinsurance ceded in an amount that is a function of the claims-paying ability or financial strength rating of the reinsurer. The Company believes that competition from multiline reinsurers and new monoline financial guaranty insurers will continue to be limited due to (a) the declining number of multiline insurers with the required financial strength and (b) the barriers to entry for new reinsurers posed by state insurance law and rating agency criteria governing minimum capitalization. Financial guaranty insurance, including municipal bond insurance and the structured business, also competes with other forms of credit enhancement, including letters of credit, guaranties and credit default swaps provided primarily by foreign banks and other financial institutions, some of which are governmental entities or have been assigned the highest credit ratings awarded by one or more of the major rating agencies. However, these credit enhancements serve to provide primary insurers with increased insurance capacity only for rating agency purposes. They do not qualify as capital for state regulatory purposes, nor do they constitute credit against specific liabilities that would allow the primary insurer greater single-risk capacity. The Company believes that Financial Guaranty has a number of direct competitors in their other insurance businesses, some of which have greater financial and other resources than Financial Guaranty. As a primary insurer, the Company writes insurance on those types of municipal bonds with respect to which such primary insurers have sometimes declined to participate because of the size or complexity of such bond issuances relative to the anticipated premium flow and returns. The Company also serves as a reinsurer for certain specialty primary insurers that are not monoline financial guaranty insurers. These specialty primary insurers are themselves subject to competition from other primary insurers, many of which have greater financial and other resources. RISK MANAGEMENT The Company considers effective risk management to be critical to its long-term financial stability. Market analysis, prudent underwriting, the use of automated risk evaluation models and quality control are all important elements of the Company's risk management process. The Company also utilizes Enterprise Risk Management (ERM) in evaluating its risk. This involves reviewing its consolidated and interdependent credit 10 risk, market or funding risk, interest rate risk, operational risk, and legal risk across all of its businesses, and the development of risk adjusted return on capital models. Mortgage Insurance Business Risk Management Personnel In addition to a centralized Risk Management department in the home office, each of the Company's mortgage insurance service regions has an assigned Risk Manager responsible for evaluating risk and monitoring the risk profiles of major lenders in the region. The Company employs an underwriting and support staff of approximately ninety (90) persons who are located in Mortgage Insurance's twelve (12) service centers. Additionally, the Company has two agency operations in place for the states of Alaska and Hawaii. Underwriting Process The Company has generally accepted applications for primary mortgage insurance (other than in connection with structured transactions) under three basic programs: the traditional fully documented program, a limited documentation program and the delegated underwriting program. Programs that involve less than fully documented file submissions have become more prevalent in recent years. In order to meet this demand, the Company introduced to the marketplace the process referred to as Radian Steamlined Doc ("Streamlined Doc"). A lender utilizing Streamlined Doc can submit loans to the Company for insurance with abbreviated levels of documentation based on the type of loan being submitted for insurance. During 2001, 46% of the commitments issued for primary insurance were received by the Company under the Streamlined Doc program. In the Streamlined Doc program, the Company has agreed to underwrite certain loans with less documentation by relying upon a scoring model created by the Company during 1996 known as the "Prophet Score(R)" System (described below). Delegated Underwriting The Company has a delegated underwriting program with a majority of its customers. The Company's delegated underwriting program, which was implemented in 1989, currently involves only lenders that are approved by the Company's risk management department. The delegated underwriting program allows the lender's underwriters to commit the Company to insure loans based on agreed upon underwriting guidelines. Delegated loans are submitted to the Company in various ways -- fax, electronic data interchange ("EDI") and through the Internet. The Company routinely audits loans submitted under this program. As of December 31, 2001, approximately 21% of the risk in force on the Company's books was originated on a delegated basis and during 2001 and 2000, respectively, 37% and 63% of the primary loans insured by the Company during such years were originated on a delegated basis. This decrease from 2000 is primarily the result of the increase in insurance written on loans resulting from structured transactions. Mortgage Scoring Models During the last few years, the use of scoring mechanisms to predict loan performance has become prevalent in the marketplace, especially with the GSEs advocacy of the use of credit scores in the mortgage loan underwriting process. The use of credit scores was pioneered by Fair Isaac and Company ("FICO") and became popular in the mid-1980s. The FICO model calculates a score based on a borrower's credit history. This credit score based scorecard is used to predict the future performance of a loan over a one or two year time horizon. The higher the credit score the lower the likelihood that a borrower will default on a loan. The Company's Prophet Score begins with a FICO score then adds specific additional data regarding the borrower, the loan and the property such as LTV, loan type, loan amount, property type, occupancy status and borrower employment. The Company believes that it is this additional mortgage data that expands the integrity of the Company's Prophet Score over the entire life of the loan. In addition to the Prophet Score, the Company's housing analysts regularly review major metropolitan areas to assess the impact that key indicators such as housing permits, employment trends, and median home sale prices have on local lending. The healthier the real estate market, the lower the risk. The Company refers to this score as a GEOScore. Beginning in October 1996, the Prophet Score and GEOScore have appeared on each insurance commitment that Mortgage Insurance issued. 11 Automated Underwriting Mortgage Insurance's frontline computer system for input and underwriting loan file information is called MINACS. In utilizing MINACS, the Company captures information from all segments of a loan file including the borrower's employment and income history and appraisal information. This information is then channeled through various edits and subfiles (including Prophet and GEOScore) to assist the underwriter in determining the total risk profile on a given file. This system also includes: a) tracking loans by borrowers who have previously defaulted on a loan insured by the Company or loans where the Company has paid a claim, b) identifying borrowers who have previously applied for the Company insurance, and c) information about the lender involved including volume, commitment rates and delinquency rates. Alternative Products An increasingly popular form of mortgage lending is in the area of non-prime loans. Subsets of this category in which the Company has become involved are Alternative A ("Alt A"), A minus and B/C loans. The Company has continued to limit its participation in these non-prime markets to mostly Alt A and A minus loans rather than "B or "C" loans and has targeted the business insured to specific lenders with proven good results and servicing experience in this area. The Company's corporate due diligence has identified such lenders as "Tier 1" lenders. Alternative A Loans Alt A loans can now be segregated into two distinct credit profiles: borrowers with a better credit profile than the Company's typical insured borrowers, with a FICO score greater than 680 ("FICO >680"), and borrowers with a credit profile equal to the Company's typical insured borrower, with a FICO score from 660 to 679 ("FICO 660-679"). The Company charges a higher premium for Alt A business due to the reduced income and/or asset documentation received at origination. The premium rate is also risk adjusted to reflect the difference in credit profile of the FICO >680 borrower and FICO 660-679 borrower. While the Company believes the Alt A loans with a FICO of 660-679 category present a slightly higher risk than its normal business, the premium surcharge compensates the Company for this additional risk. Alt A loans represented 9.4% of total primary risk in force at the end of 2001 and Alt A products made up 18.3% of the Company's primary new insurance written in 2001 as compared to 13.4% in 2000. A Minus Loans The A minus program can also be segregated into two distinct credit profiles. A "near-miss" prime A loan has a FICO score from 590-619 ("FICO 590-619"). These borrowers were forced into the A minus markets in 1996 when the GSEs set a 620 FICO score as the base for a prime borrower. These were typically borrowers the Company insured prior to 1996 and mortgage insurance on loans made to this class of borrowers has resurfaced as the GSEs have entered the A minus market. The Company receives a significantly higher premium for insuring this product that is commensurate with the additional default risk. The second credit profile contains borrowers with a FICO score from 570-589 ("FICO 570-589"). This product comes to the Company primarily through primary structured transactions and the insurance is typically lender-paid. The Company also receives a significantly higher premium for insuring this product that is commensurate with the increased default risk and which is normally a variable rate based on the Prophet Score. A minus loans represented 7.8% of total primary risk in force at the end of 2001 and A minus loans made up 10.0% of the Company's primary new insurance written in 2001 as compared to 8.1% in 2000. B/C Loans The Company has no approved programs to insure loans that are defined as B/C risk grades. However, some pools of loans submitted for insurance as primary structured transactions might contain a limited number of these loans. The Company receives significantly higher premium on these loans due to the increased default risk associated with this type of loan. B/C loans represented approximately 3.6% of total primary new insurance written during 2001 compared to less than 1% of total primary new insurance written during 2000. This increase is primarily the result of the increase in insurance written on loans resulting from structured transactions. 12 Contract Underwriting The Company utilizes its underwriting skills to provide an outsource contract underwriting service to its customers. For a fee, the Company underwrites fully documented underwriting files for secondary market compliance, while concurrently assessing the file for mortgage insurance, if applicable. The automated underwriting service introduced in the latter part of 1997 has become a major part of the Company's contract underwriting service. This service offers customers access to Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector loan origination systems. Contract underwriting continues to be a popular service to mortgage insurance customers. During 2001, loans underwritten via contract underwriting accounted for 34.5% of applications, 32.0% of commitments for insurance and 25.8% of insurance certificates issued. The Company gives recourse to its customers on loans it underwrites for compliance. If the loan does not meet agreed upon guidelines, the Company agrees to remedy the situation either by placing mortgage insurance coverage on the loan or by purchasing the loan. During 2001, the Company processed requests for remedies on less than 1% of the contract loans underwritten and sold a number of loans previously acquired as part of the remedy process. Providing these remedies means the Company assumes some credit risk and interest rate risk if an error is found during the limited remedy period in the agreements. Rising mortgage interest rates or an economic downturn may expose the mortgage insurance business to higher losses. During 2001, the financial impact of these remedies was insignificant although there is no assurance that such results will continue in 2002 and beyond. Quality Control As part of the Company's system of internal control, the Risk Management function maintains a Quality Control ("QC") Department. The QC function is responsible for ensuring that the Company's portfolio of insured loans meets good underwriting standards and conforms to the Company's guidelines for insurability, thus minimizing the Company's exposure to controllable risk. Among its other activities, the QC function accomplishes this objective primarily by performing contract underwriting audits, delegated lender audits, and due diligence reviews of structured transactions. Contract Underwriting Audits The QC function routinely audits the performance of the Company's contract underwriters. In order to ensure the most effective use and allocation of audit resources, a risk assessment model has been developed which identifies high, medium, and low risk contract underwriters based upon six weighted risk factors applied to each underwriter. The models are continually updated with current information. Audit rotation is more frequent for high risk underwriters and less frequent for those classified as low risk. Audit results are communicated to management and impact whether additional targeted training is necessary or whether termination of the underwriter's services is appropriate. Contract underwriting audits help to ensure that customers receive quality underwriting services. The audits also protect the Company in that they facilitate the Company's efforts to improve quality control. Delegated Lender Audits Through the use of borrower credit scoring and its own proprietary mortgage scoring system, the Company is able to monitor the credit quality of loans submitted for insurance. The Company also conducts a periodic, on-site review of a delegated lender's insured delegated underwriting business. Lenders with significant risk concerns, as identified in past reviews and through the Company's regular risk reporting and analysis of the business, may be reviewed more frequently. Loans are selected for review on a random sample basis, and this sample may be augmented by a targeted sample based upon specific risk factors or trends identified through the monitoring process described above. The objective of the loan review is to identify errors in the loan data transmitted to the Company, to determine lender compliance with the Company's underwriting guidelines and eligible loan criteria, to assess the quality of a lender's underwriting decisions, and to rate the risk of the individual loans insured. The Company has developed a proprietary data collection and risk analysis application to facilitate these reviews. Audits are graded based upon the risk ratings of the loans reviewed, lender compliance, and data integrity. The results of each audit are summarized in a report to the lender and to Company management. The audit results are used 13 as a means to improve the quality of the business the lender submits to the Company for insurance. Issues raised in the reports that are not resolved in a manner and within a time period acceptable to the Company may result in restriction or termination of the lender's delegated underwriting authority. Due Diligence of Structured Transactions The QC function, in conjunction with other members of the Risk Management group, also performs due diligence of structured transactions. These due diligence reviews may be precipitated either by a desire to develop an ongoing relationship with selected lenders, or by the submission of a proposed transaction by a given lender. Due diligence can take two forms: business level and loan level. Business Level Due Diligence The Company believes that a key component of understanding the risks posed by a potential business deal is understanding the business partner. The Company's objective is to understand the lender's business model in sufficient depth to determine whether the Company should have confidence in the firm as a potential long-term business partner and customer. Business level due diligence may be performed on any prospective lender with whom a structured deal is contemplated and with whom the Company has had no prior business experience. Business level due diligence includes a review of: the lender's company structure, management, business philosophy, and financial health, the company's credit management processes, the quality control processes, and servicing relations. Loan Level Due Diligence Loan level due diligence is conducted on pending structured transactions in order to determine whether appropriate underwriting guidelines have been adhered to, whether loans conform to Company guidelines, to evaluate data integrity, and to detect any fraudulent loans. Loans are selected for audit on a sample basis, and audit results are communicated to the Company's management. The results of loan level due diligence assist management in determining whether the pending deal should be consummated, and if so, provides data that can be used to determine appropriate pricing. It also provides management with a database of information on the quality of a particular lender's underwriting practices for future reference. The results of these due diligence reviews are summarized in reports to the Company's management. Letter grades are assigned to each section of the business and loan level reviews. Weights are then assigned to each section of the review (e.g., corporate, credit, quality control, servicing) that vary based upon the product under review, (e.g., prime first liens, A minus first liens, prime second liens, etc.) which results in an overall letter grade assigned to the lender. The grade conveys to the Company's management the opinion of Risk Management as to the overall risk profile presented by a lender and therefore the relative appeal of a potential relationship with that lender. Financial Guaranty Business The Company believes its financial guaranty underwriting discipline is critical to the profitability and growth of the financial guaranty insurance businesses. Financial Guaranty has a structured underwriting process to determine the characteristics and creditworthiness of risks that Financial Guaranty directly insures or reinsures, which process, in the case of reinsurance transactions, supplements the underwriting procedures of the primary insurers. Rather than relying entirely upon the underwriting performed by the primary insurers, Radian Re and Radian Asset Assurance, as applicable, and the rating agencies conduct extensive reviews of the primary insurers. Moreover, the ceding insurer is typically required to retain at least 25% of the exposure on any single risk assumed. Financial Guaranty carefully evaluates the risk underwriting and management of treaty customers, monitors the insured portfolio performance and conducts a detailed underwriting review of the facultative insurance it writes. Financial Guaranty believes that the reinsurance of municipal bond guaranties provides a relatively stable source of premium income. In addition, most premiums received are credited as deferred premium revenue and are earned as the related risks amortize, thereby providing a relatively stable, predictable source of earned premiums. 14 Financial Guaranty conducts periodic detailed reviews of each Major Monoline and other carriers with which it does facultative business. That review entails an examination of the primary insurer's operating, underwriting and surveillance procedures, personnel, organization and existing book of business, as well as the primary insurer's underwriting of a sample of business assumed under the treaty. Facultative transactions are reviewed individually under procedures adopted by Financial Guaranty's credit committees. Any underwriting issues are discussed internally by the credit committee and with the primary insurer's personnel. In connection with Financial Guaranty's direct insurance business, it conducts periodic reviews of its insured parties, whether in connection with policy renewal or otherwise. That review includes an examination of the insured party's operations, internal control procedures, personnel and organization. Limitations on Financial Guaranty's single-risk exposure derive from state insurance regulation, rating agency guidelines and internally established criteria. The primary factor in determining single-risk capacity is the class or sector of business being underwritten. For municipal credits, Financial Guaranty has self-imposed single-risk guidelines which range widely, depending upon the perceived risk of default of the municipal obligation insured or reinsured. For asset-backed transactions, the single-risk guidelines generally follow state insurance regulation limitations, as well as additional self-imposed single risk and cumulative servicer-related risk. On individual underwritings, the credit committee may limit its insurance or reinsurance participation to an amount below that allowed by the single-risk guidelines noted above. Moreover, Financial Guaranty relies on ongoing oversight by its credit committees with input from risk management and surveillance to avoid undue exposure concentration in any given type of obligation or geographic area. Financial Guaranty's surveillance procedures include reviews of those exposures assumed as a reinsurer as to which it may have concerns. Financial Guaranty also maintains regular communication with the surveillance departments of the ceding primary insurers. The underwriting criteria applied in evaluating a given issue for primary insurance coverage and the internal procedures (for example, credit committee review) for approval of the issue are substantially the same as for the underwriting of reinsurance. The entire underwriting responsibility rests with Financial Guaranty as the primary insurer. As a result, Financial Guaranty participates more actively in the structuring of the transaction and conducts more detailed reviews of the parties it insures in which Financial Guaranty is a primary insurer than it does as a reinsurer. Financial Guaranty conducts, in most cases annually, in-depth surveillance of issues insured as a primary insurer. RATINGS The Company has its claims-paying ability and/or financial strength rated by S&P, Moody's and Fitch. The rating criteria used by the rating agencies focus on the following factors: capital resources; financial strength; commitment of management to, and alignment of shareholder interests with, the insurance business; demonstrated management expertise in the insurance business conducted by the company; credit analysis; systems development; marketing; capital markets and investment operations, including the ability to raise additional capital; and a minimum policyholders' surplus comparable to primary company requirements, with initial capital sufficient to meet projected growth as well as access to such additional capital as may be necessary to continue to meet standards for capital adequacy. As part of their rating process, S&P, Moody's and Fitch test the Company's insurance subsidiaries by subjecting them to a "worst-case depression scenario." Expected losses over a depression period are established by applying capital charges to the existing and projected insurance portfolio. The claims-paying ability and financial strength ratings assigned by the rating agencies to an insurance or reinsurance company are based upon factors relevant to policyholders and are not directed toward the protection of the insurer's or reinsurer's securityholders. Such a rating is neither a rating of securities nor a recommendation to buy, hold or sell any security. Claims-paying ability and financial strength ratings assigned to the insurance subsidiaries should not be viewed as indicative of or relevant to any ratings which may be assigned to the Company's outstanding debt securities by any rating agency and should not be considered an evaluation of the likelihood of the timely payment of principal or interest under such securities. However, these ratings are an indication to an insurer's customers of the insurer's present financial strength and its capacity to honor its future claims payment obligations. Therefore, ratings are generally considered critical to 15 an insurer's ability to compete for new insurance business. Currently, Radian Guaranty, Amerin Guaranty, and Radian Insurance are rated "AA" by S&P and Fitch and "Aa3" by Moody's. Radian Re is rated by S&P, Fitch and Moody's. S&P and Fitch have each assigned Radian Re an "AAA" claims-paying ability rating, its highest rating, and Moody's has assigned Radian Re an "Aa2" financial strength rating. Radian Asset Assurance has been assigned "AA" claims-paying ability ratings by each of S&P and Fitch. Radian Group, Inc., has been assigned a senior debt rating of A+ by Fitch, A by S&P, and A2 by Moody's. Pursuant to the terms of Financial Guaranty's reinsurance agreements, a downgrade in either Radian Re's or Radian Asset Assurance's financial strength rating to (or below) "A" could have a material adverse effect on their respective competitive position. A downgrade may so diminish the value of their reinsurance to the Major Monolines that they could either materially increase the costs to Radian Re or Radian Asset Assurance associated with cessions under the Major Monolines' treaties with Radian Re or Radian Asset Assurance or recapture business previously ceded to Radian Re or Radian Asset Assurance. In either case, the effect of such changes could materially adversely affect Financial Guaranty's ability to continue to engage in the reinsurance of monoline financial guaranty insurers business. While Financial Guaranty believes that the recapture of business by the primaries would otherwise be inconsistent with their long-standing risk management practices, such action, if it occurs and depending on its magnitude, could have a material adverse effect on Financial Guaranty. In March 2002, S&P changed the outlook for the financial guaranty reinsurance industry from "stable" to "negative". Although this change does not represent a downgrade or a credit watch event with respect to Radian Re specifically, the Company anticipates such change to prompt a more thorough review of the financial guaranty reinsurance industry, generally, and Radian Re, specifically. Financial Guaranty believes that the same consequences as set forth above would occur were Radian Asset Assurance to experience any such downgrade, which, in turn, could materially adversely affect its ability to continue to engage in certain specialty businesses, principally insurance of municipal bonds. REINSURANCE CEDED Amerin Guaranty and Radian Guaranty currently use reinsurance from affiliated companies in order to remain in compliance with the insurance regulations of certain states that require that a mortgage insurer limit its coverage percentage of any single risk to 25%. Amerin Guaranty and Radian Guaranty currently intend to use such reinsurance solely for purposes of such compliance. Radian Re and Radian Asset Assurance also use reinsurance from affiliated companies in order to remain in compliance with applicable insurance regulations, including single risk limitations. Radian Re and Radian Asset Assurance currently intend to use such reinsurance from affiliated companies solely for the purpose of such compliance. Radian Guaranty reinsures all direct insurance in force under an excess of loss reinsurance program that it considers to be an effective catastrophic reinsurance coverage. Under this program, the reinsurer is responsible for 100% of covered losses in excess of Radian Guaranty's retention. The annual retention is determined by a formula that contains variable components. The estimated 2002 retention is approximately $735 million of loss, which represents 120% of expected premiums earned by Radian Guaranty. The reinsurer's aggregate annual limit of liability is also determined by a formula with variable components and is currently estimated to be $140 million. In addition, in 1999, a limit was set on the amount of annual pool insurance losses that can be counted in the reinsurance recoverable calculation. For 2002, this limit is $90 million. If the reinsurer decides not to renew the reinsurance arrangement and is not replaced by Radian Guaranty, the reinsurer must provide six years of runoff coverage. There is an overall aggregate limit of liability applicable to any runoff period equal to four times the annual limit in effect for the calendar year of such nonrenewal. For 2002, this aggregate limit is estimated to be $560 million. The excess of loss reinsurance program also provides restrictions and limitations on the payment of dividends by Radian Guaranty, investments, mergers or acquisitions involving other private mortgage insurance companies and reinsurance of exposure retained by Radian Guaranty. The Company is currently reviewing this reinsurance program and could replace the provider by 2003. 16 In addition, Radian Guaranty entered into a variable quota-share ("VQS") treaty for primary risk in the 1994 to 1997 origination years and a portion of the pool risk written in 1997. In this treaty, quota-share loss relief is provided at varying levels ranging from 7.5% to 15.0% based upon the loss ratio on the reinsured book. The higher the loss ratio, the greater the potential reinsurance relief, which protects Radian Guaranty in adverse loss situations. A ceding commission is paid by the reinsurer to Radian Guaranty and the agreement is noncancelable for ten years by either party. As of December 31, 2001, the risk in force covered by the VQS treaty was approximately $4.0 billion, or approximately 14.3% of total primary risk in force and $51.4 million, or approximately 4.1% of total pool risk in force. The Company did not reinsure any additional business pursuant to the VQS treaty for the 2001 origination year. Amerin Guaranty was party, until December 31, 2000, to a reinsurance agreement pursuant to which the reinsurer was obligated to repay, up to an aggregate amount of $100 million, all losses and allocated loss adjustment expenses paid by Amerin Guaranty during periods in which (i) the ratio of Amerin Guaranty's risk in force divided by the sum of policyholders' surplus plus the contingency reserve calculated in accordance with statutory accounting practices exceeded 24.9 to 1 and (ii) the sum of Amerin Guaranty's expense ratio and loss ratio exceeded 100%. This reinsurance treaty was cancelled as of January 1, 2001. Financial Guaranty is a party to certain facultative retrocession (the ceding of reinsured business) agreements, pursuant to which it cedes to certain retrocessionnaires a portion of its reinsurance exposure. Since it is required to pay its obligations in full to the primary insurer regardless of whether it is entitled to receive payments from its retrocessionnaire, the Company believes that it is important that its retrocessionnaires be very creditworthy. The Company also cedes to reinsurers a portion of its direct insurance exposure, and the foregoing also describes in general the relationship between the Company and its reinsurers. Financial Guaranty has historically retroceded relatively little of its financial guaranty reinsurance exposure for risk management reasons. In its specialty insurance businesses, Financial Guaranty in recent years has reinsured a portion of its direct insurance exposure, particularly that incurred in its excess-SIPC program, principally in order to comply with applicable regulatory single-risk limitations. Most of the reinsurance capacity for its excess-SIPC program is provided by certain of the Major Monolines. Radian Re is party to an excess-of-loss reinsurance agreement with a reinsurance company under which it is entitled, subject to certain conditions, to draw from such reinsurer up to $25 million under certain circumstances. The agreement has a term of one year and is cancelable annually at the option of either party, except that Radian Re has the option to force a seven-year run-off period. In November 2001, Radian Re entered into a credit agreement with a group of major foreign banks under which Radian Re is entitled, upon reaching a $200 million threshold of losses and subject to certain conditions, to draw from such banks up to $90 million under certain circumstances. The agreement has an initial term of seven years and may be extended annually for additional one-year periods. In February 2001, Radian Asset Assurance entered into a credit agreement with a major foreign bank under which Radian Asset Assurance is entitled, upon reaching a $100 million threshold of losses and subject to certain conditions, to draw from such bank up to $25 million under certain circumstances. The agreement has an initial term of seven years and may be extended annually for additional one-year periods. CROSS GUARANTY AGREEMENT A Guaranty Agreement was entered into on August 11, 1999 by Radian Guaranty and Amerin Guaranty. The agreement provides that in the event Radian Guaranty fails to make a payment to any of its policyholders, Amerin Guaranty will make the payment; in the event Amerin Guaranty fails to make a payment to any of its policyholders, then Radian Guaranty will make the payment. Under the terms of the agreement, the obligations of both parties are unconditional and irrevocable; however, no payments will be made without prior approval by the Pennsylvania Department of Insurance. DEFAULTS AND CLAIMS Defaults The default and claim cycle on loans which have private mortgage insurance begins with the insurer's receipt from the lender of notification of a default on an insured loan. The master policy requires lenders to 17 notify the Company of an uncured default on a mortgage loan within 75 days (45 days for an uncured default in the first year of the loan), although many lenders do so earlier. The incidence of default is affected by a variety of factors, including change in borrower income, unemployment, divorce and illness, the level of interest rates and general borrower creditworthiness. Defaults that are not cured result in claims to the Company. Borrowers may cure defaults by making all delinquent loan payments or by selling the property and satisfying all amounts due under the mortgage. The following table shows the number of primary and pool loans insured, related loans in default and the percentage of loans in default (default rate) as of the dates indicated: DEFAULT STATISTICS
DECEMBER 31 ----------------------------- 2001 2000 1999 ------- ------- ------- PRIMARY INSURANCE: Prime: Insured loans in force........................... 752,519 792,813 774,003 Loans in default(1).............................. 23,312 17,840 16,605 Percentage of loans in default................... 3.1% 2.3% 2.2% Non-Prime: Insured loans in force........................... 139,174 65,600 33,283 Loans in default(1).............................. 7,704 2,690 1,193 Percentage of loans in default................... 5.5% 4.1% 3.6% Total Primary Insurance: Insured loans in force........................... 891,693 858,413 807,286 Loans in default(1).............................. 31,016 20,530 17,798 Percentage of loans in default................... 3.5% 2.4% 2.2% POOL INSURANCE(2): Insured loans in force........................... 869,226 768,388 676,454 Loans in default(1).............................. 8,213 5,989 4,352 Percentage of loans in default................... 0.9% 0.8% 0.6%
- --------------- (1) Loans in default exclude those loans 45 days past due or less and loans in default for which the Company feels it will not be liable for a claim payment. (2) Includes traditional and modified pool insurance of prime and non-prime loans. Regions of the United States may experience different default rates due to varying economic conditions. The following table shows the primary mortgage insurance default rates by the Company's defined regions as of the dates indicated, including prime and non-prime loans. DEFAULT RATES BY REGION
DECEMBER 31 -------------------- 2001 2000 1999 ---- ---- ---- North....................................................... 3.85% 2.50% 1.88% South....................................................... 4.15 2.10 2.59 West........................................................ 3.38 2.21 2.10 Alaska...................................................... 0.86 1.08 0.82 Hawaii...................................................... 1.77 2.23 2.03
As of December 31, 2001, primary mortgage insurance default rates for the Company's two largest states measured by risk in force, California and Florida, were 2.9% and 4.6% respectively, compared to 2.3% and 3.9% respectively, at December 31, 2000. 18 Claims In the mortgage insurance business, the likelihood that a claim will result from a default and the amount of such claim depend principally on the borrower's equity at the time of default and the borrower's (or the lender's) ability to sell the home for an amount sufficient to satisfy all amounts due under the mortgage, as well as the effectiveness of loss mitigation efforts. Claims are also affected by local housing prices, interest rates, unemployment levels and the housing supply. Claim activity is not evenly spread through the coverage period of a book of business. Relatively few claims are received during the first two years following issuance of the policy. This is followed by a period of rising claims which, based on industry experience, has historically reached its highest level in the third through fifth years after the year of loan origination. Thereafter, the number of claims received has historically declined at a gradual rate, although the rate of decline can be affected by conditions in the economy. Approximately 66.9% of total primary risk, including most of the Company's risk in force on alternative products, and approximately 59.3% of total pool risk in force at December 31, 2001 had not yet reached its anticipated highest claim frequency years. In the financial guaranty business, the Company is typically obligated to pay amounts equal to defaulted payments on insured obligations on their respective due dates. In municipal, asset-backed, and other structured products, the Company primarily underwrites with a zero-loss or remote loss underwriting objective. As such, the patterns of claim payments tend to fluctuate and may be low in frequency and high in severity. In trade credit protection, the Company underwrites and prices to encompass historical loss patterns experienced by the Company and by ceding companies in similar businesses. The claim payments in trade credit tend to follow a more historical loss pattern that is reflective of overall global economic conditions. Loss Mitigation The Mortgage Insurance loan workout staff consists of nineteen (19) employees, including several full time loan workout specialists who proactively intervene in the default process, working with borrowers to reduce the frequency and severity of foreclosure losses. The size of the loan workout staff has decreased over the past few years, primarily due to an enhancement in the ability of loan servicers to perform this function adequately with less assistance needed by the Company. Once a notice of default is received, the Company scores the default using a proprietary model that predicts the likelihood that the default will become a claim. Using this model the loan workout specialists prioritize cases for proactive intervention to counsel and assist borrowers. Loss mitigation techniques include pre-foreclosure sales, extensions of credit to borrowers to reinstate insured loans, loan modifications and deficiency settlements. The Company still considers its loss mitigation efforts to be an effective way to reduce claim payments. Subsequent to foreclosure, the Company uses post-foreclosure sales and the exercise of the full claim payment option to further mitigate loss. This was considered an extremely effective loss mitigation tool in 2001 due to relatively strong property values, although there can be no assurance that such positive results will continue. Financial Guaranty's surveillance group is responsible for detecting any deterioration in credit quality or changes in the economic or political environment that could effect the timely payment of debt service on an insured issue. Once a problem is detected, the group then works with the appropriate parties in order to avoid a default. Claims are generally mitigated by restructuring the obligation, enforcing in a timely fashion any security arrangements, and working with the issuer to solve management or potential political problems. Issuers are typically under no obligation to restructure insured issues in order to prevent losses. Financial Guaranty believes that early detection and continued involvement by the surveillance group has reduced claims. There can be no assurance, however, that there will be no material losses in the future regarding Financial Guaranty's business. Homeownership Counseling In 1995, Mortgage Insurance established a Homeownership Counseling Center (the "Center") to work with borrowers receiving insured loans under Community Homebuyer, 97% LTV ("97s") or other "affordable housing" programs. The Company considers this counseling to be very important to the future success of those 19 particular borrowers with regard to sustaining their mortgage payments. In addition, the Center counsels such borrowers early in the default process in an attempt to help cure the loan and assist the borrower in meeting their mortgage obligation. Loss Reserves -- Mortgage Insurance The Company establishes reserves to provide for the estimated costs of settling claims in respect of loans reported to be in default and loans that are in default which have not yet been reported to the Company. Consistent with accounting principles generally accepted in the United States of America ("GAAP") and industry accounting practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default. In determining the liability for unpaid losses related to reported outstanding defaults, the Company establishes loss reserves on a case-by-case basis. The amount reserved for any particular loan is dependent upon the characteristics of the loan, the status of the loan as reported by the servicer of the insured loan as well as the economic condition and estimated foreclosure period in the area in which the default exists. As the default progresses closer to foreclosure, the amount of loss reserve for that particular loan will be increased, in stages, to approximately 100% of the Company's exposure. Loss Reserves -- Financial Guaranty Insurance Businesses Financial Guaranty establishes a provision for losses and related loss adjustment expenses as to a particular insured risk when the ceding companies report a loss on the risk or when, in its opinion, the risk is in default or a default is probable and the amount of the loss is reasonably estimable. Financial Guaranty bases the provision for losses and loss adjustment expenses on the estimated loss, including expenses associated with settlement of the loss, through the full term of the insured obligation. In the case of obligations with fixed periodic payments, the provision for losses and loss adjustment expenses represents the present value of the ultimate expected losses, adjusted for estimated recoveries under salvage or subrogation rights. On any given municipal and asset-backed reinsurance transaction, Financial Guaranty and its primary insurer customers underwrite with a zero-loss underwriting objective. For the trade credit reinsurance business, loss reserves are established based on historical loss development patterns experienced by Financial Guaranty and by ceding companies in similar businesses. The estimate of reserves for losses and loss adjustment expenses, which includes a non-specific loss reserve, is periodically evaluated by Financial Guaranty, and changes in estimate are reflected in income currently. Financial Guaranty's total unallocated or non-specific loss and loss adjustment expenses reserve for the financial guaranty business, as of December 31, 2001 is $51.5 million, having been increased from $16.1 million as of December 31, 2000. Financial Guaranty believes that after giving effect to this increase, their reserves for losses and loss adjustment expenses, including case and unallocated or non-specific reserves, are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. As anticipated, Financial Guaranty experienced relatively higher loss levels in certain of its other insurance businesses than it experienced in its financial guaranty reinsurance business. Financial Guaranty believes that the higher premiums they receive in these businesses adequately compensates them for the risks involved. At December 31, 2001, Financial Guaranty had established $123.2 million in net reserves for losses and loss adjustment expenses (of which $58.5 million represented incurred but not reported and non-specific 20 reserves). The following table sets forth certain information regarding Financial Guaranty's loss experience for the years indicated:
YEAR ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ----- ----- (IN MILLIONS) Net reserve for losses and loss adjustment expenses at beginning of year........................................ $ 70.0 $49.7 $33.7 ------ ----- ----- Net provision for losses and loss adjustment expenses Occurring in current year............................. 19.5 19.0 23.9 Occurring in prior years.............................. 48.4 15.7 2.3 ------ ----- ----- Total............................................ 67.9 34.7 26.2 ------ ----- ----- Net payments for losses and loss adjustment expenses Occurring in current year............................. 3.6 1.3 1.5 Occurring in prior years.............................. 11.1 13.1 8.7 ------ ----- ----- Total............................................ 14.7 14.4 10.2 ------ ----- ----- Net reserve for losses and loss adjustment expenses at end of year.................................................. $123.2 $70.0 $49.7 ====== ===== =====
The provision for losses and paid loss information presented above is classified as "current year" and "prior year" based upon the year in which the related reinsurance contract or insurance policy was underwritten. Therefore, amounts presented as "Occurring in prior years" are not indicative of redundancies or deficiencies in total reserves held as of prior year ends. In 2001, 2000 and 1999, Financial Guaranty recorded losses of $24.9 million, $21.9 million and $9.9 million, respectively, in connection with its trade credit businesses. Analysis of Primary Risk in Force The Company's business strategy has been to disperse risk as widely as possible. The Company analyzes its portfolio in a number of ways to identify any concentrations or imbalances in risk dispersion. The Company believes the quality of its insurance portfolio is affected significantly by: - the geographic dispersion of the properties securing the insured loans; - the quality of loan originations; - the types of loans insured (including LTV ratio, purpose of the loan, type of loan instrument and type of underlying property securing the loan); and - the age of the loans insured. Financial Guaranty seeks to maintain a diversified insurance portfolio designed to spread its risk based on insurer, type of debt obligation insured, and geographic concentration. Primary Risk In Force By Policy Year The following table sets forth the percentage of the Company's primary mortgage insurance risk in force by policy origination year as of December 31, 2001: 1996 and prior.............................................. 10.9% 1997........................................................ 5.8 1998........................................................ 16.4 1999........................................................ 17.7 2000........................................................ 13.0 2001........................................................ 36.2 ----- 100.0% =====
21 Geographic Dispersion The following tables reflect the percentage of direct primary mortgage insurance risk in force on the Company's book of business (by location of property) for the top ten states and top 15 metropolitan statistical areas ("MSAs") as of December 31, 2001 and 2000:
TOP TEN STATES 2001 2000 - -------------- ---- ---- California.................................................. 16.4% 16.8% Florida..................................................... 7.4 7.4 New York.................................................... 6.4 6.1 Texas....................................................... 5.2 5.3 Georgia..................................................... 4.4 4.3 Arizona..................................................... 4.0 3.8 New Jersey.................................................. 3.8 3.9 Illinois.................................................... 3.6 3.7 Pennsylvania................................................ 3.6 3.7 Colorado.................................................... 2.8 3.1 ---- ---- Total............................................. 57.6% 58.1% ==== ====
TOP FIFTEEN MSAS 2001 2000 - ---------------- ---- ---- Los Angeles-Long Beach, CA.................................. 4.1% 4.1% Atlanta, GA................................................. 3.4 3.4 Chicago, IL................................................. 3.0 3.2 Phoenix/Mesa, AZ............................................ 3.2 3.1 Washington, DC-MD-VA........................................ 2.6 2.9 New York, NY................................................ 2.6 2.5 Philadelphia, PA-NJ......................................... 2.2 2.4 Riverside-San Bernardino, CA................................ 2.2 2.1 Nassau/Suffolk, NY.......................................... 1.9 1.9 Denver, CO.................................................. 1.5 1.6 Detroit, MI................................................. 1.4 1.6 Orange County, CA........................................... 1.4 1.6 Las Vegas, NV............................................... 1.5 1.5 Houston, TX................................................. 1.4 1.4 Miami-Hialeah, FL........................................... 1.4 1.3 ---- ---- Total............................................. 33.8% 34.8% ==== ====
The following table sets forth the distribution by state of Financial Guaranty's insurance in force as a December 31, 2001 and 2000:
JURISDICTION 2001 2000 - ------------ ----- ----- California.................................................. 9.8% 10.7% New York.................................................... 9.7 9.0 Florida..................................................... 5.8 6.5 Texas....................................................... 5.3 5.2 Pennsylvania................................................ 4.5 5.2 Illinois.................................................... 4.3 4.3 Other(1).................................................... 58.5 59.1 ----- ----- Total............................................. 100.0% 100.0% ===== =====
- --------------- (1) Represents all remaining states, the District of Columbia and several foreign countries, in which obligations insured and reinsured by Financial Guaranty arise, none of which individually constitutes greater than 3.7% for 2001 and 4.0% for 2000 of Financial Guaranty's insurance in force. 22 Lender and Product Characteristics While geographic dispersion is an important component of overall risk dispersion and it has been a strategy of the Company to limit its exposure in the top ten states and top 15 MSAs, the Company believes the quality of the risk in force should be considered in conjunction with other elements of risk dispersion, such as product distribution, as well as the Company's risk management and underwriting practices. The following table reflects the percentage of the Company's direct risk in force (as determined on the basis of information available on the date of mortgage origination) by the categories indicated as of December 31, 2001 and 2000: DIRECT MORTGAGE INSURANCE RISK IN FORCE
2001 2000 ----- ----- Product Type: Primary................................................ 94.3% 94.7% Pool(1)................................................ 5.7 5.3 ----- ----- Total............................................. 100.0% 100.0% ===== =====
DIRECT PRIMARY RISK IN FORCE
2001 2000 ------- ------- Direct Primary Risk in Force (dollars in millions).......... $26,004 $24,622 Lender Concentration: Top 10 lenders (by original applicant)................. 40.4% 42.8% Top 20 lenders (by original applicant)................. 49.6% 58.7% LTV: 95.01% to 100.00%...................................... 6.0% 6.7% 90.01% to 95.00%....................................... 43.5 39.5 85.01% to 90.00%....................................... 40.2 41.4 85.00% and below....................................... 10.3 12.4 ------- ------- Total............................................. 100.0% 100.0% ======= ======= Loan Grade: Prime.................................................. 79.7% 90.3% Non-Prime.............................................. 20.3 9.7 ------- ------- Total............................................. 100.0% 100.0% ======= ======= Loan Type: Fixed.................................................. 86.3% 86.0% Adjustable rate mortgage ("ARM") (fully indexed)(2).... 13.0 11.8 ARM (potential negative amortization)(3)............... 0.7 2.2 ------- ------- Total............................................. 100.0% 100.0% ======= ======= Mortgage Term: 15 years and under..................................... 2.7% 2.7% Over 15 years.......................................... 97.3 97.3 ------- ------- Total............................................. 100.0% 100.0% ======= ======= Property Type: Non-condominium (principally single-family detached)... 96.2% 97.1% Condominium or cooperative............................. 3.8 2.9 ------- ------- Total............................................. 100.0% 100.0% ======= =======
23
2001 2000 ------- ------- Occupancy Status: Primary residence...................................... 96.2% 94.6% Second home............................................ 1.7 2.2 Non-owner occupied..................................... 2.1 3.2 ------- ------- Total............................................. 100.0% 100.0% ======= ======= Mortgage Amount: $200,000 or less....................................... 78.1% 85.9% Over $200,000.......................................... 21.9 14.1 ------- ------- Total............................................. 100.0% 100.0% ======= ======= Loan Purpose: Purchase............................................... 74.4% 81.5% Refinance.............................................. 25.6 18.5 ------- ------- Total............................................. 100.0% 100.0% ======= =======
- --------------- (1) Includes traditional and modified pool insurance. (2) Refers to loans where payment adjustments are the same as mortgage interest rate adjustments. (3) Loans with potential negative amortization will not have increasing principal balances unless interest rates increase as contrasted with scheduled negative amortization where an increase in loan balance will occur even if interest rates do not change. One of the most important determinants of claim incidence is the relative amount of borrower's equity, or down payment, in the home. The expectation of claim incidence on 95% LTV loans ("95s") is approximately two times the expected claim incidence on 90s. The Company believes that the higher premium rates it charges on 95s adequately reflect the additional risk on these loans. The industry and the Company have been insuring 97s since 1995 and 100% LTV Loans ("100s") since 2000. These loans are expected to have a higher claim incidence than 95s; however, with proper counseling efforts and by limiting insurance on these loans to sensible affordable housing programs, it is the Company's belief that the claim incidence should not be materially (more than one and one-half times) worse than on 95s, although there can be no assurance that claim incidence will not be materially worse on 97s or 100s than on 95s. Premium rates on 100s and 97s are higher than on 95s to compensate for the additional risk and the higher expected frequency and severity of claims. In recent years, the Company has increased its insurance on mortgages identified by its customers as "affordable housing" loans. These loans are typically made to low- and moderate-income borrowers in conjunction with special programs developed by state or local housing agencies, Fannie Mae or Freddie Mac. Such programs usually include 95s, 97s and 100s and may require the liberalization of certain underwriting guidelines in order to achieve their objectives. The Company's participation in these programs is dependent upon acceptable borrower counseling. Default experience on these programs has been worse than non-"affordable housing" loans; however, the Company does not believe the ultimate claims will materially affect its financial results due to the relatively small amount of such business in the Company's insured book combined with higher premium rates and risk-sharing elements. The Company believes that the risk of claim on non-prime loans is significantly higher than that of prime loans. Non-prime loans generally include Alternative A and A minus products and although higher premium rates and surcharges are charged in order to compensate for the additional risk, these products are relatively new and have never been insured in an adverse economic situation so there is no assurance that the premium rates are adequate or the loss performance will be at, or close to, expected levels. The Company's claim frequency on insured ARMs has been higher than on all other loan types. The Company believes that the risk on ARM loans is greater than on fixed rate loans due to possible monthly payment increases if interest rates rise. The Company believes that 15-year mortgages present a lower level of risk than 30-year mortgages, primarily as a result of the faster amortization and the more rapid accumulation of borrower equity in the property. Premium rates for 15-year mortgages are lower to reflect the lower risk. 24 The Company believes that the risk of claim is also affected by the type of property securing the insured loan. In the Company's opinion, loans on single-family detached housing are subject to less risk of claim incidence than loans on other types of properties. Conversely, loans on attached housing types, particularly condominiums and cooperatives, are generally considered by the Company to be a higher risk, due to the higher density of such properties and because a detached unit is the preferred housing type in most areas. The Company's more stringent underwriting guidelines on condominiums and cooperatives reflect this higher expected risk. The Company believes that the risk of claim on relocation loans and loans originated by credit unions is extremely low and offers lower premium rates on such loans to compensate for the lower risk. The Company believes that loans on non-owner occupied homes purchased for investment purposes represent a substantially higher risk of claim incidence, and are subject to greater value declines than loans on either primary or second homes. The Company underwrites loans on non-owner occupied homes more stringently, and sometimes requires that the investor indemnify the Company directly for any loss suffered by the Company. The Company also charges a significantly higher premium rate than the rate charged for insuring loans on owner occupied homes. The Company believes that higher priced properties experience wider fluctuations in value than moderately priced residences and that the income of many people who buy higher priced homes is less stable than that of people with moderate incomes. Underwriting guidelines for such higher priced properties reflect this concern. The following table sets forth the distribution of Financial Guaranty's insurance in force by type of issue and as a percentage of total financial guaranty insurance in force as of December 31, 2001 and 2000:
INSURANCE IN FORCE(1) -------------------------------------- 2001 2000 ----------------- ----------------- TYPE OF OBLIGATION AMOUNT PERCENT AMOUNT PERCENT - ------------------ ------ ------- ------ ------- (IN BILLIONS) Municipal: General obligation and other tax supported................................ $27.1 27.7% $26.8 28.9% Water/sewer/electric gas and investor-owned utilities................................ 17.9 18.3 18.1 19.5 Health care................................ 15.2 15.5 14.1 15.2 Airports/transportation.................... 11.1 11.3 10.5 11.4 Other municipal(2)......................... 8.5 8.7 8.8 9.5 Housing revenue............................ 2.6 2.7 2.4 2.6 ----- ----- ----- ----- Total municipal....................... 82.4 84.2 80.7 87.1 Structured finance: Asset-backed............................... 10.9 11.1 9.4 10.1 Other...................................... 4.6 4.7 2.6 2.8 ----- ----- ----- ----- Total structured finance.............. 15.5 15.8 12.0 12.9 ----- ----- ----- ----- Total................................. $97.9 100.0% $92.7 100.0% ===== ===== ===== =====
- --------------- (1) Represents Financial Guaranty's proportionate share of the aggregate outstanding principal and interest payable on such insured obligations. (2) Represents other types of municipal obligations, none of which individually constitutes a material amount of Financial Guaranty's insurance in force. 25 The following table identifies the issuers of Financial Guaranty's ten largest single-risk insurance in force by par amounts outstanding as of December 31, 2001 and the credit rating assigned by S&P as of that date (in the absence of financial guaranty insurance) to each such issuer:
NET PAR IN FORCE CREDIT CREDIT RATING OBLIGATION TYPE AS OF DECEMBER 31, 2001 - ------ ------------- ------------------ ----------------------- (IN MILLIONS) Commerzbank -- Citibank London.... AAA Asset-Backed Corp. $407 Port Authority of New York and New Jersey.......................... AA- Airport 406 New York City Municipal Water Finance Authority............... AA Water & Sewer 388 State of California............... A+ General Obligation 376 New York City, NY................. A- General Obligation 373 San Francisco, California Airport Commission...................... A+ Airport 371 Long Island, NY Power Authority... A- Water & Sewer 366 Lehman Brothers Sprint 3.......... AAA Asset-Backed Corp. 350 Cap Proj Fin Auth, FL Hosp Assoc........................... AAA Other Muni 300 California State Public Works..... A- Lease-State 297
The following table identifies the Financial Guaranty insurance in force amount outstanding at December 31, 2001 by credit rating assigned by S&P to each issuer:
AS OF DECEMBER 31, 2001 ----------------------------- INSURANCE IN FORCE PERCENT ------------------ ------- (IN BILLIONS) AAA......................................................... $ 7.3 7.5% AA.......................................................... 19.5 19.9 A........................................................... 40.5 41.4 BBB......................................................... 23.2 23.7 IG.......................................................... 4.1 4.2 NIG......................................................... 1.8 1.8 Not rated................................................... 1.5 1.5 ----- ----- Total....................................................... $97.9 100.0% ===== =====
INVESTMENT POLICY AND PORTFOLIO The Company's income from its investment portfolio is one of the Company's primary sources of cash flow to support its operations and claim payments. The Company follows an investment policy that at a minimum requires: - 95% of its investment portfolio to consist of cash equivalents and debt securities (including redeemable preferred stocks) which, at the date of purchase, were rated investment grade by a nationally recognized rating agency (e.g., "BBB" or better by S&P); and - at least 50% of its investment portfolio to consist of cash, cash equivalents and debt securities (including redeemable preferred stocks) which, at the date of purchase, were rated the highest investment grade by a nationally recognized rating agency (e.g., "AAA" by S&P). The Company is permitted to invest in equity securities (including convertible debt and convertible preferred stock), provided its equity component does not exceed 20% of the total investment portfolio. At December 31, 2001, the Company's investment portfolio had a carrying value of $3,369.5 million and a market value of $3,389.2 million, including $210.8 million of short-term investments. The Company's investment portfolio did not include any real estate or mortgage loans. The portfolio included 305 privately placed, investment-grade securities with an aggregate carrying value of $101.1 million. At December 31, 2001, 26 99.4% of the Company's investment portfolio (which excludes cash) consisted of cash equivalents and debt securities (including redeemable preferred stocks) that were rated investment grade. The Company's investment policies and strategies are subject to change depending upon regulatory, economic and market conditions and the then existing or anticipated financial condition and operating requirements, including the tax position, of the Company. The diversification of the Company's investment portfolio (other than short-term investments) at December 31, 2001 is shown in the table below: INVESTMENT PORTFOLIO DIVERSIFICATION
DECEMBER 31, 2001 -------------------------------------- AMORTIZED FAIR COST VALUE PERCENT(1) ---------- ---------- ---------- (IN THOUSANDS) Fixed maturities held to maturity: U.S. government securities(2).............. $ 9,730 $ 9,592 2.2% State and municipal obligations(3)......... 432,468 452,370 97.8 ---------- ---------- ----- Total................................. $ 442,198 $ 461,962 100.0% ---------- ---------- ----- Fixed maturities available for sale: U.S. government securities(2).............. $ 102,781 $ 102,174 4.0% U.S. government agency securities(2)....... 109,118 109,114 4.2 State and municipal obligations(3)......... 1,952,650 1,956,321 76.5 Corporate obligations(3)................... 231,893 247,648 9.1 Asset-backed securities.................... 40,552 40,586 1.6 Redeemable preferred stocks(3)............. 25,382 25,360 1.0 Private placements......................... 89,090 84,544 3.5 Foreign governments........................ 1,464 1,453 0.1 ---------- ---------- ----- Total................................. $2,552,930 $2,567,200 100.0% ---------- ---------- ----- Equity securities.......................... $ 116,978 $ 120,320 Trading securities......................... 22,599 21,659 Other invested assets...................... 7,310 7,310 ---------- ---------- Total................................. $3,142,015 $3,178,451 ========== ==========
- --------------- (1) Percentage of amortized cost. (2) Substantially all of these securities are backed by the full faith and credit of the U.S. government. (3) Consists primarily of investment-grade securities. The following table shows the scheduled maturities of the securities held in the Company's investment portfolio at December 31, 2001: INVESTMENT PORTFOLIO SCHEDULED MATURITY(1)
DECEMBER 31, 2001 --------------------- CARRYING VALUE PERCENT ---------- ------- (IN THOUSANDS) Short-term investments...................................... 210,788 6.3% Less than one year.......................................... 42,247 1.3 One to five years........................................... 435,084 12.9 Five to ten years........................................... 528,779 15.7 Over ten years.............................................. 1,828,228 54.3 Mortgage-backed securities(2)............................... 109,114 3.2 Asset-backed securities(2).................................. 40,586 1.2 Redeemable preferred stocks (3)............................. 25,360 0.7
27
DECEMBER 31, 2001 --------------------- CARRYING VALUE PERCENT ---------- ------- (IN THOUSANDS) Equity securities(3)........................................ 120,320 3.6 Trading securities(3)....................................... 21,659 0.6 Other invested assets(3).................................... 7,310 0.2 ---------- ----- Total............................................. $3,369,475 100.0% ========== =====
- --------------- (1) Actual maturities may differ as a result of calls prior to scheduled maturity. (2) Substantially all of these securities are backed by the Government National Mortgage Association ("GNMA") or the Federal National Mortgage Association ("Fannie Mae"). (3) No stated maturity date. The following table shows the ratings by S&P of the Company's investment portfolio (other than short-term investments) as of December 31, 2001: INVESTMENT PORTFOLIO BY S&P RATING
DECEMBER 31, 2001 --------------------- CARRYING VALUE PERCENT ---------- ------- (IN THOUSANDS) RATING(1) Fixed maturities: U.S. government and agency securities.................. $ 178,676 5.7% AAA.................................................... 1,698,062 53.8 AA..................................................... 652,240 20.7 A...................................................... 180,984 5.7 BBB.................................................... 140,257 4.4 BB and below and other(2).............................. 19,874 0.6 Not rated(3)........................................... 139,305 4.4 Trading securities.......................................... 21,659 0.7 Equity securities........................................... 120,320 3.8 Other invested assets....................................... 7,310 0.2 ---------- ----- Total............................................. $3,158,687 100.0% ========== =====
- --------------- (1) As assigned by S&P as of December 31, 2001. (2) Securities in this category have been rated non-investment grade by S&P as of December 31, 2001. (3) Securities in this category have not been rated by S&P as of December 31, 2001 but have been rated investment grade as of December 31, 2001 by at least one other nationally recognized securities rating agency. REGULATION Direct Regulation State Regulation The Company and its insurance subsidiaries are subject to comprehensive, detailed regulation principally designed for the protection of policyholders, rather than for the benefit of investors, by the insurance departments in the various states where the Company and its insurance subsidiaries are licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business. Insurance regulations relate, among other things, to the licensing of companies to transact business, claims handling, reinsurance requirements, premium rates and policy forms offered to customers, financial statements, periodic reporting, permissible investments and adherence to financial standards relating to 28 surplus, dividends and other criteria of solvency intended to assure the satisfaction of obligations to policyholders. Mortgage insurers are generally restricted to writing residential mortgage guaranty insurance business and financial guaranty insurers are generally restricted to writing financial guaranty insurance business. The non-insurance businesses of the Company, which consist of mortgage insurance related services, are not generally subject to regulation under state insurance laws. Radian Re and Radian Asset Assurance are domiciled and licensed in the State of New York as financial guaranty insurers. They are also subject to the provisions of the New York Insurance Law and related rules and regulations governing property-casualty insurers to the extent such provisions are not inconsistent with the financial guaranty insurance statute. Both Radian Re and Radian Asset Assurance are also licensed under the New York Insurance Law to write surety insurance, credit insurance and residual value insurance, which are the only other types of insurance that a financial guaranty insurer licensed under the New York Insurance Law may be authorized to write. Each insurance subsidiary is required by its state of domicile and each other jurisdiction in which it is licensed to make various filings, including quarterly and annual financial statements prepared in accordance with statutory accounting practices, with those jurisdictions and with the National Association of Insurance Commissioners. Additionally, each insurance subsidiary is subject to detailed regulation in each of those states, including risk limits, investment restrictions and diversification requirements. Each insurance subsidiary must maintain both a reserve for unearned premiums and for incurred losses and a special, formulaically derived contingency reserve to protect policyholders against the impact of excessive losses occurring during adverse economic cycles. Each calculated reserve may be drawn on with the approval of the New York Insurance Department under specified but limited circumstances. Insurance Holding Company Regulation. All states have enacted legislation that requires each insurance company in an insurance holding company system to register with the insurance regulatory authority of its state of domicile and to furnish to such regulator financial and other information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of insurers within the system. Because the Company is an insurance holding company, Radian Guaranty and Radian Insurance are Pennsylvania insurance companies, Amerin Guaranty is an Illinois insurance company, and Radian Re and Radian Asset Assurance are New York insurance companies, the Pennsylvania, Illinois and New York insurance laws regulate, among other things, certain transactions in the Company's common stock and certain transactions between Radian Guaranty, Radian Insurance, Amerin Guaranty, Radian Re, Radian Asset Assurance, the Company's other insurance subsidiaries, and their parent or affiliates. Specifically, no person may, directly or indirectly, offer to acquire or acquire "control" of the Company, or its insurance subsidiaries, unless such person files a statement and other documents with the relevant state's Commissioner of Insurance and obtains such Commissioner's prior approval. The Commissioner may hold a public hearing on the matter. "Control" is presumed to exist if 10% or more of the Company or its insurance subsidiaries' voting securities are owned or controlled, directly or indirectly, by a person, although "control" may or may not be deemed to exist where a person owns or controls a lesser amount of securities. In addition, material transactions between the Company and its insurance subsidiaries and their parent or affiliates are subject to certain conditions, including that they be "fair and reasonable." These restrictions generally apply to all persons controlling or under common control with the Company or its insurance subsidiaries. Certain transactions between the Company's insurance subsidiaries and their parent or affiliates may not be entered into unless the relevant Commissioner of Insurance is given 30 days prior notification and does not disapprove the transaction during such 30-day period. Dividends. The ability of Radian Guaranty to pay dividends on its common stock is restricted by certain provisions of the insurance laws of the Commonwealth of Pennsylvania, its state of domicile. The insurance laws of Pennsylvania establish a test limiting the maximum amount of dividends that may be paid without prior approval by the Pennsylvania Insurance Commissioner. Under such test, Radian Guaranty may pay 29 dividends during any 12-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. In accordance with such restrictions, $252.8 million would be available for dividends in 2002. However, an amendment to the Pennsylvania statute requires that dividends and other distributions be paid out of an insurer's unassigned surplus. Because of the unique nature of the method of accounting for contingency reserves, Radian Guaranty has negative unassigned surplus. Thus, prior approval by the Pennsylvania Insurance Commissioner is required for Radian Guaranty to pay dividends or make other distributions so long as Radian Guaranty has negative unassigned surplus. The Pennsylvania Insurance Commissioner has approved all distributions by Radian Guaranty since the passage of this amendment and management has an expectation that the Insurance Department will continue to approve such distributions in the future, provided that the financial condition of Radian Guaranty does not materially change. The ability of Amerin Guaranty to pay dividends on its common stock is restricted by certain provisions of the insurance laws of the State of Illinois, its state of domicile. The insurance laws of Illinois establish a test limiting the maximum amount of dividends that may be paid from unassigned surplus by an insurer without prior approval by the Illinois Insurance Commissioner. Under such test, Amerin Guaranty may pay dividends during any 12-month period in an amount equal to the greater of (i) 10 percent of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. In accordance with such restrictions, $53.2 million would be available for dividends in 2002 without prior regulatory approval, which represents the positive unassigned surplus of Amerin Guaranty at December 31, 2001. Under the New York Insurance Law, the financial guaranty insurance subsidiaries may declare or distribute dividends only out of earned surplus. The maximum amount of dividends, which may be paid by the financial guaranty insurance subsidiaries without prior approval of the Superintendent of Insurance, is subject to restrictions relating to statutory surplus and net investment income as defined by statute. At December 31, 2001, Radian Re would not be able to pay any dividends in 2002 and Radian Asset Assurance had $13.3 million available for dividends in 2002 without prior approvals. In connection with the approval of the acquisition of Financial Guaranty, Radian Re and Radian Asset Assurance agreed to refrain and the Company agreed to refrain from causing Radian Re and Radian Asset Assurance from paying any dividends for a period of two years from the date of acquisition of control without the prior written consent of the New York Insurance Department. The Company and Radian Guaranty have entered into an agreement, pursuant to which the Company has agreed to establish and, for as long as any shares of $4.125 Preferred Stock remain outstanding, maintain a reserve account in an amount equal to three years of dividend payments on the outstanding shares of $4.125 Preferred Stock (currently $9.9 million), and not to pay dividends on the common stock at any time when the amount in the reserve account is less than three years of dividend payments on the shares of $4.125 Preferred Stock then outstanding. This agreement between the Company and Radian Guaranty provides that the holder of the $4.125 Preferred Stock is entitled to enforce the agreement's provisions as if such holder was signatory to the agreement. The Company may not pay any dividends on its shares of common stock unless the Company has paid all accrued dividends on, and has complied with all sinking fund and redemption obligations relating to, its outstanding shares of $4.125 Preferred Stock. The Company's current excess of loss reinsurance agreement prohibits the payment of any dividend that would have the effect of reducing the total of its statutory policyholders' surplus plus its contingency reserve below $85.0 million. As of December 31, 2001, Radian Guaranty had statutory policyholders' surplus of $185.3 million and a contingency reserve of $1,348.5 million, for a total of $1,533.8 million. Risk to Capital. A number of states limit a private mortgage insurer's risk in force to 25 times the total of the insurer's policyholders' surplus plus the statutory contingency reserve, commonly known as the "risk-to-capital" requirement. As of December 31, 2001, the consolidated risk-to-capital ratio for Mortgage Insurance was 14.1 to 1, compared to 15.4 to 1 in 2000. The Cross Guaranty Agreement between Radian Guaranty and Amerin Guaranty makes it appropriate to look at risk-to-capital on a consolidated basis. 30 Reserves. For statutory reporting, the mortgage insurance companies are required annually to provide for additions to the contingency reserve in an amount equal to 50% of earned premiums. Such amounts cannot be withdrawn for a period of 10 years except under certain circumstances. The contingency reserve, designed to be a reserve against catastrophic losses, essentially restricts dividends and other distributions by the mortgage insurance companies. The mortgage insurance companies classify the contingency reserve as a statutory liability. At December 31, 2001, Radian Guaranty had policyholders' surplus of $185.3 million and a contingency reserve of $1,348.5 million and Amerin Guaranty had policyholders' surplus of $298.8 million. During 2001, Radian Guaranty and Amerin Guaranty entered into an assumption agreement, whereby Radian Guaranty assumed 100% of the rights, duties and obligations related to first lien mortgage guaranty insurance written by Amerin Guaranty. The contingency reserve of $310.9 million related to these was transferred as well. In accordance with New York Insurance Law, Financial Guaranty must establish a contingency reserve, equal to the greater of 50% of premiums written or a stated percentage of the principal guaranteed, ratably over 15-20 years dependent upon the category of obligation insured. Reinsurers are required to establish a contingency reserve equal to their proportionate share of the reserve established by the primary insurer. At December 31, 2001, Radian Re had policyholders' surplus of $188.6 million and a contingency reserve of $309.0 million and Radian Asset Assurance had policyholders' surplus of $133.1 million and a contingency reserve $37.0 million. Premium Rates and Policy Forms. Mortgage Insurance and Financial Guaranty's premium rates and policy forms are subject to regulation in every state in which it is licensed to transact business in order to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. In most states, premium rates and policy forms must be filed prior to their use. In some states, such rates and forms must also be approved prior to use. Changes in premium rates are subject to justification, generally on the basis of the insurer's loss experience, expenses and future trend analysis. The general default experience in the mortgage insurance industry may also be considered. Reinsurance. Certain restrictions apply under the laws of several states to any licensed company ceding business to an unlicensed reinsurer. Under such laws, if a reinsurer is not admitted or approved in such states, the company ceding business to the reinsurer cannot take credit in its statutory financial statements for the risk ceded to such reinsurer absent compliance with certain reinsurance security requirements. In addition, several states also have special restrictions on mortgage insurance and, several states limit the amount of risk a mortgage insurer may retain with respect to coverage on an insured loan to 25% of the insured's claim amount. Coverage in excess of 25% (i.e., deep coverage) must be reinsured. Examination. The Company's insurance subsidiaries are subject to examination of their affairs by the insurance departments of each of the states in which they are licensed to transact business. New York Circular Letter. The New York Insurance Department (the "Department") issued Circular Letter No. 2 dated February 1, 1999 (the "Letter") that discusses their position concerning various transactions between mortgage guaranty insurance companies licensed in New York and mortgage lenders. The Letter confirms that captive reinsurance transactions are permissible if they "constitute a legitimate transfer of risk" and "are fair and equitable to the parties". The Letter also states that "supernotes/performance notes," "dollar pool" insurance, and "un-captive captives" violate New York law. Accreditation. The National Association of Insurance Commissioners has instituted the Financial Regulatory Accreditation Standards Program, known as "FRASP," in response to federal initiatives to regulate the business of insurance. FRASP provides standards intended to establish effective state regulation of the financial condition of insurance companies. FRASP requires states to adopt certain laws and regulations, institute required regulatory practices and procedures, and have adequate personnel to enforce such items in order to become accredited. In accordance with the National Association of Insurance Commissioners' Model Law on Examinations, accredited states are not permitted to accept certain financial examination reports of insurers prepared solely by the insurance regulatory agency in states not accredited by January 1, 1994. Although the State of New York is not accredited, no states where Radian Re and Radian Asset Assurance are licensed have refused to accept the New York Insurance Department's Reports on Examination for Radian Re and Radian Asset Assurance. However, there can be no assurance that, should the 31 New York Insurance Department remain unaccredited, other states that are accredited will continue to accept financial examination reports prepared solely by New York. The Company does not believe that the refusal by an accredited state to continue accepting financial examination reports prepared by New York, should that occur, will have a material adverse impact on its insurance businesses. Federal Regulation RESPA. The origination or refinance of a federally regulated mortgage loan is a settlement service, and therefore subject to the Real Estate Settlement Practices Act of 1974, and the regulations promulgated thereunder (collectively, "RESPA"). In December 1992, regulations were issued which stated that mortgage insurance is also a settlement service, and therefore, that mortgage insurers are subject to the provisions of Section 8(a) of RESPA, which generally prohibits persons from accepting anything of value for referring real estate settlement services to any provider of such services. Although many states prohibit mortgage insurers from giving rebates, RESPA has been interpreted to cover many non-fee services as well. HUD's interest in pursuing violations of RESPA has increased awareness of both mortgage insurers and their customers of the possible sanctions of this law. The Company and all of its competitors have been sued in similar actions alleging violations of RESPA. The Company is contesting the action brought against it and believes its products and services comply with RESPA, as well as all other applicable laws and regulations. See "Item 3. Legal Proceedings" below for further details. HMDA. Most originators of mortgage loans are required to collect and report data relating to a mortgage loan applicant's race, nationality, gender, marital status and census tract to HUD or the Federal Reserve under the Home Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect possible discrimination in home lending and, through disclosure, to discourage such discrimination. Mortgage insurers are not required pursuant to any law or regulation to report HMDA data, although under the laws of several states, mortgage insurers are currently prohibited from discriminating on the basis of certain classifications. The active mortgage insurers, through their trade association, Mortgage Insurance Companies of America ("MICA"), entered into an agreement with the Federal Financial Institutions Examinations Council ("FFIEC") to report the same data on loans submitted for insurance as is required for most mortgage lenders under HMDA. Reports of HMDA-type data for the mortgage insurance industry have been submitted by MICA to the FFIEC since 1993. Management is not aware of any pending or expected actions by governmental agencies in response to the reports submitted by MICA to the FFIEC. Mortgage Insurance Cancellation. The Homeowners Protection Act of 1998 (the "Act") was signed into law on July 29, 1998. The Act imposes certain cancellation and termination requirements for borrower-paid private mortgage insurance and requires certain disclosures to borrowers regarding their rights under the law. The Act also requires certain disclosures for loans covered by lender-paid private mortgage insurance. Specifically, the Act provides that private mortgage insurance on most loans originated on or after July 29, 1999 may be canceled at the request of the borrower once the LTV reaches 80%, provided that certain conditions are satisfied. Private mortgage insurance must be canceled automatically once the LTV reaches 78% (or, if the loan is not current on that date, on the date that the loan becomes current). The Act establishes special rules for the termination of private mortgage insurance in connection with loans that are "high risk". The Act does not define "high risk" loans but leaves that determination to Fannie Mae and Freddie Mac for loans up to the conforming loan limit and to the mortgagee for any other loan. For "high risk" loans above the conforming loan limit, private mortgage insurance must be terminated on the date that the LTV is first scheduled to reach 77%. In no case, however, may private mortgage insurance be required beyond the midpoint of the amortization period of the loan if the mortgagor is current on the payments required by the terms of the mortgage. The Company feels that the Act will have an immaterial impact on the persistency of the Company's insured loans, on the Company's insured book of business, and on the Company's financial results. 32 Other Direct Regulation Freddie Mac and Fannie Mae As the most significant purchasers and sellers of conventional mortgage loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie Mae impose requirements on private mortgage insurers so that they may be eligible to insure loans sold to such agencies. Freddie Mac's current eligibility requirements impose limitations on the type of risk insured, standards for the geographic and customer diversification of risk, procedures for claims handling, acceptable underwriting practices, standards for certain reinsurance cessions and financial requirements which generally mirror state insurance regulatory requirements. These requirements are subject to change from time to time. Fannie Mae also has eligibility requirements, although such requirements are not published. Radian Guaranty and Amerin Guaranty are approved mortgage insurers for both Freddie Mac and Fannie Mae. In January 1999, Fannie Mae announced a new program that allows for lower levels of required mortgage insurance coverage for low down payment 30-year fixed rate loans approved through its Desktop Underwriter automated underwriting system. The insurance levels are similar to those required prior to 1995. Fannie Mae will replace some of the coverage with a layer of investor mortgage insurance coverage provided by at least two mortgage insurers, one of which will be Mortgage Insurance. Fannie Mae also announced that it intends to purchase additional insurance for certain eligible "Flex 97" and investor loans, and Mortgage Insurance has been selected to provide this coverage on a pilot basis. The Company does not believe that these developments will adversely affect the demand for or the profitability of mortgage insurance in the near future. The office of Federal Housing Enterprise Oversight issued new risk based capital regulations for Fannie Mae and Freddie Mac, which take effect September 13, 2002. The most relevant provision to the Company is a distinction between AAA rated insurers and AA rated insurers. The new regulations would impose a credit haircut that the GSEs are given for exposure ceded to AAA insurers by 3.5% and to AA insurers by 8.75%. This would be phased in over a ten-year period commencing on the effective date of the regulation. The Company believes that this distinction will not have material effect on its business. Indirect Regulation The Company is also indirectly, but significantly, impacted by regulations affecting originators and purchasers of mortgage loans, particularly Freddie Mac and Fannie Mae, and regulations affecting governmental insurers such as the FHA and VA. Private mortgage insurers, including Mortgage Insurance, are highly dependent upon federal housing legislation and other laws and regulations which affect the demand for private mortgage insurance and the housing market generally. For example, legislation which increases the number of persons eligible for FHA or VA mortgages could have a material adverse effect on the Company's ability to compete with the FHA or VA. The FHA single family loan limits were raised in the fall of 1998. These increased loan limits vary by geographic region from $109,032 to $197,620. The Company does not believe that demand for private mortgage insurance has been or will be materially adversely affected by this change. Proposals have been advanced which would allow Fannie Mae and Freddie Mac additional flexibility in determining the amount and nature of alternative recourse arrangements or other credit enhancements which they could utilize as substitutes for private mortgage insurance. The Company cannot predict if or when any of the foregoing legislation or proposals will be adopted, but if adopted and depending upon the nature and extent of revisions made, demand for private mortgage insurance may be adversely affected. There can be no assurance that other federal laws affecting such institutions and entities will not change, or that new legislation or regulations will not be adopted. In addition, Fannie Mae and Freddie Mac have entered into, and may in the future seek to enter into, alternative recourse arrangements or other enhancements based on their existing legislative authority. In the fall of 1998, Freddie Mac proposed to Congress an amendment to its charter that would have permitted it to substitute other forms of loss protection for private mortgage insurance. Although the proposed amendment was defeated, it is not clear what, if any, changes or new products may emerge; there is a possibility that any changes in this regard may materially affect the mortgage insurance industry. 33 There can be no assurance that the above-mentioned federal laws and regulations or other federal laws and regulations affecting lenders, private and governmental mortgage insurers, or purchasers of insured mortgage loans, will not be amended, or that new legislation or regulations will not be adopted, in either case, in a manner which will adversely affect the demand for private mortgage insurance. Foreign Regulation The Company is also subject to certain regulation in various foreign countries primarily the United Kingdom and Bermuda as a result of its operation in those jurisdictions. EMPLOYEES At December 31, 2001, the Company had 1,194 employees, of which approximately one-third were located at its Philadelphia headquarters facility, 111 are employees of Financial Guaranty and 90 are employees of RadianExpress. Approximately 600 employees are classified as contract underwriting employees and their employment level is commensurate with the level of production activity in the mortgage industry. The Company's employees are not unionized and management considers employee relations to be good. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 The statements contained herein that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve certain risks and uncertainties including, but not limited to: the possibility that interest rates may increase rather than remain stable or decrease; the possibility that housing demand may decrease for any number of reasons, some of which may be out of the control of the Company, including changes in interest rates, adverse economic conditions, or other reasons; the Company's market share may decrease as a result of changes in underwriting criteria by the Company or its competitors, or other reasons; performance of the financial markets generally, changes in the demand for and market acceptance of the Company's products; increased competition from government programs and the use of substitutes for mortgage insurance; changes in government regulation or tax laws that may affect one or more of the Company's businesses, changes in investor perceptions regarding the strength of financial guaranty providers and the guaranty offered by such providers, changes in investor concern regarding the credit quality of municipalities and corporations, including the need or desirability for financial guaranty insurance at all or as an alternative for other credit enhancement; and changes in general financial conditions. Investors are also directed to other risks discussed in documents filed by the Company with the Securities and Exchange Commission. ITEM 2. PROPERTIES The Company leases approximately 81,000 square feet for its corporate headquarters in Philadelphia under leases that expire between 2003 and 2006. In addition, it leases space for its Regional, Service Center and on-site offices throughout the United States comprising approximately 36,000 square feet with leases expiring between 2002 and 2004, and space for RadianExpress in Ohio comprising approximately 25,000 square feet, with leases expiring in 2003. Financial Guaranty leases 121,093 square feet of space for its operations in New York with leases expiring in 2015. It also leases additional space for its Florida and UK operations. With respect to all facilities, the Company believes it will be able to obtain satisfactory lease renewal terms. The Company believes its existing properties are well utilized and are suitable and adequate for its present circumstances. The Company currently maintains four data centers and two hotsites to support its businesses. Over the next two years, the Company will be replacing its legacy systems that currently support accounting, claims, risk management, underwriting and other non-insurance operations. The Company's strategic direction for all new system development is to deploy 100% web based custom or off the shelf software on a Unix and Windows 2000 platform. PeopleSoft Financial Systems are currently installed and operational for Financial Guaranty and will be implemented through the Company during 2002 and 2003. In addition, the Company will be building a new data center in Dayton, Ohio, which is expected to be fully operational in 2002. Two 34 separate fiber optic feeds will serve this data center. The center is cabled for two separate power grids and has sufficient diesel standby generator power to power the data center and personal work areas for critical staff. The home office in Philadelphia will become the hotsite for all operations. Over the next two years, the Company will migrate its operations from the current New York site to the data center in Ohio and the two existing hotsites to the Philadelphia hotsite. This will ensure 24/7/365 availability at the Dayton site and full business recovery capability at the Philadelphia data center. ITEM 3. LEGAL PROCEEDINGS In December 2000, a complaint seeking class action status on behalf of a nationwide class of home mortgage borrowers was filed against the Company in the United States District Court for the Middle District of North Carolina (Greensboro Division). The complaint alleges that the Company violated Section 8 of the Real Estate Settlement Procedures Act ("RESPA") which generally prohibits the giving of any fee, kickback or thing of value pursuant to any agreement or understanding that real estate settlement services will be referred. The complaint asserts that the pricing of pool insurance, captive reinsurance, contract underwriting, performance notes and other, unidentified "structured transactions," should be interpreted as imputed kickbacks made in exchange for the referral of primary mortgage insurance business, which, according to the complaint, is a settlement service under RESPA. The complaint seeks injunctive relief and damages of three times the amount of any mortgage insurance premiums paid by persons who were referred to the Company pursuant to the alleged agreement or understanding. The plaintiffs in the lawsuit are represented by the same group of plaintiffs' lawyers who filed similar lawsuits against other providers of primary mortgage insurance in federal court in Georgia. The Georgia court dismissed those lawsuits for failure to state a claim. Three of those lawsuits were settled prior to appeal; two were appealed. The Court of Appeals has reversed the dismissal of one of the two appealed cases and has yet to decide the other. The Company responded to the complaint by filing a motion to dismiss, which was granted in part, denied in part. The plaintiffs have since filed an amended complaint to which the Company has again filed a motion to dismiss. Because this case is at a very early stage, it is not possible to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential loss. A similar action focusing on pool insurance was filed in February 2001 in the United States District Court for the Eastern District of Texas. The Company's motion to dismiss that case is pending. In addition to the above, the Company is involved in certain litigation arising in the normal course of its business. The Company is contesting the allegations in each other such pending action and believes, based on current knowledge and after consultation with counsel, that the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 2001 to a vote of holders of the Company's common stock. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information with respect to this item is included on page 47 of the Company's 2001 Annual Report to Stockholders under the caption "Common Stock" and is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth in the table on page 15 of the Company's 2001 Annual Report to Stockholders under the caption "Selected Financial and Statistical Data" is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth on pages 39 through 46 in the Company's 2001 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" is hereby incorporated by reference. 35 ITEM 7A. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth on page 46 in the Company's 2001 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Quantitative and Qualitative Disclosures about Market Risk" is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated statements of income, of changes in common stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001, and the related consolidated balance sheets of the Company as of December 31, 2001 and 2000, together with the related notes thereto, the report on management's responsibility and the independent auditors' report, as well as the unaudited quarterly financial data, all set forth on pages 16 through 38 of the Company's 2001 Annual Report to Stockholders, are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information on the directors and executive officers of the Registrant is included in the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders under the captions, "ELECTION OF DIRECTORS", "EXECUTIVE OFFICERS OF THE COMPANY" and "Section 16(a) Beneficial Ownership Reporting Compliance", and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION This information is included in the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders under the caption "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS", and is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is included in the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders under the caption "SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS", and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is included in the Company's Proxy Statement for the 2002 Annual Meeting of Stockholders under the caption "CERTAIN TRANSACTIONS", and is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial statements -- The financial statements listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules are incorporated by reference from the Company's 2001 Annual Report to Stockholders into Item 8 of Part II of this Form 10-K. 2. Financial statement schedules -- The financial statement schedules listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules are filed as part of this Form 10-K. 3. Exhibits -- The exhibits listed in the accompanying Index to Exhibits are filed as part of this Form 10-K. (b) Reports on Form 8-K. 36 The Company has filed the following reports on Form 8-K since September 30, 2001: (i) On November 8, 2001, the Company filed a Current Report on Form 8-K reporting the Company's announcement on November 7, 2001 that it extended the expiration of its exchange offering for $250 million of its 7.75% Debentures due 2011, which were privately placed under Rule 144A, for $250 million of its 7.75% Debentures due 2011, that have been registered under the Securities Act of 1933, to 5:00 p.m. eastern standard time on November 26, 2001. (ii) On November 27, 2001, the Company filed a Current Report on Form 8-K reporting the Company's announcement on November 26, 2001, that its exchange offering for $250,000,000 of its 7.75% Debentures due 2011, which were privately placed under Rule 144A for $250,000,000 worth of 7.75% Debentures due 2011, that have been registered under the Securities Act of 1933 expired at 5:00 p.m. eastern standard time on November 26, 2001, $249,000,000 of its 7.75% Debentures due 2011, which were privately placed under Rule 144A were exchanged for a like amount of 7.75% Debentures due 2011, that have been registered under the Securities Act of 1933. (c) The response to Item 14(c) is contained in Item 14(a)(3) above. (d) The response to Item 14(d) is contained in pages F-1 through F-6 of this Form 10-K. 37 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 14(a) 1 AND 2)
PAGE ----------------------- 2001 ANNUAL FORM REPORT TO 10-K STOCKHOLDERS ------- ------------ CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets at December 31, 2001 and 2000... -- 16 Consolidated statements of income for each of the three years in the period ended December 31, 2001............... -- 17 Consolidated statements of changes in common stockholders' equity for each of the three years in the period ended December 31, 2001......................................... -- 18 Consolidated statements of cash flows for each of the three years in the period ended December 31, 2001............... -- 19 Notes to consolidated financial statements.................. -- 20-37 Report on management's responsibility....................... -- 38 Independent auditors' report................................ -- 38 FINANCIAL STATEMENT SCHEDULES Independent auditors' report on financial statement schedules................................................. F-1 -- Schedule I -- Summary of investments -- other than investments in related parties (December 31, 2001)........ F-2 -- Schedule III -- Condensed financial information of Registrant (December 31, 2001)............................ F-3-F-5 -- Schedule VI -- Reinsurance (December 31, 2001).............. F-6 --
All other schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto. 38 INDEX TO EXHIBITS (ITEM 14(a) 3)
EXHIBIT NUMBER EXHIBIT - ------- ------- 2.1 -- Agreement and Plan of Merger dated as of November 22, 1998 between Registrant and Amerin Corporation.(8)(Exhibit 2.1) 2.2 -- Stock Purchase Agreement dated as of October 27, 2000 by and among Registrant, ExpressClose.com, Inc. and The Founding Stockholders of ExpressClose.com, Inc.(12)(Exhibit 2.2) 2.3 -- Agreement and Plan of Merger dated as of November 13, 2000 by and among Registrant, GOLD Acquisition Corporation, and Enhance Financial Services Group Inc.(9)(Exhibit 2.1) 2.4 -- Shareholder Support Agreement by and among Registrant and Daniel Gross, dated as of November 18, 2000.(9)(Exhibit 2.2) 2.5 -- Shareholder Support Agreement by and among Registrant and Wallace O. Sellers, dated as of November 18, 2000.(9)(Exhibit 2.3) 2.6 -- Shareholder Support Agreement by and among Registrant and Allan R. Tessler, dated as of November 18, 2000.(9)(Exhibit 2.4) *3.1 -- Second Amended and Restated Certificate of Incorporation of the Registrant. *3.2 -- Amendment to Second Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of the State of Delaware on June 14, 2001. 3.3 -- Amended and restated by-laws of the Registrant.(8)(Exhibit 3.2) 4.1 -- Specimen certificate for Common Stock.(4)(Exhibit 4.1) *4.2 -- Certificate of Designations relating to $4.125 Preferred Stock of the Company 4.3 -- Specimen certificate for $4.125 Preferred Stock of the Company.(1)(Exhibit 4.3) *4.4 -- Standstill and Voting Agreement dated October 27, 1992 between the Company and Reliance Group Holdings, Inc. 4.5 -- Amended and Restated Shareholders Rights Agreement.(8) (Exhibit 4.4) 4.6 -- Indenture dated May 29, 2001 between Registrant and First Union National Bank, as Trustee.(10)(Exhibit 4.1) 4.7 -- Form of 7.75% Debentures Due 2011. (included within Exhibit 4.6) 4.8 -- Form of Indenture dated as of February , 1993 between Enhance Financial Services Group Inc. and Chase, as Trustee.(11)(Exhibit 4.1) 4.9 -- Form of Enhance Financial Services Group Inc. Debentures Due 2003.(11)(Exhibit 4.3.3) *4.10 -- Indenture dated January 11, 2002 between Registrant and First Union National Bank, as Trustee. *4.11 -- Form of 2.25% Senior Convertible Debentures Due 2012. (included within Exhibit 4.10) *10.1 -- Tax Indemnification Agreement dated October 28, 1992 among the Company, Commonwealth Land Title Insurance Company, Reliance Insurance Company and Reliance Group Holdings, Inc. 10.2 -- Tax Allocation Agreement dated as of April 1, 1992, among Reliance Insurance Company and certain of its subsidiaries, including Commonwealth Mortgage Assurance Company.(1) (Exhibit 10.4) *10.3 -- Form of Change of Control Agreement dated January 25, 1995, between the Company and each of Frank P. Filipps, Paul F. Fischer and C. Robert Quint.(6) 10.4 -- Change of Control Agreement dated October 30, 1997, between the Company and Howard S. Yaruss.(2)(6)(Exhibit 10.7) 10.5 -- Change of Control Agreement dated February 6, 1998, between the Company and Scott Stevens.(3)(6)(Exhibit 10.5)
39
EXHIBIT NUMBER EXHIBIT - ------- ------- 10.6 -- Change of Control Agreement dated March 12, 1999, between the Company and Roy J. Kasmar.(6)(8)(10.40) 10.7 -- Change of Control Agreement dated July 19, 2000, between the Company and Bruce Van Fleet.(6)(12)(Exhibit 10.8) 10.8 -- Employment Agreement dated March 12, 1999, between the Company and Roy J. Kasmar.(6)(8)(10.39) *10.9 -- Radian Group Inc. Pension Plan.(6) *10.10 -- Radian Group Inc. Savings Incentive Plan, as amended and restated through January 1, 1997.(6) *10.11 -- Radian Group Inc. 1992 Stock Option Plan, as amended. 10.12 -- Radian Group Inc. Amended and restated Equity Compensation Plan.(3)(6)(Exhibit 10.9) 10.13 -- Radian Deferred Compensation Plan(6)(4)(Exhibit 10.13) 10.14 -- Purchase Agreement dated October 29, 1992 between the Company and Commonwealth Land Title Insurance Company regarding $4.125 Preferred Stock.(10)(Exhibit 10.10) 10.15 -- Registration Rights Agreement dated October 27, 1992 between the Company and Commonwealth Land Title Insurance Company.(10)(Exhibit 10.11) 10.16 -- Form of Commonwealth Mortgage Assurance Company Master Policy.(1)(Exhibit 10.16) 10.17 -- Risk-to-Capital Ratio Maintenance Agreement between the Company and Commonwealth Mortgage Assurance Company regarding matters relating to Moody's financial strength rating as amended through October 22, 1993.(10)(Exhibit 10.13) 10.18 -- Reserve Account Agreement dated August 14, 1992, between the Company and Commonwealth Mortgage Assurance Company regarding $4.125 Preferred Stock.(1) (Exhibit 10.18) 10.19 -- First Layer Binder of Reinsurance, effective March 1, 1992, among Commonwealth Mortgage Assurance Company, Commonwealth Mortgage Assurance Company of Arizona, and AXA Reinsurance SA.(1)(Exhibit 10.19) 10.20 -- Capital Mortgage Reinsurance Company Variable Quota Share Reinsurance Agreement, effective January 1, 1994, between Commonwealth Mortgage Assurance Company and its affiliates and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.16) 10.21 -- Capital Reinsurance Company Reinsurance Agreement, effective January 1, 1994, between Commonwealth Mortgage Assurance Company and Capital Reinsurance Company.(10) (Exhibit 10.17) 10.22 -- Capital Mortgage Reinsurance Company Variable Quota Share Reinsurance Agreement, effective January 1, 1995, between Commonwealth Mortgage Assurance Company and its affiliates and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.18) 10.23 -- Capital Mortgage Reinsurance Company Variable Quota Share Reinsurance Agreement, effective January 1, 1996, between Commonwealth Mortgage Assurance Company and its affiliates and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.19) 10.24 -- Capital Mortgage Reinsurance Company Variable Quota Share Reinsurance Agreement, effective January 1, 1997, between Commonwealth Mortgage Assurance Company and its affiliates and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.20) 10.25 -- Amended form of Commonwealth Mortgage Assurance Company Master Policy, effective June 1, 1995.(10)(Exhibit 10.21) 10.26 -- Radian Group Inc. 1997 Employee Stock Purchase Plan.(5) 10.27 -- Amended and Restated Amerin Corporation 1992 Long-Term Incentive Plan.(6)(7) (Exhibit 10.2)
40
EXHIBIT NUMBER EXHIBIT - ------- ------- *10.28 -- Credit Agreement dated as of February 8, 2002, between the Registrant and First Union National Bank, as Lender. *10.29 -- Credit Agreement, dated as of February 27, 2001, between Deutsche Bank AG and Asset Guaranty Insurance Company (now know as Radian Asset Assurance Inc.) *10.30 -- Credit Agreement, dated as of November 7, 2001, among Enhance Reinsurance Company (now known as Radian Reinsurance Inc.), Banks from time to time party thereto and Deutsche Bank AG, New York Branch, as Agent. 10.31 -- 1987 Long Term Incentive Plan for Key Employees of Enhance Financial Services Group Inc.(13)(Exhibit 10.2.1) 10.32 -- 1997 Long Term Incentive Plan for Key Employees of Enhance Financial Services Group Inc., as amended and restated as of June 3, 1999.(6)(14)(Exhibit 10.2.2) 10.33 -- Enhance Reinsurance Company Supplemental Pension Plan.(6)(15)(Exhibit 10.4) 10.34 -- Non-Employee-Director Stock Option Plan of Enhance Financial Services Group Inc., as amended.(16)(Annex A) *10.35 -- Form of Second Amended and Restated Change-In-Control Protection Agreement dated November 15, 1999 between Enhance Financial Services Group Inc. and Martin Kamarck, amended and restated as of March 23, 2000. *13 -- Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2001 (which, except for those portions thereof expressly incorporated herein by reference, is furnished for the information of the Commission and is not deemed "filed" as part of this report.) *21 -- Revised Subsidiaries of the Company. *23 -- Consent of Deloitte & Touche LLP.
- --------------- * Filed herewith. (1) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-1 filed August 24, 1992 and amendments thereto (File No. 33-51188). (2) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. (3) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. (4) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. (5) Incorporated by reference filed in the Registrant's Registration Statement on Form S-8 filed November 20, 1997 (File No. 333-40623). (6) Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. (7) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in Amerin Corporation's Registration Statement on Form S-1 (File No. 33-97514). (8) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-4 filed May 6, 1999 (File No. 333-77957). (9) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-4 filed December 27, 2000 (File No. 333-52762). (10) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-4 filed July 19, 2001, and any amendment thereto (File No. 333-65440). (11) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in Enhance Financial Services Group Inc.'s Registration Statement on Form S-1 filed December 18, 1992, and any amendment thereto (File no. 33-55958). (12) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. (13) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Annual Report on Form 10-K for the year ended December 31, 1996 of Enhance Financial Services Group Inc. (14) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit in the Quarterly Report on Form 10-Q for the period ended June 30, 1999, of Enhance Financial Services Group Inc. (15) Incorporated by reference to the exhibit identified in parentheses, filed as an exhibit to Enhance Financial Services Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999. (16) Incorporated by reference to the annex identified in parentheses, filed as an annex to Enhance Financial Services Group Inc.'s Schedule 14A filed with the Securities and Exchange Commission on May 5, 1998. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 2002. Radian Group Inc. By: /s/ FRANK P. FILIPPS ------------------------------------ Frank P. Filipps Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 2002 by the following persons on behalf of the registrant and in the capacities indicated.
NAME TITLE ---- ----- /s/ FRANK P. FILIPPS Chairman of the Board, Chief Executive - -------------------------------------------------------- Officer and Director Frank P. Filipps /s/ ROY J. KASMAR President, Chief Operating Officer and - -------------------------------------------------------- Director Roy J. Kasmar /s/ C. ROBERT QUINT Executive Vice President, Chief Financial - -------------------------------------------------------- Officer C. Robert Quint /s/ HOWARD S. YARUSS Executive Vice President, Secretary & - -------------------------------------------------------- General Counsel Howard S. Yaruss /s/ JOHN J. CALAMARI Vice President, Corporate Controller - -------------------------------------------------------- John J. Calamari /s/ HERBERT WENDER Lead Director - -------------------------------------------------------- Herbert Wender /s/ DAVID C. CARNEY Director - -------------------------------------------------------- David C. Carney /s/ HOWARD B. CULANG Director - -------------------------------------------------------- Howard B. Culang /s/ CLAIRE M. FAGIN, PH.D., R.N. Director - -------------------------------------------------------- Claire M. Fagin, Ph.D., R.N. /s/ ROSEMARIE B. GRECO Director - -------------------------------------------------------- Rosemarie B. Greco /s/ STEPHEN T. HOPKINS Director - -------------------------------------------------------- Stephen T. Hopkins /s/ JAMES W. JENNINGS Director - -------------------------------------------------------- James W. Jennings /s/ RONALD W. MOORE Director - -------------------------------------------------------- Ronald W. Moore
42
NAME TITLE ---- ----- /s/ ROBERT W. RICHARDS Director - -------------------------------------------------------- Robert W. Richards /s/ ANTHONY W. SCHWEIGER Director - -------------------------------------------------------- Anthony W. Schweiger
43 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Radian Group Inc. Philadelphia, Pennsylvania We have audited the consolidated financial statements of Radian Group Inc., (the "Company") as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated March 15, 2002; such consolidated financial statements and reports are included in your 2001 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedules of Radian Group Inc., listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 15, 2002 F-1 RADIAN GROUP INC. SCHEDULE I SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2001
AMOUNT AT WHICH SHOWN ON AMORTIZED FAIR THE BALANCE TYPE OF INVESTMENT COST VALUE SHEET - ------------------ ---------- ---------- ----------- (IN THOUSANDS) Fixed Maturities: Bonds: U. S. government and government agencies and authorities................................ $ 221,629 $ 220,880 $ 221,018 State and municipal obligations.............. 2,385,118 2,408,691 2,388,789 Corporate obligations........................ 231,893 247,648 247,648 Asset-backed securities...................... 40,552 40,586 40,586 Private placements........................... 89,090 84,544 84,544 Foreign governments.......................... 1,464 1,453 1,453 Redeemable preferred stocks....................... 25,382 25,360 25,360 ---------- ---------- ---------- Total fixed maturities................................. 2,995,128 3,029,162 3,009,398 Trading securities..................................... 22,559 21,659 21,659 Equity securities...................................... 116,978 120,320 120,320 Short-term investments................................. 210,788 210,788 210,788 Other invested assets.................................. 7,310 7,310 7,310 ---------- ---------- ---------- Total investments other than investments in related parties.............................................. $3,352,763 $3,389,239 $3,369,475 ========== ========== ==========
F-2 RADIAN GROUP INC. SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS PARENT COMPANY ONLY
DECEMBER 31 ---------------------------- 2001 2000 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS) Assets Investments Fixed maturities held to maturity -- at amortized cost (fair value $10,104 and $10,160)...................... $ 9,838 $ 9,808 Fixed maturities available for sale -- at fair value (amortized cost $391)................................. -- 407 Short-term investments................................. 12,908 4,724 Cash........................................................ 1,236 21 Investment in subsidiaries, at equity in net assets......... 2,573,202 1,401,026 Federal income taxes........................................ 1,356 -- Debt issuance costs......................................... 2,040 -- Due from affiliates, net.................................... 6,596 -- Other assets................................................ 766 427 ---------- ---------- $2,607,942 $1,416,413 ========== ========== Liabilities and Stockholders' Equity Accounts payable -- affiliates.............................. $ -- $ 2,183 Accounts payable -- other................................... 3,241 1,742 Notes payable............................................... 5,936 6,684 Federal income taxes........................................ -- 3,194 Accrued interest payable.................................... 2,948 Long-term debt.............................................. 249,076 -- Other liabilities........................................... 413 413 ---------- ---------- 261,614 14,216 ---------- ---------- Redeemable preferred stock, par value $.001 per share; 800,000 shares issued and outstanding -- at redemption value..................................................... 40,000 40,000 ---------- ---------- Common stockholders' equity Common stock, par value $.001 per share; 200,000,000 shares authorized; 94,170,300 and 37,945,483 shares issued in 2001 and 2000, respectively................. 94 38 Treasury stock; 188,092 and 37,706 shares in 2001 and 2000, respectively.................................... (7,874) (2,159) Additional paid-in capital............................. 1,210,088 549,154 Retained earnings...................................... 1,093,580 789,831 Accumulated other comprehensive income................. 10,440 25,333 ---------- ---------- 2,306,328 1,362,197 ---------- ---------- $2,607,942 $1,416,413 ========== ==========
F-3 RADIAN GROUP INC. SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31 -------------------------------- 2001 2000 1999 -------- -------- -------- (IN THOUSANDS) Revenues Dividends received from subsidiaries.................. $ 25,000 $ 6,000 $ -- Net investment income................................. 1,276 83 200 Gain on sales of investments, net..................... 461 -- -- -------- -------- -------- 26,737 6,083 200 -------- -------- -------- Expenses Interest expense...................................... 10,978 -- -- Operating expenses.................................... 10,572 6,455 2,241 Merger expenses....................................... -- -- 12,812 -------- -------- -------- 21,550 6,455 15,053 -------- -------- -------- Income (loss) before income taxes and equity in undistributed income of subsidiaries..................... 5,187 (372) (14,853) Income tax benefit (expense)............................... 9,283 (1,851) 2,407 -------- -------- -------- Income before equity in undistributed income of subsidiaries............................................. 14,470 (2,223) (12,446) Equity in undistributed net income of subsidiaries......... 345,949 251,161 160,584 -------- -------- -------- Net income................................................. $360,419 $248,938 $148,138 ======== ======== ========
F-4 RADIAN GROUP INC. SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31 ----------------------------------- 2001 2000 1999 --------- --------- --------- (IN THOUSANDS) Cash flows from operating activities: Net income......................................... $ 360,419 $ 248,938 $ 148,138 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed net income of subsidiaries................................ (345,949) (251,161) (160,584) (Decrease) increase in federal income taxes... (4,550) 3,462 3,645 (Decrease) increase in notes payable.......... (748) 3,197 1,444 Net change in other assets, accounts payable and other liabilities....................... 3,472 2,110 1,589 --------- --------- --------- Net cash provided by (used in) operating activities..... 12,644 6,546 (5,768) --------- --------- --------- Cash flows from investing activities: Sales of fixed maturity investments available for sale............................................. 407 -- -- Purchases of short-term investments -- net......... (8,184) (4,019) (530) Other.............................................. (30) (27) (16) --------- --------- --------- Net cash used in investing activities................... (7,807) (4,046) (546) --------- --------- --------- Cash flows from financing activities: Dividends paid..................................... (10,052) (7,791) (6,860) Capital contributions.............................. (260,819) (11,067) (2,593) Purchase of treasury stock......................... (5,715) (2,159) -- Issuance of long-term debt......................... 247,036 -- -- Proceeds from issuance of common stock............. 25,928 18,432 13,488 --------- --------- --------- Net cash (used in) provided by financing activities..... (3,622) (2,585) 4,035 --------- --------- --------- Increase (decrease) in cash............................. 1,215 (85) (2,279) Cash, beginning of year................................. 21 106 2,385 --------- --------- --------- Cash, end of year....................................... $ 1,236 $ 21 $ 106 ========= ========= =========
F-5 RADIAN GROUP INC. SCHEDULE VI -- REINSURANCE MORTGAGE INSURANCE PREMIUMS EARNED YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ASSUMED PERCENTAGE CEDED TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET -------- --------- --------- -------- ---------- (IN THOUSANDS) 2001................................ $699,085 $60,774 $77,569 $715,880 10.84% ======== ======= ======= ======== ===== 2000................................ $570,425 $49,634 $ 80 $520,871 0.02% ======== ======= ======= ======== ===== 1999................................ $517,364 $44,816 $ 87 $472,635 0.02% ======== ======= ======= ======== =====
F-6 This document has been printed entirely on recycled paper. EX-3.1 3 w56746ex3-1.txt SECOND AMENDED AND RESTATED CERTIFICATE OF INC. EXHIBIT 3.1 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF THE STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER, WHICH MEANS: "AMERIN CORPORATION", A DELAWARE CORPORATION, WITH AND INTO "CMAC INVESTMENT CORPORATION" UNDER THE NAME OF RADIAN GROUP INC.,", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE NINTH DAY OF JUNE, A.D. 1999, AT 12:30 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ Edward J. Freel ---------------------------------------- Edward J. Freel, Secretary of State 2280968 8100M AUTHENTICATION: 9794180 991231406 DATE: 06-09-99 CERTIFICATE OF MERGER OF AMERIN CORPORATION (a Delaware corporation) WITH AND INTO CMAC INVESTMENT CORPORATION (a Delaware corporation) ---------------------------------------- Pursuant to Sections 103 and 251 of the General Corporation Law of the State of Delaware ---------------------------------------- CMAC Investment Corporation, a Delaware corporation, which desires to merge with Amerin Corporation, a Delaware corporation, pursuant to the provisions of Section 251 of the General Corporation Law of the State of Delaware (the "MERGER") hereby certifies as follows: FIRST: The names and states of incorporation of the constituent corporations in the Merger (the "CONSTITUENT CORPORATIONS") are as follows:
Name State of Incorporation ---- ---------------------- CMAC Investment Corporation Delaware Amerin Corporation Delaware
SECOND: An Agreement and Plan of Merger, dated as of November 22,1998, amended as of April 5,1999, between the Constituent Corporations (the "MERGER AGREEMENT") has been approved, adopted, certified, executed and acknowledged by each of the Constituent Corporations in accordance with the requirements of Section 251 of the General Corporation Law of the State of Delaware. THIRD: The surviving corporation shall be CMAC Investment Corporation (the "SURVIVING CORPORATION"), which shall change its name to "RADIAN GROUP INC." at the effective time of the Merger. FOURTH: The Restated Certificate of Incorporation of the Surviving Corporation shall be the Restated Certificate of Incorporation of CMAC, except that the Restated Certificate of Incorporation of CMAC shall be restated in its entirety by reason of the Merger and shall read as set forth in Exhibit A hereto and said Restated Certificate of Incorporation as so restated shall be the Certificate of Incorporation of the Surviving Corporation. FIFTH: The executed Merger Agreement is on file at the principal place of business of the Surviving Corporation. The address of the principal place of business of the Surviving Corporation is 1601 Market Sweet, Philadelphia, PA 19103. SIXTH: A copy of the executed Merger Agreement will be furnished by the Surviving Corporation, on request and without cost, to any stockholder of either of the Constituent Corporations. SEVENTH: The Merger shall become effective upon filing with the Secretary of State of Delaware. IN WITNESS WHEREOF, CMAC Investment Corporation has caused this Certificate of Merger to be signed by its Senior Vice President, Secretary and General Counsel as of this 9th day of June, 1999. CMAC INVESTMENT CORPORATION a Delaware corporation By: /s/ Howard S. Yaruss ------------------------------------ Name: Howard S. Yaruss Title: Senior Vice President, Secretary and General Counsel EXHIBIT A SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF RADIAN GROUP INC. FIRST: CORPORATE NAME. The name of the corporation is Radian Group Inc. (hereinafter refereed to as the "CORPORATION"). SECOND: REGISTERED OFFICE. The registered office of the Corporation is to be located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The name of its registered agent at that address is The Corporation Trust Company. THIRD: CORPORATE PURPOSE. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law. FOURTH: CAPITAL STOCK. The Corporation shall be authorized to issue one hundred million (100,000,000) shares of capital stock, of which eighty million (80,000,000) shares shall be Common Stock, par value $.001 per share, and twenty million (20,000,000) shares shall be Preferred Stock, par value $.001 per share. 4.1 Authority of Board to Fix Term of Shares. The Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series. The Board of Directors of the Corporation shall have the full authority permitted by law to establish one or more series and the number of shares constituting each such series and to fix by resolution full, limited, multiple or fractional, or no voting rights, and such designations, preferences, qualifications, privileges, limitations, restrictions, options, conversion rights and other special or relative rights of any series of the Preferred Stock that may be desired. Subject to the limitation on the total number of shares of Preferred Stock which the Corporation has authority to issue hereunder, the Board of Directors is also authorized to increase or decrease the number of shares of any series, subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 4.2 $4.125 Preferred Stock. The Corporation is authorized to issue a series of Preferred Stock, which shall consist of 800,000 shares and is designated as "$4,125 PREFERRED STOCK" The powers, preferences, rights, restrictions and other matters relating to the $4.125 Preferred Stock are as follows: (a) Designation. The designation of such series of the Preferred Stock shall be $4.125 Preferred Stock (the "$4.125 Preferred Stock"). The number of shares of the $4.125 Preferred Stock shall be 800,000. The number of authorized shares of the $4.125 Preferred Stock may be reduced by the Board of Directors of the Corporation or a duly authorized committee thereof and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized. The number of authorized shares of the $4.125 Preferred Stock shall not be increased. (b) Certain Definitions. As used in this Section 4.2, the following terms shall have the following respective meanings: "AFFILIATE" has the meaning contained in Rule 12b-2 promulgated under the Exchange Act, or any successor provision thereto. "BENEFICIAL OWNER" has the meaning contained in Rule 13d-3 promulgated under the Exchange Act, of any successor provision thereto. "BUSINESS DAY" means any day except a Saturday, Sunday or any day on which banking institutions are legally authorized or obligated to close in the Commonwealth of Pennsylvania or a day on which the New York Stock Exchange is not open for the regular transaction of business. "BY-LAWS" means the By-laws of the Corporation, as amended from time to time. "CMAC" means Commonwealth Mortgage Assurance Company, a Pennsylvania corporation, or any successor entity thereto which is the principal subsidiary of the Corporation engaged in the business of providing private mortgage insurance. "COMMON SHARES" means any stock of the Corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation and which is not subject to redemption by the Corporation. "COMMON STOCK" means the common stock, par value $.001 per share, of the Corporation as of the original date of issuance of shares of the $4.125 Preferred Stock, or shares of the Corporation of any class or classes resulting from any reclassification or reclassification thereof. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FUNDAMENTAL TRANSACTION" means any merger, consolidation, sale of assets or similar transaction on which the holders of Common Stock are entitled to vote. "JUNIOR DIVIDEND SHARE" means shares of any series or class of the Corporation which are by their terms expressly made junior to shares of the $4.125 Preferred Stock at the time outstanding as to dividends. II-2 "JUNIOR LIQUIDATION SHARES" means shares of any series or class of the Corporation which are by their terms expressly made junior to shares of the $4.125 Preferred Stock at the time outstanding as to the distribution of assets on any voluntary or involuntary liquidation of the Corporation. "PARITY DIVIDEND SHARES" means shares of any series or class of the Corporation which are by their terms on a parity with shares of the $4.125 Preferred Stock at the time outstanding as to dividends. "PARITY LIQUIDATION SHARES" means shares of any series or class of the Corporation which are by their terms on a parity with shares of the $4.125 Preferred Stock at the time outstanding as to as to the distribution on assets on any voluntary or involuntary liquidation of the Corporation. "PERSON" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. "SENIOR DIVIDEND SHARES" means shares of any series or class of the Corporation which are by their terms expressly made senior to shares of the $4.125 Preferred Stock at the time outstanding as to dividends. "SENIOR LIQUIDATION SHARES" means shares of any series or class of the Corporation which are by their terms expressly made senior to shares of the $4.125 Preferred Stock at the time outstanding as to the distribution of assets on any voluntary or involuntary liquidation of the Corporation. (c) VOTING RIGHTS. Except as otherwise required by law or as expressly provided in this paragraph (c), holders of shares of the $4.125 Preferred Stock shall have no voting rights: (1) Dividend Defaults. (A) If and whenever accrued dividends on shares of the $4.125 Preferred Stock or any Parity Dividend Shares shall not have been paid in an aggregate amount equal to or greater than six quarterly dividends (whether consecutive or not) on shares of the $4.125 Preferred stock or such Parity Dividend Shares at the time outstanding, the number of directors then constituting the entire Board of Directors of the Corporation shall be increased automatically by two directors and the holders of shares of the $4.125 Preferred Stock and the holders of any Parity Dividend Shares, voting non-cumulatively and together as a single class, shall be entitled to fill such newly-created directorships at the next annual meeting of stockholders of the Corporation or at a special meeting called as hereinafter provided in this subparagraph (c)(1)(A). Such right to vote as a single class to elect two directors shall, when vested, continue until all dividends in default on shares of the $4.125 Preferred Stock and any Parity Dividend Shares, as the case may be, shall have been paid in full and, when so paid, such right to elect two directors separately as a class shall cease, subject to the same II-3 provisions for the vesting of such right to elect two directors separately as a class in the case of future dividend defaults. At any time when such right to elect two directors separately as a class shall have so vested, the Corporation may, and, upon the written request of the holders of record of not less than 20% of the total number of shares of the $4.125 Preferred Stock and any Parity Dividend Shares then outstanding, shall call a special meeting of the holders of such shares for the election of directors to fill such newly-created directorships. In the case of such a written request, such special meeting shall be held within 90 days after the receipt of such request and, in either case, at the place and upon the notice provided by law and in the By-laws, except that the Corporation shall not be required to call such a special meeting if such request is received less than 120 days before the date fixed for the next ensuing annual meeting of stockholders of the Corporation, at which meeting such newly-created directorships shall be filled by the holders of shares of the $4.125 Preferred Stock and any Parity Dividend Shares. (B) So long as any shares of the $4.125 Preferred Stock are outstanding, the By-laws shall contain provisions ensuring that the number of directors of the Corporation shall at all times be such that the exercise, by the holders of shares of the $4.125 Preferred Stock and the holders of Parity Dividend Shares, of the right to elect directors under the circumstances provided in subparagraph (c)(1)(A) above will not contravene any provisions of the Corporation's Restated Certificate or By-laws. (C) Directors elected pursuant to subparagraph (c)(1)(A) shall not be elected to any particular class of the Board of Directors and shall serve until the earlier of: (i) the next annual meeting of the stockholders of the Corporation and the election (by the holders of shares of the $4.125 Preferred Stock and the holders of Parity Dividend Shares) and qualification of their respective successors; or (ii) the date upon which all accumulations of unpaid dividends on shares of the $4.125 Preferred Stock and such Parity Dividend Shares shall have been paid in full. If, prior to the end of the term of any director elected pursuant to subparagraph (c)(1)(A), a vacancy in the office of such director shall occur during the continuance of a default in dividends on the shares of the $4.125 Preferred Stock or such Parity Dividend Shares by reason of death, resignation, disability or otherwise, such vacancy shall be filled for the unexpired term by the appointment by the remaining director elected pursuant to subparagraph (c)(1)(A) of a new director for the unexpired term of such former director. (D) Notwithstanding any provision in this paragraph (c) to the contrary, so long as Reliance Group Holdings, Inc. or any Affiliate thereof is the Beneficial Owner of any shares of the $4.125 Preferred Stock, such corporation or Affiliate shall have no voting rights with respect to such shares of the $4.125 Preferred Stock in the event of the default on payment of dividends by the Corporation and any II-4 shares so beneficially owned shall not be counted as outstanding and entitled to vote for purposes of any vote or other action by the holders of the shares of $4.125 Preferred Stock and Parity Dividend Shares pursuant to subparagraph (c)(1). (2) Miscellaneous. So long as any shares of the $4.125 Preferred Stock are outstanding, the Corporation shall not, without either the affirmative vote of the holders of at least two-thirds of the outstanding shares of the $4.125 Preferred Stock voting at a meeting of such holders, or the affirmative written consent of holders of at least two-thirds of the outstanding shares of the $4.125 Preferred Stock: (A) Authorize or issue any Senior Dividend Shares or Senior Liquidation Shares. (B) Consummate any Fundamental Transaction, unless all outstanding shares of $4.125 Preferred Stock have been called for redemption pursuant to paragraph (f)(2) below and the rights of the holders of such shares have ceased in accordance with paragraph (f)(3) below. (C) Subject to the remaining provisions of this subparagraph (c)(2)(C), amend the Corporation's Certificate of Incorporation or any certificate of designations or take other action so as to affect adversely in any material respect the voting powers or other rights, privileges, powers or preferences of shares of the $4.125 Preferred Stock. No class vote of the $4.125 Preferred Stock shall be required for any of the amendments to the Corporation's Certificate of Incorporation or any certificate of designations set forth in subparagraph (c)(2)(C)(i) below which shall be deemed not to affect adversely in any material respect the voting powers or other rights and preferences of shares of the 4.125% Preferred Stock: (i) the authorization or issuance of any shares of any series or class of the Corporation which are neither Senior Dividend Shares nor Senior Liquidation Shares. (D) Amend that certain Reserve Account Agreement dated August 14,1992 by and between the Corporation and Commonwealth Mortgage Assurance Company. (d) Dividends. (1) Cash Dividends. The cash dividend rate on shares of the $4.125 Preferred Stock shall be $4.125 per annum per share. Cash dividends on shares of the 4.125% Preferred Stock shall be payable quarterly at the rate of $1.03125 per share, when, as and if declared by the Board of Directors out of funds legally available for the payment of dividends, on the fifteenth day of February, May, August and November of each year (each, a "PAYMENT DATE"), commencing February 15, 1993, except that if any such Payment Date is not a Business Day then such dividend shall be payable on the first immediately succeeding Business Day. Any cash dividend payable on February 15, 1993 on shares of the $4.125 Preferred Stock will be computed on the II-5 actual number of days from the date of issuance of the $4.125 Preferred Stock to February 15, 1993. No interest or dividends will be payable in respect of any accumulations of unpaid dividends on shares of the $4.125 Preferred Stock. The holders of shares of the $4.125 Preferred Stock shall not be entitled to any dividends other than the dividends provided in this paragraph (d). (2) Record Date. Each cash dividend shall be paid to the holders of record of shares of the $4.125 Preferred Stock as they appear on the stock register of the Corporation on the fifteenth day of the month next preceding such Payment Date (each, a "RECORD DATE"). Dividends on account of accumulations of unpaid dividends may be declared and paid at any time, without reference to any regular dividend Payment Date, to holders of record on such date, nor exceeding 60 days preceding the payment date thereof, as may be fixed by the Board of Directors of the Corporation. (3) Priority of Dividends. If at any time the Corporation has failed to pay or declare and set apart for payment accumulations of unpaid dividends on any Senior Dividend Shares, the Corporation shall not pay any dividend on the $4.125 Preferred Stock. Holders of shares of the $4.125 Preferred Stock shall be entitled to receive the dividends provided in this paragraph (d) in preference to and in priority over dividends upon the Common Shares and all Junior Dividend Shares. (4) Default; Payment of Pro Rata Dividends. Unless and until (x) all accumulations of unpaid dividends on shares of the $4.125 Preferred Stock and any Parity Dividend Shares at the time outstanding have been paid in full or declared in full and sums set apart for the payment thereof and (y) the Corporation has fully complied with all scheduled redemption obligations, sinking fund obligations and all other redemption obligations relating to the shares of $4.125 Preferred Stock, any Parity Dividend Shares and any Parity Liquidation Shares at the time outstanding, the payment of dividends on, and redemptions and purchases of, shares of the Corporation's capital stock shall be subject to the restrictions contained in paragraph (h) below. Unless and until all accumulations of unpaid dividends on shares of the $4.125 Preferred Stock and any Parity Dividend Shares at the time outstanding have been paid in full or declared in full and sums set apart for the payment thereof, all dividends declared by the Corporation upon shares of the $4.125 Preferred Stock and Parity Dividend Shares shall be declared pro rata with respect to all shares of the $4.125 Preferred Stock and Parity Dividend Shares then outstanding, so that the amounts of any dividends declared by the Corporation upon each share of $4.125 Preferred Stock and each Parity Dividend Share shall in all cases bear to each other the same ratio that, at the time of such declaration, all accumulations of unpaid dividends on shares of the $4.125 Preferred Stock and on such parity Dividend Shares bear to each other. (e) Liquidation. (1) Liquidation Value. The liquidation value of shares of the $4.125 Preferred Stock, in case of the voluntary or involuntary liquidation, II-6 dissolution or winding-up of the Corporation, shall be $50.00 per share, plus an amount equal to accumulations of unpaid dividends thereon to the payment date. Priority of Liquidation Distributions. In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the holders of shares of the $4.125 Preferred Stock shall be entitled to receive the liquidation value of such shares held by them in preference to and in priority over any distributions upon the Common Shares and the Junior Liquidation Shares, but the holders of shares of the $4.125 Preferred Stock shall not he entitled to receive any distribution in respect of the liquidation value of such shares until the Corporation has paid in full the liquidation value to which the holders of all Senior Liquidation Shares are entitled. Upon payment in full of the liquidation value to which the holders of shares of the $4.125 Preferred Stock are entitled, the holders of shares of the $4.125 Preferred Stock will not be entitled to any further participation an any distribution of assets by the Corporation. If the assets of the Corporation are nor sufficient to pay in full the liquidation value payable to the holders of shares of the $4.125 Preferred Stock and the liquidation value payable to the holders of the Parity Liquidation Shares, the distribution of such assets shall be made pro rata with respect to all shares of the $4.125 Preferred Stock and Parity Liquidation Shares then outstanding, so that the amounts of any distributions paid on each share of $4.125 Preferred Stock and each Parity Liquidation Share shall in all cases bear to each other the same ratio that, at the time of such distribution, the liquidation values of the $4.125 Preferred Stock and the Parity Liquidation Shares bear to each other. (3) Consolidations Mergers, Etc. Neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a reorganization of the Corporation, nor the purchase or redemption of all or part of the outstanding shares of any class or classes of the Corporation, nor the sale or transfer of all or any part of the Corporation's assets for cash or securities or other property shall be considered a liquidation, dissolution or winding-up of the Corporation within the meaning of this paragraph (e); provided that, each case, effective provision is made in the certificate of incorporation of the resulting or surviving corporation or otherwise for the protection of the rights of the holders of the $4.125 Preferred Stock. (f) Redemptions at the Option of the Corporation. (1) Permitted Redemptions. Subject to paragraph (f)(2) below, shares of the $4.125 Preferred Stock shall not be redeemable by the Corporation prior to August 15, 2002. Shares of the $4.125 Preferred Stock may be redeemed for cash at the option of the Corporation in whole or from time to time in part on or after August 15, 2002 at the following redemption prices per share if redeemed during the 12-month period beginning August 15 of the year specified below: II-7
12-Month Period Beginning Price August Per Share ------ --------- 2002 $54.125 2003 $52.750 2004 $51.375
and if redeemed at any time thereafter as $50.00 per share, plus, in each case, an amount equal to accumulations of unpaid dividends thereon to the redemption date. (2) Redemption in Connection with a Fundamental Transaction. If any time prior to August 15, 2002 the holders of the outstanding shares of $4.125 Preferred Stock fail to approve a Fundamental Transaction as required by paragraph (c)(2)(B) above, such shares may be redeemed in full at the option of the Corporation for cash at $50.00 per share, plus an amount equal to accumulations of unpaid dividends thereon to the redemption date. The Corporation may not exercise the redemption right provided in this paragraph (f)(2) unless the Corporation proceeds with the Fundamental Transaction which the holders of $4.125 Preferred Stock failed to approve. (3) Notice Procedures. Not less than 30 nor more than 60 days prior to the date fixed for any redemption of shares of the $4.125 Preferred Stock pursuant to this paragraph (f), a written notice specifying the time and place of such redemption, the redemption price and the number of shares to be redeemed shall be given by first class mail, postage prepaid, to the holders of record of the shares of the $4.125 Preferred Stock to be redeemed at their respective addresses as the same shall appear on the books of the Corporation, calling upon each such holder of record to surrender to the Corporation on the redemption date at the place designated in such notice the holder's certificate or certificates representing the number of shares specified in such notice of redemption. Neither a failure to mail such notice, nor any defect therein or in the mailing thereof, to any particular holder shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the holder receives the notice. On or after the redemption date each holder of shares of the $4.125 Preferred Stock to be redeemed shall present and surrender the certificate or certificates for such shares to the Corporation at the place designated in such notice, and thereupon the redemption price of such shares shall be paid to or to the order of the Person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. II-8 (4) Cessation of Rights as Stockholder. If a notice of redemption has been given pursuant to subparagraph (f)(3) above and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been deposited by the Corporation, in trust for the pro rata benefit of the holders of the shares so called for redemption (so as to be and continue to be available therefor) with a bank or trust company doing business in Philadelphia, Pennsylvania and having capital, surplus and undivided profits aggregating at least $100,000,000, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares of the $4.125 Preferred Stock to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares (except the right to receive the moneys payable upon such redemption, without interest thereon, upon surrender, and endorsement if required by the Corporation, of their certificates), and the shares evidenced thereby shall not be deemed to be outstanding shares for the purpose of voting or determining the total number of shares entitled to vote on any matter. Any moneys so deposited by the Corporation and unclaimed at the end of two years from the redemption date may revert to the general funds of the Corporation, and any funds held by any paying agent may be paid to the Corporation upon request of the Corporation, after which reversion or payment the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the redemption price. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. (5) Partial Redemption Procedures. If fewer than all of the outstanding shares of the $4.125 Preferred Stock shall be called for redemption pursuant to this prargraph (f)(1) above, the shares to be redeemed shall be selected pro rata, as nearly as practicable, or by lot or by such other manner as may be prescribed by resolution of the Board of Directors of the Corporation and shall be consistent with the applicable rules of the National Association of Securities Dealers. (g) Sinking Fund. Except as otherwise provided in this paragraph (g), the shares of the $4.125 Preferred Stock are not subject to mandatory redemption requirements. (1) Mandatory Redemption. So long as any share of $4.125 Preferred Stock remains outstanding, on August 15 of each year from 2002 to 2011, inclusive, the Corporation shall redeem 72,000 shares, and on August 15, 2012 shall redeem all shares then outstanding, at a price of $50.00 per share plus accrued and unpaid cumulative dividends to date of redemption. On or before each such August 15, the Corporation shall, deposit all finds necessary for the redemption of shares of $4.125 Preferred Stocks above provided, in trust for the account of the holders of the shares to be redeemed, so as to be and continue to be available therefor, with a bank or trust company doing business in Philadelphia, Pennsylvania, and having capital, surplus and undivided profits aggregating at least $10,000,000. The particular shares of $4.125 Preferred Stock so to be redeemed II-9 shall be determined, notice of such redemption shall be given and the deposit of funds shall be made by the Corporation in the manner and with the effect provided in paragraph (g) hereof. If the Corporation fails to comply with its sinking fund obligation as heretofore provided, it shall make good any such deficiency at the earliest possible time thereafter. The obligation to redeem shares of $4.125 Preferred Stock for the sinking fund as aforesaid shall be cumulative if and to the extent not satisfied in any year, whether or not there shall be funds legally available therefor, but without interest on the amount of any deficiencies. Against the number of shares required to be redeemed in any year by the provisions of this paragraph (g), the Corporation may credit shares of $4.125 Preferred Stock which it has purchased or redeemed at any time during or prior to such year otherwise than through the operation of the sinking fund provided that any shares so credited shall not theretofore have been used for the purpose of such credit. (2) Notice Procedures. Not less than 30 nor more than 60 days prior to any redemption date, a written notice specifying the sinking fund deposit made or to be made, the redemption date, the time and place of such redemption, the redemption price and the number of shares to be redeemed shall be given by first class mail, postage prepaid, to the holders of record of shares of the $4.125 Preferred Stock at their respective addresses as the same shall appear on the books of the Corporation, calling upon each such holder of record to surrender to the Corporation on the redemption date at the place designated in such notice the holder's certificate or certificates representing the number of shares specified in such notice of redemption. Neither a failure to mail such notice, nor any defect therein or in the mailing thereof to any particular holder shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the holder receives the notice. On or after the redemption date each holder of shares of the $4.125 Preferred Stock to be redeemed shall present and surrender the certificate or certificates for such shares to the Corporation at the place designated in such notice, and thereupon the redemption price of such shares shall be paid to or to the order of the Person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (3) Cessation of Rights as Stockholder. If a notice of redemption has been given pursuant to subparagraph (g)(2) above and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been deposited pursuant to subparagraph (g)(1) above, then notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares of the $4.125 Preferred Stock to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or II-10 claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares (except the right to receive the moneys payable upon such redemption, without interest thereon, upon surrender, and endorsement if required by the Corporation, of their certificates), and the shares evidenced thereby shall not be deemed to be outstanding shares for the purpose of voting or determining the total number of shares entitled to vote on any matter. Any moneys so deposited by the Corporation and unclaimed at the end of two years from the redemption date may revert to the general funds of the Corporation, and any funds held by any paying agent may be paid to the Corporation upon request of the Corporation, after which reversion or payment the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the redemption price. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. (4) Partial Redemption Procedures. Any shares to be redeemed pursuant to this paragraph (g) shall be selected pro rata, as nearly as practicable, or by lot as may be prescribed by resolution of the Board of Directors of the Corporation and shall be consistent with the applicable rules of the National Association of Securities Dealers. (5) Default. Unless and until (x) all accumulations of unpaid dividends on shares of the $4.125 Preferred Stock and any Parity Dividend Shares at the time outstanding have been paid in full or declared in full and sums set apart for the payment thereof and (y) the Corporation has fully complied with all scheduled redemption obligations, sinking fund obligations and all other redemption obligations relating to the shares of $4.125 Preferred Stock, any Parity Dividend Shares and any Parity Liquidation Shares at the time outstanding, the payment of dividends on, and redemptions and purchases of, shares of the Corporation's capital stock shall be subject to the restrictions contained in paragraph (h) below. (h) Dividend and Redemption Default Provisions. Unless and until (x) all accumulations of unpaid dividends on shares of the $4.125 Preferred Stock and any Parity Dividend Shares at the time outstanding have been paid in full or declared in full and sums set apart for the payment thereof and (y) the Corporation has fully complied with all scheduled redemption obligations, sinking fund obligations and all other redemption obligations relating to the shares of $4.125 Preferred Stock, any Parity Dividend Shares and any Parity Liquidation Shares at the time outstanding: (1) No dividends may be declared or paid or set aside for payment and no other distribution may be made in respect of any Common Shares, Junior Dividend Shares or (except as provided above in subparagraph (d) (4)) Parity Dividend Shares, except dividends or other distributions in Common Shares or Junior Dividend Shares. (2) No Common Shares, Junior Dividend Shares or Junior Liquidation Shares may be redeemed, purchased or otherwise acquired for any Consideration (or any payment made to or available for a sinking fund for the redemption of any such shares) by the Corporation or any entity controlled by the Corporation II-11 (except (i) by conversion into or exchange for stock of the Corporation ranking junior to shares of the $4.125 Preferred Stock as to dividend and liquidation rights, (ii) in repurchases of Common Shares, Junior Dividend Shares or Junior Liquidation Shares from employees or directors of or consultants to the Corporation pursuant to contractual arrangements entered into at the time such shares were issued giving the Corporation the right to repurchase such shares upon the occurrence of certain contingencies and (iii) by acquisition of Common Shares, Junior Dividend Shares or Junior Liquidation Shares issued in connection with an acquisition pursuant to an escrow, pledge or similar arrangement under which the Corporation becomes entitled to receive such shares). (3) No shares of the $4.125 Preferred Stock or any Parity Dividend Shares or Parity Liquidation Shares may be redeemed unless all outstanding shares of the $4.125 Preferred Stock are redeemed. (4) No shares of the $4.125 Preferred Stock or any Parity Dividend Shares or Parity Liquidation Shares may be purchased or otherwise acquired by the Corporation for value except in accordance with a purchase or exchange offer made simultaneously by the Corporation to all holders of record of shares of the $4.125 Preferred Stock, Parity Dividend Shares and Parity Liquidation Shares which, considering the annual dividend rates and the other relative rights and preferences of such shares, in the opinion of the Board of Directors (whose determination shall be conclusive), will result in fair and equitable treatment among all such shares. (i) Status of Redeemed Shares. All shares of the $4.125 Preferred Stock which are at any time redeemed pursuant to paragraph (f) or (g) above and all shares of the $4.125 Preferred Stock which are otherwise reacquired by the Corporation and subsequently cancelled by the Board of Directors shall have the status of authorized but unissued shares of Preferred Stock, without designation as to series, subject to reissuance by the Board of Directors as shares of any one or more other series. 4.3 Series A Preferred Stock. The Corporation is authorized to issue a series of Preferred Stock, which shall consist of 100,000 shares and is designated as "Series A Junior Participating Preferred Shares" (the "SERIES A PREFERRED SHARE"). The powers, preferences, rights, restrictions and other matters relating to the Series A Preferred Shares are as follows: (a) Dividends and Distributions. (1) The rate of dividends payable per share of Series A Preferred Shares on the first day of January, April, July and October in each year or such other quarterly payment date as shall be specified by the Board of Directors (each such data being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of the Series A Preferred Shares, shall be (rounded to the nearest cent) equal to the greater of (A) $10.00 or (B) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends and 1,000 times the aggregate per share amount (payable in cash, based upon the fair II-12 market value at the time the non-cash dividend or other distribution is declared or paid as determined in good faith by the Board of Directors) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, $.001 per value per share, of the Corporation since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of the Series A Preferred Shares. Dividends on the Series A Preferred Shares shall be paid out of funds legally available for such purpose. In the event the Corporation shall at any time after April 14,1995 (the "RIGHTS DECLARATION DATE") (A) declare any dividend on Common Stock payable in shares of Common Stock, (B) subdivide the outstanding shares of Common Stock, or (C) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the amounts to which holders of Series A Preferred Shares were entitled immediately prior to such event under clause (D) of the preceding sentence shall be adjusted by multiplying each such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) Dividends shall begin to accrue and be cumulative on outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such Series A Preferred Shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall nor bear interest. Dividends paid on the Series A Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. (b) Voting Rights. In addition to any other voting rights required by law, the holders of Series A Preferred Shares shall have the following voting rights: (1) Subject to the provision for adjustment hereinafter set forth, each Series A Preferred Share shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (A) declare any dividend on Common Stock payable in shares of Common Stock, (B) subdivide the outstanding shares of Common Stock, or (C) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of Series A Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the II-13 denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) In the event that dividends upon the Series A Preferred Shares shall be in arrears to an amount equal to six full quarterly dividends thereon, the holders of such Series A Preferred Shares shall become entitled to the extent hereinafter provided to vote noncumulatively at all elections of directors of the Corporation, and to receive notice of all stockholders' meetings to be held for such purpose. At such meetings, to the extent that directors are being elected, the holders of such Series A Preferred Shares voting as a class shall be entitled solely to elect two members of the Board of Directors of the Corporation; and all other directors of the Corporation shall be elected by the other stockholders of the Corporation entitled to vote in the election of directors. Such voting rights of the holders of such Series A Preferred Shares shall continue until all accumulated and unpaid dividends thereon shall have been paid or funds sufficient therefor set side, whereupon all such voting rights of the holders of shares of such series shall cease, subject to being again revived from time to time upon the reoccurrence of the conditions above described as giving rise thereto. At any time when such right to elect directors separately as a class shall have so vested, the Corporation may, and upon the written request of the holders of record of not less than 15% of the then outstanding total number of shares of all the Series A Preferred Shares having the right to elect directors in such circumstances shall, call a special meeting of holders of such Series A Preferred Shares for the election of directors. In the case of such a written request, such special meeting shall be held within ninety (90) days after the delivery of such request, and, in either case, at the place and upon the notice provided by law and in the By-laws of the Corporation; provided, that the Corporation shall not be required to call such a special meeting if such request is received less than one hundred twenty (120) days before the date fixed for the next ensuing annual or special meeting of stockholders of the Corporation. Upon the mailing of the notice of such special meeting to the holders of such Series A Preferred Shares, or, if no such meeting be held, then upon the mailing of the notice of the next annual or special meeting of stockholders for the election of directors, the number of directors of the Corporation shall, ipso facto, be increased to the extent, but only to the extent, necessary to provide sufficient vacancies to enable the holders of such Series A Preferred Shares to elect the two directors hereinabove provided for, and all such vacancies shall be filled only by vote of the holders of such Series A Preferred Shares as hereinabove provided. Whenever the number of directors of the Corporation shall have been increased, the number as so increased may thereafter be further increased or decreased in such manner as may be permitted by the By-laws and without the vote of the holders of Series A Preferred Shares, provided that no such action shall impair the right of the holders of Series A Preferred Shares to elect and to be represented by two directors as herein provided. So long as the holders of Series A Preferred Shares are entitled hereunder to voting rights, any vacancy in the Board of Directors caused by the death or resignation of any director elected by the holders of Series A Preferred Shares, shall, until the next meeting of stockholders for the election of directors, in each case be filled II-14 by the remaining director elected by the holders of Series A Preferred Shares having the right to elect directors in such circumstances. Upon termination of the voting rights of the holders of any series of Series A Preferred Shares the terms of office of all persons who shall have been elected directors of the Corporation by vote of the holders of Series A Preferred Shares or by a director elected by such holders shall forthwith terminate. (3) Except as otherwise provided herein, in the Certificate of Incorporation of the Corporation or by law, the holders of Series A Preferred Shares and the holders of Common Stock (and the holders of shares of any other series or class entitled to vote thereon) shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Reacquired Shares. Any Series A Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Series Preferred Stock and may be reissued as part of a new series of Series Preferred Stock to be created by resolution or resolutions of the Board of Directors. (d) Liquidation, Dissolution or Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of Series A Preferred Shares shall be entitled to receive the greater of (1) $100.00 per share, plus accrued dividends to the date of distribution, whether or not earned or declared, or (2) an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock. In the event the Corporation shall at any time after the Rights Declaration Date (A) declare any dividend on Common Stock payable in shares of Common Stock, (B) subdivide the outstanding shares of Common Stock, or (C) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount to which holders of Series A Preferred Shares were entitled immediately prior to such event pursuant to clause (2) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately alter such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (e) Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the Series A Preferred Shares shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (1) declare any dividend on Common Stock payable in shares of Common Stock, (2) subdivide the II-15 outstanding shares of Common Stock, or (3) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount set forth in the Preferred Shares shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (f) No Redemption. The Series A Preferred Shares shall not be redeemable. (g) Ranking. The Series A Preferred Shares shall rank junior to all other series of the Corporation's Series Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. (h) Fractional Shares. Series A Preferred Shares may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and so have the benefit of all other rights of holders of Series A Preferred Shares. FIFTH: Board of Directors. 5.1 Number; Classification. The Board of Directors of the Corporation shall consist of such number of directors, which number shall not be less than 9 or more than 14, as shall be fixed from time so time by resolution of the Board. The Board of Directors shall be divided into three classes, which shall be as nearly equal in number as possible. Directors of each class shall serve for a term of three years and until their successors shall have been elected and qualified. The three initial classes of directors shall be comprised as follows: (a) Class I shall be comprised of directors who shall serve until the annual meeting of stockholders in 1993 and until their successors shall have been elected and qualified. (b) Class II shall be comprised of directors who shall serve until the annual meeting of stockholders in 1994 and until their successors shall have been elected and qualified. (c) Class III shall be comprised of directors who shall serve until the annual meeting of stockholders in 1995 and until their successors shall have been elected and qualified. 5.2 Qualifications. No person shall be appointed or elected a director of the Corporation unless; (a) such person is elected to fill a vacancy in the Board of Directors (including any vacancy resulting from any increase in the authorized number of directors) by a vote of the majority of the Board of Directors then in office, and any II-16 director so elected shall hold office until the next election of the class for which such director shall have been elected and until a successor shall have been elected and qualified; or (b) the name of such person, together with such consents and information concerning present and prior occupations, transactions with the Corporation or its subsidiaries and other matters as may at the time be required by or pursuant to the By-laws, shall have been filed with the Secretary of the Corporation no later than a time faced by or pursuant to the By-laws immediately preceding the annual or special meeting at which such person intends to be a candidate for director. 5.3 Removal of Directors. Directors of the Corporation may only be removed for cause by a vote of the holders of shares entitled to cast a majority of the votes which all stockholders are entitled to cast at an election of directors. No decrease or increase in the size of the Board of Directors shall shorten or otherwise affect the term of any incumbent director. 5.4 Elections of Directors. Elections of directors need not be by written ballot unless the By-laws of the Corporation shall so provide. SIXTH: Unanimous Consent of Stockholders in Lieu of Meeting. Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of all of the outstanding stock entitled to vote to take such action at any annual or special meeting of stockholders of the Corporation and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the books in which proceedings of meetings of stockholders are recorded. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required in this section to the Corporation, written consents signed by the holders of all of the outstanding stock entitled to vote to take such action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. SEVENTH: By-laws. The Board of Directors shall have the power, in addition to the stockholders, to make, alter, or repeal the By-laws of the Corporation. EIGHTH: Liability of Directors. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which II-17 involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or hereafter may be amended, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director to the corporation shall be limited or eliminated to the fullest extent permitted by the Delaware General Corporation Law, as so amended from time to time. Any repeal or modification of this Article EIGHTH shall be by prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. NINTH: Indemnification. The Corporation shall, to the fullest extent permitted by the Delaware General Corporation Law, as the same may be amended and supplemented, indemnify any and all past, present and future directors and officers of the Corporation from and against any and all costs, expenses (including attorneys' fees), damages, judgments, penalties, fines, punitive damages, excise taxes assessed with respect to an employee benefit plan and amounts paid in settlement in connection with any action, suit or proceeding, whether by or in the right of the Corporation, a class of its security holders or otherwise, in which the director or officer may be involved as a party of otherwise, by reason of the fact that such person was serving as a director, officer, employee or agent of the Corporation. TENTH. Fundamental Transactions. 10.1 Stockholder Authorization of Fundamental Transactions Recommended by Management. Whenever any corporate action which constitutes a Fundamental Transaction is to be taken by vote of the stockholders and such Fundamental Transaction has been approved by at least two-thirds of the entire Board of Directors, the proposed Fundamental Transaction shall be authorized upon receiving the minimum vote required for the authorization of such action by statute, after taking into account the express terms of any class or any series of any class of shares of the Corporation with respect to such vote. 10.2 Stockholder Authorization of Fundamental Transactions Not Recommended by Management. Except as provided in Section (1) of this Article TENTH, whenever any corporate action than constitutes a Fundamental Transaction is to be taken by vote of the stockholders, the proposed Fundamental Transaction shall be authorized only upon receiving at least two-thirds of the vote which all voting stockholders, voting as a single class, are entitled to cast thereon and, in addition, the affirmative vote of the number or proportion of shares of any class or any series of any class of shares of the Corporation, if any, as shall at the time be required by statute or the express terms of any such class or series of any class of shares of the Corporation. 10.3 Fundamental Transaction Defined. For the purposes of this Article TENTH, the term "Fundamental Transaction" shall mean: II-18 (a) any of the following, if such action is effected by vote of the stockholders: amendment of this Certificate of Incorporation; adoption, amendment or repeal of the By-laws; a change in the number of directors constituting the entire Board of Directors; or removal of one or more directors; or (b) any of the following, if any such transaction requires the approval of the Stockholders under this Certificate of Incorporation of the Corporation as then in effect or the Delaware General Corporation Law as then in effect with respect to the Corporation: the sale, lease, exchange or other disposition of all or substantially all of the assets of the Corporation; or the merger, consolidation, division, reorganization, recapitalization, dissolution, liquidation, or winding up of the Corporation. ELEVENTH: Amendments. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders are granted subject to this reservation. II-19 EX-3.2 4 w56746ex3-2.txt AMENDED AND RESTATED CERTIFICATE OF INC. EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF RADIAN GROUP INC. ---------------------------------------- Under Section 242 of the General Corporation Law of the State of Delaware ---------------------------------------- RADIAN GROUP INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "GCL"), for the purpose of amending its Restated Certificate of Incorporation pursuant to Section 242 of the GCL does hereby certify as follows: 1. The first sentence of ARTICLE FOURTH of the Restated Certificate of Incorporation of the Corporation is hereby amended and restated in its entirety as follows: "FOURTH: Capital Stock. The Corporation shall be authorized to issue two hundred twenty million (220,000,000) shares of capital stock, of which two hundred million (200,000,000) shares shall be Common Stock, par value $.001 per share, and twenty million (20,000,000) shares shall be Preferred Stock, par value $.001 per share." 2. The amendment set forth above has been duly adopted in accordance with Section 242 of the GCL. 3. This Certificate of Amendment of the Restated Certificate of Incorporation of the Corporation shall be effective at 5:00p.m. as of the 14th day of June, 2001. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be duly adopted and executed in its corporate name and on its behalf by its duly authorized officer as of the 14th day of June, 2001. RADIAN GROUP INC. By: /s/ Howard S. Yaruss --------------------------------------- Name: Howard S. Yaruss Title: Secretary & S.V.P. EX-4.2 5 w56746ex4-2.txt CERTIFICATE OF DESIGNATIONS PREFERRED STOCK EXHIBIT 4.2 CERTIFICATE OF DESIGNATIONS OF CMAC INVESTMENT CORPORATION Pursuant to Section 151(g) of The Delaware General Corporation Law 1. CMAC Investment Corporation, a Delaware corporation (the "Corporation"), is authorized to issue two classes of shares known as Common Stock and Preferred Stock. 2. The Board of Directors of the Corporation is authorized by the Certificate of Incorporation of the Corporation, as amended (the "Restated Certificate") to establish and designate one or more series of the Preferred Stock and to fix full, limited, multiple or fractional, or no voting rights, and the designations, preferences, qualifications, privileges, limitations, restrictions, options, conversion rights and other special or relative rights thereof. 3. The Restated Certificate does not set forth any such powers, designations, preferences or rights or qualifications, limitations or restrictions of any shares or series of the Preferred Stock. 4. Exhibit A is a copy of the resolution adopted on the 26th day of October, 1992, by the Board of Directors of the Corporation designating the $4.125 Preferred Stock as a series of the Preferred Stock. 5. The number of shares constituting the $4.125 Preferred Stock shall be 800,000. IN WITNESS WHEREOF, the Corportion has caused this Certificate of Designations to be duly adopted in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware and the Restated Certificate and to be executed in its corporate name on the 26th day of October, 1992. CMAC INVESTMENT CORPORATION By: /s/ C. Robert Quint ------------------- Senior Vice President Attest: /s/ Thomas J. Shelly - -------------------- Secretary EX-4.4 6 w56746ex4-4.txt STANDSTILL AND VOTING AGREEMENT EXHIBIT 4.4 STANDSTILL AND VOTING AGREEMENT THIS STANDSTILL AND VOTING AGREEMENT, dated as of October ___, 1992 (the "Agreement"), among CMAC INVESTMENT CORPORATION, a Delaware corporation ("Investment"), and the Reliance Group Holdings, Inc., a Delaware corporation ("Reliance"). WINESSETH: WHEREAS, upon the completion of Investment's initial public offering (assuming no exercise of the underwriters' over-allotment options) Reliance will be the beneficial owner of 1,300,000 shares of the Common Stock of Investment, par value $.001 per share (such class of Common Stock) is referred to herein as the "Investment Common Stock"); and WHEREAS, Reliance and Investment wish to provide for a constructive and mutually beneficial relationship. NOW, THEREFORE, intending to be legally bound, the parties hereto agree as follows: Section 1. Certain Definitions. As used in this Agreement, the following terms shall have the following meanings: 1.1. "Investment Voting Securities" shall mean Investment Common Stock, any other class of Investment securities entitled to vote generally for the election of directors, and any other securities, warrants or options or rights of any nature (whether or not issued by Investment) which are convertible into, exchangeable for, or exercisable for the purchase of, or which give the holder thereof any rights in respect of Investment Common Stock or any other class of Investment securities entitled to vote generally for the election of directors. "investment Voting Securities" shall not include shares of Investment's $4.125 Preferred Stock. 1.2. "Reliance Entity" shall mean Reliance or any person directly or indirectly controlling, controlled by or under common control with Reliance. 1.3. "Stockholder Issue" shall mean the election of Investment's directors, or any charter or by-law amendment acquisition or disposition of substantial assets (by way of merger, consolidation or otherwise), change in capitalization, liquidation, or other action (whether or not arising in the ordinary course of business of Investment) which, in accordance with the Delaware General Corporation Law or applicable rules of the New York Stock Exchange, is submitted to a vote of the holders of the Investment Common Stock. 1.4. "Commencement Date" shall mean the closing date for the initial public offering of the Investment Common Stock. 1.5. "Termination Date" shall mean the tenth anniversary of the Commencement Date. 1.6. The concept of "beneficial ownership" and the terms "person" and "group" shall have the meanings defined in Regulation 13D/G adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Section 2. Representations and Warranties of Investment. Investment represents and warrants that: (a) Investment is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware, with corporate power to own its properties and to conduct its business as now conducted. (b) Investment has full right, power and authority to enter into this Agreement and perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by Investment and constitutes a valid and binding agreement of Investment enforceable in accordance with its terms. (c) Neither the execution and delivery of this Agreement nor the performance by Investment of its obligations hereunder will conflict with or result in a breach of or constitute a default under any law, rule, regulation, judgment, order or decree of any court, arbitrator or governmental agency or instrumentality or of Investment's corporate charter or by-laws or of any agreement or instrument to which it is a party or subject or by which its property is bound or affected. Section 3. Representations and Warranties of Reliance. Reliance represents and warrants to Investment as follows: (a) Reliance is a corporation duly organized validly existing and in good standing under the laws of the State of Delaware. (b) Reliance has full right, power and authority to enter into this Agreement and perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by Reliance and constitutes a valid and binding agreement of Reliance enforceable in accordance with its terms hereof. (c) Neither the execution and delivery of this Agreement nor the performance by Reliance of its obligations hereunder will conflict with or conflict with or result in a breach of or constitute a default under any law, rule, regulation, judgment, order or decree of any court, arbitrator or governmental agency or instrumentality or of any agreement or instrument to which it is a party or subject or by which its property is bound or affected, or of the corporate charter, by-laws or other governing document of Reliance. Section 4. Covenants of Reliance with Respect to Investment Voting Securities and Other Matters. After the Commencement Date and prior to the Termination Date and subject to the further provisions hereof: 4.1. Covenant With Respect to Acquisition of Investment Securities. Subject to the further provisions of this Section 4.1, no Reliance Entity shall, directly or indirectly, acquire, offer to acquire, agree to acquire, become the beneficial owner of or obtain any rights in respect of any securities issued by Investment or take any action in furtherance thereof except for (i) shares of Investment Common Stock and Investment $4.125 Preferred Stock beneficially owned on the Commencement Date, or (ii) securities distributed by Investment by means of stock dividends or other distributions made available to holders of Investment's securities. Notwithstanding the foregoing sentence, any Reliance Entity may acquire additional shares of Common Stock of Investment if, after effect to such acquisition, offer or agreement or other action, the aggregate voting power in the election of directors of all Investment Voting Securities then beneficially owned by all Reliance Entities would not be greater than 20% (such percentage herein called the "Maximum Percentage") of such total combined voting power of all Investment Voting Securities then outstanding. For purposes of calculating compliance with the Maximum Percentage, all Investment Voting Securities which are subject of an offer, agreement, arrangement or understanding pursuant to which any Reliance Entity may obtain beneficial ownership of such securities shall be deemed to be beneficially owned by such Reliance Entity. 4.2. Covenant With Respect to Voting of Investment Voting Securities. Each Reliance Entity shall take such action as may be required so that all Investment Voting Securities beneficially owned by it are voted in the identical percentages as are all Investment Voting Securities which are beneficially owned by Reliance Entity and which are voted with respect to any particular Stockholder Issue. Each Reliance Entity which beneficially owns Investment Voting Securities, shall be present or cause the holder of record to be present, in person or by proxy, at all meetings of stockholders of Investment so that all Investment Voting Securities beneficially owned by such Reliance Entity may be counted for the purpose of determining the presence of a quorum at such meetings. 4.3. Stock Pooling. No Reliance Entity shall join a partnership, limited partnership, syndicate or other group, or otherwise act in concert with any other person, for the purpose of acquiring Investment Voting Securities, or otherwise become a member of a "group" within the meaning of Section 13 (d) (3) of the Exchange Act having such purpose (in each case other than solely with Reliance Entities). Section 5. Terms of Agreement; Certain Provisions Regarding Termination. 5.1. Term of Agreement. Except as otherwise provided in Section 5.2 the respective covenants and agreements of Reliance contained in this Agreement will continue in full force and effect until the Termination Date and all of the respective representations and warranties of the parties set forth herein shall be continuing representations and warranties. 5.2 Certain Provisions Regarding Temporary Termination. If the Reliance Entities shall, at any time, beneficially own in the aggregate shares representing less than 5% of the voting power of all Investment Voting Securities, the agreements and obligations of Reliance contained in Section 4.2 hereof shall cease until such time as any Reliance Entity shall purchase or otherwise acquire beneficial ownership of Investment Voting Securities so that the Reliance Entities shall in the aggregate beneficially own Investment Voting Securities representing 5% or more of the voting power of all Investment Voting Securities. From and after such times as the Reliance Entities own in the aggregate Investment Voting Securities representing 5% or more of the voting power of the Investment Voting Securities, all such restrictions upon and covenants of Reliance set forth Section in 4.2 of this Agreement shall again be applicable. All percentages in this Section shall be calculated in accordance with the provisions of Section 4.1 hereof. Section 6. Specific Enforcement. Reliance acknowledges and agrees that (i) the provisions of this Agreement are reasonable and necessary to protect the proper and legitimate interest of Investment, and (ii) Investment would be irreparably damaged in the event any of the provisions of this Agreement were not performed by Reliance in accordance with their specific terms or were otherwise breached. It is accordingly agreed that Investment shall be entitled to preliminary and permanent injunctive relief to prevent breaches of the provisions of this Agreement, without the necessity of proving actual damages, and to enforce specifically the terms and provisions hereof and thereof in any court of the United States or any state thereof having jurisdiction, which rights shall be cumulative and in addition to any other remedy to which Investment may be entitled hereunder or at law or equity. 7. General Provisions. 7.1. Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of Delaware without giving effect to any conflicts of laws provisions. 7.2. Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein and all legal process in regard hereto shall be validly given, made or served, if in writing and delivered personally, by facsimile or sent by registered mail, postage prepaid, if to: Investment: CMAC Investment Corporation 8 Penn Center Philadelphia, PA 19103-2197 Facsimile: (215) 496-0346 Attention: Chairman Reliance: Reliance Group Holdings, Inc. Park Avenue Plaza 55 East 52nd Street, 29th Floor New York, NY 10055 Facsimile: (212) 909-1864 Attention: General Counsel or such other address or facsimile number as Investment or Reliance may, from time to time, designate in a written notice given in a like manner. Notice given by facsimile shall be deemed delivered on the day the sender receives facsimile confirmation that such notice was received at the facsimile number of the addressee. Notice given by registered mail as set out above shall be deemed delivered when the same is received by the addressee thereof. 7.3. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 7.4. Amendments. This Agreement may be amended only by an agreement in writing signed by each of the parties hereto. 7.5 Descriptive Readings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. 7.6 Counterparts. For the convenience of the parties, any number of counterparts of this Agreement may be executed by any party hereto and each such executed counterpart shall be, and shall be deemed to be, an original instrument. 7.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto intending to be legally bound have caused this Standstill and Voting Agreement to be duly executed as of the date first above written. CMAC INVESTMENT CORPORATION By: _____________________________________ Title RELIANCE GROUP HOLIDNGS, INC. By: _____________________________________ Title JOINDER Commonwealth Land Title Insurance Company, a "Reliance Entity" as defined in the foregoing agreement, hereby acknowledges, and agrees so long as it is a Reliance Entity to be bound as if it were a party to, the foregoing Standstill and Voting Agreement. COMMONWEALTH LAND TITLE INSURANCE COMPANY By: _____________________________________ Title EX-4.10 7 w56746ex4-10.txt INDENTURE DATED JANUARY 11,2002 EXHIBIT 4.10 EXHIBIT 4.11 CONFORMED COPY RADIAN GROUP INC. 2.25% SENIOR CONVERTIBLE DEBENTURES DUE 2022 INDENTURE DATED JANUARY 11, 2002 THE BANK OF NEW YORK, TRUSTEE TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE........................................ 1 Section 1.1 Definitions................................................................... 1 Section 1.2 Other Definitions............................................................. 4 Section 1.3 Incorporation by Reference of TIA............................................. 5 Section 1.4 Rules of Construction......................................................... 5 Section 1.5 Acts of Holders............................................................... 6 ARTICLE II THE SECURITIES................................................................... 7 Section 2.1 Form and Dating............................................................... 7 Section 2.2 Execution and Authentication.................................................. 7 Section 2.3 Registrar, Paying Agent, Conversion Agent and Calculation Agent............... 8 Section 2.4 Paying Agent to Hold Money and Securities in Trust............................ 8 Section 2.5 Securityholder Lists.......................................................... 9 Section 2.6 Transfer and Exchange......................................................... 9 Section 2.7 Replacement Securities........................................................ 10 Section 2.8 Outstanding Securities; Determinations of Holders' Action..................... 11 Section 2.9 Temporary Securities.......................................................... 11 Section 2.10 Cancellation................................................................. 12 Section 2.11 Persons Deemed Owners........................................................ 12 Section 2.12 Global Securities............................................................ 12 Section 2.13 CUSIP Numbers................................................................ 16 Section 2.14 Ranking...................................................................... 16 ARTICLE III REDEMPTION AND PURCHASES........................................................ 17 Section 3.1 Company's Right to Redeem; Notices to Trustee................................. 17 Section 3.2 Selection of Securities to Be Redeemed........................................ 17 Section 3.3 Notice of Redemption.......................................................... 17 Section 3.4 Effect of Notice of Redemption................................................ 18 Section 3.5 Deposit of Redemption Price................................................... 18 Section 3.6 Securities Redeemed in Part................................................... 18 Section 3.7 Purchase of Securities by the Company at Option of the Holder................. 18 Section 3.8 Purchase of Securities at Option of the Holder upon Change of Control......... 20 Section 3.9 Company's Right to Elect Manner of Payment of Purchase Price and Change of Control Purchase Price for Payment........................................ 24 Section 3.10 Effect of Purchase Notice or Change of Control Purchase Notice............... 28 Section 3.11 Deposit of Purchase Price or Change of Control Purchase Price................ 29 Section 3.12 Securities Purchased in Part................................................. 29 Section 3.13 Covenant to Comply With Securities Laws Upon Purchase of Securities.......... 30 Section 3.14 Repayment to the Company..................................................... 30 ARTICLE IV COVENANTS........................................................................ 30 Section 4.1 Payment of Securities......................................................... 30 Section 4.2 SEC and Other Reports......................................................... 30 Section 4.3 Compliance Certificate........................................................ 31 Section 4.4 Further Instruments and Acts.................................................. 31 Section 4.5 Maintenance of Office or Agency............................................... 31 Section 4.6 Delivery of Certain Information............................................... 31
Page ---- Section 4.7 Payment of Taxes and Other Claims............................................. 32 Section 4.8 Registration Rights........................................................... 32 Section 4.9 Tax Treatment of Securities................................................... 32 ARTICLE V SUCCESSOR CORPORATION............................................................. 32 Section 5.1 When Company May Merge or Transfer Assets..................................... 32 ARTICLE VI DEFAULTS AND REMEDIES............................................................ 33 Section 6.1 Events of Default............................................................. 33 Section 6.2 Acceleration.................................................................. 35 Section 6.3 Other Remedies................................................................ 35 Section 6.4 Waiver of Past Defaults....................................................... 35 Section 6.5 Control by Majority........................................................... 36 Section 6.6 Limitation on Suits........................................................... 36 Section 6.7 Rights of Holders to Receive Payment.......................................... 36 Section 6.8 Collection Suit by Trustee.................................................... 36 Section 6.9 Trustee May File Proofs of Claim.............................................. 36 Section 6.10 Priorities................................................................... 37 Section 6.11 Undertaking for Costs........................................................ 37 Section 6.12 Waiver of Stay, Extension or Usury Laws...................................... 38 ARTICLE VII TRUSTEE......................................................................... 38 Section 7.1 Duties of Trustee............................................................. 38 Section 7.2 Rights of Trustee............................................................. 39 Section 7.3 Individual Rights of Trustee.................................................. 40 Section 7.4 Trustee's Disclaimer.......................................................... 40 Section 7.5 Notice of Defaults............................................................ 41 Section 7.6 Reports by Trustee to Holders................................................. 41 Section 7.7 Compensation and Indemnity.................................................... 41 Section 7.8 Replacement of Trustee........................................................ 42 Section 7.9 Successor Trustee by Merger................................................... 42 Section 7.10 Eligibility; Disqualification................................................ 43 Section 7.11 Preferential Collection of Claims Against Company............................ 43 ARTICLE VIII DISCHARGE OF INDENTURE......................................................... 43 Section 8.1 Discharge of Liability on Securities.......................................... 43 Section 8.2 Repayment to the Company...................................................... 43 ARTICLE IX AMENDMENTS....................................................................... 43 Section 9.1 Without Consent of Holders.................................................... 43 Section 9.2 With Consent of Holders....................................................... 44 Section 9.3 Compliance with TIA........................................................... 45 Section 9.4 Revocation and Effect of Consents, Waivers and Actions........................ 45 Section 9.5 Notation on or Exchange of Securities......................................... 46 Section 9.6 Trustee to Sign Supplemental Indentures....................................... 46 Section 9.7 Effect of Supplemental Indentures............................................. 46 ARTICLE X CONVERSIONS....................................................................... 46 Section 10.1 Conversion Privilege......................................................... 46 Section 10.2 Conversion Procedure; Conversion Price; Fractional Shares.................... 48 Section 10.3 Adjustment of Conversion Price for Common Stock.............................. 49 Section 10.4 Consolidation or Merger of the Company....................................... 57 Section 10.5 Notice of Adjustment......................................................... 58 Section 10.6 Notice in Certain Events..................................................... 59
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Page ---- Section 10.7 Company To Reserve Stock: Registration; Listing.............................. 59 Section 10.8 Taxes on Conversion.......................................................... 60 Section 10.9 Conversion After Record Date................................................. 60 Section 10.10 Company Determination Final................................................. 60 Section 10.11 Responsibility of Trustee for Conversion Provisions......................... 60 Section 10.12 Unconditional Right of Holders to Convert................................... 61 ARTICLE XI MISCELLANEOUS.................................................................... 61 Section 11.1 Trust Indenture Act Controls................................................. 61 Section 11.2 Notices...................................................................... 61 Section 11.3 Communication by Holders with Other Holders.................................. 62 Section 11.4 Certificate and Opinion as to Conditions Precedent........................... 62 Section 11.5 Statements Required in Certificate or Opinion................................ 62 Section 11.6 Separability Clause.......................................................... 62 Section 11.7 Rules by Trustee, Paying Agent, Conversion Agent and Registrar.............. 62 Section 11.8 Legal Holidays............................................................... 63 Section 11.9 Governing Law................................................................ 63 Section 11.10 No Recourse Against Others.................................................. 63 Section 11.11 Successors.................................................................. 63 Section 11.12 Multiple Originals.......................................................... 63
EXHIBIT A Form of Global Security EXHIBIT B Form of Certificated Security EXHIBIT C Transfer Certificate iii INDENTURE dated as of January 11, 2002 between RADIAN GROUP, INC., a Delaware corporation ("Company"), and THE BANK OF NEW YORK, a New York banking corporation ("Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 2.25% Senior Convertible Debentures due 2022: ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "144A Global Security" means a permanent Global Security in the form of the Security attached hereto as Exhibit A, and that is deposited with and registered in the name of the Depositary, representing Securities sold in reliance on Rule 144A under the Securities Act. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any specified person means the power to direct or cause the direction of the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Amerin Guaranty" shall mean Amerin Guaranty Corporation, an Illinois Corporation. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, in each case to the extent applicable to such transaction and as in effect from time to time. "Asset Guaranty" shall mean Asset Guaranty Insurance Company, a New York company. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of such board. "Board Resolution" means a resolution of the Board of Directors. "Business Day" means, with respect to any Security, a day that in the City of New York, is not a day on which banking institutions are authorized by law or regulation to close. "Calculation Agent" shall mean initially The Bank of New York and its successors and assigns. "Capital Stock" for any corporation means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) stock issued by that corporation. "Certificated Securities" means Securities that are in the form of the Securities attached hereto as Exhibit B. 2 "Common Stock" shall mean the Common Stock, $0.001 par value per share, of the Company existing on the date of this Indenture or any other shares of Capital Stock of the Company into which such Common Stock shall be reclassified or changed. "Company" means the party named as the "Company" in the first Section of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any two Officers. "Conversion Price" means initially $57.75, subject to adjustment as set forth herein. "Corporate Trust Office" means the principal office of the Trustee at which at any time its corporate trust business shall be administered, which office at the date hereof is located at 101 Barclay Street, Floor 21 West, New York, NY 10286, Attention: Corporate Trust Administration, or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor Trustee (or such other address as a successor Trustee may designate from time to time by notice to the Holders and the Company). "Default" means an Event of Default. "Enhance Reinsurance" shall mean Enhance Reinsurance Company, a New York company. "Global Securities" means Securities that are in the form of the Securities attached hereto as Exhibit A, and that are registered in the register of Securities in the name of a Depositary or a nominee thereof, and to the extent that such Securities are required to bear the Legend required by Section 2.6, such Securities will be in the form of a 144A Global Security. "Holder" or "Securityholder" means a person in whose name a Security is registered on the Registrar's books. "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof, including the provisions of the TIA that are deemed to be a part hereof. "Issue Date" of any Security means the date on which the Security was originally issued or deemed issued as set forth on the face of the Security. "Non-Recourse Debt" means indebtedness of the Company or any Designated Subsidiary for borrowed money as to which the lenders have recourse only to specified assets of the Company or any Designated Subsidiary, other than the capital stock of a Designated Subsidiary. "NYSE" means The New York Stock Exchange, Inc. "Officer" means the Chairman of the Board, any Vice Chairman, the President, any Vice President, the Treasurer, the Secretary or any Assistant Treasurer or Assistant Secretary of the Company. "Officers' Certificate" means a written certificate containing the information specified in Sections 11.4 and 11.5, signed in the name of the Company by any two Officers, and delivered to the 3 Trustee. An Officers' Certificate given pursuant to Section 4.3 shall be signed by the principal executive officer, principal financial officer or principal accounting officer of the Company but need not contain the information specified in Sections 11.4 and 11.5. "Opinion of Counsel" means a written opinion containing the information specified in Sections 11.4 and 11.5, from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of, or counsel to, the Company or the Trustee. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof. "Radian Group" shall mean Radian Group Inc. and its subsidiaries. "Radian Guaranty" shall mean Radian Guaranty Inc., a Pennsylvania company. "Redemption Date" or "redemption date" shall mean the date specified in a notice of redemption on which the Securities may be redeemed in accordance with the terms of the Securities and this Indenture. "Redemption Price" or "redemption price" shall have the meaning set forth in Section 5 of the Securities. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date hereof, among the Company, Banc of America Securities LLC and Lehman Brothers Inc. "Responsible Officer" shall mean, when used with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Restricted Security" means a Security required to bear the restrictive legend set forth in the form of Security set forth in Exhibits A and B of this Indenture. "Rule 144A" means Rule 144A under the Securities Act (or any successor provision), as it may be amended from time to time. "SEC" means the Securities and Exchange Commission. "Securities" means any of the Company's 2.25% Senior Convertible Debentures due 2022, as amended or supplemented from time to time, issued under this Indenture. "Securityholder" or "Holder" means a person in whose name a Security is registered on the Registrar's books. "Stated Maturity", when used with respect to any Security, means January 1, 2022. 4 "Subsidiary" means any person of which at least a majority of the outstanding Voting Stock shall at the time directly or indirectly be owned or controlled by the Company or by one or more Subsidiaries or by the Company and one or more Subsidiaries. "TIA" means the Trust Indenture Act of 1939 as in effect on the date of this Indenture, provided, however, that in the event the TIA is amended after such date, TIA means, to the extent required by any such amendment, the TIA as so amended. "Trading Day" means a day during which trading in securities generally occurs on the NYSE or, if the Common Stock is not listed on the NYSE, on the principal other national or regional securities exchange on which the Common Stock then is listed or, if the Common Stock is not listed on a national or regional securities exchange, on the National Association of Securities Dealers Automated Quotation System or, if the Common Stock is not quoted on the National Association of Securities Dealers Automated Quotation System, on the principal other market on which the Common Stock is then traded. "Trustee" means the party named as the "Trustee" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "Voting Stock" of a person means Capital Stock of such person of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such person (irrespective of whether or not at the time Capital Stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). Section 1.2 Other Definitions
Term Section: Defined in: "Agent Members"............................ 2.12(e) "Applicable Stock.......................... 3.8(c) "beneficial owner"......................... 3.8(a) "cash"..................................... 3.9(a) "Change of Control"........................ 3.8(a) "Change of Control Purchase Date".......... 3.8(a) "Change of Control Purchase Notice"........ 3.8(c) "Change of Control Purchase Price"......... 3.8(a) "Company Notice"........................... 3.9(d) "Company Notice Date"...................... 3.9(b) "Continuing Director"...................... 3.8(a) "Conversion Agent"......................... 2.3 "Conversion Period"........................ 10.1(b) "Conversion Rate".......................... 10.1(b) "Conversion Value"......................... 10.1(b) "Depositary"............................... 2.1(a) "Designated Subsidiary" ................... 6.1 "Event of Default"......................... 6.1 "Ex-Dividend Time"......................... 10.1(b) "Excess Amount" ........................... 10.3(f)
5 "Exchange Act"............................. 2.12(e) "Expiration Time" ......................... 10.3(f) "Institutional Accredited Investors"....... 2.12(a)(iv) "Legal Holiday"............................ 11.8 "Legend"................................... 2.6(f) "Market Price"............................. 3.9(c) "Non-Electing Share" ...................... 10.4 "Notice of Default"........................ 6.1 "Paying Agent"............................. 2.3 "Purchase Date"............................ 3.7(a) "Purchase Notice".......................... 3.7(a) "Purchase Price"........................... 3.7(a) "QIB"...................................... 2.1(a) "Reference Period" ........................ 10.3(d)(2) "Registrar"................................ 2.3 "Rule 144A Information".................... 4.6 "Sale Price"............................... 3.9(c) "Securities Act"........................... 2.6(f) "Spin-Off" ................................ 10.3(d)(2) "Trading Price"............................ 10.1(b) "Trigger Event" ........................... 10.3(d)(3)
Section 1.3 Incorporation by Reference of TIA. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. Section 1.4 Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as in effect from time to time; (3) "or" is not exclusive; 6 (4) "including" means including, without limitation; and (5) words in the singular include the plural, and words in the plural include the singular. Section 1.5 Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company, as described in Section 11.2. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to such officer the execution thereof. Where such execution is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer's authority. The fact and date of the execution of any such instrument or writing, or the authority of the person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The principal amount and serial number of any Security and the ownership of Securities shall be proved by the register for the Securities. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (e) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. 7 ARTICLE II THE SECURITIES Section 2.1 Form and Dating The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibits A and B, which are a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage (provided that any such notation, legend or endorsement required by usage is in a form acceptable to the Company). The Company shall provide any such notations, legends or endorsements to the Trustee in writing. Each Security shall be dated the date of its authentication. (a) 144A Global Securities. Securities offered and sold within the United States to qualified institutional buyers as defined in Rule 144A ("QIBs") in reliance on Rule 144A shall be issued, initially in the form of a 144A Global Security, which shall be deposited with the Trustee at its Corporate Trust Office, as custodian for the Depositary (as defined below) and registered in the name of The Depository Trust Company ("DTC") or the nominee thereof (DTC, or any successor thereto, and any such nominee being hereinafter referred to as the "Depositary"), duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the 144A Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary as hereinafter provided. (b) Global Securities in General. Each Global Security shall represent such of the outstanding Securities as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, redemptions, repurchases and conversions. Any adjustment of the aggregate principal amount of a Global Security to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee in accordance with instructions given by the Holder thereof as required by Section 2.12 hereof and shall be made on the records of the Trustee and the Depositary. (c) Book-Entry Provisions. This Section 2.1(c) shall apply only to Global Securities deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(c), authenticate and deliver initially one or more Global Securities that (a) shall be registered in the name of the Depositary, (b) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (c) shall be substantially in the form of Exhibit A attached hereto. (d) Certificated Securities. Securities not issued as interests in the Global Securities will be issued in certificated form substantially in the form of Exhibit B attached hereto. Section 2.2 Execution and Authentication. The Securities shall be executed on behalf of the Company by any Officer. The signature of the Officer on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at the time of the execution of the Securities Officers shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of authentication of such Securities. 8 No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized signatory, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. The Trustee shall authenticate and deliver the Securities for original issue in an aggregate principal amount of up to $220,000,000 upon one or more Company Orders without any further action by the Company (other than as contemplated in Section 11.4 and Section 11.5 hereof). The aggregate principal amount of the Securities due at the Stated Maturity thereof outstanding at any time may not exceed the amount set forth in the foregoing sentence, except upon the accrual of contingent interest as contemplated in the form of Security attached hereto as Exhibit A. The Securities shall be issued only in registered form without coupons and only in denominations of $1,000 of principal amount and any integral multiple of $1,000. Section 2.3 Registrar, Paying Agent, Conversion Agent and Calculation Agent The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented for purchase or payment ("Paying Agent") and an office or agency where Securities may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars, one or more additional paying agents and one or more additional conversion agents. The term Paying Agent includes any additional paying agent, including any named pursuant to Section 4.5. The term Conversion Agent includes any additional conversion agent, including any named pursuant to Section 4.5. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent, Conversion Agent, Calculation Agent or co-registrar (in each case, if such Registrar, agent or co-registrar is a Person other than the Trustee). The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.7. The Company or any Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar, Conversion Agent or co-registrar. The Company initially appoints the Trustee as Registrar, Conversion Agent, Calculation Agent and Paying Agent in connection with the Securities. Section 2.4 Paying Agent to Hold Money and Securities in Trust. Except as otherwise provided herein, on or prior to each due date of payments in respect of any Security, the Company shall deposit with the Paying Agent a sum of money (in immediately available funds if deposited on the due date) or shares of Common Stock sufficient to make such payments when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money and shares of Common Stock held by the Paying Agent for the making of payments in respect of the Securities and shall promptly notify a Responsible Officer of the Trustee of any default by the Company in making any such payment. At any time during the continuance of any such default, the Paying Agent shall, upon the written request of the Trustee, forthwith pay to the Trustee all money and shares of Common Stock so held in trust. If the Company, a Subsidiary or an Affiliate of either of them acts as Paying Agent, it shall segregate the money and shares of Common Stock held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money and shares of 9 Common Stock held by it to the Trustee and to account for any funds and Common Stock disbursed by it. Upon doing so, the Paying Agent shall have no further liability for the money or shares of Common Stock. Section 2.5 Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall cause to be furnished to the Trustee at least semiannually on January 1 and July 1 a listing of Securityholders dated within 15 days of the date on which the list is furnished and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. Section 2.6 Transfer and Exchange. (a) Subject to Section 2.12 hereof, upon surrender for registration of transfer of any Security, together with a written instrument of transfer satisfactory to the Registrar duly executed by the Securityholder or such Securityholder's attorney duly authorized in writing, at the office or agency of the Company designated as Registrar or co-registrar pursuant to Section 2.3, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denomination or denominations, of a like aggregate principal amount. The Company shall not charge a service charge for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges that may be imposed in connection with the transfer or exchange of the Securities from the Securityholder requesting such transfer or exchange. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denomination or denominations, of a like aggregate principal amount upon surrender of the Securities to be exchanged, together with a written instrument of transfer satisfactory to the Registrar duly executed by the Securityholder or such Securityholder's attorney duly authorized in writing, at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. The Company shall not be required to make, and the Registrar need not register, transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities in respect of which a Purchase Notice or Change of Control Purchase Notice has been given and not withdrawn by the Holder thereof in accordance with the terms of this Indenture (except, in the case of Securities to be purchased in part, the portion thereof not to be purchased) or any Securities for a period of 15 days before the mailing of a notice of redemption of Securities to be redeemed. (b) Notwithstanding any provision to the contrary herein, so long as a Global Security remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Security, in whole or in part, shall be made only in accordance with Section 2.12 and this Section 2.6(b). Transfers of a Global Security shall be limited to transfers of such Global Security in whole or in part, to the Depositary, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee. (c) Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the register for the Securities. (d) Any Registrar appointed pursuant to Section 2.3 hereof shall provide to the Trustee such information as the Trustee may reasonably require in connection with the delivery by such Registrar of Securities upon transfer or exchange of Securities. 10 (e) No Registrar shall be required to make registrations of transfer or exchange of Securities during any periods designated in the text of the Securities or in this Indenture as periods during which such registration of transfers and exchanges need not be made. (f) If Securities are issued upon the transfer, exchange or replacement of Securities subject to restrictions on transfer and bearing the legends set forth on the forms of Security attached hereto as Exhibits A and B setting forth such restrictions (collectively, the "Legend"), or if a request is made to remove the Legend on a Security, the Securities so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is delivered to the Company and the Registrar such satisfactory evidence, which shall include an opinion of counsel, as may be reasonably required by the Company and the Registrar and the Trustee (if not the same Person as the Trustee), that neither the Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A or Rule 144 under the Securities Act of 1933, as amended ("Securities Act") or that such Securities are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon (i) provision of such satisfactory evidence, or (ii) notification by the Company to the Trustee and Registrar of the sale of such Security pursuant to a registration statement that is effective at the time of such sale, the Trustee, at the written direction of the Company, shall authenticate and deliver a Security that does not bear the Legend. If the Legend is removed from the face of a Security and the Security is subsequently held by the Company or an Affiliate of the Company, the Legend shall be reinstated. (g) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Agent Members or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Section 2.7 Replacement Securities. If (a) any mutilated Security is surrendered to the Trustee, or (b) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its written request the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount, bearing a certificate number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, or is about to be purchased by the Company pursuant to Article 3 hereof, the Company in its discretion may, instead of issuing a new Security, pay or purchase such Security, as the case may be. Upon the issuance of any new Securities under this Section 2.7, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section 2.7 in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by 11 anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section 2.7 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 2.8 Outstanding Securities; Determinations of Holders' Action. Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those paid pursuant to Section 2.7, those delivered to it for cancellation and those described in this Section 2.8 as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate thereof holds the Security; provided, however, that in determining whether the Holders of the requisite principal amount of Securities have given or concurred in any request, demand, authorization, direction, notice, consent, waiver, or other Act hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other Act, only Securities which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Subject to the foregoing, only Securities outstanding at the time of such determination shall be considered in any such determination (including, without limitation, determinations pursuant to Articles 6 and 9). If a Security is replaced pursuant to Section 2.7, it ceases to be outstanding. If the Paying Agent holds, in accordance with this Indenture, on a Redemption Date, or on the Business Day following a Purchase Date or a Change of Control Purchase Date, or on Stated Maturity, money or securities, if permitted hereunder, sufficient to pay Securities payable on that date, then immediately after such Redemption Date, Purchase Date, Change of Control Purchase Date or Stated Maturity, as the case may be, such Securities shall cease to be outstanding and interest, including contingent interest and additional interest, if any, on such Securities shall cease to accrue; provided, that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made. If a Security is converted in accordance with Article 10, then from and after the time of conversion on the date of conversion, such Security shall cease to be outstanding and interest, including contingent interest and additional interest, if any, shall cease to accrue on such Security. Section 2.9 Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 2.3, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of 12 definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 2.10 Cancellation. All Securities surrendered for payment, purchase by the Company pursuant to Article 3, conversion, redemption or registration of transfer or exchange shall, if surrendered to any person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. The Company may not issue new Securities to replace Securities it has paid or delivered to the Trustee for cancellation or that any Holder has converted pursuant to Article 10. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of by the Trustee in accordance with the Trustee's customary procedure. Section 2.11 Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of the Security or the payment of any Redemption Price, Purchase Price or Change of Control Purchase Price in respect thereof, and interest thereon, for the purpose of conversion and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 2.12 Global Securities. (a) Notwithstanding any other provisions of this Indenture or the Securities, (A) transfers of a Global Security, in whole or in part, shall be made only in accordance with Section 2.6 and Section 2.12(a)(i), (B) transfers of a beneficial interest in a Global Security for a Certificated Security shall comply with Section 2.6, Section 2.12(a)(ii) below and Section 2.12(e)(1) below, and (C) transfers of a Certificated Security shall comply with Section 2.6 and Sections 2.12(a)(iii) and (iv) below. (i) Transfer of Global Security. A Global Security may not be transferred, in whole or in part, to any person other than the Depositary or a nominee or any successor thereof, and no such transfer to any such other person may be registered; provided that this clause (i) shall not prohibit any transfer of a Security that is issued in exchange for a Global Security but is not itself a Global Security. No transfer of a Security to any person shall be effective under this Indenture or the Securities unless and until such Security has been registered in the name of such person. Nothing in this Section 2.12(a)(i) shall prohibit or render ineffective any transfer of a beneficial interest in a Global Security effected in accordance with the other provisions of this Section 2.12(a). (ii) Restrictions on Transfer of a Beneficial Interest in a Global Security for a Certificated Security. A beneficial interest in a Global Security may not be exchanged for a Certificated Security except upon satisfaction of the requirements set forth below and in Section 2.12(e)(1) below. Upon receipt by the Trustee of a transfer of a beneficial interest in a Global Security in accordance with Applicable Procedures for a Certificated Security in the form satisfactory to the Trustee, together with: (A) so long as the Securities are Restricted Securities, certification in the form set forth in Exhibit C; 13 (B) written instructions to the Trustee to make, or direct the Registrar to make, an adjustment on its books and records with respect to such Global Security to reflect a decrease in the aggregate principal amount of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such decrease; and (C) if the Company so requests, an opinion of counsel or other evidence reasonably satisfactory to it as to the compliance with the restrictions set forth in the Legend, then the Trustee shall cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate principal amount of the Securities represented by the Global Security to be decreased by the aggregate principal amount of the Certificated Security to be issued, shall issue such Certificated Security and shall debit or cause to be debited to the account of the person specified in such instructions a beneficial interest in the Global Security equal to the principal amount of the Certificated Security so issued. (iii) Transfer and Exchange of Certificated Securities. When Certificated Securities are presented to the Registrar with a request: (y) to register the transfer of such Certificated Securities; or (z) to exchange such Certificated Securities for an equal principal amount of Certificated Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Certificated Securities surrendered for transfer or exchange: (1) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (2) so long as such Securities are Restricted Securities, such Securities are being transferred or exchanged pursuant to an effective registration statement under the Securities Act or pursuant to clause (A), (B) or (C) below, and are accompanied by the following additional information and documents, as applicable: (A) if such Certificated Securities are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Certificated Securities are being transferred to the Company, a certification to that effect; or (C) if such Certificated Securities are being transferred pursuant to an exemption from registration, (i) a certification to that effect (in the form set forth in Exhibit C, if applicable) and (ii) if the Company so requests, an opinion of counsel or other evidence reasonably satisfactory to it as to the compliance with the restrictions set forth in the Legend. 14 (iv) Restrictions on Transfer of a Certificated Security for a Beneficial Interest in a Global Security. A Certificated Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Certificated Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (A) so long as the Securities are Restricted Securities, certification, in the form set forth in Exhibit C, that such Certificated Security is being transferred to a QIB in accordance with Rule 144A, or to an institutional accredited investor within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D of the Securities Act; and (B) written instructions directing the Trustee to make, or to direct the Registrar to make, an adjustment on its books and records with respect to such Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such Certificated Security and cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate principal amount of Securities represented by the Global Security to be increased by the aggregate principal amount of the Certificated Security to be exchanged, and shall credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the Global Security equal to the principal amount of the Certificated Security so cancelled. If no Global Securities are then outstanding, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Security in the appropriate principal amount. (b) Subject to the following subsection (c), every Security shall be subject to the restrictions on transfer provided in the Legend including the delivery of an opinion of counsel, if so provided. Whenever any Restricted Security is presented or surrendered for registration of transfer or for exchange for a Security registered in a name other than that of the Holder, such Security must be accompanied by a certificate in substantially the form set forth in Exhibit C, dated the date of such surrender and signed by the Holder of such Security, as to compliance with such restrictions on transfer. The Registrar shall not be required to accept for such registration of transfer or exchange any Security not so accompanied by a properly completed certificate. (c) The restrictions imposed by the Legend upon the transferability of any Security shall cease and terminate when such Security has been sold pursuant to an effective registration statement under the Securities Act or transferred in compliance with Rule 144 under the Securities Act (or any successor provision thereto) or, if earlier, upon the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision). Any Security as to which such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon a surrender of such Security for exchange to the Registrar in accordance with the provisions of this Section 2.12 (accompanied, in the event that such restrictions on transfer have terminated by reason of a transfer in compliance with Rule 144 or any successor provision, by an opinion 15 of counsel having substantial experience in practice under the Securities Act and otherwise reasonably acceptable to the Company, addressed to the Company and in form acceptable to the Company, to the effect that the transfer of such Security has been made in compliance with Rule 144 or such successor provision), be exchanged for a new Security, of like tenor and aggregate principal amount, which shall not bear the restrictive Legend. The Company shall inform the Trustee of the effective date of any registration statement registering the Securities under the Securities Act. The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the aforementioned opinion of counsel or registration statement. (d) As used in the preceding two paragraphs of this Section 2.12, the term "transfer" encompasses any sale, pledge, transfer, loan, hypothecation, or other disposition of any Security. (e) The provisions of clauses (1), (2), (3) and (4) below shall apply only to Global Securities: (1) Notwithstanding any other provisions of this Indenture or the Securities, a Global Security shall not be exchanged in whole or in part for a Security registered in the name of any person other than the Depositary or one or more nominees thereof, provided that a Global Security may be exchanged for Securities registered in the names of any person designated by the Depositary in the event that (i) the Depositary has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or such Depositary has ceased to be a "clearing agency" registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and a successor Depositary is not appointed by the Company within 90 days or (ii) an Event of Default has occurred and is continuing with respect to the Securities. Any Global Security exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part, and any Global Security exchanged pursuant to clause (ii) above may be exchanged in whole or from time to time in part as directed by the Depositary. Any Security issued in exchange for a Global Security or any portion thereof shall be a Global Security; provided that any such Security so issued that is registered in the name of a person other than the Depositary or a nominee thereof shall not be a Global Security. (2) Securities issued in exchange for a Global Security or any portion thereof shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate principal amount equal to that of such Global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depositary shall designate and shall bear the applicable legends provided for herein. Any Global Security to be exchanged in whole shall be surrendered by the Depositary to the Trustee, as Registrar. With regard to any Global Security to be exchanged in part, either such Global Security shall be so surrendered for exchange or, if the Trustee is acting as custodian for the Depositary or its nominee with respect to such Global Security, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and deliver the Security issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof. (3) Subject to the provisions of clause (5) below, the registered Holder may grant proxies and otherwise authorize any person, including Agent Members (as defined 16 below) and persons that may hold interests through Agent Members, to take any action which a holder is entitled to take under this Indenture or the Securities. (4) In the event of the occurrence of any of the events specified in clause (1) above, the Company will promptly make available to the Trustee a reasonable supply of Certificated Securities in definitive, fully registered form, without interest coupons. (5) Neither any members of, or participants in, the Depositary (collectively, the "Agent Members") nor any other persons on whose behalf Agent Members may act shall have any rights under this Indenture with respect to any Global Security registered in the name of the Depositary or any nominee thereof, or under any such Global Security, and the Depositary or such nominee, as the case may be, may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner and holder of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a holder of any Security. Section 2.13 CUSIP Numbers. The Company may issue the Securities with one or more "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. Section 2.14 Ranking. The indebtedness of the Company arising under or in connection with this Indenture and every outstanding Security issued under this Indenture from time to time constitutes and will constitute a senior unsecured general obligation of the Company, ranking equally with other existing and future senior unsecured Indebtedness of the Company and ranking senior in right of payment to any future Indebtedness of the Company that is expressly made subordinate to any unsecured and unsubordinated Indebtedness of the Company by the terms of such subordinated Indebtedness. For purposes of this Section 2.14 only, "Indebtedness" means, without duplication, the principal or face amount of (i) all obligations for borrowed money, (ii) all obligations evidenced by debentures, notes or other similar instruments, (iii) all obligations in respect of letters of credit or bankers acceptances or similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (v) all obligations as lessee which are capitalized in accordance with generally accepted accounting principles, and (vi) all Indebtedness of others guaranteed by the Company or any of its Subsidiaries or for which the Company or any of its Subsidiaries is legally responsible or liable (whether by agreement to purchase indebtedness of, or to supply funds or to invest in, others). 17 ARTICLE III REDEMPTION AND PURCHASES Section 3.1 Company's Right to Redeem; Notices to Trustee. Prior to January 1, 2005, the Securities will not be redeemable at the Company's option. Beginning on January 1, 2005, the Company, at its option, may redeem the Securities in accordance with the provisions of Section 5 of the Securities for cash at any time as a whole, or from time to time in part, at a redemption price equal to the principal amount of those Securities plus any accrued and unpaid interest, including contingent interest and additional interest, if any, on those Securities to the Redemption Date. If the Company elects to redeem Securities pursuant to Section 5 of the Securities, it shall notify the Trustee in writing of the Redemption Date, the principal amount of Securities to be redeemed and the Redemption Price. The Company shall give the notice to the Trustee provided for in this Section 3.1 by a Company Order, at least 40 days before the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee). Section 3.2 Selection of Securities to Be Redeemed. If less than all the Securities are to be redeemed, unless the procedures of the Depositary provide otherwise, the Trustee shall select the Securities to be redeemed by lot, on a pro rata basis or by another method the Trustee considers fair and appropriate (so long as such method is not prohibited by the rules of any stock exchange on which the Securities are then listed). The Trustee shall make the selection within five Business Days after it receives the notice provided for in Section 3.1 from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal amount of Securities that have denominations larger than $1,000. Securities and portions of Securities that the Trustee selects shall be in principal amounts of $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of the Securities to be redeemed. Securities and portions of Securities called for redemption will be convertible by the Holder until the close of business on the second Business Day prior to the Redemption Date. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be taken from the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed may be treated by the Trustee as outstanding for the purpose of such selection. Section 3.3 Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first-class mail, postage prepaid, to each Holder of Securities to be redeemed. The notice shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the Conversion Price; 18 (4) the name and address of the Paying Agent and Conversion Agent; (5) that Securities called for redemption may be converted at any time before the close of business on the second Business Day prior to the Redemption Date; (6) that Holders who want to convert their Securities must satisfy the requirements set forth in Section 8 of the Securities; (7) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (8) if fewer than all of the outstanding Securities are to be redeemed, the certificate numbers, if any, and principal amounts of the particular Securities to be redeemed; (9) that, unless the Company defaults in making payment of such Redemption Price, interest, including contingent interest and additional interest, if any, on Securities called for redemption will cease to accrue interest on and after the Redemption Date; and (10) the CUSIP number(s) of the Securities. At the Company's written request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense, provided that the Company makes such request at least ten days prior to the date by which such notice of redemption must be given to Holders in accordance with this Section 3.3. Section 3.4 Effect of Notice of Redemption. Once notice of redemption is given, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price stated in the notice except for Securities which are converted in accordance with the terms of this Indenture. Upon surrender to the Paying Agent, such Securities shall be paid at the Redemption Price stated in the notice. Section 3.5 Deposit of Redemption Price. Prior to 10:00 a.m. (New York City time), on the Redemption Date, the Company shall deposit with the Paying Agent (or if the Company or a Subsidiary or an Affiliate of either of them is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the Redemption Price of all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which on or prior thereto have been delivered by the Company to the Trustee for cancellation or have been converted. The Paying Agent shall as promptly as practicable return to the Company any money not required for that purpose because of conversion of Securities pursuant to Article 10. If such money is then held by the Company in trust and is not required for such purpose it shall be discharged from such trust. Section 3.6 Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Security in an authorized denomination equal in principal amount to the unredeemed portion of the Security surrendered. Section 3.7 Purchase of Securities by the Company at Option of the Holder. (a) General. Securities shall be purchased by the Company pursuant to Section 6 of the Securities at the option of the Holder on January 1, 2005, 2007, 2009, 2012 and 2017 (each, a "Purchase Date"), at a purchase price equal to the principal amount of those Securities plus accrued and unpaid interest, 19 including contingent interest and additional interest, if any, to such Purchase Date (the "Purchase Price"), subject to the provisions of Section 3.9. Purchases of Securities hereunder shall be made, at the option of the Holder thereof, upon: (1) delivery to the Paying Agent by the Holder of a written notice of purchase (a "Purchase Notice") during the period beginning at any time from the opening of business on the date that is 20 Business Days prior to the relevant Purchase Date until the close of business on the third Business Day prior to such Purchase Date stating: (A) the certificate number of the Security which the Holder will deliver to be purchased or the appropriate Depositary procedures if Certificated Securities have not been issued, (B) the portion of the principal amount of the Security which the Holder will deliver to be purchased, which portion must be in principal amounts of $1,000 or an integral multiple of $1,000, (C) that such Security shall be purchased by the Company as of the Purchase Date pursuant to the terms and conditions specified in Section 6 of the Securities and in this Indenture, (D) in the event the Company elects, pursuant to Section 3.9(c), to pay the Purchase Price, in whole or in part, in shares of Common Stock, but such portion of the Purchase Price shall ultimately be paid to such Holder entirely in cash because any of the conditions to payment of the Purchase Price in shares of Common Stock is not satisfied prior to the close of business on the relevant Purchase Date, as set forth in Section 3.9, whether such Holder elects (i) to withdraw such Purchase Notice as to some or all of the Securities to which such Purchase Notice relates (stating the principal amount and certificate numbers, if any, of the Securities as to which such withdrawal shall relate), or (ii) to receive cash in respect of the entire Purchase Price for all Securities (or portions thereof) to which such Purchase Notice relates; and (2) delivery of such Security to the Paying Agent at any time after delivery of the Purchase Notice (together with all necessary endorsements) at the offices of the Paying Agent, such delivery being a condition to receipt by the Holder of the Purchase Price therefor; provided, however, that such Purchase Price shall be so paid pursuant to this Section 3.7 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof in the related Purchase Notice. If a Holder, in such Holder's Purchase Notice and in any written notice of withdrawal delivered by such Holder pursuant to the terms of Section 3.9, fails to indicate such Holder's choice with respect to the election set forth in clause (D) of Section 3.7(a)(1), such Holder shall be deemed to have elected to receive cash in respect of the entire Purchase Price for all Securities subject to such Purchase Notice in the circumstances set forth in such clause (D). The Company shall purchase from the Holder thereof, pursuant to this Section 3.7, a portion of a Security, if the principal amount of such portion is $1,000 or an integral multiple of $1,000. 20 Provisions of this Indenture that apply to the purchase of all of a Security also apply to the purchase of such portion of such Security. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.7 shall be consummated by the delivery of the consideration to be received by the Holder as promptly as practicable following the later of the Purchase Date and the time of delivery of the Security. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Purchase Notice contemplated by this Section 3.7(a) shall have the right to withdraw such Purchase Notice at any time prior to the close of business on the Purchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.10. The Paying Agent shall promptly notify the Company of the receipt by it of any Purchase Notice or written notice of withdrawal thereof. Section 3.8 Purchase of Securities at Option of the Holder upon Change of Control. (a) (1) If a Change of Control occurs (subject to certain exceptions set forth below), the Securities not previously purchased by the Company shall be purchased by the Company, at the option of the Holder thereof, at a purchase price specified in Section 6 of the Securities (the "Change of Control Purchase Price"), as of the date that is 30 days after the date of a notice of Change of Control delivered by the Company (the "Change of Control Purchase Date"), subject to satisfaction by or on behalf of the Holder of the requirements set forth in Section 3.8(c). A "Change of Control" will be deemed to have occurred at such time after the Securities are originally issued when any of the following events shall occur: (i) the acquisition by any person, including any syndicate or group deemed to be a "person" under Section 13(d) (3) of the Exchange Act of beneficial ownership, directly or indirectly through a purchase, merger or other acquisition transaction or series of purchase, merger or other acquisition transactions, of shares of the Capital Stock of the Company entitling that person to exercise 50% or more of the total voting power of all shares of the Capital Stock of the Company entitled to vote generally in elections of directors, other than any acquisition by the Company, any of its subsidiaries or any of its employee benefit plans (except that any of those persons shall be deemed to have beneficial ownership of all securities it has the right to acquire, whether the right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); or (ii) the first day on which a majority of the members of the board of directors of the Company are not Continuing Directors; or (iii) the Company consolidates or merges with or into any other person, any merger of another person into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the Company's properties and assets to another person, other than: (A) any transaction: (1) that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of the Company's Capital Stock; and (2) pursuant to which holders of the Company's Capital Stock immediately prior to the transaction have the entitlement to exercise, directly or indirectly 50% or more of the total voting power of all shares of Capital Stock entitled to vote generally in elections of directors of the continuing or surviving Person immediately after giving effect to such issuance; and (B) any merger, share exchange, transfer of assets or similar transaction solely for the purpose of changing the Company's jurisdiction of incorporation and resulting in a reclassification, conversion or exchange of 21 outstanding shares of Common Stock, if at all, solely into shares of common stock, ordinary shares or American Depositary Shares of the surviving Person or a direct or indirect parent of the surviving corporation. A "Continuing Director" shall mean: (i) An individual who was a member of the Board of Directors of the Company first elected by the stockholders or by the Board of Directors prior to the date hereof or prior to the time that any person becomes after the date hereof the holder of record of in excess of 20% of the Capital Stock of the Company entitled to vote in the election of directors; or (ii) An individual designated (before such individual's initial election as a director) as a Continuing Director by a majority of the then Continuing Directors. (2) Notwithstanding the provisions of Section 3.8(a)(1), the Company shall not be required to purchase the Securities of the Holders upon a Change of Control pursuant to this Section 3.8 if: (i) the Sale Price per share of Common Stock for any five trading days within (1) the period of 10 consecutive trading days ending immediately after the later of the Change of Control or the public announcement of the Change of Control, in the case of a Change of Control under clause (i) or (ii) above, or (2) the period of 10 consecutive trading days ending immediately before the Change of Control, in the case of a Change of Control under clause (iii) above, equals or exceeds 110% of the Conversion Price of the Securities in effect on each of those five trading days; or (ii) 100% of the consideration in the transaction or transactions (other than cash payments for fractional shares and cash payments made in respect of dissenters' appraisal rights) constituting a Change of Control consists of shares of common stock, ordinary shares or American Depositary Shares traded or to be traded immediately following a Change of Control on a national securities exchange or the Nasdaq National Market, and, as a result of the transaction or transactions, the Securities become convertible into that common stock, ordinary shares or American Depositary Shares (and any rights attached thereto). For the purposes of this Section 3.8, (x) whether a person is a "beneficial owner" shall be determined in accordance with Rule 13d-3 under the Exchange Act and (y) the term "person" includes any syndicate or group that would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act. (b) No later than 30 days after the occurrence of a Change of Control, the Company shall mail a written notice of the Change of Control by first class mail to the Trustee and to each Holder (and to beneficial owners as required by applicable law). The notice shall include a form of Change of Control Purchase Notice to be completed by the Holder and shall state: (1) briefly, the events causing a Change of Control and the date of such Change of Control; (2) the date by which the Change of Control Purchase Notice pursuant to this Section 3.8 must be delivered to the Paying Agent in order for a Holder to exercise the repurchase rights; 22 (3) the Change of Control Purchase Date; (4) the Change of Control Purchase Price; (5) whether the Change of Control Purchase Price will be paid in cash or Applicable Stock, or a combination thereof; (6) the name and address of the Paying Agent and the Conversion Agent; (7) the Conversion Rate and any adjustments thereto; (8) that the Securities as to which a Change of Control Purchase Notice has been given may be converted if they are otherwise convertible pursuant to Article 10 hereof only if the Change of Control Purchase Notice has been withdrawn in accordance with the terms of this Indenture; (9) that the Securities must be surrendered to the Paying Agent to collect payment; (10) that the Change of Control Purchase Price for any Security as to which a Change of Control Purchase Notice has been duly given and not withdrawn will be paid as promptly as practicable following the later of the Change of Control Purchase Date and the time of surrender of such Security as described in (8); (11) briefly, the procedures the Holder must follow to exercise rights under this Section 3.8; (12) briefly, the conversion rights, if any, of the Securities; (13) the procedures for withdrawing a Change of Control Purchase Notice; (14) that, unless the Company defaults in making payment of such Change of Control Purchase Price, interest, if any, on Securities surrendered for purchase by the Company will cease to accrue on and after the Change of Control Purchase Date; and (15) the CUSIP number(s) of the Securities. (c) A Holder may exercise its rights specified in Section 3.8(a) upon delivery of a written notice of purchase (a "Change of Control Purchase Notice") to the Trustee at any time on or prior to the close of business on the Business Day immediately preceding the Change of Control Purchase Date: (1) the certificate number of the Security which the Holder will deliver to be purchased or the appropriate depositary procedures if Certificated Securities have not been issued; (2) the portion of the principal amount of the Security which the Holder will deliver to be purchased, which portion must be $1,000 or an integral multiple of $1,000; (3) that such Security shall be purchased pursuant to the terms and conditions specified in Section 6 of the Securities and in this Indenture; and 23 (4) in the event the Company elects, pursuant to Section 3.9, to pay the Change of Control Purchase Price, in whole or in part, in shares of Applicable Stock but such portion of the Change of Control Purchase Price shall ultimately be paid to such Holder entirely in cash because any of the conditions to payment of the Change of Control Purchase Price in shares of Applicable Stock is not satisfied prior to the close of business on the third Business Day prior to the relevant Change of Control Purchase Date, as set forth in Section 3.9, whether such Holder elects (i) to withdraw such Change of Control Purchase Notice as to some or all of the Securities to which such Change of Control Purchase Notice relates (stating the principal amount and certificate numbers, if any, of the Securities as to which such withdrawal shall relate), or (ii) to receive cash in respect of the entire Change of Control Purchase Price for all Securities (or portions thereof) to which such Change of Control Purchase Notice relates. "Applicable Stock" means (i) the Common Stock and (ii) in the event of a merger, consolidation or other similar transaction involving the Company that is otherwise permitted hereunder in which the Company is not the surviving corporation, the common stock, ordinary shares or American Depositary Shares of such surviving corporation or its direct or indirect parent corporation. The delivery of such Security to the Paying Agent with the Change of Control Purchase Notice (together with all necessary endorsements) at the offices of the Paying Agent shall be a condition to the receipt by the Holder of the Change of Control Purchase Price therefor; provided, however, that such Change of Control Purchase Price shall be so paid pursuant to this Section 3.8 and Section 3.9 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Change of Control Purchase Notice. If a Holder, in such Holder's Change of Control Purchase Notice and in any written notice of withdrawal delivered by such Holder pursuant to the terms of Section 3.10, fails to indicate such Holder's choice with respect to the election set forth in Section 3.8(c)(4), such Holder shall be deemed to have elected to receive cash in respect of the entire Change of Control Purchase Price for all Securities subject to such Change of Control Purchase Notice in the circumstances set forth in such Section 3.8(c)(4). The Company shall purchase from the Holder thereof, pursuant to this Section 3.8 and Section 3.9, a portion of a Security if the principal amount of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Security also apply to the purchase of such portion of such Security. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.8 and Section 3.9 shall be consummated by the delivery of the consideration to be received by the Holder on the Change of Control Purchase Date. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Change of Control Purchase Notice contemplated by this Section 3.8(c) shall have the right to withdraw such Change of Control Purchase Notice at any time prior to the close of business on the last Business Day immediately preceding the Change of Control Purchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.10. The Paying Agent shall promptly notify the Company of the receipt by it of any Change of Control Purchase Notice or written withdrawal thereof. 24 Section 3.9 Company's Right to Elect Manner of Payment of Purchase Price and Change of Control Purchase Price for Payment. (a) The Securities to be purchased on any Purchase Date or Change of Control Purchase Date, as the case may be, pursuant to Section 3.7(a) and 3.8(a), respectively, may be paid for, in whole or in part, at the election of the Company, in U.S. legal tender ("cash") or shares of Applicable Stock, or in any combination of cash and shares of Applicable Stock, subject to the conditions set forth in Sections 3.9(c) and (d). The Company shall designate, in the Company Notice delivered pursuant to Section 3.9(d), whether the Company will purchase the Securities for cash or shares of Applicable Stock, or, if a combination thereof, the percentages of the Purchase Price or Change of Control Purchase Price, as the case may be, of Securities in respect of which it will pay in cash or shares of Applicable Stock; provided that the Company will pay cash for fractional interests in shares of Applicable Stock. For purposes of determining the existence of potential fractional interests, all Securities subject to purchase by the Company held by a Holder shall be considered together (no matter how many separate certificates are to be presented). Each Holder whose Securities are purchased pursuant to Section 3.7 or 3.8, as the case may be, shall receive the same percentage of cash or shares of Applicable Stock in payment of the Purchase Price for such Securities, except (i) as provided in this Section 3.9(a) with regard to the payment of cash in lieu of fractional shares of Applicable Stock and (ii) in the event that the Company is unable to purchase the Securities of a Holder or Holders for shares of Applicable Stock because any necessary qualifications or registrations of the shares of Applicable Stock under applicable state securities laws cannot be obtained, the Company may purchase the Securities of such Holder or Holders for cash. The Company may not change its election with respect to the consideration (or components or percentages of components thereof) to be paid once the Company has given its Company Notice to Holders except pursuant to Section 3.9(b) or pursuant to Section 3.9(d) in the event of a failure to satisfy, prior to the close of business on the Business Day immediately preceding the Purchase Date or Change of Control Purchase Date, as the case may be, any condition to the payment of the Purchase Price or Change of Control Purchase Price, as the case may be, in whole or in part, in shares of Applicable Stock. At least three Business Days before each Company Notice Date (as defined below), the Company shall deliver an Officers' Certificate to the Trustee specifying: (i) the manner of payment selected by the Company, (ii) the information required by Section 3.9(d) in the Company Notice, (iii) if the Company elects to pay the Purchase Price or Change of Control Purchase Price, as the case may be, or a specified percentage thereof, in shares of Applicable Stock, that the conditions to such manner of payment set forth in Section 3.9(c) have been or will be complied with, and (iv) whether the Company desires the Trustee to give the Company Notice required by Section 3.9(d). (b) Purchase with Cash. At the option of the Company, the Purchase Price or Change of Control Purchase Price, as the case may be, of Securities in respect of which a Purchase Notice pursuant to Section 3.7(a) or Change of Control Purchase Notice pursuant to Section 3.8(c), as the case may be, has been given, or a specified percentage thereof, may be paid by the Company with cash equal to the aggregate Purchase Price or Change of Control Purchase Price, as the case may be, of such Securities. The Purchase Price or Change of Control Purchase Price, as the case may be, of Securities in respect of which a Purchase Notice pursuant to Section 3.7(a) or Change of Control Purchase Notice pursuant to Section 3.8(c), as the case may be, has been given shall, for all other Purchase Dates or Change of Control Purchase Dates, as the case may be, be paid in cash. The Company Notice, as provided in Section 3.9(d), 25 shall be sent to Holders (and to beneficial owners as required by applicable law) not less than 20 Business Days prior to such Purchase Date or Change of Control Purchase Date, as the case may be (the "Company Notice Date"). (c) Payment by Issuance of Shares of Common Stock. At the option of the Company, the Purchase Price or Change of Control Purchase Price, as the case may be, of Securities in respect of which a Purchase Notice pursuant to Section 3.7(a) or Change of Control Purchase Notice pursuant to Section 3.8(c), as the case may be, has been given, or a specified percentage thereof, may be paid by the Company by the issuance of a number of shares of Applicable Stock equal to the quotient obtained by dividing (i) the portion of the Purchase Price or Change of Control Purchase Price, as the case may be, to be paid in shares of Applicable Stock by (ii) 97.5% of the Market Price determined by the Company in the Company Notice, subject to the next succeeding paragraph. The Company will not issue fractional shares of Applicable Stock in payment of the Purchase Price or Change of Control Purchase Price, as the case may be. Instead, the Company will pay cash based on the current market price for all fractional shares. It is understood that if a Holder elects to have more than one Security purchased, the number of shares of Applicable Stock shall be based on the aggregate amount of Securities to be purchased. If the Company elects to purchase the Securities by the issuance of shares of Applicable Stock or in any combination of cash and Applicable Stock, the Company Notice, as provided in Section 3.9(d), shall be sent to the Holders (and to beneficial owners as required by applicable law) not later than the Company Notice Date. The Company's right to exercise its election to purchase Securities through the issuance of shares of Applicable Stock shall be conditioned upon: (i) the Company's not having given its Company Notice of an election to pay entirely in cash and its giving of timely Company Notice of an election to purchase all or a specified percentage of the Securities with shares of Common Stock as provided herein; (ii) the registration of such shares of Applicable Stock under the Securities Act and the Exchange Act, in each case, if required; (iii) the listing of such shares of Applicable Stock on a United States national securities exchange or the quotation of such shares of Applicable Stock in an inter-dealer quotation system of any registered United States national securities association; (iv) any necessary qualification or registration of such shares of Applicable Stock under applicable state securities laws or the availability of an exemption from such qualification and registration; and (v) the receipt by the Trustee of an Officers' Certificate and an Opinion of Counsel each stating that (A) the terms of the issuance of the shares of Applicable Stock are in conformity with this Indenture and (B) the shares of Applicable Stock to be issued by the Company in payment of the Purchase Price or Change of Control Purchase Price, as the case may be, in respect of Securities have been duly authorized and, when issued and delivered pursuant to the terms of this Indenture in payment of the Purchase Price or Change of Control Purchase Price, as the case may be, in respect of the Securities, will be validly issued, fully paid and non-assessable and, to the best of such counsel's knowledge, free from preemptive rights, and, in the case of such Officers' Certificate, stating that the conditions above and the condition set forth 26 in the second succeeding sentence have been satisfied and, in the case of such Opinion of Counsel, stating that the conditions in clauses (i) through (iv) above have been satisfied. Such Officers' Certificate shall also set forth the number of shares of Applicable Stock to be issued for each $1,000 principal amount of Securities and the Sale Price of a share of Applicable Stock on each trading day during the period commencing on the first trading day of the period during which the Market Price is calculated and ending on the third day prior to the applicable Purchase Date or Change of Control Purchase Date, as the case may be. If the foregoing conditions are not satisfied with respect to a Holder or Holders prior to the close of business on the last day prior to the Purchase Date or Change of Control Purchase Date, as the case may be, and the Company has elected to purchase the Securities pursuant to this Section 3.9 through the issuance of shares of Applicable Stock, the Company shall pay the entire Purchase Price or Change of Control Purchase Price, as the case may be, of the Securities of such Holder or Holders in cash. The "Market Price" means the average of the Sale Prices of the shares of Applicable Stock for the 20-trading day period immediately preceding and including the third day prior to the applicable Purchase Date or Change of Control Purchase Date, as the case may be (if the third Business Day prior to the applicable Purchase Date is a trading day, or if not, then on the last trading day prior to the third Business Day), appropriately adjusted to take into account the occurrence, during the period commencing on the first of the trading days during the 20-trading day period and ending on the Purchase Date or Change of Control Purchase Date, as the case may be, of any event described in Sections 10.3 or 10.4. The "Sale Price" of the shares of Applicable Stock on any date means the closing per share sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on such date as reported on the NYSE or, if the shares of Applicable Stock are not listed on the NYSE, as reported on a national securities exchange, or if not reported on a national securities exchange, as reported by the Nasdaq system. In the absence of such quotations, the Company shall be entitled to determine the sales price on the basis of such quotations as it considers appropriate. Upon determination of the actual number of shares of Applicable Stock to be issued upon redemption or repurchase of Securities, the Company shall be required to disseminate a press release through Dow Jones & Company, Inc. or Bloomberg Business News containing this information or publish the information on the Company's web site or through such other public medium as the Company may use at that time. (d) Notice of Election. In connection with any purchase of Securities pursuant to Section 6 of the Securities, the Company shall give notice to Holders setting forth information specified in this Section 3.9(d) (the "Company Notice"). In the event the Company has elected to pay the Purchase Price or Change of Control Purchase Price, as the case may be (or a specified percentage thereof), with shares of Applicable Stock, the Company Notice shall: (1) state that each Holder will receive a number of shares of Applicable Stock with a value equal to 97.5% of the Market Price determined as of a specified date prior to the Purchase Date or Change of Control Purchase Date, as the case may be, equal to such specified percentage of the Purchase Price or Change of Control Purchase Price, as the case may be, of the Securities held by such Holder (except any cash amount to be paid in lieu of fractional shares); 27 (2) set forth the method of calculating the Market Price of the shares of Applicable Stock; and (3) state that because the Market Price of shares of Applicable Stock will be determined prior to the Purchase Date or Change of Control Purchase Date, as the case may be, Holders of the Securities will bear the market risk with respect to the value of the shares of Applicable Stock to be received from the date such Market Price is calculated to the Purchase Date or Change of Control Purchase Date, as the case may be. In any case, each Company Notice shall include a form of Purchase Notice or Change of Control Purchase Notice, as the case may be, to be completed by a Holder and shall state: (i) the Purchase Price or Change of Control Purchase Price, as the case may be, and the Conversion Rate; (ii) the name and address of the Paying Agent and the Conversion Agent; (iii) that Securities as to which a Purchase Notice or Change of Control Purchase Notice, as the case may be, has been given may be converted if they are otherwise convertible only in accordance with Article 10 hereof and Section 8 of the Securities if the applicable Purchase Notice or Change of Control Purchase Notice, as the case may be, has been withdrawn in accordance with the terms of this Indenture; (iv) that Securities must be surrendered to the Paying Agent to collect payment; (v) that the Purchase Price or Change of Control Purchase Price, as the case may be, for any security as to which a Purchase Notice or Change of Control Purchase Notice, as the case may be, has been given and not withdrawn will be paid as promptly as practicable following the later of the Purchase Date or Change of Control Purchase Date, as the case may be, and the time of surrender of such Security as described in (iv); (vi) the procedures the Holder must follow to exercise its put rights under Section 3.7 or 3.8, as the case may be, and a brief description of those rights; (vii) briefly, the conversion rights of the Securities; (viii) the procedures for withdrawing a Purchase Notice or Change of Control Purchase Notice, as the case may be (including, without limitation, for a conditional withdrawal pursuant to the terms of Section 3.7(a)(1)(D), Section 3.8(c)(4)or Section 3.10); (ix) that, unless the Company defaults in making payment on Securities for which a Purchase Notice or Change of Control Purchase Notice, as the case may be, has been submitted, interest, if any, on such Securities will cease to accrue on the Purchase Date or Change of Control Purchase Date, as the case may be; and (x) the CUSIP number of the Securities. 28 At the Company's written request, the Trustee shall give such Company Notice in the Company's name and at the Company's expense; provided, however, that, in all cases, the text of such Company Notice shall be prepared by the Company. (e) Covenants of the Company. All shares of Common Stock delivered upon purchase of the Securities shall be newly issued shares or treasury shares, shall be duly authorized, validly issued, fully paid and nonassessable, and shall be free from preemptive rights and free of any lien or adverse claim. (f) Taxes. If a Holder of a purchased Security is paid in shares of Applicable Stock, the Company shall pay any documentary, stamp or similar issue or transfer tax due on such issue of Applicable Stock. However, the Holder shall pay any such tax which is due because the Holder requests the Applicable Stock to be issued in a name other than the Holder's name. The Paying Agent may refuse to deliver the certificates representing the shares of Applicable Stock being issued in a name other than the Holder's name until the Paying Agent receives a sum sufficient to pay any tax which will be due because the shares of Applicable Stock are to be issued in a name other than the Holder's name. Nothing herein shall preclude any income tax withholding required by law or regulations. Section 3.10 Effect of Purchase Notice or Change of Control Purchase Notice. Upon receipt by the Paying Agent of the Purchase Notice or Change of Control Purchase Notice specified in Section 3.7(a) or Section 3.8(c), as applicable, the Holder of the Security in respect of which such Purchase Notice or Change of Control Purchase Notice, as the case may be, was given shall (unless such Purchase Notice or Change of Control Purchase Notice, as the case may be, is withdrawn as specified in the following two paragraphs) thereafter be entitled to receive solely the Purchase Price or Change of Control Purchase Price, as the case may be, with respect to such Security. Such Purchase Price or Change of Control Purchase Price shall be paid to such Holder, subject to receipts of funds and/or securities by the Paying Agent, as promptly as practicable following the later of (x) the Purchase Date or the Change of Control Purchase Date, as the case may be, with respect to such Security (provided the conditions in Section 3.7(a) or Section 3.8(c), as applicable, have been satisfied) and (y) the time of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 3.7(a) or Section 3.8(c), as applicable. Securities in respect of which a Purchase Notice or Change of Control Purchase Notice has been given by the Holder thereof may not be converted pursuant to Article 10 hereof on or after the date of the delivery of such Purchase Notice or Change of Control Purchase Notice unless such Purchase Notice or Change of Control Purchase Notice has first been validly withdrawn as specified in the following two paragraphs. A Purchase Notice or Change of Control Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent in accordance with the Purchase Notice or Change of Control Purchase Notice, as the case may be, at any time prior to the close of business on the third Business Day prior to the Purchase Date or the close of business on the Business Day immediately preceding the Change of Control Purchase Date, as the case may be, specifying: (1) the certificate number, if any, of the Security in respect of which such notice of withdrawal is being submitted, (2) the principal amount of the Security with respect to which such notice of withdrawal is being submitted, and (3) the principal amount, if any, of such Security which remains subject to the original Purchase Notice or Change of Control Purchase Notice, as the case may be, and which has been or will be delivered for purchase by the Company. 29 A written notice of withdrawal of a Purchase Notice may be in the form set forth in the preceding Section or may be in the form of (i) a conditional withdrawal contained in a Purchase Notice pursuant to the terms of Section 3.7(a)(1)(D) or (ii) a conditional withdrawal containing the information set forth in Section 3.7(a)(1)(D) and the preceding Section and contained in a written notice of withdrawal delivered to the Paying Agent as set forth in the preceding paragraph. A written notice of withdrawal of a Change of Control Purchase Notice may be in the form set forth in the preceding Section or may be in the form of (i) a conditional withdrawal contained in a Purchase Notice pursuant to the terms of Section 3.8(c)(4) or (ii) a conditional withdrawal containing the information set forth in Section 3.8(c)(4) and the preceding Section and contained in a written notice of withdrawal delivered to the Paying Agent as set forth in the preceding paragraph. There shall be no purchase of any Securities pursuant to Section 3.7 or 3.8 if there has occurred (prior to, on or after, as the case may be, the giving, by the Holders of such Securities, of the required Purchase Notice or Change of Control Purchase Notice, as the case may be) and is continuing an Event of Default (other than a default in the payment of the Purchase Price or Change of Control Purchase Price, as the case may be, with respect to such Securities). The Paying Agent will promptly return to the respective Holders thereof any Securities (x) with respect to which a Purchase Notice or Change of Control Purchase Notice, as the case may be, has been withdrawn in compliance with this Indenture, or (y) held by it during the continuance of an Event of Default (other than a default in the payment of the Purchase Price or Change of Control Purchase Price, as the case may be, with respect to such Securities) in which case, upon such return, the Purchase Notice or Change of Control Purchase Notice with respect thereto shall be deemed to have been withdrawn. Section 3.11 Deposit of Purchase Price or Change of Control Purchase Price. Prior to 10:00 a.m. (New York City time) on the Business Day preceding the Purchase Date or the Change of Control Purchase Date, as the case may be, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the Paying Agent, shall segregate and hold in trust as provided in Section 2.4) an amount of cash (in immediately available funds if deposited on such Business Day) or Applicable Stock, if permitted hereunder, sufficient to pay the aggregate Purchase Price or Change of Control Purchase Price, as the case may be, of all the Securities or portions thereof which are to be purchased as of the Purchase Date or Change of Control Purchase Date, as the case may be. As soon as practicable after the Purchase Date or Change of Control Purchase Date, as the case may be, the Company shall deliver to each Holder entitled to receive shares of Applicable Stock through the Paying Agent, a certificate for the number of full shares of Applicable Stock issuable in payment of the Purchase Price or Change of Control Purchase Price, as the case may be, and cash in lieu of any fractional interests. The person in whose name the certificate for the shares of Applicable Stock is registered shall be treated as a holder of record of Applicable Stock on the Business Day following the Purchase Date or Change of Control Purchase Date, as the case may be. Subject to Section 3.9(c), no payment or adjustment will be made for dividends on the shares of Applicable Stock the record date for which occurred on or prior to the Purchase Date or Change of Control Purchase Date, as the case may be. Section 3.12 Securities Purchased in Part. Any Certificated Security which is to be purchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, a new Security or Securities, of any authorized denomination as 30 requested by such Holder in aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered which is not purchased. Section 3.13 Covenant to Comply With Securities Laws Upon Purchase of Securities. When complying with the provisions of Section 3.7 or 3.8 hereof (provided that such offer or purchase constitutes an "issuer tender offer" for purposes of Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act at the time of such offer or purchase), and subject to any exemptions available under applicable law, the Company shall (i) comply with Rule 13e- 4 and Rule 14e-1 (or any successor provision) under the Exchange Act, (ii) file the related Schedule TO (or any successor schedule, form or report) under the Exchange Act, and (iii) otherwise comply with all federal and state securities laws so as to permit the rights and obligations under Sections 3.7 and 3.8 to be exercised in the time and in the manner specified in Sections 3.7 and 3.8. Section 3.14 Repayment to the Company. The Trustee and the Paying Agent shall return to the Company any cash or shares of Common Stock that remain unclaimed as provided in Section 12 of the Securities, together with interest or dividends, if any, thereon (subject to the provisions of Section 7.1(f)), held by them for the payment of the Purchase Price or Change of Control Purchase Price, as the case may be; provided, however, that to the extent that the aggregate amount of cash or shares of Common Stock deposited by the Company pursuant to Section 3.11 exceeds the aggregate Purchase Price or Change of Control Purchase Price, as the case may be, of the Securities or portions thereof which the Company is obligated to purchase as of the Purchase Date or Change of Control Purchase Date, as the case may be, then, unless otherwise agreed in writing with the Company, promptly after the Business Day following the Purchase Date or Change of Control Purchase Date, as the case may be, the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon (subject to the provisions of Section 7.1(f)). ARTICLE IV COVENANTS Section 4.1 Payment of Securities. The Company shall promptly make all payments in respect of the Securities on the dates and in the manner provided in the Securities or pursuant to this Indenture. Any amounts of cash or shares of Applicable Stock to be given to the Trustee or Paying Agent, shall be deposited with the Trustee or Paying Agent by 10:00 a.m. (New York City time), by the Company. Principal amount plus accrued interest, if any, including contingent interest and additional interest, if any, Redemption Price, Purchase Price, Change of Control Purchase Price and cash interest, if any, shall be considered paid on the applicable date due if on such date (or, in the case of a Purchase Price or Change of Control Purchase Price, on the Business Day following the applicable Purchase Date or Change of Control Purchase Date, as the case may be) the Trustee or the Paying Agent holds, in accordance with this Indenture, cash or securities, if permitted hereunder, sufficient to pay all such amounts then due. Section 4.2 SEC and Other Reports. The Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall be deemed to have complied with the previous sentence to the extent the Company shall have filed or furnished such reports, information or documents to the SEC via EDGAR (or any successor electronic delivery procedure). In the event the Company is at any time no longer subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, it shall continue to provide the Trustee with 31 reports containing substantially the same information as would have been required to be filed with the SEC had the Company continued to have been subject to such reporting requirements. In such event, such reports shall be provided at the times the Company would have been required to provide reports had it continued to have been subject to such reporting requirements. The Company also shall comply with the other provisions of TIA Section 314(a). Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely conclusively on Officers' Certificates). Section 4.3 Compliance Certificate. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year ending on December 31, 2001) an Officers' Certificate, stating whether or not to the knowledge of the signers thereof, the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. Section 4.4 Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture. Section 4.5 Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, the City of New York, an office or agency of the Trustee, Registrar, Paying Agent and Conversion Agent where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer, exchange, purchase, redemption or conversion and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office of the Trustee (Attention: Corporate Trust Administration) shall initially be such office or agency for all of the aforesaid purposes. The Company shall give prompt written notice to the Trustee of the location, and of any change in the location, of any such office or agency (other than a change in the location of the office of the Trustee). If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 11.2. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, for such purposes. Section 4.6 Delivery of Certain Information. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a Holder or any beneficial owner of Securities or holder or beneficial owner of shares of Common Stock issued upon conversion thereof, or in accordance with Section 3.8(c), the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or any beneficial owner of Securities or holder or beneficial owner of shares of Common Stock, or to a prospective purchaser of any such security designated by any such holder, as the case may be, to the extent required to permit compliance by such Holder or holder with Rule 144A under the Securities Act in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) 32 under the Securities Act. Whether a person is a beneficial owner shall be determined by the Company to the Company's reasonable satisfaction. Section 4.7 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. Section 4.8 Registration Rights. The Company agrees that the Securityholders are entitled to the benefits of the Registration Rights Agreement (including the payment of Special Interest on a Registration Default, as those terms are defined in the Registration Rights Agreement) and the Company covenants that it will perform or cause to be performed all duties and obligations arising thereunder. Other than the payment of additional interest as set forth in the Security, the rights and remedies of the Holders for a breach of this Section 4.8 are exclusively set forth in the Registration Rights Agreement. Section 4.9 Tax Treatment of Securities. The Company agrees, and by acceptance of a beneficial ownership interest in the Debentures, each beneficial holder of Debentures will be deemed to have agreed, for United States federal income tax purposes, to treat the Debentures as indebtedness that is subject to Section 1.1275-4 of the United States Treasury Regulations (the "Contingent Debt Regulations"). A holder of Debentures may obtain the comparable yield and projected payment schedule by telephoning Radian Group Inc. Investor Relations Department at (215) 564-6600 or submitting a written request for it to the Company at the following address: Radian Group Inc., 1601 Market Street, Philadelphia, PA 19103, Attention: Investor Relations Department. ARTICLE V SUCCESSOR CORPORATION Section 5.1 When Company May Merge or Transfer Assets. The Company shall not consolidate with or merge with or into any other person or convey, transfer, sell, lease or otherwise dispose of all or substantially all of its properties and assets to another person, unless: (a) either (1) the Company shall be the continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or lease all or substantially all of the properties and assets of the Company substantially as an entirety (i) shall be organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (ii) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, all of the obligations of the Company under the Securities and this Indenture; (b) immediately after giving effect to such transaction, no Event of Default, and no event that, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; and (c) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, 33 comply with this Article 5 and that all conditions precedent herein provided for relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of the properties and assets of one or more Subsidiaries (other than to the Company or another Subsidiary), which, if such assets were owned by the Company, would constitute all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The successor Person formed by such consolidation or into which the Company is merged or the successor Person to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor had been named as the Company herein; and thereafter, except in the case of a lease and obligations the Company may have under a supplemental indenture, the Company shall be discharged from all obligations and covenants under this Indenture and the Securities. Subject to Section 9.6, the Company, the Trustee and the successor Person shall enter into a supplemental indenture to evidence the succession and substitution of such successor Person and such discharge and release of the Company. ARTICLE VI DEFAULTS AND REMEDIES Section 6.1 Events of Default. So long as any Securities are outstanding, each of the following shall be an "Event of Default": (1) the Company fails to convert any portion of the principal amount of any Security upon the exercise by the Holder of the right to convert such Security into Common Stock pursuant to and in accordance with Article X hereof; (2) the Company defaults in its obligation to repurchase any Security, or any portion thereof, upon the exercise by the Holder of such Holder's right to require the Company to purchase such Securities pursuant to and in accordance with Sections 3.7 and 3.8 hereof; (3) the Company defaults in its obligation to redeem any Security, or any portion thereof, called for redemption by the Company pursuant to and in accordance with Section 3.1 hereof. (4) the Company defaults in the payment of the principal amount on any Security when the same becomes due and payable at its Stated Maturity; (5) the Company defaults in the payment of any accrued and unpaid interest, including contingent interest or additional interest, if any, in each case when due and payable, and continuance of such default for a period of 30 days; (6) the Company fails to comply with any other terms, agreements or covenants in the Securities or this Indenture (other than those referred to in clause (1) through (5) above and other than those set forth in Section 4.8) and such failure continues for 60 days after receipt by the Company of a Notice of Default; (7) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed (other than Non-Recourse Debt) by the Company or any Designated Subsidiary having an 34 aggregate principal amount outstanding of at least $15,000,000, whether such indebtedness now exists or shall hereafter be created, which default (A) shall constitute a failure to pay any portion of the principal of such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or (B) shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without, in the case of Clause (A), such indebtedness having been discharged or without, in the case of Clause (B), such indebtedness having been discharged or such acceleration having been rescinded or annulled, in each such case within a period of 15 days after there shall have been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 10% in principal amount of the Securities then outstanding a written notice specifying such default and stating that such notice is a "Notice of Default" under this Indenture; (8) the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in respect of the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, in an involuntary case or proceeding under any applicable bankruptcy, insolvency, receivership, rehabilitation, reorganization or other similar law or (ii) a decree or order adjudging the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, receivership, rehabilitation, arrangement, adjustment or composition of or in respect of the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, under any applicable law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (9) the commencement by the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, of a voluntary case or proceeding under any applicable bankruptcy, insolvency, receivership, rehabilitation, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, to the entry of a decree or order for relief in respect of the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, in an involuntary case or proceeding under any applicable bankruptcy, receivership, rehabilitation, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Company, or the filing by the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, of a petition or answer or consent seeking reorganization or relief under any applicable law, or the consent by the Company to the filing of such petition or to the appointment of or the taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, of an assignment for the benefit of creditors, or the admission by the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company or any of its Subsidiaries that is a Designated Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary, expressly in furtherance of any such action. 35 A Default under clause (6) above is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding notify or shall notify in writing the Company and the Trustee, of the Default and the Company does not cure such Default (and such Default is not waived) within the time specified in clause (6) above after such notice. Any such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default." "Designated Subsidiary" shall mean each of Radian Guaranty, Amerin Guaranty, Enhance Reinsurance, Asset Guaranty and any other existing or future, direct or indirect, Subsidiary of the Company whose assets constitute 15% or more of the total assets of the Company on a consolidated basis. Section 6.2 Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.1(8) or (9)) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding by notice to the Company and the Trustee, may declare the principal amount plus accrued and unpaid interest, including contingent interest and additional interest, if any, on all the Securities to be immediately due and payable. Upon such a declaration, such accelerated amount shall be due and payable immediately. If an Event of Default specified in Section 6.1(8) or (9) occurs and is continuing, the principal amount plus accrued and unpaid interest, including contingent interest and additional interest, if any, on all the Securities shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholders. The Holders of a majority in aggregate principal amount of the Securities at the time outstanding, by notice to the Trustee (and without notice to any other Securityholder) may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of the principal amount plus accrued and unpaid interest, including contingent interest and additional interest, if any, that have become due solely as a result of acceleration and if all amounts due to the Trustee under Section 7.7 have been paid. No such rescission shall affect any subsequent Default or impair any right consequent thereto. Section 6.3 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of the principal amount plus accrued and unpaid interest, including contingent interest and additional interest, if any, on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if the Trustee does not possess any of the Securities or does not produce any of the Securities in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of, or acquiescence in, the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. Section 6.4 Waiver of Past Defaults. The Holders of a majority in aggregate principal amount of the Securities then outstanding, by notice to the Trustee (and without notice to any other Securityholder), may waive an existing Default and its consequences except (1) an Event of Default described in Section 6.1(1) or (2), (2) a Default in respect of a provision that under Section 9.2 cannot be amended without the consent of each Securityholder affected or (3) a Default which constitutes a failure to convert any Security in accordance with the terms of Article 10. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. This Section 6.4 shall be in lieu of Section 316(a)1(B) of the TIA and such Section 316(a)1(B) is hereby expressly excluded from this Indenture, as permitted by the TIA. 36 Section 6.5 Control by Majority. The Holders of a majority in aggregate principal amount of the Securities then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or that the Trustee determines in good faith is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability unless the Trustee is offered indemnity satisfactory to it. This Section 6.5 shall be in lieu of Section 316(a)1(A) of the TIA and such Section 316(a)1(A) is hereby expressly excluded from this Indenture, as permitted by the TIA. Section 6.6 Limitation on Suits. A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate principal amount of the Securities then outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee security or indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of such notice, request and offer of security or indemnity; and (5) the Holders of a majority in aggregate principal amount of the Securities then outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. A Securityholder may not use this Indenture to prejudice the rights of any other Securityholder or to obtain a preference or priority over any other Securityholder. Section 6.7 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of the principal amount, Redemption Price, Purchase Price, Change of Control Purchase Price or interest, including contingent interest and additional interest, if any, in respect of the Securities held by such Holder, on or after the respective due dates expressed in the Securities or any Redemption Date, and to convert the Securities in accordance with Article 10, or to bring suit for the enforcement of any such payment on or after such respective dates or the right to convert, shall not be impaired or affected adversely without the consent of such Holder. Section 6.8 Collection Suit by Trustee. If an Event of Default described in Section 6.1(2), (3) or (4) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount owing with respect to the Securities and the amounts provided for in Section 7.7. Section 6.9 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal amount, Redemption Price, Purchase Price, Change of Control Purchase Price or interest, including contingent interest and additional interest, if any, in respect of the Securities shall then be due 37 and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of any such amount) 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 amount, Redemption Price, Purchase Price, Change of Control Purchase Price, or interest, including contingent interest and additional interest, if any, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel or any other amounts due the Trustee under Section 7.7) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10 Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: FIRST: to the Trustee for amounts due under Section 7.7; SECOND: to Securityholders for amounts due and unpaid on the Securities for the principal amount, Redemption Price, Purchase Price, Change of Control Purchase Price or interest, including contingent interest and additional interest, if any, as the case may be, ratably, without preference or priority of any kind, according to such amounts due and payable on the Securities; and THIRD: the balance, if any, to the Company. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10. At least 15 days before such record date, the Trustee shall mail to each Securityholder and the Company a notice that states the record date, the payment date and the amount to be paid. Section 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant (other than the Trustee) in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7 or a suit by Holders of more than 10% in aggregate principal amount of the Securities then outstanding. This Section 6.11 shall be in lieu of Section 315(e) of the TIA and such Section 315(e) is hereby expressly excluded from this Indenture, as permitted by the TIA. 38 Section 6.12 Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the principal amount, Redemption Price, Purchase Price or Change of Control Purchase Price in respect of Securities, or any interest, including contingent interest and additional interest, if any, on such amounts, as contemplated herein, or which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VII TRUSTEE Section 7.1 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture, but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture, but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein. This Section 7.1(b) shall be in lieu of Section 315(a) of the TIA and such Section 315(a) is hereby expressly excluded from this Indenture, as permitted by the TIA. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (1) this Section (c) does not limit the effect of Section (b) of this Section 7.1; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. 39 Subparagraphs (c)(1), (2) and (3) shall be in lieu of Sections 315(d)(1), 315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1), 315(d)(2) and 315(d)(3) are hereby expressly excluded from this Indenture, as permitted by the TIA. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section 7.1. (e) The Trustee may refuse to perform any duty or exercise any right or power or extend or risk its own funds or otherwise incur any financial liability unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee (acting in any capacity hereunder) shall be under no liability for interest on any money received by it hereunder unless otherwise agreed in writing with the Company. Section 7.2 Rights of Trustee. Subject to its duties and responsibilities under the TIA, (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers' Certificate; (c) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (d) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith which it believes to be authorized or within its rights or powers conferred under this Indenture; (e) the Trustee may consult with counsel selected by it and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (f) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders, pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby; (g) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; 40 (h) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; (i) the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Securities and this Indenture; (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other person employed to act hereunder; and (k) the Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorized to sign an Officers' Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded. Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, Conversion Agent or co-registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. Section 7.4 Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use or application of the proceeds from the Securities, it shall not be responsible for any statement in the registration statement for the Securities under the Securities Act or in any offering document for the Securities, the Indenture or the Securities (other than its certificate of authentication), or the determination as to which beneficial owners are entitled to receive any notices hereunder. 41 Section 7.5 Notice of Defaults. The Trustee shall, within 90 days of the occurrence of a Default, give to the Holders of the Securities notice of all uncured Defaults known to it and written notice of any event which with the giving of notice or the lapse of time, or both, would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto. Notwithstanding the preceding sentence, except in the case of a Default described in Section 6.1(1) through (5) inclusive, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interest of the Securityholders. The preceding sentence shall be in lieu of the proviso to Section 315(b) of the TIA and such proviso is hereby expressly excluded from this Indenture, as permitted by the TIA. The Trustee shall not be deemed to have knowledge of a Default unless a Responsible Officer of the Trustee has received written notice of such Default, which notice specifically references this Indenture and the Securities. Section 7.6 Reports by Trustee to Holders. Within 60 days after each November 15 beginning with the November 15 following the date of this Indenture, the Trustee shall mail to each Securityholder a brief report dated as of such November 15 that complies with TIA Section 313(a), if required by such Section 313(a). The Trustee also shall comply with TIA Section 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each securities exchange, if any, on which the Securities are listed. The Company agrees to notify the Trustee promptly whenever the Securities become listed on any securities exchange and of any delisting thereof. Section 7.7 Compensation and Indemnity. The Company agrees: (a) to pay to the Trustee from time to time such compensation as the Company and the Trustee shall from time to time agree in writing for all services rendered by it hereunder (which compensation shall not be limited (to the extent permitted by law) by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses, advances and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee or any predecessor Trustee and their agents for, and to hold them harmless against, any loss, damage, claim, liability, cost or expense (including attorney's fees and expenses, and taxes (other than taxes based upon, measured by or determined by the income of the Trustee)) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim (whether asserted by the Company or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. To secure the Company's payment obligations in this Section 7.7, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay the principal amount, Redemption Price, Purchase Price, Change of Control Purchase Price or interest, including contingent interest and additional interest, if any, as the case may be, on particular Securities. 42 The Company's payment obligations pursuant to this Section 7.7 shall survive the discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.1(8) or (9), the expenses including the reasonable charges and expenses of its counsel, are intended to constitute expenses of administration under any bankruptcy law. Section 7.8 Replacement of Trustee. The Trustee may resign by so notifying the Company; provided, however, no such resignation shall be effective until a successor Trustee has accepted its appointment pursuant to this Section 7.8. The Holders of a majority in aggregate principal amount of the Securities at the time outstanding may remove the Trustee by so notifying the Trustee and the Company. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint, by resolution of its Board of Directors, a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company satisfactory in form and substance to the retiring Trustee and the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.7. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in aggregate principal amount of the Securities at the time outstanding may petition any court of competent jurisdiction at the expense of the Company for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Section 7.9 Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. 43 Section 7.10 Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA Sections 310(a)(1) and 310(b). The Trustee (or its parent holding company) shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. Nothing herein contained shall prevent the Trustee from filing with the Commission the application referred to in the penultimate paragraph of TIA Section 310(b). Section 7.11 Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE VIII DISCHARGE OF INDENTURE Section 8.1 Discharge of Liability on Securities. When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced or repaid pursuant to Section 2.7) for cancellation or (ii) all outstanding Securities have become due and payable and the Company deposits with the Trustee cash sufficient to pay all amounts due and owing on all outstanding Securities (other than Securities replaced pursuant to Section 2.7), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Section 7.7, cease to be of further effect. The Trustee shall join in the execution of a document prepared by the Company acknowledging satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and Opinion of Counsel and at the cost and expense of the Company. Section 8.2 Repayment to the Company. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Securities that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person and the Trustee and the Paying Agent shall have no further liability to the Securityholders with respect to such money or securities for that period commencing after the return thereof. ARTICLE IX AMENDMENTS Section 9.1 Without Consent of Holders. The Company and the Trustee may amend this Indenture or the Securities without the consent of any Securityholder to: (a) add to the covenants of the Company for the benefit of the Holders of Securities; (b) surrender any right or power herein conferred upon the Company; (c) provide for conversion rights of Holders of Securities if any reclassification or change of the Common Stock or any consolidation, merger or sale of all or substantially all of the Company's assets occurs; (d) provide for the assumption of the Company's obligations to the Holders of Securities in the case of a merger, consolidation, conveyance, transfer or lease pursuant to Article V hereof; 44 (e) reduce the Conversion Price; provided, however, that such reduction in the Conversion Price shall not adversely affect the interests of the Holders of Securities (after taking into account tax and other consequences of such reduction); (f) comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; (g) make any changes or modifications necessary in connection with the registration of the Securities under the Securities Act as contemplated in the Registration Rights Agreement; provided, however, that such action pursuant to this clause (g) does not, in the good faith opinion of the Board of Directors of the Company (as evidenced by a Board Resolution) and the Trustee, adversely affect the interests of the Holders of Securities in any material respect; (h) cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or which is otherwise defective, or to make any other provisions with respect to matters or questions arising under this Indenture which the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of this Indenture; provided, however, that such action pursuant to this clause (h) does not, in the good faith opinion of the Board of Directors of the Company (as evidenced by a Board Resolution) and the Trustee, adversely affect the interests of the Holders of Securities in any material respect; and (i) add or modify any other provisions herein with respect to matters or questions arising hereunder which the Company and the Trustee may deem necessary or desirable and which will not adversely affect the interests of the Holders of Securities. Section 9.2 With Consent of Holders. Except as provided below in this Section 9.2, this Indenture or the Securities may be amended, modified or supplemented, and noncompliance in any particular instance with any provision of this Indenture or the Securities may be waived, in each case with the written consent of the Holders of at least a majority of the principal amount of the Securities at the time outstanding. Without the written consent or the affirmative vote of each Holder of Securities affected thereby, an amendment or waiver under this Section 9.2 may not: (a) change the maturity of the principal amount of, or any installment of interest, including contingent interest or additional interest, on, any Security; (b) reduce the principal amount of, or interest, including contingent interest or additional interest, payable on, or the Redemption Price, Purchase Price or Change of Control Purchase Price of any Security; (c) impair or adversely affect the conversion rights of any Holder of Securities; (d) reduce the value of the Common Stock to which reference is made in determining whether an interest adjustment will be made on the Securities, or change the method by which this value is calculated; (e) change the currency of any amount owed or owing under the Security or any interest thereon from U.S. Dollars; 45 (f) alter or otherwise modify the rate of interest, including contingent interest or additional interest, on any Security, or the manner of calculation thereof, or extend time for payment of any amounts due and payable to the Holders of the Securities; (g) impair the right of any Holder to institute suit for the enforcement of any payment or with respect to, or conversion of, any Security; (h) modify the obligation of the Company to maintain an office or agency pursuant to Section 4.5; (i) adversely affect the purchase right of the Holders of the Securities as provided in Article III or the right of the Holders of the Securities to convert any Security as provided in Article X; (j) modify the provisions of Article III in a manner adverse to the Holders of the Securities; (k) modify any of the provisions of this Section, or reduce the principal amount of outstanding Securities required to waive a default, except to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Security affected thereby; or (l) reduce the percentage of the principal amount of the outstanding Securities the consent of whose Holders is required for any such supplemental indenture or the consent of whose Holders is required for any waiver provided for in this Indenture. It shall not be necessary for the consent of the Holders under this Section 9.2 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section 9.2 becomes effective, the Company shall mail to each Holder a notice briefly describing the amendment. Nothing in this Section 9.2 shall impair the ability of the Company and the Trustee to amend this Indenture or the Securities without the consent of any Securityholder to provide for the assumption of the Company's obligations to the Holders of Securities in the case of a merger, consolidation, conveyance, transfer or lease pursuant to Article V hereof. Section 9.3 Compliance with TIA. Every supplemental indenture executed pursuant to this Article shall comply with the TIA. Section 9.4 Revocation and Effect of Consents, Waivers and Actions. Until an amendment, waiver or other action by Holders becomes effective, a consent thereto by a Holder of a Security hereunder is a continuing consent by the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same obligation as the consenting Holder's Security, even if notation of the consent, waiver or action is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent, waiver or action as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment, waiver or action becomes effective. After an amendment, waiver or action becomes effective, it shall bind every Securityholder. 46 Section 9.5 Notation on or Exchange of Securities. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall, if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for outstanding Securities. Section 9.6 Trustee to Sign Supplemental Indentures. The Trustee shall sign any supplemental indenture authorized pursuant to this Article 9 if the amendment contained therein does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign such supplemental indenture. In signing such supplemental indenture the Trustee shall receive, and (subject to the provisions of Section 7.1) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. Section 9.7 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. ARTICLE X CONVERSIONS Section 10.1 Conversion Privilege. (a) Subject to and upon compliance with the provisions of this Article X, a Holder of a Security shall have the right, at such Holder's option, to convert all or any portion (if the portion to be converted is $1,000 or an integral multiple of $1,000) of such Security into shares of Common Stock at the Conversion Price in effect on the date of conversion: (1) during any Conversion Period, if the Sale Price of the Common Stock for at least 20 Trading Days in the 30 Trading Day period ending on the first day of such Conversion Period exceeds 120% of the Conversion Price in effect on such thirtieth Trading Day (in the event that the Conversion Price on such thirtieth Trading Day is not the same as the Conversion Price in effect for each of such thirty Trading Days, the Conversion Agent shall make such adjustments as it, in its discretion, deems appropriate in determining whether the foregoing condition has been met); (2) during the five Business Day period following any 10 consecutive Trading Day period in which the average of the Trading Prices of the Securities for such 10 Trading Day period was less than 105% of the average of the Conversion Values of the Securities during the same period; (3) at any time prior to the close of business on the second Business Day preceding the date fixed for redemption, if such Security has been called for redemption pursuant to Article III hereof; (4) during any period after the 30th day following the original issuance of the Securities in which (A) the credit ratings assigned to the Securities by both Moody's Investor Services, Inc. and Standard & Poor's Rating Services are below Baa3 or BBB-, respectively, (B) 47 the credit ratings assigned to the Securities are suspended or withdrawn by both such voting agencies or (C) neither of such rating agencies is then rating the Securities; or (5) as provided in Section (b) of this Section 10.1. The Conversion Agent shall, on behalf of the Company, determine on a daily basis whether the Securities shall be convertible as a result of the occurrence of an event specified in clause (1) or clause (2) above and, if the Securities shall be so convertible, the Conversion Agent shall promptly deliver to the Company and the Trustee written notice thereof. Whenever the Securities shall become convertible pursuant to Section 10.1, the Company or, at the Company's request, the Trustee in the name and at the expense of the Company, shall notify the Holders of the event triggering such convertibility in the manner provided in Section 11.2, and the Company shall also publicly announce such information and publish it on the Company's web site. Any notice so given shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. (b) In addition, in the event that: (1) (A) the Company distributes to all holders of its shares of Common Stock rights or warrants entitling them (for a period expiring within 60 days of the Record Date for such distribution) to subscribe for or purchase shares of Common Stock, at a price per share less than the Sale Price of the Common Stock on the Business Day immediately preceding the announcement of such distribution, (B) the Company distributes to all holders of its shares of Common Stock, cash or other assets, debt securities or rights or warrants to purchase its securities, where the Fair Market Value (as determined by the Board of Directors) of such distribution per share of Common Stock exceeds 10% of the Sale Price of a share of Common Stock on the Business Day immediately preceding the date of declaration of such distribution, or (C) a Change of Control occurs but Holders of Securities do not have the right to require the Company to purchase their Securities as a result of such Change of Control, because of the provisions set forth in Section 3.8(a)(2), then, in each case, the Securities may be surrendered for conversion at any time on and after the date that the Company gives notice to the Holders of such right, which shall be not less than 20 days prior to the Ex-Dividend Time for such distribution, in the case of (A) or (B), or within 30 days after the occurrence of the Change of Control, in the case of (C), until the earlier of the close of business on the Business Day immediately preceding the Ex-Dividend Time or the date the Company announces that such distribution will not take place, in the case of (A) or (B), or the earlier of 30 days after the Company's delivery of the Change of Control Purchase Notice or the date the Company announces that the Change of Control will not take place, in the case of (C). (2) the Company consolidates with or merges into another corporation, or is a party to a binding share exchange pursuant to which the shares of Common Stock would be converted into cash, securities or other property as set forth in Section 10.4 hereof, then the Securities may be surrendered for conversion at any time from and after the date which is 15 days prior to the date announced by the Company as the anticipated effective time of such transaction until 15 days after the actual date of such transaction. "Conversion Period" means the period from and including the thirtieth trading day in a fiscal quarter to, but not including, the thirtieth trading day in the immediately following fiscal quarter. "Conversion Value", on any day, means the product of the Sale Price for the Common Stock multiplied by the then-current Conversion Rate. 48 "Ex-Dividend Time" means, with respect to any issuance or distribution on shares of Common Stock, the first date on which the shares of Common Stock trade regular way on the principal securities market on which the shares of Common Stock are then traded without the right to receive such issuance or distribution. The "Trading Price" of the Securities, on any date of determination, means the average of the secondary market bid quotations per Security obtained by the Company or the Calculation Agent for $10,000,000 principal amount at maturity of Securities at approximately 3:30 p.m., New York City time, on such determination date from three independent nationally recognized securities dealers selected by the Company, provided that if at least three such bids cannot reasonably be obtained by the Company or the Calculation Agent, but two such bids are obtained, then the average of the two bids shall be used, and if only one such bid can reasonably be obtained by the Company or the Calculation Agent, this one bid shall be used. If either the Company or the Calculation Agent cannot reasonably obtain at least one bid for $10,000,000 principal amount at maturity of Securities from a nationally recognized securities dealer or in the reasonable judgment of the Company, the bid quotations are not indicative of the secondary market value of the Securities, then the trading price of the Securities will equal (a) the then-applicable Conversion Rate multiplied by (b) the Sale Price of the Common Stock on such determination date. The Conversion Rate, at any time, shall equal (A) $1,000 divided by the Conversion Price at such time, rounded to three decimal places (rounded up if the fourth decimal place thereof is 5 or more and otherwise rounded down). Section 10.2 Conversion Procedure; Conversion Price; Fractional Shares. (a) Each Security shall be convertible at the office of the Conversion Agent into fully paid and nonassessable shares (calculated to the nearest 1/100th of a share) of Common Stock. The Security will be converted into shares of Common Stock at the Conversion Price therefor. No payment or adjustment shall be made in respect of dividends on the Common Stock or accrued interest on a converted Security, except as described in Section 10.9 hereof. The Company shall not issue any fraction of a share of Common Stock in connection with any conversion of Securities, but instead shall, subject to Section 10.3(h) hereof, make a cash payment (calculated to the nearest cent) equal to such fraction multiplied by the Sale Price of the Common Stock on the last Trading Day prior to the date of conversion. Notwithstanding the foregoing, a Security in respect of which a Holder has delivered a Purchase Notice or Change of Control Purchase Notice exercising such Holder's option to require the Company to repurchase such Security may be converted only if such notice of exercise is withdrawn in accordance with the Section 3.10 hereof. (b) Before any Holder of a Security shall be entitled to convert the same into Common Stock, such Holder shall, in the case of Securities issued in global form, comply with the procedures of the Depositary in effect at that time, and in the case of definitive Securities, surrender such Securities, duly endorsed to the Company or in blank, at the office of the Conversion Agent, and shall give written notice to the Company at said office or place that such Holder elects to convert the same and shall state in writing therein the principal amount of Securities to be converted and the name or names (with addresses) in which such Holder wishes the certificate or certificates for Common Stock to be issued. Before any such conversion, a Holder also shall pay all funds required, if any, relating to interest on the Securities, as provided in Section 10.9, and all taxes or duties, if any, as provided in Section 10.8. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares of Common Stock which shall be deliverable upon conversion shall be 49 computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof to the extent permitted thereby) so surrendered. Subject to the next sentence, the Company will, as soon as practicable thereafter, issue and deliver at said office or place to such Holder of a Security, or to such Holder's nominee or nominees, certificates for the number of full shares of Common Stock to which such Holder shall be entitled as aforesaid, together, subject to the last sentence of Section (a) above, with cash in lieu of any fraction of a share to which such Holder would otherwise be entitled. The Company shall not be required to deliver certificates for shares of Common Stock while the stock transfer books for such stock or the security register are duly closed for any purpose, but certificates for shares of Common Stock shall be issued and delivered as soon as practicable after the opening of such books or security register. (c) A Security shall be deemed to have been converted as of the close of business on the date of the surrender of such Securities for conversion as provided above, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record Holder or Holders of such Common Stock as of the close of business on such date. (d) In case any Security shall be surrendered for partial conversion, the Company shall execute and the Trustee shall authenticate and deliver to or upon the written order of the Holder of the Security so surrendered, without charge to such Holder (subject to the provisions of Section 10.8 hereof), a new Security or Securities in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Securities. Section 10.3 Adjustment of Conversion Price for Common Stock. The Conversion Price shall be adjusted from time to time as follows: (a) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, pay a dividend or make a distribution in shares of Common Stock to all holders of its outstanding shares of Common Stock, then the Conversion Price in effect at the opening of business on the date following the record date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction: (1) the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the Record Date fixed for such determination; and (2) the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution. Such reduction shall become effective immediately after the opening of business on the day following the Record Date fixed for such determination. If any dividend or distribution of the type described in this Section 10.3(a) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared. (b) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, then the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in case the Company shall, at any time or from time to time while any of the Securities are outstanding, combine its outstanding shares of Common Stock into a smaller number of shares of 50 Common Stock, then the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased. Such reduction or increase, as the case may be, shall become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (c) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, issue rights or warrants (other than any rights or warrants referred to in Section 10.3(d)) to all holders of its shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into shares of Common Stock) at a price per share (or having a conversion price per share) less than the Sale Price on the Business Day immediately preceding the date of the announcement of such issuance (treating the conversion price per share of the securities convertible into Common Stock as equal to (x) the sum of (i) the price for a unit of the security convertible into Common Stock and (ii) any additional consideration initially payable upon the conversion of such security into Common Stock divided by (y) the number of shares of Common Stock initially underlying such convertible security), then the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such date of announcement by a fraction: (1) the numerator of which shall be the number of shares of Common Stock outstanding on the close of business on the date of announcement, plus the number of shares or securities which the aggregate offering price of the total number of shares or securities so offered for subscription or purchase (or the aggregate conversion price of the convertible securities so offered) would purchase at such Sale Price of the Common Stock; and (2) the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on the date of announcement, plus the total number of additional shares of Common Stock so offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall become effective immediately after the opening of business on the day following the date of announcement of such issuance. To the extent that shares of Common Stock (or securities convertible into shares of Common Stock) are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of the delivery of only the number of shares of Common Stock (or securities convertible into shares of Common Stock) actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if the date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Sale Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration if other than cash, to be determined by the Board of Directors. (d) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, by dividend or otherwise, distribute to all holders of its shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation and the Common Stock is not changed or exchanged), cash, shares of its capital stock (other than any dividends or distributions to which Section 10.3(a) applies), 51 evidences of its Indebtedness or other assets, including securities, but excluding (i) any rights or warrants referred to in Section 10.3(c), (ii) dividends or distributions of stock, securities or other property or assets (including cash) in connection with a reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance to which Section 10.4 applies and (iii) dividends and distributions paid exclusively in cash (such capital stock, evidence of its indebtedness, cash, other assets or securities being distributed hereinafter in this Section 10.3(d) called the "distributed assets"), then, in each such case, subject to the third and fourth succeeding paragraphs and the last Section of this Section 10.3(d), the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date with respect to such distribution by a fraction: (1) the numerator of which shall be the Current Market Price of the Common Stock, less the Fair Market Value on such date of the portion of the distributed assets so distributed applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock outstanding on the record date)(determined as provided in Section 10.3(g)) on such date; and (2) the denominator of which shall be such Current Market Price. Such reduction shall become effective immediately prior to the opening of business on the day following the Record Date for such distribution. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the Fair Market Value of any distribution for purposes of this Section 10.3(d) by reference to the actual or when issued trading market for any distributed assets comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period (the "Reference Period") used in computing the Current Market Price pursuant to Section 10.3(g) to the extent possible, unless the Board of Directors determines in good faith that determining the Fair Market Value during the Reference Period would not be in the best interest of the Holders. In the event any such distribution consists of shares of capital stock of, or similar equity interests in, one or more of the Company's Subsidiaries (a "Spin-Off"), the Fair Market Value of the securities to be distributed shall equal the average of the closing sale prices of such securities on the principal securities market on which such securities are traded for the five consecutive Trading Days commencing on and including the sixth day of trading of those securities after the effectiveness of the Spin-Off, and the Current Market Price shall be measured for the same period. In the event, however, that an underwritten initial public offering of the securities in the Spin-Off occurs simultaneously with the Spin-Off, Fair Market Value of the securities distributed in the Spin-Off shall mean the initial public offering price of such securities and the Current Market Price shall mean the Sale Price for the Common Stock on the same Trading Day. Rights or warrants distributed by the Company to all holders of its shares of Common Stock entitling them to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Trigger Event"), (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of shares of Common Stock shall be deemed not to have been distributed for purposes of this Section 10.3(d) (and no adjustment to the Conversion Price under this Section 10.3(d) will be required) until the occurrence of the earliest Trigger Event. If such right or warrant is subject to subsequent events, upon the occurrence of which such right 52 or warrant shall become exercisable to purchase different distributed assets, evidences of indebtedness or other assets, or entitle the holder to purchase a different number or amount of the foregoing or to purchase any of the foregoing at a different purchase price, then the occurrence of each such event shall be deemed to be the date of issuance and record date with respect to a new right or warrant (and a termination or expiration of the existing right or warrant without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto, that resulted in an adjustment to the Conversion Price under this Section 10.3(d): (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder of shares of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of shares of Common Stock as of the date of such redemption or repurchase; and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise, the Conversion Price shall be readjusted as if such rights and warrants had never been issued. For purposes of this Section 10.3(d) and Sections 10.3(a), 10.3(b) and 10.3(c), any dividend or distribution to which this Section 10.3(d) is applicable that also includes (i) shares of Common Stock, (ii) a subdivision or combination of shares of Common Stock to which Section 10.3(b) applies or (iii) rights or warrants to subscribe for or purchase shares of Common Stock to which Section 10.3(c) applies (or any combination thereof), shall be deemed instead to be: (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants, other than such shares of Common Stock, such subdivision or combination or such rights or warrants to which Sections 10.3(a), 10.3(b) and 10.3(c) apply, respectively (and any Conversion Price reduction required by this Section 10.3(d) with respect to such dividend or distribution shall then be made), immediately followed by (2) a dividend or distribution of such shares of Common Stock, such subdivision or combination or such rights or warrants (and any further Conversion Price reduction required by Sections 10.3(a), 10.3(b) and 10.3(c) with respect to such dividend or distribution shall then be made), except: (A) the Record Date of such dividend or distribution shall be substituted for (i) "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution," "Record Date fixed for such determinations" and "Record Date" within the meaning of Section 10.3(a), (ii) "the day upon which such subdivision becomes effective" and "the day upon which such combination becomes effective" within the meaning of Section 10.3(b), and (iii) "the date fixed for the determination of stockholders entitled to receive such rights or warrants," "the Record Date fixed for the determination of the stockholders entitled to receive such rights or warrants" and such "Record Date" within the meaning of Section 10.3(c); and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 10.3(a) and any reduction or increase in the 53 number of shares of Common Stock resulting from such subdivision or combination shall be disregarded in connection with such dividend or distribution. In the event of any distribution referred to in this Section 10.3(d) in which (1) the Fair Market Value (as determined by the Board of Directors) of such distribution applicable to one share of Common Stock (determined as provided above) equals or exceeds the average of the Sale Prices of the Common Stock over the ten consecutive Trading Day period ending on the Record Date for such distribution or (2) the average of the Sale Prices of the Common Stock over the ten consecutive Trading Day period ending on the Record Date for such distribution exceeds the Fair Market Value of such distribution by less than $1.00, then, in each such case, in lieu of an adjustment to the Conversion Price, adequate provision shall be made so that each Holder shall have the right to receive upon conversion of a Security, in addition to shares of Common Stock, the kind and amount of such distribution such Holder would have received had such Holder converted such Security immediately prior to the Record Date for determining the shareholders entitled to receive the distribution. In the event of any distribution referred to in Section 10.3(c) or 10.3(d), where, in the case of a distribution described in Section 10.3(d), the Fair Market Value of such distribution per share of Common Stock (as determined by the Board of Directors) exceeds 10% of the Sale Price of a share of Common Stock on the Business Day immediately preceding the declaration date for such distribution, then, if such distribution would also trigger a conversion right under Section 10.1(b) or the Securities are otherwise convertible pursuant to this Article X, the Company will be required to give notice to the Holders of Securities at least 20 days prior to the Ex-Dividend Time for the distribution and, upon the giving of notice, the Securities may be surrendered for conversion at any time on and after the date that the Company gives notice to the Holders of such conversion right, until the close of business on the Business Day prior to the Ex-Dividend Time or the Company announces that such distribution will not take place. No adjustment to the Conversion Price or the ability of a Holder of a Security to convert will be made if the Holder will otherwise participate in such distribution without conversion. (e) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, by dividend or otherwise, distribute to all holders of its shares of Common Stock, cash (excluding any cash that is distributed upon a reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance to which Section 10.4 applies or as part of a distribution referred to in Section 10.3(d)), in an aggregate amount that, combined together with: (1) the aggregate amount of any other such distributions to all holders of shares of Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 10.3(e) has been made; and (2) the aggregate amount of any cash, plus the Fair Market Value (as determined by the Board of Directors) of consideration payable in respect of any tender offer by the Company or any of its Subsidiaries for all or any portion of the shares of Common Stock concluded within the 12 months preceding the date of such distribution, and in respect of which no adjustment pursuant to Section 10.3(f) has been made; exceeds 10% of the product of the Current Market Price of the Common Stock on the Record Date with respect to such distribution, times the number of shares of Common Stock outstanding on such date, then, and in each such case, immediately after the close of business on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction: 54 (1) the numerator of which shall be equal to the Current Market Price on the Record Date, less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of shares of Common Stock outstanding on the Record Date; and (2) the denominator of which shall be equal to the Current Market Price on such date. However, in the event that the then Fair Market Value (as so determined) of the portion of cash and other securities, if any, so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Holder shall have the right to receive upon conversion of a Security (or any portion thereof) the amount of cash in excess of such 10% such Holder would have received had such Holder converted such Security (or portion thereof) immediately prior to such Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. (f) In case a tender offer made by the Company or any of its Subsidiaries for all or any portion of the shares of Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of shares tendered) of an aggregate consideration having a Fair Market Value (as determined by the Board of Directors) that combined together with: (1) the aggregate amount of the cash, plus the Fair Market Value (as determined by the Board of Directors), as of the expiration of such tender offer, of consideration payable in respect of any other tender offers, by the Company or any of its Subsidiaries for all or any portion of the shares of Common Stock expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this Section 10.3(f) has been made; and (2) the aggregate amount of any distributions to all holders of shares of Common Stock made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to Section 10.3(e) has been made; exceeds 10% of the product of the Current Market Price of the Common Stock as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended), times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time (such excess, the "Excess Amount"), then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction: (1) the numerator of which shall be the (x) the product of (i) the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time and (ii) the Current Market Price of the Common Stock at the Expiration Time, less (y) the Excess Amount; and (2) the denominator shall be the product of the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time and the Current Market Price of the Common Stock at the Expiration Time. 55 Such reduction (if any) shall become effective immediately prior to the opening of business on the day following the Expiration Time. In the event that the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all or a portion of such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such (or such portion of the) tender offer had not been made. If the application of this Section 10.3(f) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 10.3(f). Pursuant to rights issued under the Company's preferred share purchase rights plan, if holders of the Securities exercising the right of conversion attaching after the date the rights separate from the underlying Common Stock are not entitled to receive the rights that would otherwise be attributable to the shares of Common Stock received upon conversion, the Conversion Price will be adjusted as though the rights were being distributed to holders of Common Stock on the date of such separation. If such an adjustment is made and the rights are later redeemed, invalidated or terminated, then a corresponding reversing adjustment will be made to the conversion price on an equitable basis. (g) For purposes of this Article X, the following terms shall have the meanings indicated: "Current Market Price" on any date means the average of the daily Sale Prices per share of Common Stock for the ten consecutive Trading Days immediately prior to such date; provided, however, that if: (1) the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 10.3(a), (b), (c), (d), (e) or (f) occurs during such ten consecutive Trading Days, the Sale Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by dividing such Sale Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event; (2) the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 10.3(a), (b), (c), (d), (e) or (f) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the Sale Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by dividing such Sale Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event; and (3) the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Sale Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the Fair Market Value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 10.3(d), (e) or (f)) of the evidences of Indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 10.3(f), if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 10.3(a), (b), (c), (d), (e) or (f) occurs on or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the Sale Price for each Trading Day on 56 and after the "ex" date for such other event shall be adjusted by dividing such Sale Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, when used: (1) with respect to any issuance or distribution, means the first date on which the shares of Common Stock trade regular way on the relevant exchange or in the relevant market from which the Sale Price was obtained without the right to receive such issuance or distribution; (2) with respect to any subdivision or combination of shares of Common Stock, means the first date on which the shares of Common Stock trade regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective; and (3) with respect to any tender or exchange offer, means the first date on which the shares of Common Stock trade regular way on such exchange or in such market after the Expiration Time of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to this Section 10.3, such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 10.3 and to avoid unjust or inequitable results as determined in good faith by the Board of Directors. "Fair Market Value" shall mean the amount which a willing buyer would pay a willing seller in an arm's length transaction (as determined by the Board of Directors, whose determination shall be conclusive). "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of shares of Common Stock have the right to receive any cash, securities or other property or in which the shares of Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (h) The Company shall be entitled to make such additional reductions in the Conversion Price, in addition to those required by Sections 10.3(a), (b), (c), (d), (e) and (f), as shall be necessary in order that any dividend or distribution of Common Stock, any subdivision, reclassification or combination of shares of Common Stock or any issuance of rights or warrants referred to above shall not be taxable to the holders of Common Stock for United States federal income tax purposes. (i) To the extent permitted by applicable law, the Company may, from time to time, reduce the Conversion Price by any amount for any period of time, if such period is at least 20 days and the reduction is irrevocable during the period. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to the Trustee and each Holder at the address of such Holder as it appears in the register of the Securities maintained by the Registrar, at least 15 days prior to the date the reduced Conversion Price takes effect, a notice of the reduction stating the reduced Conversion Price and the period during which it will be in effect. (j) In any case in which this Section 10.3 shall require that any adjustment be made effective as of or retroactively immediately following a Record Date, the Company may elect to defer (but only for five Trading Days following the filing of the statement referred to in Section 10.5) issuing to the Holder of any Securities converted after such Record Date the shares of Common Stock issuable upon such conversion over and above the shares of Common Stock issuable upon such conversion on the basis 57 of the Conversion Price prior to adjustment; provided, however, that the Company shall deliver to such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (k) All calculations under this Section 10.3 shall be made to the nearest cent or one-hundredth of a share, with one-half cent and 0.005 of a share, respectively, being rounded upward. Notwithstanding any other provision of this Section 10.3, the Company shall not be required to make any adjustment of the Conversion Price unless such adjustment would require an increase or decrease of at least 1% of such price. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least 1% in such price. Any adjustments under this Section 10.3 shall be made successively whenever an event requiring such an adjustment occurs. (l) In the event that at any time, as a result of an adjustment made pursuant to this Section 10.3, the Holder of any Securities thereafter surrendered for conversion shall become entitled to receive any shares of stock of the Company other than shares of Common Stock into which the Securities originally were convertible, the Conversion Price of such other shares so receivable upon conversion of any such Security shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in subparagraphs (a) through (k) of this Section 10.3, and the provision of Sections 10.1, 10.2 and 10.4 through 10.9 with respect to the Common Stock shall apply on like or similar terms to any such other shares and the determination of the Board of Directors as to any such adjustment shall be conclusive. (m) No adjustment shall be made pursuant to this Section 10.3 (i) if the effect thereof would be to reduce the Conversion Price below the par value (if any) of the Common Stock or (ii) if the Holders of the Securities may participate in the transaction that would otherwise give rise to an adjustment pursuant to this Section 10.3. Section 10.4 Consolidation or Merger of the Company. If any of the following events occurs, namely: (1) any reclassification or change of the outstanding Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); (2) any merger, consolidation, statutory share exchange or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock; or (3) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock; the Company or the successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture, if such supplemental indenture is then required to so comply) providing that such Securities shall be convertible into the kind and amount of shares of stock 58 and other securities or property or assets (including cash) which such Holder would have been entitled to receive upon such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance had such Securities been converted into Common Stock immediately prior to such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance assuming such holder of Common Stock did not exercise its rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such merger, consolidation, statutory share exchange, sale or conveyance (provided, that if the kind or amount of securities, cash or other property receivable upon such merger, consolidation, statutory share exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("Non-Electing Share"), then for the purposes of this Section 10.4, the kind and amount of securities, cash or other property receivable upon such merger, consolidation, statutory share exchange, sale or conveyance for each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article X. If, in the case of any such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance, the stock or other securities and assets receivable thereupon by a holder of Common Stock includes shares of stock or other securities and assets of a corporation other than the successor or purchasing corporation, as the case may be, in such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance, then such supplemental indenture shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the Holders of the Securities as the Board of Directors shall reasonably consider necessary by reason of the foregoing, including to the extent practicable the provisions providing for the Repurchase Rights set forth in Article X hereof. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder, at the address of such Holder as it appears on the register of the Securities maintained by the Registrar, within 20 days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section 10.4 shall similarly apply to successive reclassifications, mergers, consolidations, statutory share exchanges, combinations, sales and conveyances. If this Section 10.4 applies to any event or occurrence, Section 10.3 shall not apply. Section 10.5 Notice of Adjustment. Whenever an adjustment in the Conversion Price with respect to the Securities is required: (1) the Company shall forthwith place on file with the Trustee and any Conversion Agent for such securities a certificate of the Treasurer of the Company, stating the adjusted Conversion Price determined as provided herein and setting forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustment; and (2) a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall forthwith be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company, to each Holder in the manner provided in Section 11.2. Any notice so given shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. 59 Section 10.6 Notice in Certain Events. In case: (1) of a consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or conveyance to another Person or entity or group of Persons or entities acting in concert as a partnership, limited partnership, syndicate or other group (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of all or substantially all of the property and assets of the Company; or (2) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (3) of any action triggering an adjustment of the Conversion Price referred to in clauses (x) or (y) below; then, in each case, the Company shall cause to be filed with the Trustee and the Conversion Agent, and shall cause to be given, to the Holders of the Securities in the manner provided in Section 11.2, at least 15 days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of any distribution or grant of rights or warrants triggering an adjustment to the Conversion Price pursuant to this Article X, or, if a record is not to be taken, the date as of which the holders of record of Common Stock entitled to such distribution, rights or warrants are to be determined, or (y) the date on which any reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up triggering an adjustment to the Conversion Price pursuant to this Article X is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger sale, conveyance, dissolution, liquidation or winding up. Failure to give such notice or any defect therein shall not affect the legality or validity of the proceedings described in clause (1), (2) or (3) of this Section 10.6. Section 10.7 Company To Reserve Stock: Registration; Listing. (a) The Company shall, in accordance with the laws of the State of Delaware, at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of the Securities, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all Securities then Outstanding into such Common Stock at any time (assuming that, at the time of the computation of such number of shares or securities, all such Securities would be held by a single Holder); provided, however, that nothing contained herein shall preclude the Company from satisfying its obligations in respect of the conversion of the Securities by delivery of purchased shares of Common Stock which are then held in the treasury of the Company. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be fully paid and nonassessable and free from all liens and charges and, except as provided in Section 10.8, taxes with respect to the issue thereof. (b) If any shares of Common Stock which would be issuable upon conversion of Securities hereunder require registration with or approval of any governmental authority before such shares or securities may be issued upon such conversion, the Company will in good faith and as expeditiously as possible endeavor to cause such shares or securities to be duly registered or approved, as 60 the case may be. The Company further covenants that so long as the Common Stock shall be listed on the New York Stock Exchange, the Company will, if permitted by the rules of such exchange, list and keep listed all Common Stock issuable upon conversion of the Securities, and the Company will endeavor to list the shares of Common Stock required to be delivered upon conversion of the Securities prior to such delivery upon any other national securities exchange upon which the outstanding Common Stock is listed at the time of such delivery. Section 10.8 Taxes on Conversion. The issue of stock certificates on conversion of Securities shall be made without charge to the converting Holder for any documentary, stamp or similar issue or transfer taxes in respect of the issue thereof, and the Company shall pay any and all documentary, stamp or similar issue or transfer taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock or the portion, if any, of the Securities which are not so converted in a name other than that in which the Securities so converted were registered, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of such tax or has established to the satisfaction of the Company that such tax has been paid. Section 10.9 Conversion After Record Date. Except as provided below, if any Securities are surrendered for conversion on any day other than an Interest Payment Date, the Holder of such Securities shall not be entitled to receive any interest that has accrued on such Securities since the prior Interest Payment Date. By delivery to the Holder of the number of shares of Common Stock or other consideration issuable upon conversion in accordance with this Article X, any accrued and unpaid interest on such Securities will be deemed to have been paid in full. If any Securities are surrendered for conversion subsequent to the Record Date preceding an Interest Payment Date but on or prior to such Interest Payment Date, the Holder of such Securities at the close of business on such Record Date shall receive the interest payable on such Securities on such Interest Payment Date notwithstanding the conversion thereof. Securities surrendered for conversion during the period from the close of business on any Record Date preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall (except in the case of Securities which have been called for redemption on a Redemption Date within such period) be accompanied by payment by Holders, for the account of the Company, in New York Clearing House funds or other funds of an amount equal to the interest payable on such Interest Payment Date on the Securities being surrendered for conversion. Except as provided in this Section 10.9, no adjustments in respect of payments of interest on Securities surrendered for conversion or any dividends or distributions or interest on the Common Stock issued upon conversion shall be made upon the conversion of any Securities. Section 10.10 Company Determination Final. Any determination that the Company or the Board of Directors must make pursuant to this Article X shall be conclusive if made in good faith and in accordance with the provisions of this Article, absent manifest error, and set forth in a Board Resolution. Section 10.11 Responsibility of Trustee for Conversion Provisions. 61 The Trustee has no duty to determine when an adjustment under this Article X should be made, how it should be made or what it should be. The Trustee makes no representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for any failure of the Company to comply with this Article X. Each Conversion Agent other than the Company shall have the same protection under this Section 10.11 as the Trustee. The rights, privileges, protections, immunities and benefits given to the Trustee under the Indenture including, without limitation, its rights to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each Paying Agent or Conversion Agent acting hereunder. Section 10.12 Unconditional Right of Holders to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to convert its Security in accordance with this Article X and to bring an action for the enforcement of any such right to convert, and such rights shall not be impaired or affected without the consent of such Holder. ARTICLE XI MISCELLANEOUS Section 11.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. Section 11.2 Notices. Any request, demand, authorization, notice, waiver, consent or communication shall be in writing and delivered in person or mailed by first-class mail, postage prepaid, addressed as follows or transmitted by facsimile transmission (confirmed by guaranteed overnight courier) to the following facsimile numbers: if to the Company: Radian Group Inc. 1601 Market Street Philadelphia, PA 19103 Attn: General Counsel Facsimile No. (215) 564-6600 if to the Trustee: The Bank of New York 101 Barclay Street Floor 21 West New York, NY 10286 Telephone No. (212) 896-7170 Facsimile No. (212) 896-7298 Attention: Corporate Trust Administration The Company or the Trustee by notice given to the other in the manner provided above may designate additional or different addresses for subsequent notices or communications. 62 Any notice or communication given to a Securityholder shall be mailed to the Securityholder, by first-class mail, postage prepaid, at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not received by the addressee. If the Company mails a notice or communication to the Securityholders, it shall mail a copy to the Trustee and each Registrar, Paying Agent, Conversion Agent or co-registrar. Section 11.3 Communication by Holders with Other Holders. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar, the Paying Agent, the Conversion Agent and anyone else shall have the protection of TIA Section 312(c). Section 11.4 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) if the Trustee shall so request, an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 11.5 Statements Required in Certificate or Opinion. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that each person making such Officers' Certificate or Opinion of Counsel has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (3) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable such person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement that, in the opinion of such person, such covenant or condition has been complied with. Section 11.6 Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 11.7 Rules by Trustee, Paying Agent, Conversion Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar, the Conversion Agent and the Paying Agent may make reasonable rules for their functions. 63 Section 11.8 Legal Holidays. A "Legal Holiday" is any day other than a Business Day. If any specified date (including a date for giving notice) is a Legal Holiday, the action shall be taken on the next succeeding day that is not a Legal Holiday, and, if the action to be taken on such date is a payment in respect of the Securities, no interest, if any, shall accrue for the intervening period. Section 11.9 Governing Law. This Indenture shall be governed by, and construed in accordance with, the laws of the state of New York, without regard to conflicts of laws principles thereof. Section 11.10 No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. Section 11.11 Successors. All agreements of the Company in this Indenture and the Securities shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. Section 11.12 Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. 64 IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Indenture on behalf of the respective parties hereto as of the date first above written. RADIAN GROUP INC. By: /s/ Howard S. Yaruss ------------------------------ Name: Howard S. Yaruss Title: Senior Vice President THE BANK OF NEW YORK As Trustee By: /s/ Paul Schmalzel ------------------------------ Name: Paul Schmalzel Title: Vice President EXHIBIT A [FORM OF FACE OF GLOBAL SECURITY] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS TO NOMINEES OF THE DEPOSITORY TRUST COMPANY, OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THE SECURITY EVIDENCED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT OF 1933"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER: (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT OF 1933; (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT OF 1933, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OF 1933 (IF AVAILABLE), (D) TO AN INSTITUTIONAL INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), OR (E) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OF 1933 AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(C) OR 2(E) ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. The foregoing legend may be removed from this Security on satisfaction of the conditions specified in the Indenture. PURSUANT TO SECTION 4.9 OF THE INDENTURE, RADIAN GROUP INC. AGREES, AND BY ACCEPTANCE OF A BENEFICIAL OWNERSHIP INTEREST IN THE SECURITY, EACH BENEFICIAL HOLDER OF THE SECURITIES WILL BE DEEMED TO HAVE AGREED, FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, TO TREAT THE SECURITIES AS INDEBTEDNESS THAT IS SUBJECT TO SECTION 1.1275-4 OF THE UNITED STATES TREASURY REGULATIONS (THE "CONTINGENT PAYMENT DEBT REGULATIONS"). YOU MAY OBTAIN THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, YIELD TO MATURITY, COMPARABLE YIELD AND PROJECTED PAYMENT SCHEDULE FOR THE SECURITY BY TELEPHONING RADIAN GROUP INC. INVESTOR RELATIONS DEPARTMENT AT (215) 564-6600 OR SUBMITTING A WRITTEN REQUEST FOR SUCH INFORMATION TO: RADIAN GROUP INC., 1601 MARKET STREET, PHILADELPHIA, PA 19103, ATTENTION: INVESTOR RELATIONS DEPARTMENT. A-2 RADIAN GROUP INC. 2.25% Senior Convertible Debentures due 2022 No. [ ] CUSIP: 750236 AE 1 Issue Date: [ ], 2002 Principal Amount: [ ] RADIAN GROUP INC., a Delaware corporation, promises to pay to Cede & Co. or registered assigns, the principal amount of $[ ] on January 1, 2022. Interest Payment Dates: January 1 and July 1, commencing July 1, 2002. Record Dates: December 15 and June 15. Reference is hereby made to the further provisions of this Security set forth on the reverse side of this Security, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. RADIAN GROUP INC. By:___________________________ Title:________________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By__________________________________ Authorized Signatory Dated: [ ], 2002 A-3 [FORM OF REVERSE OF GLOBAL SECURITY] 2.25% Senior Convertible Debentures due 2022 This Security is one of a duly authorized issue of 2.25% Senior Convertible Debentures due 2022 (the "Securities") of Radian Group Inc., a Delaware corporation (including any successor corporation under the Indenture hereinafter referred to, the "Company"), issued under an Indenture, dated as of January 11, 2002 (the "Indenture"), between the Company and The Bank of New York, as trustee (the "Trustee"). The terms of the Security include those stated in the Indenture, those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended ("TIA"), and those set forth in this Security. This Security is subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Security and the terms of the Indenture, the terms of the Indenture shall control. Capitalized terms used but not defined herein have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. Interest General. The Company promises to pay interest on the principal amount of the Securities plus accrued and unpaid interest, if any, including contingent interest and additional interest, if any, at the interest rate (the "Interest Rate") and for the periods specified herein. The Company will pay interest on this Security semi-annually in arrears on January 1 and July 1 of each year (each, an "interest payment date"), commencing July 1, 2002. (a) The Securities shall bear interest from January 11, 2001 or from the most recent interest payment date to which interest has been paid or duly provided for until the principal amount thereof is paid or made available for payment in accordance with the Indenture, or until such date on which the Securities are converted, redeemed or purchased as provided herein, at a rate of 2.25% per annum. (b) Interest on the Securities shall be computed (i) for any full semi-annual period for which a particular Interest Rate is applicable, on the basis of a 360-day year of twelve 30-day months and (ii) for any period for which a particular Interest Rate is applicable for less than a full semiannual period for which Interest is calculated, on the basis of a 30-day month and, for such periods of less than a month, the actual number of days elapsed over a 30-day month. For purposes of determining the Interest Rate, the Trustee may assume that the Trading Price Condition has not been satisfied and that Reset Rate is not in effect unless the Trustee has received an Officers' Certificate stating that the Trading Price Condition has been satisfied and specifying the Reset Rate then in effect. (c) The Interest Rate on this Security will increase to the Reset Rate for any semi-annual period commencing on January 1, 2005, 2007, 2009, 2012 or 2017, each of which shall be referred to as a "Reset Rate Determination Date", if the Trading Price Condition for that semi-annual period is satisfied. The "Trading Price Condition" shall be satisfied for any semi-annual period if the Sale Price of the Common Stock for any 20 out of the last 30 trading days ending five days prior to the first day of such semi-annual period is less than or equal to 60% of the Conversion Price of the Security in effect for each of those 20 trading days. Such interest payable at the Reset Rate is sometimes referred to herein as "contingent interest." Following an increase to the Reset Rate, the Interest Rate on the Security will remain at the Reset Rate unless and until the first day of a subsequent semi-annual period for which the Trading A-4 Price Condition is not satisfied, at which time the Interest Rate on the Security will revert to 2.25% per annum and will remain at such rate unless and until the Trading Price Condition is satisfied for a semi-annual period commencing on a subsequent Reset Rate Determination Date. If the Reset Rate is in effect for a particular semi-annual period, the Company will pay a portion of any increase represented by the change to the Reset Rate as cash interest at an annualized rate of 0.35% per annum (0.175% per semi-annual period) and any remaining increase in interest will be added to the principal amount of the Security (but which will not affect the number of shares of Common Stock issuable upon conversion of the Security) and will be accrued and payable at maturity and upon any purchase by the Company at the option of the Holder or upon any optional redemption by the Company. Interest, additional interest and contingent interest will accrue on any such remaining increase in interest and will be payable at such times as interest, additional interest and contingent interest is otherwise payable. The "Reset Rate" determined as of each Reset Rate Determination Date will be equal to 75% of the rate that would, in the sole judgment of the Reset Rate Agent, result in a trading price of par of a hypothetical issue of senior, nonconvertible, noncontingent, fixed-rate debt securities of the Company with (i) a final maturity comparable to the Security; (ii) an aggregate principal amount equal to the aggregate principal amount of all Securities then outstanding; and (iii) covenants and other provisions that are, insofar as would be practicable for an issue of senior, nonconvertible, non-contingent fixed-rate debt security, substantially identical to those of this Security, but which are not subject to repurchase by the Company at the option of the Holder. In no case, however, will the Reset Rate ever be greater than 12% or less than 2.60%. Also, if the Reset Rate Agent has not established the Reset Rate for the applicable semi-annual period, or if the Reset Rate Agent determines in its sole judgment that there is no suitable reference rate from which the Reset Rate may by determined, the Reset Rate for that period will be the Reset Rate most recently determined (except if there is no Reset Rate most recently determined, in which case the Reset Rate shall be a rate mutually agreed upon by the Reset Rate Agent and the Company reflecting current market conditions), and such Reset Rate shall remain in effect until the Reset Rate Agent shall determine a new Reset Rate. The Company will appoint a Reset Rate Agent. For the determination of the Reset Rate, the Reset Rate Agent will seek indicative reference rates from three nationally-recognized investment banks, and the Reset Rate shall be the average of such three indicative reference rates, provided that if at least three such indicative reference rates cannot reasonably be obtained by the Reset Rate Agent, but two such indicative reference rates are obtained, then the average of the two indicative reference rates shall be used, and if only one such indicative reference rate can reasonably be obtained by the Reset Rate Agent, this one indicative reference rate shall be used. The determination of any Reset Rate will be conclusive and binding upon the Reset Rate Agent, the Company, the Trustee and the Holders of the Security, in the absence of manifest error. The Company may remove the Reset Rate Agent and appoint a successor Reset Rate Agent at anytime. The "sale price" of the Common Stock on any date means the closing per share sale price (or if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average asked prices) on that date as reported on the New York Stock Exchange or, if the Common Stock is not listed on the New York Stock Exchange, then as reported by the Nasdaq system. In the event contingent interest is payable, the Company will disseminate a press release through Dow Jones & Company, Inc. or Bloomberg Business News containing this information or publish the information on the Company's web site or through such other public medium as the Company may use at that time. A-5 (d) In accordance with the Registration Rights Agreement, if: (i) the Shelf Registration Statement is not filed with the SEC prior to or on the 100th day after the Closing; or (ii) the Shelf Registration Statement has not been declared effective by the SEC prior to or on the 190th day after the Closing; or (iii) at any time after the 190th day after the Closing, the Shelf Registration Statement ceases to be effective or fails to be usable for its intended purpose or if the Company suspends the use of the Prospectus forming a part thereof; except under the circumstances and for the time periods set forth in Section 3(c) of the Registration Rights Agreement, (each such event referred to in foregoing clauses (i) through (iii), a "Registration Default"), the Company hereby agrees to pay additional interest with respect to the Transfer Restricted Securities from and including the day following the Registration Default to but excluding the earlier of (1) the day on which the Registration Default has been cured and (2) the date the Shelf Registration Statement is no longer required to be kept effective, which shall accrue at a rate per year as follows: 0.25% of the principal amount of the Securities to and including the 90th day following such Registration Default; and 0.50% of the principal amount of the Securities from and after the 91st day following such Registration Default. In no event will such additional interest accrue at a rate per year exceeding 0.50%. If a holder has converted some or all of its Securities into common stock, the Holder will be entitled to receive equivalent amounts based on the principal amount of the Securities converted. A Holder will not be entitled to such additional interest unless it has provided all information requested by the questionnaire prior to the deadline as set forth in the Registration Rights Agreement. Following the cure of all Registration Defaults relating to any particular Security or share of Common Stock issued upon conversion of Securities, the accrual of such additional interest with respect to such Securities or such share of Common Stock shall cease. Defined terms used in this section but not defined in this Security or the Indenture shall have the meaning given to them in the Registration Rights Agreement. (e) If this Security is redeemed or the Holder elects to require the Company to purchase this Security pursuant to Section 6 of this Security, on a date that is after the record date and prior to the corresponding interest payment date, interest, including contingent interest, if any, accrued and unpaid hereon to but not including the applicable Redemption Date, Purchase Date or Change of Control Purchase Date as the case may be will be paid to the same Holder to whom the Company pays the principal of this Security. Interest on Securities converted after a record date but prior to the corresponding interest payment date will be paid to the Holder of the Securities on the record date but, upon conversion, the Holder must pay the Company the interest, including contingent interest, which has accrued and will be paid on such interest payment date. No such payment need be made with respect to Securities which will be redeemed after a record date and prior to the corresponding interest payment date. A-6 If the principal amount hereof or any portion of such principal amount or any interest, including contingent interest and additional interest, if any, on any Security is not paid when due (whether upon acceleration pursuant to Section 6.2 of the Indenture, upon the date set for payment of the Redemption Price pursuant to Section 5 hereof or the Purchase Price or Change of Control Purchase Price pursuant to Section 6 hereof or upon the Stated Maturity of this Security), then in each such case the overdue amount shall, to the extent permitted by law, bear interest at the applicable Interest Rate, compounded semi-annually, which interest shall accrue from the date of such overdue amount was originally due to the date of payment of such amount, including interest thereon, has been made or duly provided for. All such interest shall be payable on demand. 2. Method of Payment. Except as provided below, interest will be paid (i) on the Global Securities to DTC in immediately available funds, (ii) on any definitive Securities having an aggregate principal amount of $5,000,000 or less, by check mailed to the Holders of such Securities; and (iii) on any definitive Securities having an aggregate principal amount of more than $5,000,000 by wire transfer in immediately available funds at the election of the Holders of these Securities. At Stated Maturity the Company will pay interest on definitive Securities at the Company's office or agency in New York City, which initially will be the Corporate Trust Office of the trustee. Principal on definitive Securities will be payable, upon Stated Maturity or when due, at the office or agency of the Company in New York City, maintained for such purpose, initially the Corporate Trust Office of the Trustee. Subject to the terms and conditions of the Indenture, the Company will make payments in cash, shares of Common Stock or a combination thereof, as the case may be, in respect of Redemption Prices, Purchase Prices, Change of Control Purchase Prices and at Stated Maturity to Holders who surrender Securities to a Paying Agent to collect such payments in respect of the Securities. The Company will pay cash amounts in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may make such cash payments by check payable in such money. 3. Paying Agent, Conversion Agent and Registrar. Initially, The Bank of New York (the "Trustee") will act as Paying Agent, Conversion Agent and Registrar. The Company may appoint and change any Paying Agent, Conversion Agent or Registrar without notice, other than notice to the Trustee; provided that the Company will maintain at least one Paying Agent in the City of New York, Borough of Manhattan, which shall initially be an office or agency of the Trustee. The Company or any of its Subsidiaries or any of their Affiliates may act as Paying Agent, Conversion Agent or Registrar. 4. Indenture. The Securities are general unsecured obligations of the Company limited to $220,000,000 aggregate principal amount. The Indenture does not limit other indebtedness of the Company, secured or unsecured. A-7 5. Redemption at the Option of the Company. No sinking fund is provided for the Securities. The Securities are redeemable for cash at the option of the Company, in whole or in part, at any time or from time to time on, or after January 1, 2005 upon not less than 30 nor more than 60 days' notice by mail for a redemption price equal to the principal amount of those Securities plus accrued and unpaid interest, including contingent interest and additional interest, if any, up to the Redemption Date (the "Redemption Price"). 6. Purchase By the Company at the Option of the Holder. Subject to the terms and conditions of the Indenture, the Company shall become obligated to purchase, at the option of the Holder, all or any portion of the Securities held by such Holder on January 1, 2005, 2007, 2009, 2012 and 2017 in integral multiples of $1,000 at a Purchase Price equal to the principal amount of those Securities plus accrued and unpaid interest, including contingent interest and additional interest, if any, of such Security on the Purchase Date. To exercise such right, a Holder shall deliver to the Company a Purchase Notice containing the information set forth in the Indenture, at any time from the opening of business on the date that is 20 Business Days prior to such Purchase Date until the close of business on the third Business Day prior to such Purchase Date, and shall deliver the Securities to the Paying Agent as set forth in the Indenture. The Purchase Price may be paid, at the option of the Company, in cash or by the issuance and delivery of shares of Common Stock, or in any combination thereof, subject to the terms and conditions of the Indenture. At the option of the Holder and subject to the terms and conditions of the Indenture, the Company shall become obligated to offer to purchase the Securities held by such Holder within 30 days (which purchase shall occur 30 days after the date of such offer) after the occurrence of a Change of Control of the Company for a Change of Control Purchase Price equal to the principal amount plus accrued and unpaid interest, including contingent interest and additional interest, if any, of such Security on the Change of Control Purchase Date. The Change of Control Purchase Price may be paid, at the option of the Company, in cash or by the issuance and delivery of shares of Applicable Stock, or in any combination thereof, subject to the terms and conditions of the Indenture. Holders have the right to withdraw any Purchase Notice or Change of Control Purchase Notice, as the case may be, by delivering to the Paying Agent a written notice of withdrawal in accordance with the provisions of the Indenture. If cash (and/or Applicable Stock if permitted under the Indenture) sufficient to pay the Purchase Price or Change of Control Purchase Price, as the case may be, of all Securities or portions thereof to be purchased as of the Purchase Date or the Change of Control Purchase Date, as the case may be, is deposited with the Paying Agent, on the Business Day following the Purchase Date or the Change of Control Purchase Date, interest will cease to accrue on such Securities (or portions thereof) immediately after such Purchase Date or Change of Control Purchase Date, and the Holder thereof shall have no other rights as such other than the right to receive the Purchase Price or Change of Control Purchase Price upon surrender of such Security. 7. Notice of Redemption. Notice of redemption pursuant to Section 5 of this Security will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of all Securities (or portions A-8 thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent prior to or on the Redemption Date, immediately after such Redemption Date interest ceases to accrue on such Securities or portions thereof. Securities in denominations larger than $1,000 of principal amount may be redeemed in part but only in integral multiples of $1,000 of principal amount. 8. Conversion. Subject to and in compliance with the provisions of the Indenture (including, without limitation, the conditions to conversion of this Security set forth in Section 10.1 thereof), a Holder is entitled, at such Holder's option, to convert the Holder's Security (or any portion of the principal amount thereof that is $1,000 or an integral multiple $1,000), into fully paid and nonassessable shares of Common Stock at the Conversion Price in effect at the time of conversion. The Company will notify Holders of any event triggering the right to convert the Securities as specified above in accordance with the Indenture. A Security in respect of which a Holder has delivered a Purchase Notice or Change of Control Purchase Notice, as the case may be, exercising the option of such Holder to require the Company to purchase such Security may be converted only if such Purchase Notice or Change of Control Purchase Notice, as the case may be, is withdrawn in accordance with the terms of the Indenture. The initial Conversion Price is $57.75, subject to adjustment in certain events described in the Indenture. No fractional shares of Common Stock shall be issued upon conversion of any Security. Instead of any fractional share of Common Stock that would otherwise be issued upon conversion of such Security, the Company shall pay a cash adjustment as provided in the Indenture. A Holder which surrenders Securities for conversion will receive cash or a check in lieu of any fractional share of Common Stock. To surrender a Security for conversion, a Holder must (1) complete and manually sign the conversion notice below (or complete and manually sign a facsimile of such notice) and deliver such notice to the Conversion Agent, (2) surrender the Security to the Conversion Agent, (3) furnish appropriate endorsements and transfer documents and (4) pay any transfer or similar tax, if required. No payment or adjustment will be made for dividends on the shares of Common Stock, except as provided in the Indenture. If the Company (i) is a party to a consolidation, merger or binding share exchange (ii) reclassifies the Common Stock or (iii) conveys, transfers or leases its properties and assets substantially as an entirety to any Person, the right to convert a Security into shares of Common Stock may be changed into a right to convert it into securities, cash or other assets of the Company or such other Person, in each case in accordance with the Indenture. 9. Conversion Arrangement on Call for Redemption. Any Securities called for redemption, unless surrendered for conversion before the close of business on the day that is two Business Days prior to the Redemption Date, may be deemed to be purchased from the Holders of such Securities at an amount not less than the Redemption Price, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Securities from the Holders, to convert them into shares of Common Stock and to make payment for such Securities to the Trustee in trust for such Holders. A-9 10. Denominations; Transfer; Exchange. The Securities are in fully registered form, without coupons, in denominations of $1,000 of principal amount and integral multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities in respect of which a Purchase Notice or Change of Control Purchase Notice has been given and not withdrawn (except, in the case of a Security to be purchased in part, the portion of the Security not to be purchased) or any Securities for a period of 15 days before the mailing of a notice of redemption of Securities to be redeemed. 11. Persons Deemed Owners. The registered Holder of this Security may be treated as the owner of this Security for all purposes. 12. Unclaimed Money or Securities. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Securities that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. 13. Amendment; Waiver. Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in aggregate principal amount of the outstanding Securities and (ii) certain Defaults may be waived with the written consent of the Holders of a majority in aggregate principal amount of the outstanding Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company and the Trustee may amend the Indenture or the Securities (i) to add to the covenants of the Company for the benefit of the Holders of Securities, (ii) to surrender any right or power conferred upon the Company in the Indenture, (iii) to provide for conversion rights of Holders of Securities if any reclassification or change of the Company's Common Stock or any consolidation, merger or sale of all or substantially all of the Company's assets occurs, (iv) to provide for the assumption of the Company's obligations to the Holders of Securities in the case of a merger, consolidation, conveyance, transfer or lease pursuant to Article V of the Indenture, (v) to reduce the Conversion Price; provided, however, that such reduction in the Conversion Price shall not adversely affect the interest of the Holders of Securities (after taking into account tax and other consequences of such reduction), (vi) to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA, (vii) to make any changes or modifications necessary in connection with the registration of the Securities under the Securities Act as contemplated in the Registration Rights Agreement; provided, however, that such action pursuant to this clause does not, in the good faith opinion of the Board of Directors of the Company (as evidenced by a Board Resolution) and the Trustee, adversely affect the interests of the Holders of Securities in any material respect, (viii) to cure any ambiguity, to correct or supplement any provision in the Indenture which may be inconsistent with any other provision therein or which is otherwise defective, or to make any other provisions with respect to matters or questions arising under the Indenture which the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of the Indenture; A-10 provided, however, that such action pursuant to this clause does not, in the good faith opinion of the Board of Directors of the Company (as evidenced by a Board Resolution) and the Trustee, adversely affect the interests of the Holders of Securities in any material respect, and (ix) to add or modify any other provisions in the Indenture with respect to matters or questions arising hereunder which the Company and the Trustee may deem necessary or desirable and which will not adversely affect the interests of the Holders of Securities. 14. Defaults and Remedies. If any Event of Default with respect to Securities shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. 15. Trustee Dealings with the Company. Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 16. Calculations in Respect of Securities. The Company or its agents will be responsible for making all calculations called for under the Securities including, but not limited to, determination of the market prices for the Securities and of the Common Stock and the amounts of interest and contingent payments, if any, on the Securities. Any calculations made in good faith and without manifest error will be final and binding on Holders of the Securities. The Company or its agents will be required to deliver to the Trustee a schedule of its calculations and the Trustee will be entitled to conclusively rely upon the accuracy of such calculations without independent verification. 17. No Recourse Against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 18. Authentication. This Security shall not be valid until an authorize signatory of the Trustee manually signs the Trustee's Certificate of Authentication on the other side of this Security. 19. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). A-11 20. Governing Law. The laws of the State of New York shall govern the Indenture and this Security, without regard to conflicts of laws principles thereof. The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture which has in it the text of this Security in larger type. Requests may be made to: RADIAN GROUP INC. 1601 Market Street Philadelphia, PA 19103 Attn: General Counsel Facsimile No. (215) 405-9160 21. Registration Rights. The Holders of the Securities are entitled to the benefits of a Registration Rights Agreement, dated as of January 11, 2002, among the Company, Banc of America Securities LLC and Lehman Brothers Inc., including the receipt of additional interest upon a registration default (as defined in such agreement). A-12
ASSIGNMENT FORM CONVERSION NOTICE To assign this Security, fill in the form below: To convert this Security into Common Stock of the Company, check the box | | I or we assign and transfer this Security to To convert only part of this Security, _________________________ state the principal amount to be converted _________________________ (which must be $1,000 or an integral (Insert assignee's soc. sec. or tax ID no.) multiple of $1,000): _________________________ _________________________ If you want the stock certificate made out _________________________ in another person's name fill in the form (Print or type assignee's name, address and zip below: code) _________________________ _________________________ and irrevocably appoint (Insert the other person's soc. sec. tax ID no.) ____________________ agent to transfer this Security on the books of the Company. The __________________________ agent may substitute another to act for him. __________________________ __________________________ __________________________ __________________________ (Print or type other person's name, address and zip code)
A-13 Date: __________ Your Signature: _________________________________ ________________________________________________________________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guaranteed ______________________________________ Participant in a Recognized Signature Guarantee Medallion Program By:_____________________________ Authorized Signatory A-14 SCHEDULE OF INCREASES AND DECREASES OF GLOBAL SECURITY Initial Principal Amount of Global Security: $[ ].
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A-15 EXHIBIT B [FORM OF FACE OF CERTIFICATED SECURITY] THE SECURITY EVIDENCED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT OF 1933") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE BY ACQUISITION HEREOF, THE HOLDER: (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT OF 1933; (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT OF 1933, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OF 1933 (IF AVAILABLE), (D) TO ANY INSTITUTIONAL INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), OR (E) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OF 1933 AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(C) OR 2(E) ABOVE), A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. The foregoing legend may be removed from this Security on satisfaction of the conditions specified in the Indenture. PURSUANT TO SECTION 4.9 OF THE INDENTURE, RADIAN GROUP INC. AGREES, AND BY ACCEPTANCE OF A BENEFICIAL OWNERSHIP INTEREST IN THE SECURITY, EACH BENEFICIAL HOLDER OF THE SECURITIES WILL BE DEEMED TO HAVE AGREED, FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, TO TREAT THE SECURITIES AS INDEBTEDNESS THAT IS SUBJECT TO SECTION 1.1275-4 OF THE UNITED STATES TREASURY REGULATIONS (THE "CONTINGENT PAYMENT DEBT REGULATIONS"). YOU MAY OBTAIN THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, YIELD TO MATURITY, COMPARABLE YIELD AND PROJECTED PAYMENT SCHEDULE FOR THE SECURITY BY TELEPHONING RADIAN GROUP INC. INVESTOR RELATIONS DEPARTMENT AT (215) 564-6600 OR SUBMITTING A WRITTEN REQUEST FOR SUCH INFORMATION TO: RADIAN GROUP INC., 1601 MARKET STREET, PHILIADELPHIA, PA 19103, ATTENTION: INVESTOR RELATIONS DEPARTMENT. RADIAN GROUP, INC. 2.25% Senior Convertible Debentures due 2022 No. [ ] CUSIP: 750236 AE 1 Issue Date: [ ] Issue Price: $[ ] RADIAN GROUP INC., a Delaware corporation, promises to pay to Cede & Co. or registered assigns, the principal amount of $[ ] on January 11, 2022. Interest Payment Dates: January 1 and July 1, commencing July 1, 2002. Record Dates: December 15 and June 15. Reference is hereby made to the further provisions of this Security set forth on the reverse side of this Security, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. RADIAN GROUP INC. By: _______________________ Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By __________________________________ Authorized Signatory Dated: [ ], 2002 B-2 [FORM OF REVERSE OF CERTIFICATED SECURITY IS IDENTICAL TO EXHIBIT A] EXHIBIT C 2.25% Senior Convertible Debentures due 2022 Transfer Certificate In connection with any transfer of any of the Securities within the period prior to the expiration of the holding period applicable to the sales thereof under Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act") (or any successor provision), the undersigned registered owner of this Security hereby certifies with respect to $[ ] principal amount of the above-captioned Securities presented or surrendered on the date hereof (the "Surrendered Securities") for registration of transfer, or for exchange or conversion where the securities issuable upon such exchange or conversion are to be registered in a name other than that of the undersigned registered owner (each such transaction being a "transfer"), that such transfer complies with the restrictive legend set forth on the face of the Surrendered Securities for the reason checked below: | | A transfer of the Surrendered Securities is made to the Company or any subsidiaries; or | | The transfer of the Surrendered Securities complies with Rule 144A under the Securities Act; or | | The transfer of the Surrendered Securities complies with Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act; or | | The transfer of the Surrendered Securities is pursuant to an effective registration statement under the Securities Act; or | | The transfer of the Surrendered Securities is pursuant to another available exemption from the registration requirement of the Securities Act; and unless the box below is checked, the undersigned confirms that, to the undersigned's knowledge, such Securities are not being transferred to an "affiliate" of the Company as defined in Rule 144 under the Securities Act (an "Affiliate"). | | The transferee is an Affiliate of the Company. DATE: __________________________________ Signature(s) (If the registered owner is a corporation, partnership or fiduciary, the title of the person signing on behalf of such registered owner must be stated.) Signature Guaranteed _____________________________________ Participant in a Recognized Signature Guarantee Medallion Program By: ________________________________ Authorized Signatory EX-10.1 8 w56746ex10-1.txt TAX INDEMNIFICATION AGREEMENT Exhibit 10.01 October 28, 1992 Commonwealth Land Title Insurance Company Reliance Insurance Company Reliance Group Holdings, Inc. Park Avenue Plaza 55 East 52nd Street New York, NY 10055 Dear Sirs: This letter is written to confirm certain understandings among CMAC Investment Corporation (the "Company"), Commonwealth Mortgage Assurance Company and its subsidiaries, Commonwealth Mortgage Assurance Company of Arizona and Commonwealth Mortgage Assurance Company Service Company (collectively, "CMAC"), Commonwealth Land Title Insurance Company ("CLTIC"), Reliance Insurance Company ("RIC") and Reliance Group Holdings, Inc. ("Reliance") with respect to the registration and public offering of (a) 5,700,000 shares of common stock of the Company held by CLTIC, and (b) 3,404,000 shares of common stock to be issued by the Company (the shares to be sold by CLTIC and the Company being referred to herein as the "Shares"). 1. For purposes of Paragraph 2 hereof, the following definitions shall apply: (a) "CMAC shall mean and include CMAC and the Company. (b) "Federal Taxes" shall mean all income taxes (including estimated taxes) imposed by the United States. (c) "Adjustment" shall mean any change in an item of income, gain, loss, deduction or credit of CMAC or the Company, including but not limited to, changes attributable to amended federal tax returns, deficiencies asserted by a federal taxing authority, audit, examination, proceeding or litigation resulting from any of the foregoing events, but only after such change becomes final by virtue of an agreement between the pertinent taxpayer and the Internal Revenue Service or of the conclusion of any administrative or judicial proceedings in connection with the items that are the subject of the proposed adjustment; provided that "Adjustment" shall not include any disallowance of the worthless stock deduction for CMAC's investment in the common stock of Telemundo Group, Inc. (d) "Pre-Closing Date Interest" shall mean all interest payable for periods ending on or before the Closing Date on federal income tax assessments attributable to CMAC. (e) "Post-Closing Date Interest" shall mean all interest payable for periods after the Closing Date on federal income tax assessments attributable to CMAC. (f) "Federal Tax Rate" shall mean 34%. 2. Consolidated Group Tax Matters. (a) Reliance shall file a consolidated federal tax return for the taxable year ended December 31, 1992, which tax return shall include in the consolidated taxable income therein reported for the Reliance consolidated group the taxable income of CMAC for the period commencing January 1, 1992 and ending on the date on which the closing of the sale of the Shares shall occur (the "Closing Date") computed in accordance with Treasury Regulation Section 1.1502-76(b)(4). (b) Reliance shall file, or cause to be filed, when due, all federal income tax and information returns and reports (including federal estimated tax returns) which are required to be filed with respect to CMAC for all periods during which CMAC has been a member of the Reliance consolidated group and will pay, or cause to be paid, when due, all amounts which are shown as due and owing on such returns and reports. (c) Reliance agrees to indemnify and hold harmless CMAC against any and all Federal Taxes, together with any related interest, penalties or additions to tax, relating to members of Reliance's consolidated group other than CMAC arising pursuant to Treasury Regulation Section 1.1502-6(a) with respect to all periods during which CMAC has been a member of the Reliance consolidated group. (d) On or before the Closing Date, CMAC shall pay to CLTIC, in cash, an amount equal to Federal Taxes of CMAC for the period from January 1, 1992 through October 31, 1992 as determined in accordance with the terms of the current tax sharing arrangement between CMAC and RIC, less the amounts previously paid (or applied against such taxes) by CMAC to CLTIC with respect to Federal Taxes of CMAC for such period. (e) On or before September 30, 1993, CMAC shall pay to CLTIC, or CLTIC shall pay to CMAC as the case may be, in cash, an amount equal to Federal Taxes of CMAC for the period from January 1, 1992 through the Closing Date, as determined in accordance with the terms of the current tax sharing arrangement between CMAC and RIC, less the amounts previously paid including any amount paid under paragraph (d) hereof (or applied against such taxes) by CMAC to CLTIC, or by CLTIC to CMAC as the case may be, with respect to Federal Taxes of CMAC for such period. (f) (i) If there is an Adjustment to any item reported on a federal tax return that increases the taxable income or reduces the taxable loss of the Reliance consolidated group for a period ending -2- prior to, on, or including the Closing Date (the "Reliance Increase") and such Adjustment results in a corresponding change to CMAC's taxable income in a period beginning on or after the Closing Date with the result that Federal Taxes of CMAC are or could have been reduced in such period, then CMAC shall pay to Reliance an amount equal to the product of (x) the Reliance Increase multiplied by (y) the Federal Tax Rate, plus Post-Closing Date Interest. Payments pursuant to this Paragraph 2(f)(i) are to be made, in cash, on the date which is five business days after CMAC has been notified of the Adjustment, and (ii) if there is an Adjustment to any item reported on a federal tax return that increases the taxable income or reduces the taxable loss of CMAC for a period beginning on or after the Closing Date (the "CMAC Increase") and such Adjustment results in a corresponding change to Reliance's taxable income in a period ending prior to, on, or including the Closing Date with the result that Federal Taxes of the Reliance consolidated group are reduced, then Reliance shall pay to CMAC an amount equal to the product of (x) the CMAC Increase multiplied by (y) the Federal Tax Rate. Payments pursuant to this Paragraph 2(f)(ii) are to be made, in cash, on the date which is five business days after Reliance has been notified of the Adjustment. (g) CMAC agrees to reimburse, indemnify and hold harmless CLTIC, RIC and Reliance against any and all loss, liability, claim, damage and expense whatsoever for (1) Federal Taxes attributable to CMAC with respect to all periods during which CMAC has been a member of the Reliance consolidated group for any Adjustment that is not subject to reimbursement pursuant to paragraph (f) above. (2) any penalties or additions to tax attributable to CMAC with respect to all periods during which CMAC has been a member of the Reliance consolidated group, and (3) Pre-Closing Date Interest. Reliance agrees to limit the aggregate amount of such reimbursements by CMAC under this Paragraph 2(g) to the sum of (x) $1,853,000, the amount included in the federal income tax liability account on CMAC's June 30, 1992 balance sheet, and (y) the federal income tax benefit, if any, derived by CMAC from all such payments by CMAC under this Paragraph 2(g). Payments pursuant to this Paragraph 2(g) are to be made, in cash, on the date which is five business days after CMAC has been notified of the Adjustment. (h)(i) Reliance shall have the sole right to control federal income tax audits or contests for all periods during which CMAC has been a member of the Reliance consolidated group; provided however, that Reliance shall not, without the prior written consent of CMAC which consent shall not be unreasonably withheld, change any tax election affecting CMAC, file any amended return or enter into any compromise or settlement of any audit or contest which could result in an Adjustment giving rise to a liability of CMAC for Federal Taxes, including interest, penalties or additions to tax, or decreasing the amount of any refund of Federal Taxes of CMAC. Notwithstanding the foregoing, CMAC shall at its own expense and cost, including without limitation all attorneys' fees, accountants' fees, court costs and related expenses, pursue, defend or conduct any audit or contest which could result in an Adjustment giving rise to a liability of CMAC to the extent the aforementioned consent is withheld by CMAC. -3- (ii) CMAC shall have the sole right to control federal tax audits or contests for all periods beginning after the Closing Date; provided, however, that CMAC shall not, without the prior written consent of Reliance which consent shall not be unreasonably withheld, change any tax election affecting Reliance, file any amended return or enter into any compromise or settlement of any audit or contest which could result in an Adjustment giving rise to a liability for Federal Taxes of Reliance, or decreasing the amount of any refund of Federal Taxes of Reliance. Notwithstanding the foregoing, Reliance shall at its own expense and cost, including without limitation all attorneys' fees, accountants' fees, court costs and related expenses, pursue, defend or conduct any audit or contest which could result in an Adjustment giving rise to a liability of Reliance to the extent the aforementioned consent is withheld by Reliance. (i) Reliance, RIC, CLTIC and CMAC shall each make available to the other party on a reasonable basis for examination and copying, books, records and documents relevant to the determination of any Federal Taxes. (j) Except as specifically provided in Paragraphs 2(d) and 2(e) above, the current tax sharing arrangement between CMAC and RIC is hereby terminated and this Letter Agreement comprises the entire understanding between the parties with respect to tax liabilities. Reliance, RIC and CLTIC shall have no claim against CMAC for any amounts with respect to taxes and CMAC shall have no claim against Reliance, RIC and CLTIC, or any affiliate thereof, for any amounts with respect to taxes, except as provided herein. The Capital Maintenance Agreement, dated January 5, 1987, between CMAC and Reliance is hereby terminated and neither party thereto shall have any claim against the other relating to such agreement. -4- Sincerely, Commonwealth Mortgage Assurance Company By: -------------------------------------- Commonwealth Mortgage Assurance Company of Arizona By: -------------------------------------- Commonwealth Mortgage Assurance Company Service Company By: -------------------------------------- CMAC Investment Corporation By: --------------------------------------- Accepted as of the date first written above: Commonwealth Land Title Insurance Company By: --------------------------------------- -5- Reliance Insurance Company By: --------------------------------------- Reliance Group Holdings, Inc. By: -------------------------------------- -6- EX-10.3 9 w56746ex10-3.txt FORM OF CHANGE OF CONTROL AGREEMENT EXHIBIT 10.3 AGREEMENT THIS AGREEMENT made and entered into this 25th day of January, 1995 by and between CMAC INVESTMENT CORPORATION, a corporation organized and existing under the laws of the state of Delaware (hereinafter referred to as the "Company") and ________ (hereinafter referred to as the "Employee"). WHEREAS, the Employee is presently employed by the Company as its _________; and WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the Company's management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company; and WHEREAS, in order to induce the Employee to remain in the employ of the Company, the Company agrees that the Employee shall receive the compensation set forth in this Agreement as a cushion against the financial and career impact on the Employee in the event that Employee's employment with the Company is terminated subsequent to a "Change of Control" (as that term is defined in Section 1 hereof). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS. When used in this Agreement, the following terms shall have the specific meanings shown in this Section unless the context of any provision of this Agreement clearly requires otherwise: (a) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) "Beneficial Owner" of any securities shall mean: 1 (i) that such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for payment, purchase or exchange; (ii) that such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including without limitation, pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial Owner" of any security under this subsection (ii) as a result of an oral or written agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, an in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable successor report); or (iii) where voting securities are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy described in the proviso to subsection (ii) above) or disposing of any voting securities of the Company; provided, however, that nothing in this subsection (c) shall cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of any securities acquired through such Person's participation in good faith in a firm commitment underwriting until expiration of forty (40) days after the date of such acquisition. (c) "Change of Control" shall be deemed to have taken place if (i) any Person (except for the Employee or his family, the Company or any employee benefit plan of the Company or of any Affiliate, any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the Beneficial Owner in the aggregate of 20% or more of the shares of the Company then outstanding and entitled to vote for directors generally, (ii) any Person (except the Employee and his family), together with all Affiliates and Associates of such Person purchases substantially all of the assets of the Company, or (iii) during any twenty-four (24) month period, individuals who at the beginning of such period constituted the Board cease for any reason to constitute a majority thereof, unless the election, or the nomination for election by the Company's 2 stockholders, of at least seventy-five percent (75%) of the directors who were not directors at the beginning of such period was approved by a vote of at least seventy-five percent (75%) of the directors in office at the time of such election or nomination who were directors at the beginning of such period. (d) "Person" shall mean any individual, firm, corporation, partnership or other entity. (e) "Subsidiary" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (f) "Termination Date" shall mean the date of receipt of the Notice of Termination described in Section 2 hereof or any later date specified therein, as the case may be. (g) "Termination of Employment" shall mean the termination of the Employee's actual employment relationship with the Company. (h) "Termination following a Change of Control" shall mean a Termination of Employment within two years after a Change of Control either: (1) initiated by the Company for any reason other than (a) the Employee's continuous illness, injury or incapacity for a period of twelve consecutive months or (b) for "cause", which shall mean misappropriation of funds, habitual insobriety, substance abuse, conviction of a crime involving moral turpitude, or gross negligence in the performance of duties, which gross negligence has had a material adverse effect on the business, operations, assets, properties or financial condition of the Company and its Subsidiaries taken as a whole; or (2) initiated by the Employee upon the occurrence of one or more of the following: (a) any failure of the Company to comply with and satisfy any of the conditions of this Agreement; (b) any change resulting in a significant reduction by the Company of the authority, duties or responsibilities of the Employee; (c) any removal by the Company of the Employee from the employment grade, compensation level or officer positions which the Employee holds as of the effective date hereof, except in connection with promotions to a higher office; (d) the requirement that the Employee undertake business travel (or commuting in excess of fifty miles each way) to an extent substantially 3 greater than is reasonable and customary for the position the Employee holds. 2. NOTICE OF TERMINATION. Any Termination following a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 14 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) briefly summarizes the facts and circumstances deemed to provide a basis for termination of the Employee's employment under the provision so indicated, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than fifteen days after the giving of such notice). 3. BENEFITS UPON CHANGE OF CONTROL. (a). In the event of a Change of Control (i) any stock options previously granted to the Employee under any Company stock option or equity compensation plan which have not yet vested shall become vested, and (ii) any restricted stock previously granted to the Employee under any Company equity compensation plan which has not yet vested or become freely transferable shall become vested and freely transferable. (b). In the event of the Employee's Termination following a Change of Control the Company shall pay to the Employee, within fifteen days after the Termination Date, an amount in cash equal to 2.0 times (i) the Employee's then current annual base compensation, plus (ii) the Employee's then current maximum bonus eligibility. (c). In the event of the Employee's Termination following a Change of Control, the Employee shall be entitled to continued participation in the Company's life, disability, accident and health insurance plans for a period not to exceed thirty-six (36) months following the termination. 4. OTHER PAYMENTS. The payment due under Section 3 hereof shall be in addition to and not in lieu of any payments or benefits due to the Employee under any other plan, policy or program of the Company except that no payments shall be due to the Employee under the Company's then current severance pay plan for employees, if any. 5. ESTABLISHMENT OF TRUST. The Company has or will establish an irrevocable trust fund (hereinafter referred to as the "Trust Fund") pursuant to a trust agreement to hold assets contributed to satisfy its obligations under this Agreement. Funding of such trust fund shall be subject to the Company's discretion, as set forth in the trust agreement establishing the Trust Fund. Notwithstanding the foregoing: (i) Upon a Change of Control of the Company, the Chief Financial Officer of the Company, or his authorized representative (hereinafter referred to collectively as the "Treasurer"), shall immediately remit to the Trustee of the Trust Fund as a contribution to the applicable trust established as part of the 4 Trust Fund for the benefit of the Employee the amount due under this Agreement and not yet contributed to the Trustee as well as an amount estimated to be sufficient to pay all fees and expenses that may thereafter become due. The Trustee shall be under no duty to determine the sufficiency, or to enforce the making, of such contributions. (ii) In the event that the Chairman of the Board determines that a Change of Control of the Company is imminent, the Treasurer shall make the payments to the Trustee specified in paragraph (i) above. If a Change of Control of the Company shall not have occurred within ninety (90) days of the contribution made pursuant to this Section 5 and the Board adopts a resolution to the effect that, for purposes of this Agreement, a Change of Control of the Company is not imminent, any amounts added to the Trust Fund pursuant to this Section, together with any earnings thereon, shall be paid by the Trustee to the Company. 6. ENFORCEMENT. (a) In the event that the Company shall fail or refuse to make payment of any amounts due the Employee under Sections 3 and 4 hereof within the respective time periods provided therein, the Company shall pay to the Employee, in addition to the payment of any other sums provided in this Agreement, interest, compounded daily, on any amount remaining unpaid from the date payment is required under Section 3 and 4, as appropriate, until paid to the Employee, at the rate from time to time announced by PNC Bank as its "prime rate" plus 2%, each change in such rate to take effect on the effective date of the change in such prime rate. (b) It is the intent of the parties that the Employee not be required to incur any expenses associated with the enforcement of his rights under this Agreement by arbitration, litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder. Accordingly, the Company shall pay the Employee on demand the amount necessary to reimburse the Employee in full for all expenses (including attorney's fees and legal expenses) incurred by the Employee in enforcing any of the obligations of the Company under this Agreement. 7. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for herein be reduced by any compensation earned by other employment or otherwise. 8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company or any of its Subsidiaries or Affiliates and for which the Employee may qualify; provided, however, that with respect to 5 a Termination following a Change of Control, the Employee hereby waives the Employee's right to receive any payments under any severance pay plan or similar program applicable to other employees of the Company, and agrees to accept the payment provided in Section 3(b) above in lieu of any other severance pay plan or similar program. 9. NO SET-OFF. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Employee or others. 10. TAXES. Any payment required under this Agreement shall be subject to all requirements of law with regard to the withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. 11. ADJUSTMENT FOR TAXES. In the event that either the Company's independent public accountants or the Internal Revenue Service determine that any payment, coverage, benefit or benefit acceleration provided to the Employee, whether specifically provided for in this Agreement or otherwise, is subject to the excise tax imposed by Section 4999 (or any successor provision) ("Section 4999") of the Code, the Company, within thirty (30) days thereafter, shall pay to the Executive, in addition to any other payment, coverage or benefit due and owing hereunder, an amount determined by multiplying the rate of excise tax then imposed by Section 4999 by the amount of the "excess parachute payment" received by the Executive (determined without regard to any payments made to the Executive pursuant to this paragraph) and dividing the product so obtained by the amount obtained by subtracting the aggregate local, estate and Federal income tax rate applicable to the receipt by the Employee of the "excess parachute payment" (taking into account the deductibility for Federal income tax purposes of the payment of state and local income taxes thereon) from the amount obtained by subtracting from 1.00 the rate of excise tax then imposed by Section 4999 of the Code, it being the Company's intention that the Employee's net after tax position be identical to that which would have obtained had Sections 280G and 4999 not been a part of the Code. 12. TERM OF AGREEMENT. The term of this Agreement shall be for 3 years from the date hereof and shall be automatically renewed for successive one-year periods unless the Company notifies the Employee in writing that this Agreement will not be renewed at least sixty (60) days prior to the end of the current term; provided, however, that (i) after a Change of Control during the term of this Agreement, this Agreement shall remain in effect until all of the obligations of the parties hereunder are satisfied or have expired, and (ii) this Agreement shall terminate if, prior to a Change of Control, the employment of the Employee with the Company or any of its Subsidiaries, as the case may be, shall terminate for any reason, or if the Employee shall cease to be an Employee. 13. SUCCESSOR COMPANY. The Company shall require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) 6 to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Employee, to acknowledge expressly that this Agreement is binding upon and enforceable against the Company in accordance with the terms hereof, and to become jointly and severally obligated with the Company to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or successions had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement. As used in this Agreement, the Company shall mean the Company as hereinbefore defined and any successor or successors to its business and/or assets, jointly and severally. 14. NOTICE. All notices and other communications required or permitted hereunder or necessary or convenient herewith shall be in writing and shall be delivered personally or mailed by registered or certified mail, return receipt requested, or by overnight express courier service, as follows: If to the Company, to: CMAC Investment Corporation 1601 Market Street Philadelphia, PA 19103 Attention: Corporate Secretary If to the Employee, to: _________________ _________________ _________________ or to such other names or addresses as the Company or the Employee, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section 14; provided, however, that if no such notice is given by the Company following a Change of Control, notice at the last address of the Company or to any successor pursuant to Section 13 hereof shall be deemed sufficient for the purposes hereof. Any such notice shall be deemed delivered and effective when received in the case of personal delivery; five days after deposit, postage prepaid, with the U.S. Postal Service in the case of registered or certified mail; or on the next business day in the case of an overnight express courier service. 15. GOVERNING LAW. This Agreement shall be governed by and construed by and interpreted under the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws provisions. 16. CONTENTS OF AGREEMENTS, AMENDMENT AND ASSIGNMENT. 7 (a) This Agreement supersedes all prior agreements, including that certain employment agreement between the Employee and the Company dated August 2, 1992, and sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment executed by the Employee and approved by the Board and executed on the Company's behalf by a duly authorized officer. The provisions of this Agreement may provide for payments to the Employee under certain compensation or bonus plans under circumstances where such plans would not provide for the payment thereof. It is the specific intention of the parties that the provisions of this Agreement shall supersede any provisions to the contrary in such plans, and such plans shall be deemed to have been amended to correspond with this Agreement without further action by the Company or the Board. (b) Nothing in this Agreement shall be construed as giving the Employee any right to be retained in the employ of the Company. (c) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee and the Company hereunder shall not be assignable in whole or in part by the Company. 17. SEVERABILITY. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 18. REMEDIES CUMULATIVE; NO WAIVER. No right conferred upon the Employee by this Agreement is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Employee in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, including, without limitation, any delay by the Employee in delivering a Notice of Termination pursuant to Section 2 hereof after an event has occurred which would, if the Employee had resigned, have constituted a Termination following a Change of Control pursuant to Section 1(1)(ii) of this Agreement. 19. MISCELLANEOUS. All section headings are for convenience only. This Agreement may be executed in several counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 8 IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. CMAC INVESTMENT CORPORATION BY: __________________________ _______________________________ [ EMPLOYEE ] ATTEST: ______________________ 9 EX-10.9 10 w56746ex10-9.txt RADIAN PENSION PLAN EXHIBIT 10.9 RADIAN GROUP INC. PENSION PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997 (Incorporating Amendments through January 1, 2002) RADIAN GROUP INC. PENSION PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997 Table of Contents
Page ---- PREAMBLE............................................................................. 1 ARTICLE I - Definitions ............................................................. 2 1.1 Accrued Benefit........................................................ 2 1.2 Actuarial Equivalent................................................... 2 1.3 Affiliate.............................................................. 3 1.4 Annual Salary.......................................................... 3 1.5 Annuity Starting Date.................................................. 4 1.6 Average Annual Salary.................................................. 4 1.7 Board.................................................................. 4 1.8 Code................................................................... 4 1.9 Commonwealth Pension Plan.............................................. 5 1.10 Company................................................................ 5 1.11 Covered Compensation................................................... 5 1.12 Credited Service....................................................... 5 1.13 Deferred Retirement Date............................................... 6 1.14 Early Retirement Date.................................................. 6 1.15 Effective Date......................................................... 6 1.16 Eligible Employee...................................................... 6 1.17 Employee............................................................... 7 1.18 Employment Year........................................................ 7 1.19 ERISA.................................................................. 7 1.20 Fresh-Start Date....................................................... 7 1.21 Frozen Retirement Benefit.............................................. 7 1.22 Hour of Service........................................................ 12 1.23 Investment Manager..................................................... 14 1.24 Normal Retirement Date................................................. 15 1.25 One-Year Break in Service.............................................. 15 1.26 Participant............................................................ 16 1.27 Participating Employer................................................. 16 1.28 Plan................................................................... 16 1.29 Plan Administrator..................................................... 16 1.30 Required Beginning Date................................................ 16 1.31 Spouse................................................................. 17 1.32 Termination of Employment.............................................. 17 1.33 Trust Agreement........................................................ 17 1.34 Trust Fund............................................................. 17 1.35 Trustee................................................................ 18 1.36 Year of Service........................................................ 18
i ARTICLE II - Participation........................................................... 19 2.1 Eligibility to Participate............................................. 19 2.2 Employment with a Predecessor.......................................... 19 2.3 Periods of Non-Covered Employment...................................... 19 2.4 Service as a Leased Employee........................................... 20 2.5 Employment with a Successor............................................ 21 2.6 Termination of Participation........................................... 21 2.7 Reemployment After Military Service.................................... 22 ARTICLE III - Contributions.......................................................... 23 ARTICLE IV - Retirement Dates........................................................ 25 4.1 Normal Retirement Date................................................. 25 4.2 Early Retirement Date.................................................. 25 4.3 Deferred Retirement Date............................................... 25 ARTICLE V - Benefits................................................................ 26 5.1 Normal Retirement Benefit.............................................. 26 5.2 Early Retirement Benefit............................................... 26 5.3 Deferred Retirement Benefit............................................ 27 5.4 Retirement Benefit in Event of Disability.............................. 27 5.5 Minimum Benefit........................................................ 29 5.6 Deduction for Other Pension............................................ 29 ARTICLE VI - Payment of Benefits..................................................... 31 6.1 Standard............................................................... 31 6.2 Minimum Distribution Requirements...................................... 32 6.3 Qualified Joint and Survivor Annuity................................... 32 6.4 Joint and Survivor Annuity Option...................................... 35 6.5 Payment of Small Benefits.............................................. 36 6.6 General Rules and Restrictions......................................... 36 6.7 Direct Rollover of Benefits from Plan.................................. 37 ARTICLE VII - Death Benefits......................................................... 39 7.1 Death While Employed................................................... 39 7.2 Death After Vested Termination of Employment........................... 39 7.3 Commencement of Surviving Spouse's Annuity............................. 40 7.4 Special Rule Concerning Joint and Survivor Annuity..................... 41 7.5 Lump Sum Payment of Spouse's Annuity................................... 41 ARTICLE VIII - Termination of Employment............................................. 42 8.1 Termination After 5 or More Years of Service........................... 42 8.2 Early Commencement of Termination Benefit.............................. 42 8.3 Payment of Benefits.................................................... 42
ii ARTICLE IX - Reemployment............................................................ 43 9.1 Reemployment Without Intervening Break in Service...................... 43 9.2 Reemployment After Intervening Break in Service........................ 43 9.3 Reemployment After Normal Retirement Date.............................. 44 9.4 Form of Benefit........................................................ 45 ARTICLE X - Funding.................................................................. 47 10.1 Establishment of Trust................................................. 47 10.2 Administration of the Trust............................................ 47 10.3 General................................................................ 48 10.4 Changes in Funding Medium.............................................. 48 ARTICLE XI - Administration of the Plan.............................................. 49 11.1 General................................................................ 49 11.2 Disputes............................................................... 50 11.3 Plan Expenses.......................................................... 51 ARTICLE XII - Limitation on Assignment of Benefits................................... 52 12.1 Limitation on Assignment of Benefits................................... 52 ARTICLE XIII - Miscellaneous ........................................................ 53 13.1 Limitation of Rights................................................... 53 13.2 Actions of Participating Employers..................................... 53 13.3 Inability to Locate Payee.............................................. 54 13.4 Exclusivity of Benefits................................................ 54 13.5 Distributions on Behalf of Incapacitated Persons....................... 54 13.6 Determination as to Payment of Benefits by the Plan Administrator...... 54 13.7 Withholding Requirements............................................... 54 ARTICLE XIV - Limitation on Benefits................................................. 55 14.1 Maximum Limitations.................................................... 55 ARTICLE XV - Amendment or Termination of the Plan.................................... 56 15.1 Right to Amend or Terminate............................................ 56 15.2 Complete Termination of the Plan....................................... 57 15.3 Partial Termination of the Plan........................................ 60 15.4 Mergers, Consolidations and Transfers.................................. 60 15.5 Withdrawal by a Participating Employer................................. 61 ARTICLE XVI - Pre-Termination Restrictions........................................... 63 16.1 Limitation............................................................ 63
iii ARTICLE XVII - Top-Heavy Provisions.................................................. 65 17.1 Definitions............................................................ 65 17.2 Vesting................................................................ 68 17.3 Minimum Accrued Benefit................................................ 69 17.4 Change in Section 415 Limitations...................................... 70 ARTICLE XVIII - Construction of the Plan............................................. 71 SCHEDULE A - Participating Employers................................................. 72
iv RADIAN GROUP INC. PENSION PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997 Preamble WHEREAS, Radian Group Inc. (formerly known as, CMAC Investment Corporation) (the "Company") adopted the Radian Group Inc. Pension Plan (formerly known as, the CMAC Investment Corporation Pension Plan) (the "Plan"), effective November 6, 1992, for the benefit of its eligible employees and the eligible employees of the Participating Companies in the United States; and WHEREAS, the Company has amended the Plan several times before; and WHEREAS, the Company desires at this time to amend and restate the Radian Group Inc. Pension Plan to, among other things, incorporate the applicable provisions of the Uruguay Round Agreement Act, the Uniformed Services Employment and Reemployment Act of 1994, the Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997 (collectively, "GUST") and other amendments which were made to the Plan by the Company since the Plan's last restatement; and WHEREAS, the Company also desires to make other changes; NOW, THEREFORE, effective January 1, 1997 (except as otherwise set forth herein), the Plan is hereby amended and restated as hereinafter set forth. -1- ARTICLE I Definitions The following words and phrases when used herein shall have the meanings set forth below. 1.1 "Accrued Benefit" means, for any Participant as of any date, the amount of benefit earned to such date, payable as a Single Life Annuity beginning at the Participant's Normal Retirement Date calculated in accordance with Section 5.1 of the Plan. 1.2 "Actuarial Equivalent" means a benefit having an equivalent value of the Single Life Annuity based upon the 1971 TPF&C Forecast Mortality Table for males set back two years and an interest rate of 6% compounded annually, except as otherwise specifically provided below. Except as otherwise specifically provided, such factors and tables shall also be used in applying "actuarial value", "present value", "actuarially reduced" and other similar terms. Effective January 1, 2002, the present value of a Participant's benefit, payable in the form of a lump sum, shall be calculated by using the Applicable Interest Rate and Applicable Mortality Table. The "Applicable Interest Rate" shall be the average annual rate of interest on 30-year Treasury securities, as determined by Regulation or other Internal Revenue Service guidance for this purpose, determined during the November preceding the Plan Year during which the Annuity Starting Date occurs. The "Applicable Mortality Table" shall be the mortality table based on the prevailing Commissioners' standard table (described in Section 807(d)(5)(A) of the Code) used to determine reserves for group annuity contracts issued on the date as of which present value is being determined (without regard to any other subparagraph of Section 807(d)(5) of the Code), that is prescribed by the Commissioner in revenue rulings, notices and other guidelines published in the Internal Revenue Bulletin. Provided however, with respect to any distribution in the form of a lump sum with an Annuity Starting Date that occurs within the 12-month period beginning on January 1, 2002, the amount of -2- such lump sum distribution shall be the greater of the amount that would be determined under the Plan using the assumptions described in this paragraph or the amount determined using the assumptions described in the next following paragraph. Prior to January 1, 2002, the present value of a Participant's benefit, payable in the form of a lump sum, shall be calculated on the basis of the interest rates in use by the Pension Benefit Guaranty Corporation, for the purpose of valuing immediate and deferred annuities provided under terminating single employer pension plans, on January 1 of the calendar year in which the distribution occurs and on the UP-1984 Mortality Table (except that in determining the value of the Participant's benefit at the date of any prior benefit payment, the interest rates used shall be those applicable to a lump sum payable at the time of such prior benefit payment). 1.3 "Affiliate" means any corporation or other trade or business that together with any Participating Employer is deemed a single employer under Code Sections 414(b), 414(c) or 414(m), or is required to be aggregated with a Participating Employer pursuant to Code Section 414(o), with any such entity to be considered an Affiliate under the Plan (i) during any such period of affiliated or required aggregated status, and (ii) to the extent specifically provided elsewhere in the Plan, during any period preceding a period of such affiliated status. 1.4 "Annual Salary" means, as of any January 1, the basic annual salary rate or annualized hourly wage rate of a Participant then in effect (excluding overtime, bonuses or any other form of additional compensation, but including all amounts that would have been paid as basic salary had the Participant not elected a reduction in salary under any plan maintained by a Participating Employer that qualifies under Code Sections 125, 132(f) or 401(k)). For purposes hereof, in the case of any Participant who is employed on a part-time basis on any January 1, his Annual Salary for such January 1 shall be determined as if he were employed on a full-time basis. -3- Notwithstanding the foregoing, a Participant's Annual Salary for purposes of the Plan for any calendar year beginning after December 31, 1988, but before January 1, 1994 shall not exceed $200,000 (or such greater amount as may be permissible under Code Section 401(a)(17)). For calendar years beginning after December 31, 1993 a Participant's Annual Salary for purposes of the Plan shall not exceed $150,000 (or such greater amount as may be permissible under Code Section 401(a)(17). In determining the Annual Salary of a Participant, with respect to calendar years beginning prior to January 1, 1997, for purposes of the application of the limitation under Code Section 401(a)(17), the rules of Code Section 414(q)(6) shall apply, except that in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year. For purposes of this paragraph, a Participant is an Eligible Employee who either is a 5% owner or is both a highly compensated employee and one of the ten most highly compensated employees. If, as a result of the application of these rules, the Code Section 401(a)(17) limitation is exceeded, then (except for purposes of determining the portion of a Participant's Annual Salary up to integration level) the limitation shall be prorated among the affected persons in proportion to each such Participant's Annual Salary as determined under this paragraph prior to the application of this limitation. 1.5 "Annuity Starting Date" means the first day of the first period for which an amount is payable as an annuity, or in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant to such benefit. 1.6 "Average Annual Salary" means the average of a Participant's Annual Salary rates on January 1 of the five consecutive calendar years of his years of highest Annual Salary. If a Participant has not been an Eligible Employee on January 1 of five consecutive calendar years, his Average Annual Salary shall be based on the last five January 1 dates (or the actual number of such January 1 dates, if less than five) on which he is an Eligible Employee, whether or not consecutive. -4- 1.7 "Board" means the Board of Directors of the Company. 1.8 "Code" means the Internal Revenue Code of 1986, as amended. 1.9 "Commonwealth Pension Plan" means the Commonwealth Land Title Insurance Company Pension Plan, as in effect on the Effective Date. 1.10 "Company" means Radian Group Inc., a Pennsylvania Corporation, or any successor or assignee which adopts this Plan in writing. 1.11 "Covered Compensation" means the average of the annual Social Security taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the Participant attains or will attain Social Security retirement age, as defined in Code Section 415(b)(8). A Participant's Covered Compensation for a calendar year after the 35-year period shall be the Participant's Covered Compensation for the calendar year during which the 35-year period ends. Covered Compensation shall be determined annually pursuant to the Rounded Table of Covered Compensation issued by the Internal Revenue Service, not taking into account any changes in such Table after a Participant's date of retirement or other Termination of Service. 1.12 "Credited Service" means the period of an Eligible Employee's service with a Participating Employer (except as provided below) which is taken into account in determining the amount of his Accrued Benefit. Credited Service shall be computed in accordance with the following rules: (a) With respect of an Eligible Employee's service prior to the end of his Employment Year that includes December 31, 1975, an Eligible Employee who was a participant under the Commonwealth Pension Plan on December 31, 1975, or would have been a participant thereunder on such date but for the maximum eligibility age provision of the Commonwealth Pension Plan as then in effect, shall be credited with a number of years of Credited Service equal to his years of "Service" (as -5- defined in the Commonwealth Pension Plan as in effect on December 31, 1975) after his twentieth birthday; provided, however, that Credited Service shall not be taken into account for any period during which an Eligible Employee was eligible but did not elect to participate in a "Superseded Plan" (as defined in the Commonwealth Pension Plan as in effect on the date preceding the Effective Date). (b) With respect of Employment Years that begin after December 31, 1975, an Eligible Employee shall be credited with a year of Credited Service for each Employment Year after his twentieth birthday during which he is employed by a Participating Employer; provided, however, that if an Employee is not employed as an Eligible Employee by a Participating Employer for an entire Employment Year, he shall be credited with a fraction of a year of Credited Service (not to exceed one-twelfth multiplied by the number of months during such Employment Year in which he is an Eligible Employee) equal to the ratio that his Hours of Service as an Eligible Employee in the portion of such Employment Year bear to 2,080, except that no Credited Service shall be given for any portion of an Employment Year if such Eligible Employee is credited with less than 1,000 Hours of Service as an Eligible Employee during such Employment Year unless such Eligible Employee retires or dies during such Employment Year. Notwithstanding the foregoing, in the case of an Eligible Employee who commenced employment after age 60 and prior to January 1, 1988, no Credited Service shall be credited with respect to any period of employment prior to January 1, 1988. 1.13 "Deferred Retirement Date" means the date for deferred retirement specified in Section 4.3 of the Plan. 1.14 "Early Retirement Date" means the date of eligibility for early retirement specified in Section 4.2 of the Plan. -6- 1.15 "Effective Date" means November 6, 1992, the closing date of the initial public offering of the Company's common stock. 1.16 "Eligible Employee" means any Employee who is employed by a Participating Employer and who is classified by the Participating Employer as a common law employee, except that Employees whose employment is covered by a collective bargaining agreement shall not be Eligible Employees unless such agreement specifically provides for their participation in the Plan. For purposes of determining eligibility under the Plan, the classification to which an individual is assigned by a Participating Employer shall be final and conclusive, regardless of whether a court, a governmental agency or other entity subsequently finds such individual should have been assigned a different classification. 1.17 "Employee" means an individual who is reported on payroll records as a common law employee of a Participating Employer or Affiliate (but not by a joint venture in which the Participating Employer is a joint venturer) or an Affiliate. A person who is not a common law employee of a Participating Employer or Affiliate shall be deemed to be a common law employee by such entity if he is a leased employee with respect to whose services such Participating Employer or Affiliate is the recipient within the meaning of Code Section 414(n), but to whom Code Section 414(n)(5) does not apply and then only if the coverage requirements of Code Section 410(b) would otherwise not be met. 1.18 "Employment Year" means the twelve-month period beginning on the date an Employee first completes an Hour of Service and the successive twelve-month periods beginning, respectively, on each anniversary of such date. 1.19 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.20 "Fresh-Start Date" means the last day of the calendar year preceding a calendar year for which any amendment of the Plan that directly or indirectly affects the amount of a Participant's Retirement Benefit determined under the current benefit formula is made effective. -7- 1.21 "Frozen Retirement Benefit" means a Participant's Retirement Benefit under the Plan determined as of the latest Fresh-Start Date as if a Participant terminated employment with a Participating Employer on that date and without regard to any amendment to the Plan adopted after that date, other than amendments recognized as effective as of or before that date under Code Section 401(b) or Section 1.401(a)(4)-11(g) of the Treasury Regulations. If, as of the latest Fresh-Start Date, the amount of a Participant's Frozen Retirement Benefit was limited by the application of Code Section 415, the Participant's Frozen Retirement Benefit will be increased for years after the latest Fresh-Start Date to the extent permitted under Code Section 415(d)(1). In addition, the Frozen Retirement Benefit of a Participant whose Frozen Retirement Benefit includes the top heavy minimum benefits provided in Section 17.3 of the Plan, will be increased to the extent necessary to comply with the average compensation requirement of Code Section 416(c)(1)(D)(i). If (a) the Plan's standard form of benefit is in effect on the latest Fresh-Start Date and is not the same as the standard form under the Plan after the latest Fresh-Start Date and/or (b) Normal Retirement Date for any Participant or that date was greater than the Normal Retirement Date for that Participant under the Plan after the latest Fresh-Start Date, the stated Frozen Retirement Benefit will be expressed as an actuarially equivalent benefit in the standard form under the Plan after the latest Fresh-Start Date commencing at the Participant's Normal Retirement Date under the Plan in effect after the latest Fresh-Start Date. Each Participant's Frozen Retirement Benefit will be increased to the extent necessary as that the base benefit percentage determined with reference to all years of Credited Service as of the latest Fresh-Start Date. Each Participant's offset applied to determine the Frozen Retirement Benefit will be decreased to the extent necessary so that it does not exceed 50 percent of the -8- benefit determined without applying the offset taking into account all years of Credited Service as of the latest Fresh-Start Date. With respect to any Participant with at least one Hour of Service in a calendar year beginning after the Fresh-Start Date, the Participant's Frozen Retirement Benefit (as adjusted above, if applicable) shall be multiplied by a fraction not less than one, the numerator of which is the Participant's Average Annual Salary for the current calendar year and the denominator of which is the Participant's Average Annual Salary for the calendar year ending on the Fresh-Start Date, determined in the same manner as the numerator. If the latest Fresh-Start Date is the last day of the last calendar year beginning before January 1, 1989, the Frozen Retirement Benefit of any Code Section 401(a)(17) Participant will be adjusted in accordance with the old salary fraction, except that the numerator will be determined after applying Code Section 401(a)(17) compensation limit for the current year and the denominator will be determined as of the last day of the last calendar year beginning before January 1, 1989 without regard to Code Section 401(a)(17) compensation limit. If the latest Fresh-Start Date is later than the last day of the last calendar year beginning before January 1, 1989 the benefit determined after the latest Fresh-Start Date for any participant who is a Code Section 401(a)(17) Participant will be adjusted under the following method: (a) Determine the Participant's Frozen Retirement Benefit as the latest Fresh-Start Date (b) Determine an amount equal to the Participant's Frozen Retirement Benefit at the end of the last calendar year beginning before January 1, 1989 (c) Adjust through the latest Fresh-Start Date the amount in (b) as provided under the old salary fraction except that the numerator will be -9- determined after applying Code Section 401(a)(17) compensation limit for the year ending on the latest Fresh-Start Date, and the denominator will be determined as of the last day of the last calendar year beginning before January 1, 1989 without regard to Code Section 401(a)(17) compensation limit. (d) Subtract the amount determined in (c) above from the amount determined in (a) above (e) Adjust the amount in (d) under the rules applied to Participants who are not Code Section 401(a)(17) Participants (f) Adjust the amount in (c) as provided under the old salary fraction except that the numerator will be determined after applying Code Section 401(a)(17) compensation limit for the current year, and the denominator will be determined as of the last day of the last calendar year before January 1, 1989, without regard to Code Section 401(a)(17). (g) The total adjusted accrued benefit of the Code Section 401(a)(17) Participant after the latest Fresh-Start Date is the sum of the amounts (e) and (f) above. If this Section satisfies the requirement of Section 1.401(a)-13(d) of the Treasury Regulations for a Fresh-Start as of the last day of the last calendar year beginning before January 1, 1994, then notwithstanding any other provisions of the Plan any "Code Section 401(a)(17) employee's" Retirement Benefit frozen in accordance with Section 1.401(a)(11)-13 of the Treasury Regulation as of a Fresh-Start date is adjusted after the Fresh Start Date. However this adjustment may be made only if the adjustment will not cause the Plan to fail to satisfy the consistency requirement of Section 1.401(a)(4)-13(c) of the Treasury Regulations as modified by Section 1.401(a)(17)-1(e) of the proposed Treasury Regulations. -10- In determining a "Code Section 401(a)(17) employee's" Retirement Benefit in any Plan Year beginning on or after January 1, 1994 the portion of the Employee's Frozen Retirement Benefit attributable to Plan Years beginning before January 1, 1994, will be determined in accordance with method A for "statutory Code Section 401(a)(17) employees" and method B for "Code Section 401(a)(17) employees" other than "statutory Code Section 401(a) (17) employees." A "statutory Code Section 401(a)(17) employee" means an Employee whose current Retirement Benefit as of a date on or after the first day of the first calendar year beginning on or after January 1, 1994, is based on an Annual Salary for a year beginning prior to the first date of the first Plan Year beginning on or after January 1, 1989 that exceeded $200,000. A "Code Section 401(a)(17) employee" means an Employee whose current Retirement Benefit as of a date on or after the first day of the first calendar year beginning on or after January 1, 1994 is based on Annual Salary for a year beginning prior to the first day of the first calendar year beginning on or after January 1, 1994 that exceeded $150,000. Method A: ("Statutory Code Section 401(a)(17) employees") Step 1: Determine each "statutory Code Section 401(a)(17) employee's" Retirement Benefit as of the last day of the last Plan Year beginning before January 1, 1993, frozen in accordance with Section 1.401(a)(4)-13 of the Treasury Regulations. Step 2: Adjust the amount in Step 1 up through the last day of the last calendar year beginning before the first calendar year beginning on or after January 1, 1994, under the method provided under the Plan for increasing the amount in Step 1 to take into account increases in annual salary in calendar years beginning on or after January 1, 1989. However, if the Plan does not provide for such increases, the amount in Step 2 shall be equal to the amount in Step 1. -11- Step 3: Determine the "statutory Code Section 401(a)(17) employee's" Retirement Benefit as of the last day of the last calendar year beginning before January 1, 1994, frozen in accordance with Section 1.401(a)(4)-13 of the Treasury Regulations. Step 4: Subtract the amount determined in Step 2 from the amount in Step 3. Step 5: Adjust the amount in Step 4 by multiplying it by the following fraction (not less than 1) the numerator of the fraction is the "statutory Code Section 401(a)(17) employee's" average salary determined for the current year (as limited by Code Section 401 (a)(17)) using the same definition and compensation formula in effect as of the last day of the last calendar year beginning before January 1, 1994 the denominator of the fraction is the Employee's average salary for the last day of the last calendar year beginning before January 1, 1994 using the definition and salary formula in effect as of the last day of the last calendar year beginning before January 1, 1994. Step 6: Adjust the amount in Step 1 by multiplying it by the following fraction (not less than 1). The numerator of the fraction is the "statutory Code Section 401(a)(17) employee's" average salary for the current year (as limited by Code Section 401(a)(17)), using the same definition of salary and salary formula in effect as of the last day of the last calendar year beginning before January 1, 1989. Step 7: Add the amounts determined in Step 5, and the greater of Steps for 2. Method B: ("Code Section 401(a)(17) employees" other than "statutory Code Section 401(a)(17) employees") Step 1: Determine the Retirement Benefit of each "Code Section 401(a)(17) employee" other than "statutory Code Section 401(a)(17) employees" as of the last day of the calendar year beginning before January 1, 1994, frozen in accordance with Section 1.401(a)(4)-13 of the Treasury Regulations. -12- Step 2: Adjust the amount in Step 1 by multiplying it by the following fraction (not less than 1) the numerator of the fraction is the average salary of the "Code Section 401(a)(17) employee" who is not a statutory Code Section 401(a)(17) employee determined for the current year (as limited by Code Section 401(a)(17)), using the definition and salary formula in effect as of the last day of the last calendar year beginning before January 1, 1994 the denominator of the fraction is the employee's average salary for the last day of the last calendar year beginning before January 1, 1994 using the definition and salary formula in effect as of the last day of the last calendar year beginning before January 1, 1994. 1.22 "Hour of Service" means each hour for which an Employee is paid, or entitled to payment, by a Participating Employer or Affiliate, for the performance of services. An Employee shall also be credited with Hours of Service for (a) any non-work period (occurring prior to Termination of Employment) for which he is paid, or entitled to payment, by a Participating Employer or Affiliate on account of vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence, and (b) all periods of compulsory service in the Armed Forces of the United States of America, provided the Employee returns to employment within three months following the date upon which he becomes eligible for separation from active duty in the Armed Forces (or such longer period during which his employment rights are protected by law). Hours of Service credited for a period described under (b) shall be based on the Participant's customarily scheduled working hours. Notwithstanding the foregoing, to the extent required by ERISA, if an Employee terminates employment and is paid (or is entitled to payment), for a period beginning immediately thereafter, by a Participating Employer or Affiliate for one of the reasons listed in (a) above (and would not otherwise be entitled to credit for such period), he shall continue to be credited with Hours of Service (but shall accrue no additional benefits) until the earlier of (1) the cessation of such payments or (2) the date he has been credited with 501 Hours of Service since his last day of active work. For purposes of this Section, the following rules shall apply: -13- (a) A payment shall be deemed to be made by, or due from, a Participating Employer or Affiliate whether such payment is made by the Participating Employer or Affiliate directly, or is made indirectly through a trust fund or an insurer (or other entity) to which the Participating Employer or Affiliate contributes or pays premiums (regardless of whether such contributions or premiums are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate); provided, however, that any payment made or due (1) under a plan maintained solely to comply with applicable unemployment compensation, workmen's compensation or disability insurance laws (or any similar law), or (2) solely to reimburse an Employee for medical or medically related expenses incurred by the employee (or a member of his family) shall not be considered to be direct or indirect compensation paid or due from the Participating Employer or Affiliate; and (b) An Employee shall be considered to be entitled to pay for any hour during any of the periods described above for which back pay is either awarded or agreed to by a Participating Employer or Affiliate (irrespective of mitigation of damages). (c) Hours of Service credited for any period of full-time employment by an Employee shall be calculated by crediting him with 45 Hours of Service for each calendar week in such period for which he is entitled to be credited with at least one Hour of Service; provided, however, that number of Hours of Service credited with respect to any period of absence (including the week such absence begins and the week such absence ends) shall in no event exceed the actual number of weeks of such absence (including such beginning and ending weeks) multiplied by 45. This rule shall not be used to determine whether such Employee's employment during any calendar month after his Normal Retirement Date involves less than 40 Hours of Service for purposes of Sections 5.3 and 9.2 of the Plan. -14- (d) Notwithstanding the foregoing, for eligibility and vesting purposes only, if an Employee who is not employed on a full-time basis terminates service on account of military service and returns to employment with the Employer with legally protected reemployment rights, he shall be credited with a number of Hours of Service for each week of absence for military service equal to the number of hours of work in his customary work week at the time the absence began. The number of Hours of Service to be credited in accordance with the foregoing, and the calendar year (or other applicable computation period) to which such Hours are credited, shall be determined by the Plan Administrator in accordance with the rules set forth in Labor Department Regulations 2530.200b2-(b) and (c). 1.23 "Investment Manager" means any investment advisor registered under the Investment Advisors Act of 1940, a bank (other than a Trustee) as defined in such Act, or an insurance company qualified to perform investment management services under the laws of more than one State, which shall have acknowledged in writing that it is a fiduciary with respect to the Plan. 1.24 "Normal Retirement Date" means the date for normal retirement specified in Section 4.1 of the Plan. 1.25 "One-Year Break in Service" means any Employment Year during which a Participant does not have any Hours of Service. For purposes only of determining whether a Participant has incurred a One-Year Break in Service, a Participant shall be credited with Hours of Service for any non-work period of maternity or paternity leave in accordance with the following rules: (a) Such Hours of Service shall be credited for such purpose in the Employment Year in which the leave begins if necessary to avoid a One-Year Break in Service during such calendar year, and shall otherwise be credited in the next following Employment Year for such -15- purpose. Any Hours of Service credit provided under this Section shall, solely for such purpose, replace any credit for the same Hours of Service that would otherwise be given under any other provision of the Plan. (b) For purposes hereof, a period of maternity or paternity leave shall mean an absence from work (1) by reason of the Employee's pregnancy or the birth of the Employee's child, (2) by reason of the placement of a child with the Employee in connection with the Employee's adoption of such child or (3) for purposes of caring for such child for a period beginning immediately after such birth or placement. (c) The number of Hours of Service credited in respect of such maternity or paternity leave shall be based upon the number of Hours of Service which otherwise would normally have been credited to the Employee but for such absence or, in any case in which the Plan Administrator is unable to determine such normal Hours of Service, shall be 8 Hours of Service per day of absence. (d) Notwithstanding the foregoing, no credit shall be given under this Section unless the Employee furnishes to the Plan Administrator (within the time period specified by the Plan Administrator) such information as the Plan Administrator shall require to establish the extent of the period of absence that constitutes a period of maternity or paternity absence under clause (b) above. 1.26 "Participant" means any person included in the Plan in accordance with the provisions of Article II whose participation has not been terminated thereunder. 1.27 "Participating Employer" means, collectively or individually, as the context may indicate, the Company and any Affiliate that shall be designated by the Board as a Participating Employer and that shall have adopted the Plan, with any such Affiliate to be considered a Participating Employer under the Plan only during its -16- actual period of participation, except to the extent otherwise specifically provided in Schedule A to the Plan. 1.28 "Plan" means this Radian Group Inc. Pension Plan, as it may be amended from time to time. 1.29 "Plan Administrator" means the Company or any person or entity delegated as such by the Board, as described in Section 11.1 of the Plan. 1.30 "Required Beginning Date" means, for any Participant: (a) if he attained age 70-1/2 on or after January 1, 1996, the April 1 of the calendar year following the calendar year in which occurs the later of (1) his attainment of age 70-1/2 or (2) his Termination of Employment; provided, however, if he is a 5-percent owner (within the meaning of Code Section 416) of a Participating Employer, clause (2) shall not apply; (b) if he attained age 70-1/2 before January 1, 1988, and is not a 5-percent owner (within the meaning of Code Section 416) of a Participating Employer, April 1 of the calendar year following the later of the calendar year in which he has a Termination of Employment or the calendar year in which he attained age 70-1/2; (c) if he attained age 70-1/2 before January 1, 1988, and is a 5-percent owner (within the meaning of Code Section 416) of a Participating Employer, the later of December 31, 1987 or April 1 of the calendar year following the calendar year in which he attained age 70-1/2; (d) if he attained age 70-1/2 before January 1, 1989 and after December 31, 1987, is not a 5-percent owner (within the meaning of Code Section 416) of a Participating Employer, and has not had a Termination of Employment before January 1, 1989, April 1, 1990; (e) if he attains age 70-1/2 on or after January 1, 1989, April 1 of the calendar year next following the calendar year in which he attains Age 70-1/2. -17- 1.31 "Spouse" or "Surviving Spouse" means the person to whom the Participant is married on his Annuity Starting Date (without regard to whether the marriage terminates at a later date). 1.32 "Termination of Employment" means, for any Employee, his death, retirement, resignation, discharge or any absence that causes him to cease to be an Employee of a Participating Employer or any Affiliate. 1.33 "Trust Agreement" means any trust agreement which the Company has entered into or adopted for purposes of funding benefits under the Plan as described in Section 10.1 of the Plan, collectively referred to as the "Trust Agreements". 1.34 "Trust Fund" means the trust fund established and maintained under any Trust Agreement for the purpose of holding the assets of the Plan, out of which benefits payable under this Plan shall be paid. 1.35 "Trustee" means the trustee under any Trust Agreement, collectively referred to as the "Trustees". 1.36 "Year of Service" means, for any Employee, each Employment Year (ending on or after January 1, 1976) that begins after he attains age 18 during which the Employee completes at least 1,000 Hours of Service. An Employee's Years of Service for periods prior to January 1, 1976 shall equal his full years of service after attaining age 20 as determined under the Commonwealth Pension Plan as in effect on December 31, 1975; provided, however, that an Employee shall not be credited with a Year of Service for any period prior to January 1, 1976 for any period during which he was eligible to participate in a "Superseded Plan" (as defined in the Commonwealth Pension Plan as in effect on the date preceding the Effective Date) but did not do so. -18- For purposes of determining Years of Service, each employee of Amerin Guaranty Corporation as of the date Amerin Guaranty Corporation merged with the Company shall be credited with service with Amerin Guaranty Corporation. -19- ARTICLE II Participation 2.1 Eligibility to Participate. Each person who was an Eligible Employee and a participant in the Commonwealth Plan on the date immediately preceding the Effective Date shall become a Participant in the Plan on the Effective Date, if he is then an Eligible Employee. Each other Eligible Employee shall become a Participant on the first day of the Employment Year that next follows the later of (i) the date on which he first performs an Hour of Service as an Employee and (ii) the date he attains age 20-1/2, if he is then an Eligible Employee. Notwithstanding the foregoing, each Eligible Employee who is employed on a part-time or temporary basis and who was not a Participant on the Effective Date, shall become a Participant on the first day of the Employment Year or the first day of the seventh month of the Employment Year that next follows the later of (a) the date on which he completes 1,000 Hours of Service during an Employment Year and (b) the date he attains age 20-1/2, if he is then an Eligible Employee 2.2 Employment with a Predecessor. A person shall receive service credit for any period of employment with a predecessor to a Participating Employer to the extent (a) explicitly provided in the Plan or (b) required by Code Section 414(a)(1) or under regulations prescribed pursuant to Code Section 414(a)(2). 2.3 Periods of Non-Covered Employment. Any period during which a person is employed by an Affiliate that is not a Participating Employer (either before or after employment covered by the Plan) shall be treated as employment as an Employee for all purposes of the Plan, except that (a) no person may become a Participant during any such period and (b) such period shall not constitute a period of Credited Service for purposes of determining the amount of his Accrued Benefit. If an Employee transfers from employment with a Participating Employer to employment with an -20- Affiliate that is not a Participating Employer, his employment hereunder will be deemed terminated hereunder at such time as he shall cease to be employed by either the Participating Employers or any Affiliate. Any period during which a person is employed by a Participating Employer in a non-covered position (i.e., other than as an Employee), either before or after employment covered by the Plan, shall be treated as employment as an Employee for all purposes of the Plan, except as provided in clauses (a) and (b) of this Section 2.3 of the Plan. For purposes of determining eligibility under Article II of the Plan, each employee of Amerin Guaranty Corporation as of the date Amerin Guaranty Corporation merged with the Company shall be credited with service with Amerin Guaranty Corporation. 2.4 Service as a Leased Employee. In the case of any person who is a "leased employee" of a Participating Employer or an Affiliate, the entire period during which the person performs services for the Participating Employer or an Affiliate shall be treated as employment hereunder for all purposes of the Plan, except that (a) no person may become a Participant during any such period and (b) no person may accrue service for purposes of determining benefits under Section 5.1 of the Plan during any such period (assuming such period is not taken into account under any other provisions of the Plan). A person who is performing services for a Participating Employer (and is not a common-law employee of the Participating Employer or Affiliate) shall be considered a "leased employee" if: (a) such services are provided pursuant to an agreement between the Participating Employer and any other entity (hereinafter referred to as the "leasing organization"), -21- (b) such person has performed the services for the Participating Employer (or a related company, within the meaning of Code Section 144(a)(3)) on a substantially full-time basis for a period of at least one year, and (c) such services are performed under the primary direction or control of the Participating Employer. Notwithstanding the foregoing, a person shall not be considered a leased employee if (1) he is covered by a plan maintained by the leasing organization that constitutes a safe harbor plan under Code Section 414(n)(5) and (2) leased employees do not constitute more than 20 percent of the Participating Employer's non-highly compensated work force. A Participating Employer may rely upon a written certificate by the leasing organization as to whether a person is covered by a plan of the type described. 2.5 Employment with a Successor. Notwithstanding anything elsewhere in the Plan to the contrary, if a Participant ceases to be employed by any Participating Employer or Affiliate as a result of a stock or asset sale or as a result of any other corporate reorganization, but (because of employment with a successor employer) he does not have a "separation from service" as that term is defined for purposes of Code Section 402(e), no benefits shall be payable to him until he ceases to be employed by such successor employer (or any affiliate thereof within the meaning of Code Sections 414(b) or 414(c)) but he shall not be treated as continuing in employment for any other purpose. 2.6 Termination of Participation. The participation of a Participant shall cease at such time as neither he nor any person on his behalf shall have any further rights to benefits under the Plan. Any Participant who shall terminate employment without vested rights to a benefit under the Plan shall be considered, upon his Termination of Employment, to have received the full value of his interest in the Plan as of the date of his Termination -22- of Employment and he shall have no further rights under the Plan (subject to the provisions of the Plan concerning reemployment). A Participant who receives (or is considered to receive) the full value of his interest in the Plan upon his Termination of Employment, shall thereupon cease to be a Participant. 2.7 Reemployment after Military Service. Effective December 12, 1994, notwithstanding any provision of the Plan to the contrary, benefits and service credit with respect to qualified military service shall be provided in accordance with Code Section 414(u). -23- ARTICLE III Contributions It is the intention of the Participating Employers to continue the Plan and from time to time to make those contributions thereunder which are considered actuarially necessary (based on the funding policy adopted in accordance with ERISA) to provide benefits under the Plan. The Company, however, reserves the right to reduce, suspend or discontinue the contributions of Participating Employers under the Plan for any reason at any time. Any forfeiture occurring under the Plan shall be used as promptly as possible to reduce Participating Employer contributions under the Plan and in no event shall such forfeitures increase the benefit that any person would otherwise receive under the Plan. No Participant shall be required or permitted to make any contributions under the Plan. Notwithstanding the foregoing or anything elsewhere in the Plan to the contrary, to the extent permitted by applicable government regulations, upon the Company's request, (a) a contribution made under the Plan by a Participating Employer which was made by a mistake of fact shall be returned to the Participating Employer within one year after the payment of the contribution, (b) a contribution made under the Plan by a Participating Employer which was conditioned upon the initial qualification of the Plan under Code Section 401(a) shall be returned to the Participating Employer within one year after the date on which the initial qualification of the Plan is denied by the Internal Revenue Service, and (c) a contribution or any part of a contribution made under the Plan by a Participating Employer as to which a deduction under Code Section 404 is disallowed shall be returned to the Participating Employer within one year after such disallowance (to the extent disallowed), it being hereby provided that any contribution made under the Plan by a Participating Employer is specifically conditioned upon the current deductibility of the contribution under Code Section 404, and no contribution shall be made under the Plan by a -24- Participating Employer that is not currently deductible under such Code Section 404. Any contribution to be returned to a Participating Employer in accordance with (a) or (c) above shall be adjusted before return to the Participating Employer to reflect investment losses, but not investment gains. -25- ARTICLE IV Retirement Dates 4.1 Normal Retirement Date. The Normal Retirement Date of a Participant shall be the first day of the month coincident or next following the later of (a) the Participant's 65th birthday or (b) the earlier of (1) the date the Participant completes 5 Years of Service or (2) the 5th anniversary of the date such Plan participation commenced. A Participant's rights to benefits under the Plan shall become fully vested and nonforfeitable upon attainment of the later of age 65 or the earlier of the dates specified under clause (b) above. 4.2 Early Retirement Date. The Early Retirement Date of a Participant shall be the first day of the month coincident with or next following the first date he has both attained age 55 and completed 15 Years of Service. Subject to Section 2.5 of the Plan, a Participant's Termination of Employment after his Early or Normal Retirement Date shall be considered a retirement from employment for all purposes of the Plan. 4.3 Deferred Retirement Date. If a Participant continues as an Employee after his Normal Retirement Date, his Deferred Retirement Date shall be the first day of the month coincident with or next following the date of his actual retirement. -26- ARTICLE V Benefits 5.1 Normal Retirement Benefit. Subject to the provisions of Section 5.6 of the Plan, the Accrued Benefit of a Participant who is eligible for Normal Retirement benefits shall be an annual benefit, payable monthly, which is the Actuarial Equivalent of a Single Life Annuity commencing at his Normal Retirement Date equal to one-twelfth of: (a) 1.1% of his Average Annual Salary multiplied by his number of years of Credited Service not in excess of 35 years; plus (b) 0.5% of his Average Annual Salary in excess of Covered Compensation multiplied by his number of years of Credited Service not in excess of 35; plus (c) 0.5% of his Average Annual Salary multiplied by his number of years of Credited Service in excess of 35 provided, however, that a Participant's Accrued Benefit shall never be less than his Frozen Retirement Benefit. 5.2 Early Retirement Benefit. A Participant who retires on or after his Early Retirement Date (and prior to his Normal Retirement Date) shall be entitled to an Early Retirement benefit, commencing on his Normal Retirement Date if he is then living. Such Early Retirement benefit shall be an annual amount equal to: (a) the Accrued Benefit to which the Participant would have been entitled under Section 5.1 of the Plan if he had continued employment with a Participating Employer, and continued to be credited with years of Credited Service until his Normal Retirement Date (except that the Participant's Average Annual Salary shall be determined as of his actual date of retirement), multiplied by -27- (b) a fraction whose numerator is the Participant's actual years of Credited Service at retirement and whose denominator is the number of years of Credited Service he would have had if he had continued to be credited with years of Credited Service until his Normal Retirement Date. Notwithstanding the foregoing, a Participant who retires on or after his Early Retirement Date (and prior to his Normal Retirement Date) may elect an Early Retirement benefit commencing (if he is then living) as of the first day of any month following his retirement and preceding his Normal Retirement Date. Any such election shall be by prior written notice filed with the Plan Administrator (in a form approved by it) not more than 90 days prior to the day on which such Early Retirement benefit is to commence. Any such Early Retirement benefit shall equal the benefit that would otherwise be payable commencing as of his Normal Retirement Date, reduced by 1/180th for each of the first sixty months and by 1/360th for each of the next sixty months by which his Annuity Starting Date precedes his Normal Retirement Date. 5.3 Deferred Retirement Benefit. The Deferred Retirement benefit payable to a Participant who retires on a Deferred Retirement Date shall equal a benefit determined in the same manner as a Normal Retirement benefit (determined in accordance with Section 5.1 of the Plan) but based on his Credited Service and Average Annual Salary to his Deferred Retirement Date. Notwithstanding the foregoing, the Deferred Retirement benefit payable to a Participant whose benefit commences pursuant to Section 6.1 of the Plan prior to his actual retirement date, on account of (a) reaching his required Beginning Date or (b) continued employment after his Normal Retirement Date that is not substantial (as defined in Section 9.3 of the Plan), shall be a benefit calculated in the same manner as a Normal Retirement benefit under Section 6.1 of the Plan which shall initially be based on his years of Credited Service and Average Annual Salary as of his Annuity Starting Date and shall be recalculated prospectively, as of each January 1 thereafter, to reflect his current total Credited Service and Average Annual Salary. -28- 5.4 Retirement Benefit in Event of Disability. If a Participant terminates his employment by reason of a total and permanent disability on account of which he becomes entitled to both benefits under a long-term disability plan of a Participating Employer ("LTD Benefits") and disability benefits under the Social Security Act, he shall be eligible for a benefit commencing as of his Normal Retirement Date (or, if later, the date he ceases to be entitled to LTD Benefits but not later than the earliest date permitted under Code Section 401(a)(9)) in an amount that would have been payable as a Normal Retirement benefit (or Deferred Retirement benefit, as the case may be), had he continued to be employed by a Participating Employer as an Eligible Employee at an Annual Salary equal to his Annual Salary on the date his disability absence is determined by the Plan Administrator to have commenced and continued to accrue Normal Retirement benefits during the period he was receiving LTD Benefits; provided, however, that (a) no Credited Service shall be given for benefit accrual purposes for any period of disability during which he was not entitled to receive benefits under the disability provisions of the Social Security Act and (b) if applicable, any such disability retirement benefit shall be computed on the assumption that no changes in the applicable provisions of the Social Security Act occurred after the date his disability is determined to have begun. The benefit provided hereunder shall be in lieu of any benefit to which the Participant would otherwise be entitled under this Article V or Article VIII, except as provided below. A Participant receiving LTD Benefits shall be treated as though he were still employed by a Participating Employer as a full-time Employee for purposes of (a) the spouse's annuity coverage provided under Section 7.1 of the Plan (including determination of such Participant's vested right under Article VIII), (b) the notice provisions of Section 6.1 of the Plan, (c) the service requirement for early retirement and (d) Plan provisions relating to commencement of benefits. Notwithstanding the foregoing, if any Participant ceases to be entitled to LTD Benefits because he has recovered from his disability and he does not return to -29- employment within six months from the date he ceases to be entitled to LTD Benefits, his entitlement to a benefit shall then be determined under Sections 5.1, 5.2, 5.3 or Article VIII of the Plan, whichever is applicable. Any such benefit shall be computed as though he had terminated employment on the date he ceased to be entitled to LTD Benefits and in accordance with the applicable provisions of the Social Security Act on the date the Participant's disability began. A Participant receiving LTD Benefits who has satisfied the requirements for an Early or Normal Retirement benefit under the Plan may elect to retire under the Plan, as of the first day of any month, by prior notice in writing to the Plan Administrator. In such event, the Participant shall not be entitled to any further benefits under this Section 5.4 of the Plan, but shall be entitled to a benefit under Sections 5.1, 5.2, or 5.3 of the Plan, whichever applies. The amount of such benefit shall equal the amount that would have been payable under the foregoing provisions of this Section 5.4 of the Plan if he had recovered on the date of such retirement. In the event that a Participant shall begin receiving benefits under this Section 5.4 of the Plan while he is still receiving LTD Benefits, his LTD Benefits shall be reduced, to the extent provided under the program paying such LTD Benefits, to reflect any benefit (other than the portion of such benefit attributable to his employee contributions, if any) payable hereunder. If any Participant ceases to be disabled and returns to employment, his accumulated Credited Service shall continue to his credit (including any Credited Service he accrued under the foregoing provisions of this Section 5.4 of the Plan during his period of total and permanent disability). 5.5 Minimum Benefit. A Participant's Accrued Benefit on account of retirement under this Article V shall in no event be less than the Accrued Benefit to which he would have been entitled if he had retired on an earlier date (adjusted to reflect any changes in his Covered Compensation occurring after any such date). 5.6 Deduction for Other Pension. If any Participant entitled to benefits under this Plan is or shall become, or upon application would become, entitled to -30- benefits under the Commonwealth Pension Plan or the Reliance Pension Plan, by reason of employment or service credited before the most recent date as of which the Participant initially or again became covered by the Plan, and which employment or service is taken into consideration in determining the amount of any payment pursuant to this Plan, then the amount determined under the provisions of the Plan and otherwise payable to such Participant for any period shall be reduced by the amount of the benefits under the Commonwealth Pension Plan or the Reliance Pension Plan, as applicable, paid or payable to him or that would upon application become payable to him for the corresponding period; provided, however, that such deduction shall not exceed the lesser of (a) the amount, to the extent reasonably determinable, of the benefit payable by the Commonwealth Pension Plan or the Reliance Pension Plan, as applicable, attributable to employment with the Company during a period in which the Participant has been credited with years of Credited Service for the purpose of calculating the amount of any benefit under the Plan, or (b) the amount, to the extent reasonably determinable, of the portion of any payment under this Plan attributable to employment or service upon which the benefit payable by the Commonwealth Pension Plan or the Reliance Pension Plan, as applicable, is based, in whole or in part. -31- ARTICLE VI Payment of Benefits 6.1 Standard. Benefits under the Plan shall be payable monthly. A Normal Retirement benefit shall be payable commencing as of a Participant's Normal Retirement Date. An Early Retirement Benefit shall be payable commencing as of the date applicable under Section 5.2 of the Plan. A benefit payable under Section 5.4 of the Plan in the event of disability shall be payable as provided in such Section 5.4 of the Plan. A benefit under Article VIII of the Plan shall be payable as provided in such Article VIII of the Plan. Benefits payable in the standard form, a Single Life Annuity, shall terminate with the monthly payment for the month in which the Participant's death occurs. In the case of a Participant who continues as an Employee after his Normal Retirement Date, payment of his benefit shall commence as of (a) his Deferred Retirement Date or (b) if earlier, his Required Beginning Date. Notwithstanding the foregoing, if a Participant has reached his Normal Retirement Date and his employment as an Eligible Employee is not substantial (as described in Section 9.3 of the Plan), his benefit shall commence as of the first day of the month (on or after his Normal Retirement Date) in which his employment is not substantial; provided, however, that if such benefit is being paid solely by reason of the Participant's employment not being substantial, such benefit shall be paid only for the months in which his employment is not substantial. If a Participant commences benefits while employed after his Normal Retirement Date because his employment is not substantial and he later resumes substantial employment before reaching his Required Beginning Date, his benefit payments shall be suspended and the provisions of Section 9.4 of the Plan shall apply (as though he had been reemployed). Each Participant who continues employment with a Participating Employer after his Normal Retirement Date shall receive a notice containing the information described in Section 9.3 of the Plan. Such notice shall be furnished to the Participant during the calendar month in which his Normal Retirement Date occurs. -32- Notwithstanding anything elsewhere in the Plan to the contrary, if a Participant's Normal Retirement Date is after the end of the year in which he attains age 70-1/2 and he acquires a vested right to a pension before his Normal Retirement Date, benefit payments to him shall commence by the latest date permissible under Code Section 401(a)(9). 6.2 Minimum Distribution Requirements. Unless a Participant elects otherwise, his Annuity Starting Date shall be no later than the 60th day after the close of the Plan Year in which the Participant (a) attains his Normal Retirement Date, (b) incurs a Termination of Employment, or (c) reaches the tenth (10th) anniversary of his date on which he first completed an Hour of Service, whichever occurs last. Notwithstanding anything in the Plan to the contrary, the form and the timing of all distributions under the Plan shall be in accordance with regulations issued by the Department of the Treasury under Code Section 401(a)(9), including the incidental death benefit requirements of Code Section 401(a)(9)(G). Notwithstanding anything in the Plan to the contrary, with respect to distributions under the Plan made on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the regulations under Section 401(a)(9) of the Code that were proposed on January 17, 2001 (the 2001 Proposed Regulations). Minimum distributions under the Plan shall continue to be made in accordance with the 2001 Proposed Regulations until the calendar year beginning before the effective date of the final regulations under Section 401(a)(9) of the Code or such other date as may be published by the Internal Revenue Service. 6.3 Qualified Joint and Survivor Annuity. Notwithstanding anything elsewhere in the Plan to the contrary, any Participant who is not married on his Annuity Starting Date shall receive payment of his of benefit in the form of a Single Life Annuity and any Participant who is married on his Annuity Starting Date shall automatically be deemed to have elected to receive an Actuarial Equivalent reduced benefit with 50% of the Participant's reduced benefit to be paid to his Spouse after his death (the "Qualified Joint and Survivor Annuity"), effective as of his Annuity Starting Date, unless such Participant shall have filed a written election with the Plan -33- Administrator, within 90 days prior to such Annuity Starting Date, effectively waiving the Qualified Joint and Survivor Annuity and effectively electing the Single Life Annuity or the Joint and Survivor Annuity Option. Each Participant shall file a written statement with the Plan Administrator indicating whether he is married, and shall notify the Plan Administrator of any subsequent change in his marital status occurring on or before his Annuity Starting Date. Any waiver of the Qualified Joint and Survivor Annuity and election of the Single Life Annuity filed by a Participant shall be effective only if the consent of the Participant's Spouse to such waiver (and election of the Single Life Annuity) is indicated thereon in writing and such consent explicitly acknowledges the effect of the waiver and is notarized, unless no such consent is necessary because (a) such Spouse cannot be located, (b) the Participant and such Spouse are legally separated or the Participant has been abandoned by such Spouse (within the meaning of local law) and has a court order to such effect or (c) such other circumstance exists as a result of which such consent is not required under applicable Treasury Regulations. Any consent by a Participant's Spouse to a waiver of the Qualified Joint and Survivor Annuity shall be irrevocable. If any payment is made under the Plan in reasonable reliance on (a) a written statement by the Participant that he is unmarried, (b) a Spousal consent that on its face conforms to the requirements set forth above or (c) evidence establishing to the Plan Administrator's satisfaction that a Participant's Spouse cannot be located (or that Spousal consent is unnecessary because of the existence of the other circumstances described above), the Plan's liability for such payment shall be satisfied to the extent of such payment (and the Plan shall have no liability to any Spouse to such extent). Any subsequent change (by a married Participant who has previously filed a waiver) in his form of benefit (other than a reinstatement of the Qualified Joint and Survivor Annuity or an election of the Joint and Survivor Annuity Option) shall not be effective unless a new waiver of the Qualified Joint and Survivor Annuity (containing the notarized consent of the Participant's Spouse as described above) is filed with the Plan Administrator. If the Spouse dies on or after the Participant's Annuity Starting -34- Date, the Participant shall continue to receive only the reduced benefit payable under the Qualified Joint and Survivor Annuity, as though the Spouse had not died. The Plan Administrator shall prepare a notice which shall describe in general terms (a) (in the case of a married Participant), the Qualified Joint and Survivor Annuity or (in the case of a single Participant), the Single Life Annuity, (b) the Participant's right to waive the Qualified Joint and Survivor Annuity or the Single Life Annuity, (whichever is applicable) and to revoke any such waiver, (c) in the case of a married Participant, the rights of the Participant's Spouse with respect to such Annuity, (d) the general financial effect of waiving the Qualified Joint and Survivor Annuity or Single Life Annuity (whichever is applicable) and of revoking any such waiver, and (e) the other optional forms of benefit available. Such notice shall also describe the Participant's right to request further financial information about the effect of any such waiver, as described below. Such notice shall be furnished by mail or personal delivery to each Participant no more than 90 days and no less than 30 days prior to the Participant's Annuity Starting Date or by any other means the Plan Administrator shall select that conforms to the requirements of ERISA. If a Participant shall so request in writing at least 90 days prior to his Annuity Starting Date or within 30 days after receiving the notice described above, the Plan Administrator shall furnish to the Participant (by mail or personal delivery), within 30 days after the Participant's request, the additional information required by applicable Treasury Regulations; provided, however, that the Plan Administrator need not comply with more than one such request. The Annuity Starting Date may be less than 30 days after receipt of the written explanation described above, provided that: (a) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of 30 days after receiving the notice to consider whether to waive the Qualified Joint and Survivor Annuity and elect, with his Spouse's consent, a form of distribution other the Qualified Joint and Survivor Annuity. -35- (b) the Participant is permitted to revoke an affirmative distribution election at least until the Annuity Starting Date, or, if later, at any time prior to the expiration of the 7-day period that begins the day after the written explanation of the Qualified Joint and Survivor Annuity is provided to the Participant, and (c) the Annuity Starting Date is after the date that the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant. (d) Notwithstanding the above, if the Plan Administrator provides the written notice described above after the Annuity Starting Date, the Participant (with applicable Spousal consent) may elect to waive any requirement that the written notice be provided at least 30 days prior to the Annuity Starting Date (or to waive the 30-day requirement hereunder) if the distribution commences no more than 7 days after such notice is provided. Any election made by a Participant hereunder waiving the Qualified Joint and Survivor Annuity or Single Life Annuity (whichever is applicable) may itself be revoked in writing not later than his Annuity Starting Date, effective as of the date of such revocation. If a waiver is thus revoked, another waiver may be made in accordance with the foregoing provisions of this Section 6.3 of the Plan. The Plan Administrator shall interpret the provisions of this Section 6.3 and Section 6.4 of the Plan in such manner, and shall take such administrative actions hereunder, as shall be necessary to comply with applicable provisions of ERISA. The payment of benefits to a Participant or any other person shall not commence until such Participant or other person shall have furnished the Plan Administrator with such information as it may reasonably require to provide benefits payable in accordance with the terms of the Plan, including such information as it may require to administer the provisions of the Plan relating to the Qualified Joint and -36- Survivor Annuity and Surviving Spouse's annuity benefits payable under Sections 7.1 and 7.2 of the Plan. 6.4 Joint and Survivor Annuity Option. In lieu of a benefit payable in accordance with Section 6.3 of the Plan, a married Participant may, within 90 days prior to his Annuity Starting Date, elect to receive a reduced benefit payable monthly during his lifetime, with 75% or 100% (as the Participant specifies) of such reduced benefit to be paid after his death to his Spouse. The reduced benefits payable to the Participant and his Spouse shall be the Actuarial Equivalent of the Single Life Annuity for the Participant under Section 6.1 of the Plan. A benefit payable under this Section 6.4 of the Plan shall become effective on the Participant's Annuity Starting Date. Subject to Section 7.4 of the Plan, if a Participant dies before his Annuity Starting Date, his election of a Joint and Survivor Annuity Option shall be void. If the Participant's Spouse dies before the Participant's Annuity Starting Date, his election of the Joint and Survivor Annuity Option shall be void. All payments under the Joint and Survivor Annuity Option shall cease with the payment for the month in which the Participant or his Spouse dies, whichever is later. 6.5 Payment of Small Benefits. Notwithstanding any provision in the Plan to the contrary, the present value of the vested Accrued Benefit payable to the Participant commencing on (a) the earliest date following his Termination of Employment he can receive benefits under the Plan or (b) his Normal Retirement Date, in the case of a Participant whose employment terminates prior to his Normal Retirement Date, if the use of such date produces a greater present value, shall be paid in a lump sum (in lieu of all annuity or other Plan benefits) as soon as practicable following the Participant's Termination of Employment (other than by death), if the Actuarial Equivalent lump sum value of the Participant's Accrued Benefit is $5,000 ($3,500 prior to January 1, 2002 ) or less. Any Participant who shall terminate employment (other than by death) without vested rights to a benefit under the Plan shall be considered, upon his Termination of Employment, to have received the full value of his interest in the Plan -37- and he shall have no further rights under the Plan (subject to the provisions of the Plan concerning reemployment). 6.6 General Rules and Restrictions. Any election of an optional form of payment shall not be effective unless such optional form complies with the Proposed Regulations under Code Section 401(a)(9) (including the minimum distribution incidental benefit requirements of Section 1.401(a)(9)-2 of such Proposed Regulations) or any successor regulations. 6.7 Direct Rollover of Benefits from Plan. (a) This Section 6.7 of the Plan shall apply to distributions made from the Plan on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a direct rollover. (b) For the purposes of this Section 6.6 of the Plan, the following definitions will apply: (1) "Eligible Rollover Distribution" shall mean any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution shall not include: (i) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the -38- Distributee's designated Beneficiary, or for a specified period of ten (10) years or more; and (ii) any distribution to the extent such distribution is required under Code Section 401(a)(9). (2) "Eligible Retirement Plan" shall mean an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (3) "Distributee" shall mean an Employee or former Employee. It shall also include the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), as it regards to the interest of the spouse or former spouse. (4) "Direct Rollover" shall mean a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. -39- ARTICLE VII Death Benefits 7.1 Death While Employed. A benefit shall be payable hereunder to a Participant's Surviving Spouse in the event of the Participant's death while employed by a Participating Employer on or after the date he first acquires a vested right to a benefit under the Plan (except to the extent that (a) a prior benefit election (including a deemed election) remains in effect in accordance with the provisions of Section 9.4 of the Plan or (b) the Participant has begun receiving his benefit while employed after his Normal Retirement Date). If the Participant's death occurs on or after the earliest date he could retire under the Plan, the annuity payable hereunder to the Participant's Surviving Spouse shall be a life annuity in an amount equal to 50% of the amount that would have been payable to the Participant had he retired and immediately commenced receiving a reduced benefit under the Plan on the day before his death, in the form of a Qualified Joint and Survivor Annuity. Such annuity shall commence as of the first day of the earliest month that the Participant could have commenced receiving benefits and shall cease with the payment for the month in which the Surviving Spouse dies. If the Participant's death occurs before the earliest date he could retire under the Plan, the annuity payable hereunder to the Participant's Surviving Spouse shall be a life annuity in the amount that would be payable to the Surviving Spouse if the Participant had terminated employment on the day of his death (but had not then died) and had died immediately after beginning to receive reduced benefit payments on the earliest date he could have commenced receiving reduced benefits under the Plan, with the Qualified Joint and Survivor Annuity in effect. Such annuity shall commence as of the first day of the earliest month that the Participant could have commenced receiving benefits and shall cease with the payment for the month in which the Surviving Spouse dies. 7.2 Death After Vested Termination of Employment. A benefit shall be payable hereunder to a Participant's Surviving Spouse in the event of the Participant's -40- death after he has retired or otherwise terminated employment but before his Annuity Starting Date, if at the Termination of Employment, he had acquired a vested right to a benefit under the Plan. If the Participant's death occurs on or after the earliest date as of which he could have commenced to receive benefits, any annuity payable hereunder to his Surviving Spouse shall commence as of the first day of the month coincident with or next following the Participant's death and shall cease with the payment for the month in which the Surviving Spouse dies. The amount of the annuity shall be the amount that would have been payable to the Surviving Spouse if the Participant had commenced receiving a reduced immediate benefit under the Plan on the day before his death, with the Qualified Joint and Survivor Annuity in effect. If the Participant's death occurs before the earliest date as of which he could have commenced to receive benefits, any annuity payable hereunder to his Surviving Spouse shall commence as of the first day of the earliest month that the Participant could have commenced receiving benefits under the Plan and shall cease with the payment for the month in which the Surviving Spouse dies. The amount of the annuity shall be the amount that would have been payable to the Surviving Spouse if the Participant had survived to the earliest date as of which payments could have commenced and had died immediately after beginning to receive reduced benefits on such date, with the Qualified Joint and Survivor Annuity in effect. 7.3 Commencement of Surviving Spouse's Annuity. Notwithstanding anything elsewhere in this Article VII of the Plan to the contrary, any Surviving Spouse's annuity otherwise payable under Sections 7.1 or 7.2 of the Plan commencing as of a date before a Participant would have reached his Normal Retirement Date, shall instead commence as of the date the Participant would have reached his Normal Retirement Date, unless the Surviving Spouse elects in writing, within 90 days after the Participant's death, to have the annuity commence as of the earlier date otherwise applicable (or elects to have the annuity commence as of the first day of any subsequent month prior to the date the Participant would have reached his Normal Retirement Date, by prior written notice filed with the Plan Administrator). The -41- amount of any such Surviving Spouse's annuity commencing on the date the Participant would have reached his Normal Retirement Date shall be determined as provided above, but without taking into account any reduction for early commencement of payments, the amount of such Surviving Spouse's annuity commencing on an earlier date shall be similarly determined but shall take into account any applicable reduction for early commencement of payments. 7.4 Special Rule Concerning Joint and Survivor Annuity. If (a) a Participant had elected to commence benefits on a specific date by written notice to the Plan Administrator in accordance with the applicable provisions of the Plan or a Participant's benefits are to commence on or after his Normal Retirement Date or Required Beginning date in the absence of any such election and (b) within 90 days prior to such Annuity Starting Date, the Participant had elected a Joint and Survivor Annuity under Section 6.4 of the Plan, any Surviving Spouse's annuity under Sections 7.1 or 7.2 of the Plan in respect of the Participant's death prior to such Annuity Starting Date shall be based on the amount payable under such Joint and Survivor Annuity; provided, however, that in the case of a Participant who dies while employed on or after the earliest date he could retire under the Plan, the annuity payable hereunder to his Surviving Spouse shall not be less than the amount determined pursuant to Section 7.1 of the Plan. 7.5 Lump Sum Payment of Surviving Spouse's Annuity. Notwithstanding anything elsewhere in the Plan to the contrary, the present value of the benefit payable to any Surviving Spouse under this Article VII of the Plan commencing on (a) the earliest date following the Participant's death such Surviving Spouse can receive benefits under the Plan or (b) the Participant's Normal Retirement Date, in the case of a Participant whose death occurs prior to his Normal Retirement Date, if the use of such date produces a greater present value, shall be paid in a lump sum (in lieu of all annuity or other Plan benefits) as soon as practicable following the Participant's death, if 50% of the Actuarial Equivalent lump sum value amount of the Participant's Accrued Benefit as of his date of death (commencing at his Normal Retirement Date under the standard form) is $5,000 ($3,500 prior to January 1, 2002) or less. -42- ARTICLE VIII Termination of Employment 8.1 Termination of Employment After 5 or More Years of Service. Subject to the provisions of Article IX of the Plan in the event of reemployment, if a Participant incurs a Termination of Employment prior to his Normal Retirement Date after completing at least 5 Years of Service, he shall have a nonforfeitable interest in his Accrued Benefit. 8.2 Early Commencement of Termination Benefit. Notwithstanding the foregoing, any such Participant entitled to a vested benefit under Section 8.1 of the Plan who has completed 15 Years of Service may elect to have payment of such vested benefit commence as of the first day of any month on or after his 55th birthday that is prior to his Normal Retirement Date. Such election shall be made by written notice to the Plan Administrator (in form approved by it) not more than 90 days prior to such Participant's Annuity Starting Date, and such benefit shall be equal to the benefit that would have been payable to the Participant under Section 5.2 of the Plan, actuarially reduced to reflect the early commencement of payments. 8.3 Payment of Benefits. The provisions of Article VI of the Plan shall apply to any benefits payable under this Article VIII of the Plan, as though the Participant had retired. -43- ARTICLE IX Reemployment 9.1 Reemployment Without Intervening Break in Service. If after having previously terminated employment with all Participating Employers and Affiliates, a person shall resume his status as an Eligible Employee without an intervening One-Year Break in Service, benefit payments being made to him (if any) shall be suspended. He shall resume participation in the Plan immediately as though such Termination of Employment had not occurred (if he was a Participant at the time his employment terminated) and his credit for Hours of Service, Credited Service and Years of Service before his Termination of Employment shall be reinstated for all purposes of the Plan (including calculation of his Average Annual Salary) as though such Termination of Employment had not occurred; provided, however, that if he shall have received any periodic or lump-sum payments in respect of his prior Termination of Employment, the benefits otherwise payable to him upon his later Termination of Employment shall be reduced by an amount that is the Actuarial Equivalent of the payments made to him prior to his reemployment (except that the value of such actuarial reduction shall not exceed the charge made for such benefit payments originally and if such later termination occurs after his Normal Retirement Date, the actuarial value of such reduction shall not exceed the actuarial value, as of the Participant's Normal Retirement Date, of any benefit payments made to him prior to such date). 9.2 Reemployment After Intervening Break in Service. If after having previously terminated employment, a person shall resume his status as an Eligible Employee after at least a One-Year Break in Service, benefit payments being made to him (if any) shall be suspended, and he shall resume his participation in the Plan as of the date he satisfies the requirements for eligibility in the Plan as set forth in Section 2.1 of the Plan (disregarding for this purpose all service prior to his reemployment). As of the date he shall satisfy the service requirement for participation, if he is then an Eligible Employee, his credit with respect to periods of employment before his Termination of Employment shall be reinstated and he shall be given credit for the period since his reemployment as though such Termination of Employment had not -44- occurred, except that the restriction set forth in the provision to Section 9.1 of the Plan shall apply; provided, however, that such credit shall not be reinstated in the case of a person who is reemployed after at least five consecutive One-Year Breaks in Service and who had no vested rights to benefits hereunder at the time of his prior Termination of Employment. If there are benefits remaining payable to any Eligible Employee on the date of his reemployment and he again terminates employment prior to satisfying the requirements hereof for a reinstatement of his credit for his previous employment, the actuarial value of any such benefits remaining payable to him as of the date of his reemployment shall be preserved to his credit (on a fully vested basis) and shall be paid to him after termination of such reemployment in accordance with the provisions of the Plan. 9.3 Reemployment After Normal Retirement Date. Notwithstanding anything contained herein, (a) if a Participant resumes his status as an Eligible Employee after reaching his Required Beginning Date, his benefit payments shall be continued, as provided in Section 6.1 of the Plan and (b) if at any time after a Participant's resumption of service (and before clause (a) above becomes applicable to him) his employment after Normal Retirement Date in any month is not substantial, a benefit payment shall be made to him for such month in accordance with Section 6.1 of the Plan. For this purpose a Participant's employment will be considered substantial for any month only if he completes 40 or more Hours of Service in such month. If a Participant is receiving benefits and in any subsequent month (prior to his Required Beginning Date) he again completes at least 40 Hours of Service, no benefit payment shall be made to him for such subsequent month. If any Participant shall resume his status as an Eligible Employee after his Normal Retirement Date and benefit payments to him are suspended as provided herein, the Plan Administrator shall furnish him with a notice containing (a) a description of the specific reasons for the suspension of benefit payments, (b) a general description of the Plan provisions relating to the suspension (including the provisions of Sections 4.3, 5.3, 6.12 and 9.3 of the Plan), (c) a copy of such provisions, (d) a statement to the effect that applicable Department of Labor regulations may be found in section 2530.203-3 of the Code of Federal Regulations and (e) a description of the -45- Plan's claims procedure. Such notice shall be furnished by personal delivery or first class mail during the first calendar month in which benefit payments are suspended. Benefit payments suspended under this Section shall resume (or commence, in the case of a Participant who continues in service after his Normal Retirement Date) no later than the earlier of (a) the first day of the third calendar month following the month in which the Participant's substantial employment ceases or, if later, the first day of the calendar month following receipt by the Plan Administrator of the Participant's notice that his substantial employment has ceased or (b) the Participant's Required Beginning Date. The initial resumption payment shall include payment for the current month and for any previous calendar months since the cessation of the Participant's substantial employment. The resumed benefit payments shall be recalculated on the basis of Annual Salary earned and years of Credited Service credited (if any) during such period of reemployment and the provisions of the Plan as then in effect. The resumed benefit payments shall be paid in the same form as the suspended benefit payments. Resumed benefits shall be reduced by an amount equal to any benefits which were paid to the Participant with respect to a calendar month in which the Participant was engaged in substantial employment. However, the reduction in any monthly benefit, other than the initial resumption payment, shall not exceed twenty-five percent (25%) of such monthly benefit. Any remaining reduction shall be applied to benefits payable in subsequent months 9.4 Form of Benefit. The following rules shall apply with respect to a Participant's form of benefit in the event of his reemployment. (a) If a Participant is reemployed hereunder prior to his Normal Retirement Date, any election previously made by him under Article VI of the Plan with respect to the form of his benefits shall be canceled and shall be of no further effect. (b) If a Participant is reemployed after his Normal Retirement Date and his most recent election as to the form of his benefits ("benefit election") -46- became effective on or after his Normal Retirement Date, such benefit election shall continue in effect and shall apply to all benefits (including subsequent accruals), with death benefits, if any, to be paid in accordance with such form of payment. (c) If any such Participant's most recent benefit election became effective prior to his Normal Retirement Date and his benefits are suspended upon reemployment, such prior election shall be canceled and he shall be permitted to make a new election (or have a deemed election apply with respect to his entire accrued benefit, effective as of his subsequent resumption of pension benefits (which election shall continue in effect for all periods thereafter and shall apply to all subsequent benefit accruals). (d) If any such Participant's most recent benefit election became effective prior to his Normal Retirement Date but, in accordance with Section 9.3 of the Plan, his benefits are not suspended upon his reemployment, such prior election shall remain in effect as to his Accrued Benefit at the time of his reemployment, and he shall be permitted to make a new election (or have a deemed election apply) as of the date additional benefits become payable to him on account of accruals after his reemployment (which election shall continue in effect for all periods after such date and shall apply to all subsequent benefit accruals). -47- ARTICLE X Funding 10.1 Establishment of Trust. The Company has entered into a Trust Agreement with the Trustee for the purpose of providing benefits under the Plan. Such Agreement contains provisions with respect to powers and authority of the Trustee and the authority of the Board from time to time to remove such Trustee and to appoint a new Trustee in place of any then acting Trustee. Notwithstanding the foregoing, the Board may authorize an officer of the Company to select a Trustee and enter into a Trust Agreement with the Trustee containing such provisions as the officer deems appropriate. The Trust Agreement is deemed to form a part of the Plan and any and all rights which may accrue to any person under the Plan are subject to all of the terms and provisions of the Trust Agreement to the extent such terms and provisions of the Trust Agreement do not conflict with the terms and provisions of the Plan. Upon the transfer by a Participating Employer of any money to the Trustee, all interest of a Participating Employer therein shall cease and terminate, except as provided in Articles III or XV of the Plan. Legal title to the Trust is vested absolutely in the Trustee, and (except as provided in Articles III or XV of the Plan) no part of the corpus of the Trust or income therefrom may be used for or diverted to purposes other than the exclusive benefit of the Participants and their beneficiaries (or joint annuitants) under the Plan, or for expenses of administering the Plan and Trust. 10.2 Administration of the Trust. The Trustee shall have custody of the assets of the Trust. At the direction of the Plan Administrator, the Trustee shall make payments to or on account of Participants out of the Trust. Except as provided below, the Trustee shall have sole discretionary responsibility for the investment and management of the Trust Fund. -48- In accordance with the terms of the Trust Agreement, the Trustee appointed as Investment Trustee by the Board may appoint an Investment Manager for all or a portion of the assets of the Trust. Each such person shall become an Investment Manager for the Plan upon its acknowledgment in writing that it is a fiduciary with respect to the Plan. Notwithstanding the foregoing provisions of this Section 10.2 of the Plan, each Investment Manager so appointed shall have exclusive responsibility for directing the investment and management of the Trust assets, in conformity with the investment policy set by the Board, to which its appointment applies, as determined from time to time by the Board, and the Trustee shall not have any responsibility for the investment and management of such assets. The Board may at any time remove any person serving as an Investment Manager upon written notice to such person. Each Investment Manager shall exercise its fiduciary responsibilities with respect to Plan assets allocated to it, including (without limitation) any responsibility of diversification imposed by law, as if the assets allocated to it constituted the entirety of the Plan assets; provided, however, that the Board may direct that an Investment Manager invest only in a class or classes of assets specified by the Board, in which case the Board shall have the fiduciary responsibility for ensuring that the diversification requirements imposed by law are not thereby violated. 10.3 General. Subject to the provisions of applicable law, benefits under the Plan shall be payable solely from the Trust Fund and only to the extent that the allocable assets held in the Trust Fund shall suffice therefor. 10.4 Changes in Funding Medium. Notwithstanding the foregoing provisions of this Article X of the Plan, the Board may at any time or times change the method and medium of funding benefits under the Plan and take procedures appropriate to such ends, subject to the provisions of Article XV of the Plan and of applicable law. -49- ARTICLE XI Administration of the Plan 11.1 General. The Company shall be the Plan Administrator of the Plan for purposes of ERISA. The Company shall be the named fiduciary responsible for the administration of the Plan. The Company may, however, by or pursuant to a resolution of the Board, delegate to any person or entity any of its powers or duties under the Plan. To the extent of any such delegation, the delegate shall become the named fiduciary responsible for administration of the Plan (if the delegate is a fiduciary by reason of the delegation), and any references to Company shall apply instead to the delegate. Any action by the Company assigning any of its responsibilities to specific persons who are all directors, officers, or employees thereof shall not constitute delegation of its responsibility but rather shall be treated as the manner in which the Company had determined internally to discharge such responsibility. The Company shall adopt such rules for administration of the Plan as it considers desirable, provided they do not conflict with the terms of the Plan, and may construe the Plan, make factual determinations, correct defects, supply omissions and reconcile inconsistencies to the extent necessary to effectuate the terms of the Plan and such action shall be conclusive. Records of administration of the Plan shall be kept, and Eligible Employees and their beneficiaries may examine records pertaining directly to themselves. The Company may contract for legal, actuarial, investment advisor, medical, accounting, clerical and other services to carry out the Plan. The Company shall annually review and determine the funding policy of the Plan, with the advice of such experts as the Company deems appropriate. -50- All rules, decisions and designations by the Company under the Plan shall be made in a nondiscriminatory manner, and persons similarly situated shall be treated alike. Neither the Company, the Participating Employers, nor their directors, officers or employees shall be liable for any loss due to an error or omission in administration of the Plan unless the loss is due to the gross negligence or willful misconduct of the party to exercise a fiduciary responsibility with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a life character and with like aims. 11.2 Disputes. (a) In the event that the Plan Administrator denies, in whole or in part, a claim for benefits by a Participant or his beneficiary, the Plan Administrator shall furnish notice of the denial to the claimant, setting forth: (1) the specific reasons for the denial, (2) specific reference to the pertinent Plan provisions on which the denial is based, (3) a description of any additional information necessary for the claimant to perfect the claim and an explanation of why such information is necessary, and (4) appropriate information as to the steps to be taken if the claimant wishes to submit his claim for review. Such notice shall be forwarded to the claimant within 90 days of the Plan Administrator's receipt of the claim; provided, however, that in special -51- circumstances the Plan Administrator may extend the response period for up to an additional 90 days, in which event it shall notify the claimant in writing of the extension, and shall specify the reason or reasons for the extension. (b) Within 60 days of receipt of a notice of claim denial, a claimant or his duly authorized representative may petition the Plan Administrator in writing for a full and fair review of the denial. The claimant or his duly authorized representative shall have the opportunity to review pertinent documents and to submit issues and comments in writing to the Plan Administrator. The Plan Administrator shall review the denial and shall communicate its decision and the reasons therefor to the claimant in writing within 60 days of receipt of the petition; provided, however, that in special circumstances the Plan Administrator may extend the response period for up to an additional 60 days, in which event it shall notify the claimant in writing prior to the commencement of the extension. 11.3 Plan Expenses. All expenses reasonably incurred in the administration of the Plan shall be paid by the Trustee out of the Plan's assets (either directly or through reimbursement of the Participating Employers for any such expenses paid by the Participating Employers), except to the extent that the Participating Employers shall otherwise provide for such payment. -52- ARTICLE XII Limitation on Assignment of Benefits 12.1 Limitation on Assignment of Benefits. Except as specifically permitted by applicable Treasury Regulations, no benefit payable at any time under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, attachment, garnishment or encumbrance of any time, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, attach, garnish or encumber the same shall be void, nor shall any such benefit be in any way liable for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to such benefit. Notwithstanding the foregoing or anything elsewhere in the Plan to the contrary, all benefits shall be paid under the Plan which are required to be paid under the terms of any domestic relations order constituting a "Qualified Domestic Relations Order" ("QDRO") under ERISA, in such manner and to such person or persons as such QDRO shall specify. The Plan Administrator shall establish reasonable procedures for determining the qualified status of any domestic relations order and for administering distributions under any QDRO. No payments shall be made from the Plan pursuant to a QDRO before the earliest date the Participant (a) is entitled to begin receiving benefits under the Plan (other than the Plan's provisions relating to the payment of benefits whose value does not exceed $5,000) or (b) (in the case of a Participant who is still employed) would be entitled to thus begin receiving such benefits immediately, if he were to retire. -53- ARTICLE XIII Miscellaneous 13.1 Limitation of Rights. No person shall have any vested right under the Plan except as otherwise expressly provided in the Plan. Neither the Plan nor any action of the Board or of the Plan Administrator, heretofore or hereafter taken, shall be construed to give any person a right to be retained in the employ of a Participating Employer, or to furnish any basis for a claim to any benefit before or after retirement or Termination of Employment except as provided in the Plan, or to interfere with the right of a Participating Employer to discharge, suspend or otherwise treat any person without regard to the effect which such action might have upon him under the Plan. 13.2 Actions of Participating Employers. Any action by a Participating Employer under the Plan may be by resolution of its Board of Directors or by resolution of any person or persons authorized by such Board of Directors to take such action. 13.3 Inability to Locate Payee. If the Plan Administrator is unable, after making reasonable efforts, to locate any person to whom an amount is payable under the Plan, such person's rights under the Plan shall be forfeited. For this purpose, the Plan Administrator will be deemed to have been unable, after making reasonable efforts, to locate a payee if (a) a written notice has been sent to such person's last known address, by first class or certified mail, notifying him of his eligibility to receive a benefit under the Plan, and the payee has not responded to such written notice within 90 days and (b) a notification has been sent to the Pension Benefit Guaranty Corporation or the Social Security Administration (under their program to identify payees under retirement plans) and the payee has not responded within six months thereafter. The benefit of any person whom the Plan Administrator is unable, after the foregoing or other reasonable efforts, to locate shall in any event be forfeited no later than the date by which distributions are required to have commenced under Code Section 401(a)(9). If any such person thereafter files a claim for the forfeited benefits with the Plan Administrator, the benefit rights forfeited by such person shall be reinstated and benefits shall be payable to the person in accordance with the Plan's -54- provisions (including, in addition to future payments due, a lump-sum payment (to be made as promptly as practicable) equal to the aggregate dollar amount of the benefit payments missed because of the inability to locate the person). 13.4 Exclusivity of Benefits. The Plan has been created for the exclusive benefit of Participants and beneficiaries. Except as provided in Article III and Section 15.2 of the Plan, no part of the assets of the Plan shall revert to a Participating Employer nor be used other than for the exclusive benefit of Participants and beneficiaries and payment of Plan expenses. No person shall have any interest in or right to any part of the assets of the Plan, or any rights in, to or under any Trust Agreement, except to the extent expressly provided in the Plan. 13.5 Distributions on Behalf of Incapacitated Persons. If the Plan Administrator receives evidence satisfactory to it that (i) a person entitled to receive any payment under the Plan is physically, mentally or otherwise incompetent to receive such payment and to give a valid release therefor, and (ii) another person or an institution is then maintaining or has custody of such person and no guardian, committee or other representative of the estate of such person has been duly appointed by a court of competent jurisdiction, the Plan Administrator may direct that the payment or any portion thereof be made to such other person or institution, and the release of such other person or institution shall be a valid and complete discharge of the payment or the portion thereof so made. 13.6 Determination as to Payment of Benefits by the Plan Administrator. Benefits under this Plan shall be paid only if the Plan Administrator decides in his discretion that the claimant is entitled to them. Payments in accordance with such determination shall constitute a complete discharge of the payment thereof so made. 13.7 Withholding Requirements. Any benefit payment made under the Plan will be subject to any applicable income tax withholding requirements. For this purpose, the Plan Administrator shall provide the Trustee with any information that the Trustee needs to satisfy such withholding obligations and with any other information that may be required by regulations promulgated under the Code. -55- ARTICLE XIV Limitation on Benefits 14.1 Maximum Limitations. In addition to any other limitations set forth in this Plan, and notwithstanding any other provisions of the Plan, no benefit shall be paid with respect to a Participant which exceeds the limitation under the provisions of Code Section 415. Code Section 415 is hereby incorporated by reference. For purposes of applying the limitations under Code Section 415, "compensation" for any calendar year shall mean wages as defined in Code Section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the service performed. Effective with respect to Plan Years beginning prior to January 1, 2000, to whatever extent the Code Section 415(e) would restrict the combined benefits payable under this Plan and any other plan and such other plan does not require the reduction in benefits under such other plan to prevent the payment of benefits in excess of those allowed, the benefits payable under this Plan shall be reduced. -56- ARTICLE XV Amendment or Termination of the Plan 15.1 Right to Amend or Terminate. Subject to applicable law and to the further provisions of this Article XV of the Plan, the Company reserves the right from time to time to amend the Plan by action of the Board, in any way (whether or not the cost of the Plan to the Participating Employers be increased thereby) and to suspend or terminate the Plan either (a) in its entirety or (b) with respect to Eligible Employees at any location of the Participating Employers; provided, however that no amendment to the Plan shall have the effect of retroactively depriving Participants of benefits already accrued under the Plan. No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their beneficiaries or estates or causes any reduction in the benefit of any Participant (except to the extent permitted under Code Section 412(c)(8)); or causes or permits any portion of the Trust Fund to revert to or become property of the Participating Employers. Except as permitted by the Treasury Regulations, no Plan amendments or transactions having the effect of a Plan amendment (such as a merger, Plan transfer or similar transaction) shall be effective to the extent it eliminates or reduces any "Code Section 411(d)(6) protected benefit" the result of which is a further restriction on such benefit unless such protected benefits are preserved with respect to benefits accrued as of the later of the adoption date or the effective date of the amendment. "Code Section 411(d)(6) protected benefits" are benefits described in Code Section 411(d)(6) early retirement benefits and retirement type subsidies and optional forms of benefit. If any future amendment to the Plan which alters the vesting provisions of Section 8.1 of the Plan, then any active Participant, with at least three Years of Service on the later of the adoption of such amendment or its effective date, may elect to have his vested interest in his Accrued Benefit computed under the Plan without regard to such -57- amendment. Such election must be made within 60 days from the latest of the date on which (a) such amendment was adopted, (b) the amendment was effective or (c) the Participant was issued written notice of such amendment by the Plan Administrator. Notwithstanding the foregoing, a committee delegated by the Plan Administrator, by a majority of its members, may adopt any Plan amendments that (a) are designed to implement contractual commitments by the Company, (b) reflect changes approved in substance by the Board, or (c) make changes not involving material cost increases for purposes of legal compliance, clarity, administrative convenience or otherwise. No further administrative action shall be required for such amendment to be effective (except to the extent otherwise required by resolution of the Board). Notwithstanding the foregoing, no amendment to the Plan which increases the current liability of the Plan for the calendar year in which the amendment is to be effective shall take effect until the Company provides security to the Plan, if and to the extent required under Code Section 401(a)(29). Subject to the provisions of Article III of the Plan, at no time prior to the satisfaction of all liabilities under the Plan to Participants, their beneficiaries and joint annuitants shall the corpus or income of the Trust Fund be used for, or diverted to, purposes other than the exclusive benefit of such Participants, beneficiaries and joint annuitants and the payment of taxes and administrative expenses of the Plan. Anything in this Article to the contrary notwithstanding, any amendment to the Plan may be made which in the opinion of the Board is necessary or appropriate (a) to qualify or maintain the Plan as a plan and trust meeting the requirements of the applicable provisions of the Code and regulations thereunder and corresponding provisions of subsequent laws and regulations or (b) to conform to any requirements of ERISA. -58- 15.2 Complete Termination of the Plan. The Company shall have the power to terminate the Plan, by resolution of the Board, subject to applicable law. Notice of such termination shall be given to the Trustee. After termination of the Plan, (a) no further contributions shall be made hereunder and (b) there shall be no further accrual of benefits (i.e., no increase in Accrued Benefits by reason of additional Credited Service, a change in a Participant's Average Annual Salary, an increase in the benefits permissible under Code Section 415 or any other event). However, the Plan Administrator shall continue to administer the Plan, and all provisions of the Plan and Trust shall remain in force which are necessary in the opinion of the Plan Administrator. Upon termination of the Plan in its entirety, the right of each Participant to benefits accrued to the date of such termination (hereinafter referred to as the "Termination Date") that would be vested under the provisions of the Plan in the absence of such termination shall continue to be vested and nonforfeitable; and the right of each such Participant to any other benefits accrued to the Termination Date shall be fully vested and nonforfeitable to the extent then funded under the priority rules described below. In any event, a Participant (or anyone claiming benefits on his account) shall have recourse only against the assets of the Plan for the payment of benefits thereunder, subject to any applicable provisions of Title IV of ERISA. In the event of such termination, amounts held under the Plan shall be allocated, subject to provision for expenses of administration and liquidation, to provide benefits as follows, in the following order of priority, to the extent of the sufficiency (actuarial determined) of such funds: (a) To benefits payable to a Participant (or his beneficiary or joint annuitant) who (1) was in pay status as of the beginning of the three-year period ending on the Termination Date, based on the provisions of the Plan (as in effect during the five-year period ending on the Termination Date, under which such benefit would be the least or (2) would have been in -59- pay status as of the beginning of such three-year period if the Participant had retired prior to the beginning of the three-year period and if his benefits had commenced (in the standard form of annuity under the Plan) as of the beginning of such period, based on the provisions of the Plan (as in effect during the five-year period ending on the Termination Date) under which such benefits would be the least. For purposes hereof, the lowest benefit in pay status during a three-year period shall be considered the benefit in pay status for such period. (b) To all other benefits of a Participant (or his beneficiary or joint annuitant) under the Plan to the extent such benefits are guaranteed by the Pension Benefit Guaranty Corporation (in accordance with the priorities listed in Section 4044(a)(4) of ERISA). (c) To all other nonforfeitable benefits under the Plan (excluding any benefits which become nonforfeitable due to termination of the Plan). (d) To any other benefits remaining payable under the Plan. If the assets of the Plan as of the Termination Date exceed the amounts required under priorities (a) through (d) above, such excess shall, after all liabilities of the Plan with respect to the benefits payable to or on account of all Participants have been satisfied, revert to the Participating Employers. If the assets of this Plan are insufficient to fully satisfy priority (b) above, the following allocation rule shall apply: (a) the available assets shall be applied to procure nonforfeitable benefits under the Plan as in effect at the beginning of the five-year period ending on the Termination Date; and -60- (b) if the available assets are sufficient to satisfy benefits payable under clause (a) above (without regard to this clause (b)) then the benefits described in clause (a) above shall be determined by the most recent Plan amendment effective during such five-year period under which the assets available for allocation are sufficient to satisfy in full the benefits described in clause (a) above and any assets remaining shall be allocated under clause (a) above on the basis of this Plan as amended by the next succeeding amendment effective during such period. If the assets held under the Plan shall be inadequate to provide in full for the allocations under any one of the above priorities other than priority (2), they shall be allocated among the Participants (or their beneficiaries or joint annuitants) entitled to receive amounts under that priority in proportion to the actuarial values of their respective accrued benefit. Upon termination of the Plan in its entirety, the amounts allocated to Participants, joint annuitants and beneficiaries as provided above shall be used to purchase annuity benefits for the persons entitled to retirement or disability benefits in the order of priority provided above. 15.3 Partial Termination of the Plan. If at any time the Plan is terminated as to any group of Participants under such circumstances as to constitute a partial termination of the Plan within the meaning of Code Section 411(d)(3), the rights of each such Participant as to whom the Plan is terminated to benefits that have accrued to the date of such termination and that would be vested under the provisions of the Plan in the absence of such termination shall continue to be so vested and the right of each Participant (as to whom such termination occurred) to any other benefits accrued to the date of such termination shall be vested to the extent that assets would be allocable to such benefits under the priority rules described in Section 15.2 of the Plan, had a complete termination of the Plan occurred on the date of such partial termination (but without regard to any additional contributions the Participating Employers might have been required to make if a complete termination had occurred). In any event, Participants as to whom such termination occurred shall have recourse only against the assets of the Plan for the payment of benefits thereunder, subject to -61- any applicable provisions of Title IV of ERISA. Subject to the foregoing, the vested Accrued Benefits of such Participants shall be payable as though such termination had not occurred. 15.4 Mergers, Consolidations and Transfers. The Plan shall not be merged or consolidated with, or transfer its assets or liabilities to, any other employee retirement plan unless each Participant or his beneficiary or joint annuitant, as the case may be, would receive a benefit, were such other plan to terminate immediately after such merger, consolidation or transfer, at least equal to the benefit he would have received if the Plan had terminated immediately prior to such transaction (but without regard to any additional contributions the Participating Employers might have been required to make if a complete termination had occurred). Any spin-off of assets of the Plan shall comply, to the extent required, with the provisions of Code Section 414(l)(2) concerning allocation of excess assets. 15.5 Withdrawal by a Participating Employer. A Participating Employer other than the Company may withdraw from the Plan at any time, by action of its Board of Directors, and the Board may take action to terminate the status of any such Participating Employer as a Participating Employer. An Affiliate of the Company shall automatically cease to be a Participating Employer if its status as an Affiliate is terminated by sale or otherwise. In the event an entity ceases to be a Participating Employer, the share of the Plan assets allocable to liabilities for its employees shall be certified by the Plan Administrator and set aside as a separate fund (with such share of Plan assets to be determined in accordance with the order of priority set forth in Section 15.3 of the Plan) as though the Plan had terminated with respect to such Participating Employer. Such separate fund shall thereafter be applied and used in accordance with the provisions of the Plan and any related documents in effect at the time of such withdrawal (except that such Participating Employer shall become the "Company" thereunder and such separate plan shall cover only employees of such Participating Employer). Notwithstanding the foregoing provisions of this Section 15.5 of the Plan, if Employees of a Participating Employer cease to be eligible to accrue benefits under the -62- Plan by reason of this Section 15.5 of the Plan, the Board may elect to continue to provide under the Plan the benefits due to such Employees (in lieu of segregation of the assets allocable to them), in which case the Company shall pay any costs necessary to provide for any amounts payable to or on account of such Employees in respect of their previously Accrued Benefits and any such Employees (a) shall be considered to have transferred to non-covered status or (b) shall be treated as terminated Employees if no longer employed by a Participating Employer or any Affiliate; provided, however, that an election hereunder may be made by the Board only if such withdrawal occurs on account of the cessation of the business of such Participating Employer, its liquidation, or the sale of substantially all its stock or assets to an unrelated entity. -63- ARTICLE XVI Pre-Termination Restrictions 16.1 Limitation. (a) The annual payments to an Employee described in Subsection (c) are restricted to an amount equal to the payments that would be made on behalf of the Employee under a single life annuity that is the Actuarial Equivalent of the sum of the Employee's Accrued Benefit and the Employee's other benefits under the Plan. (b) The restrictions in Subsection (a) will not apply, however, if: (1) After payment to an Employee described in Subsection (c) of all benefits described in Subsection (d), the value of Plan assets equals or exceeds 110 percent of the value of current liabilities, as defined in Code Section 412(l)(7); or (2) The value of the benefits described in Subsection (d) for an Employee described in Subsection (c) is less than 1 percent of the value of the Plan's current liabilities. (c) The Employees whose benefits are restricted on distribution for any one Plan Year are the twenty-five Highly Compensated Employees or former Highly Compensated Employees (as defined in Code Section 414(q) and regulations thereunder) who receive the greatest Compensation during such Plan Year. (d) For purposes of this Section 16.1, "benefit" includes loans in excess of the amounts set forth in Code Section 72(p), any periodic income, any withdrawal values payable to a living Employee, and any death benefits not provided for by insurance on the Employee's life. -64- (e) In the event of Plan termination, the benefit payable to any Employee described in Subsection (c) shall be limited to a benefit that is nondiscriminatory under Code Section 401(a)(4). If payment of benefits is restricted in accordance with Subsection (a), assets in excess of the amount required to provide such restricted benefits shall become a part of the assets available under Section 10.2 for allocation among Participants and their joint annuitants and beneficiaries whose benefits are not restricted under Subsection (a). -65- ARTICLE XVII Top-Heavy Provisions If the Plan is or becomes a Top-Heavy Plan in any calendar year on the Determination Date the provisions of this Article will supersede any conflicting provisions of the Plan. It is intended that this Article shall be construed in accordance with the provisions of Code Section 416. 17.1 Definitions. For purposes of this Article XVII of the Plan, the following definitions will apply: (a) "Key Employee" shall mean any employee of the Participating Employers or an Affiliate who is a key employee within the meaning of Code Section 416(i). (b) "Top-Heavy Plan" shall mean, for any Plan Year, each plan in the Aggregation Group for such Plan Year, if, as of the applicable Determination Date, the Top-Heavy Ratio exceeds 60%. (c) "Top-Heavy Ratio" For purposes of this Section, Top-Heavy Ratio shall mean the following: (1) If the Participating Employers has never maintained a defined contribution plan that covered a Participant in this Plan, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the present value (based upon the actuarial assumptions set forth in Section 1.2) of Retirement Benefits for all Key Employees under this Plan and all other defined benefit plans maintained by the Participating Employers as of the Determination Date and the denominator of which is the sum of Present Value of Retirement Benefits under this Plan and such other defined benefit plans on that date. Both the numerator and the denominator are adjusted -66- to reflect any distributions made in the five-year period ending on the Determination Date. (2) If the Participating Employers maintain one of more defined contribution plans that cover a Key Employee that participates in this Plan, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of account balances for all Key Employees under the defined contribution plans sponsored by the Participating Employers and the Present Value of Retirement Benefits under this Plan and all other defined benefit plans sponsored by the Participating Employers and the Present Value of Retirement Benefits under this Plan and all other defined benefit plans sponsored by the Participating Employers . Both the numerator and denominator are adjusted for any distribution made in the five-year period ending on the Determination Date and any contribution due but unpaid as of the Determination Date. (3) For purposes of (c) (1) and (2) above, the value of account balances and the Present Value of Retirement Benefits will be determined as of the most recent valuation date that falls within or ends with the twelve (12) month period ending on the Determination Date. The account balances and accrued benefits of a Participant who is not a Key Employee but who was a Key Employee in a prior year will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollover and transfers are taken into account will be made in accordance with Code Section 416 and the regulations thereunder. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. (d) "Permissive Aggregation Group of Plans" shall mean the Required -67- Aggregation Group of Plans plus any other plan or plans of the Participating Employers which when considered together with the Required Aggregation Group of Plans, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410. (e) "Required Aggregation Group of Plans" shall mean: (1) each qualified plan of the Participating Employers in which at least one (1) Key Employee participates; and (2) any other qualified plan of the Participating Employers which enables a Plan described in subsection (d) above to meet the requirements of Code Sections 401(a)(4) and 410. (f) "Determination Date" shall mean the last day of the preceding calendar year. (g) "Present Value of Retirement Benefit" shall mean, in the case of a defined benefit plan, a Participant's Present Value of Retirement Benefit shall be determined: (1) in the case of a Participant other than a Key Employee, using the single accrual method used by all plans of the Participating Employers and Affiliate, or if no such single method exists, using. a method which results in benefits accruing not more rapidly than the slowest accrual rate permitted under Code Section 411(b)(1)(C). (2) as of the most recent "actuarial valuation date", which is the most recent valuation date within a twelve (12) month period ending on the Determination Date. -68- (3) for the first calendar year, as if (i) the Participant terminated service as of the Determination Date: or (ii) the Participant terminated service as of the actuarial valuation date, but taking into account the estimated retirement benefits as of the Determination Date. (4) for the second calendar year, the Retirement Benefit taken into account for a current Participant must not be less than the Retirement Benefit taken into account for the first Calendar Year unless the difference is attributable to using an estimate of the Retirement Benefit as of the Determination Date for the first calendar year and using the actual Retirement Benefit for the second calendar year. (5) for any other Plan Year, as if the participant terminated service as of the actuarial valuation date. (6) the actuarial valuation date must be the same date used for computing the defined benefit plan minimum funding costs, regardless of whether a valuation is performed that Plan Year. (7) by not taking into account proportional subsidies. (8) by not taking into account nonproportional subsidies. 17.2 Vesting. For any calendar year in which the Plan is a Top-Heavy Plan, the nonforfeitable interest of a Participant who terminates employment other than by death or retirement shall not be less than the interest determined on the basis of the following schedule: 20% vesting after 2 Years of Service, 40% vesting after 3 Years of Service, 60% vesting after 4 Years of Service, and 100% vesting after 5 Years of Service. -69- Notwithstanding the foregoing, if after having previously been a Top-Heavy Plan, the Plan is no longer a Top-Heavy Plan in any calendar year, the vesting schedule set forth above shall no longer apply (and vesting shall be determined under otherwise applicable Plan provisions), except that (a) such schedule shall continue to apply (with respect to his entire Accrued Benefit) to a Participant who has at least 3 Years of Service at the beginning of the calendar year in which the Plan ceases to be a Top-Heavy Plan and (b) in the case of any other Participant, with respect to his Accrued Benefit as of the beginning of such calendar year, the vesting percentage applicable shall not be less than the percentage applicable under the above schedule as of the beginning of such calendar year. 17.3 Minimum Accrued Benefit. Notwithstanding any other provision of this Plan, if in any calendar year the Plan is a Top-Heavy Plan, the benefit of any Participant (other than a Key Employee), payable as a life annuity commencing at his Normal Retirement Date, shall not be less than: (a) the product of the Participant's average compensation for the "testing period" (as determined under Code Section 416(c)(1)(D)) multiplied by the lesser of (1) 2% multiplied by the number of years of employment during which years the Plan is a Top-Heavy Plan or (2) 20%, minus (b) the Participant's cumulative annual retirement benefit under all other tax-qualified retirement plans maintained by the Participating Employers. The amount of the reduction applicable under (b) above shall be determined by conversion of the Participant's Accrued Benefit under each other tax-qualified retirement plan into an actuarial equivalent life annuity commencing at his Normal Retirement Date, disregarding any portion of such benefit that is attributable to (1) employee contributions, (2) salary reduction contributions and (3) matching employer contributions required by any such other tax-qualified retirement plan to satisfy the -70- deferral test under Code Section 401(k) or the contribution test under Code Section 401(m). For purposes of computing the minimum accrued benefit, compensation shall include all compensation, as that term is defined in Section 14.1 of the Plan (subject to the limitation under Code Section 401(a)(17)). The minimum accrued benefit hereunder shall be determined without regard to any Social Security benefit. The minimum accrual shall apply even though under other Plan provisions the Participant would not otherwise be entitled to receive an accrual, or would have received a lesser accrual, for years in which the Plan is a Top-Heavy Plan because (a) his compensation is less than a stated amount, or (b) he is not employed on the last day of the accrual computation period. If a Non-Key Employee participates in this Plan and a defined contribution Plan included in a Required Aggregation Group which is Top Heavy, a minimum allocation of shall be provided under this Plan only. 17.4 Change in Section 415 Limitations. In addition, if the Plan becomes a Top-Heavy Plan, the maximum benefit limitations set forth in the Plan to comply with Code Section 415(e) in effect for Plan Years beginning prior to January 1, 2000 shall be modified to the extent required under Code Section 416(h). -71- ARTICLE XVIII Construction of the Plan The validity of the Plan or of any of the provisions thereof shall be determined under and shall be construed according to the laws of the State of Delaware and ERISA. Titles to Sections are for general information only and the Plan is not to be construed by reference thereto. The masculine pronoun includes the feminine and the singular form includes the plural wherever such usage would apply. IN WITNESS WHEREOF, Radian Group Inc. has caused this amendment and restatement of the Plan to be executed by its duly authorized party on this ______________ day of __________________, 2002. [ SEAL] RADIAN GROUP INC. Attest:__________________________________ By:______________________________ Its:_____________________________ -72- SCHEDULE A Participating Employers Radian Group Inc. RadianExpress.com Inc. Radian Guaranty Inc. Radian Insurance Inc. -73- EX-10.10 11 w56746ex10-10.txt RADIAN SAVINGS INCENTIVE PLAN EXHIBIT 10.10 RADIAN GROUP INC. SAVINGS INCENTIVE PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997 (Incorporating Amendments through January 1, 2002) RADIAN GROUP INC. SAVINGS INCENTIVE PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997 Table of Contents
Page PREAMBLE....................................................................... 1 ARTICLE I - DEFINITIONS ...................................................... 2 1.1 Account...................................................... 2 1.2 Actual Deferral Percentage................................... 3 1.3 Affiliated Company........................................... 3 1.4 Age.......................................................... 4 1.5 Annuity Starting Date........................................ 4 1.6 Average Actual Deferral Percentage........................... 4 1.7 Average Contribution Percentage.............................. 4 1.8 Beneficiary.................................................. 4 1.9 Board of Directors........................................... 4 1.10 Code......................................................... 4 1.11 Company...................................................... 4 1.12 Company Stock................................................ 4 1.13 Compensation................................................. 5 1.14 Contribution Percentage...................................... 5 1.15 Discretionary Contributions.................................. 6 1.16 Early Retirement Date ....................................... 6 1.17 Eligible Employee............................................ 6 1.18 Employee..................................................... 6 1.19 Employment Commencement Date................................. 7 1.20 Entry Date................................................... 7 1.21 ERISA........................................................ 7 1.22 Fund......................................................... 7 1.23 Highly Compensated Employee.................................. 7 1.24 Hour of Service.............................................. 7 1.25 Investment Medium............................................ 9 1.26 Matching Contributions....................................... 9 1.27 Non-Highly Compensated Employee.............................. 9 1.28 Normal Retirement Age........................................ 9 1.29 Participant.................................................. 9 1.30 Participating Company........................................ 10 1.31 Period of Severance.......................................... 10 1.32 Plan......................................................... 11 1.33 Plan Administrator........................................... 11 1.34 Plan Year.................................................... 11
i 1.35 Probationary Period.......................................... 11 1.36 Required Beginning Date...................................... 11 1.37 Rollover Contributions....................................... 12 1.38 Salary Reduction Contributions............................... 12 1.39 Separation from Service...................................... 12 1.40 Spouse....................................................... 12 1.41 Total Disability............................................. 12 1.42 Trust Agreement.............................................. 13 1.43 Trustee...................................................... 13 1.44 Valuation Date............................................... 13 1.45 Voluntary Contributions...................................... 13 1.46 Year of Service.............................................. 13 ARTICLE II - ELIGIBILITY TO PARTICIPATE....................................... 15 2.1 Eligibility to Participate................................... 15 2.2 Participation and Service Upon Reemployment.................. 15 2.3 Data ...................................................... 15 2.4 Transfers.................................................... 15 2.5 Reemployment after Military Service.......................... 16 ARTICLE III - CONTRIBUTIONS TO THE PLAN....................................... 17 3.1 Salary Reduction Contributions............................... 17 3.2 Voluntary Contributions...................................... 18 3.3 Change of Percentage Rate.................................... 18 3.4 Discontinuance of Salary Reduction Contributions............. 18 3.5 Employer Contributions....................................... 19 3.6 Timing Contributions......................................... 20 3.7 Limitation on Salary Reduction Contributions and Matching Contributions and Prevention of Violation.................... 20 3.8 Maximum Allocation........................................... 25 3.9 Rollover Contributions....................................... 29 ARTICLE IV - PARTICIPANTS' ACCOUNTS............................................ 32 4.1 Accounts .................................................... 32 4.2 Valuation.................................................... 32 4.3 Apportionment of Gain or Loss................................ 32 ARTICLE V - VESTING .......................................................... 33 5.1 Nonforfeitable Amounts....................................... 33 5.2 Period of Severance and Loss of Service...................... 33 5.3 Restoration of Service....................................... 34 5.4 Forfeitures and Restoration of Forfeited Amounts upon Reemployment................................................. 34
ii
Page ARTICLE VI - DISTRIBUTIONS.................................................... 36 6.1 General ..................................................... 36 6.2 Normal Retirement............................................ 36 6.3 Early Retirement............................................. 36 6.4 Late Retirement.............................................. 36 6.5 Death .................................................... 36 6.6 Total Disability............................................. 36 6.7 Valuation for Distribution................................... 37 6.8 Payment of Benefits.......................................... 37 6.9 Timing of Distribution....................................... 37 6.10 Beneficiary Designation...................................... 39 6.11 Treatment of Terminated Vested Participant................... 41 6.12 Direct Rollover.............................................. 42 ARTICLE VII - WITHDRAWALS .................................................... 44 7.1 Non-Hardship In-Service Withdrawals.......................... 44 7.2 Hardship Withdrawals Subject to Code Section 401(k).......... 44 7.3 Amount and Payment of Withdrawals............................ 47 7.4 Withdrawals Not Subject to Replacement....................... 47 7.5 Investment Medium to be Charged with Withdrawal.............. 47 7.6 Order of Withdrawals......................................... 47 7.7 Timing of Withdrawals........................................ 48 ARTICLE VIII - LOANS TO PARTICIPANTS.......................................... 49 8.1 Loan Application............................................. 49 8.2 Loan Approval................................................ 49 8.3 Amount of Loan............................................... 49 8.4 Terms of Loan................................................ 50 8.5 Loan Fees.................................................... 51 8.6 Suspension of Repayments..................................... 51 8.7 Additional Rules............................................. 51 ARTICLE IX - PLAN ADMINISTRATION.............................................. 52 9.1 Plan Administrator........................................... 52 9.2 Appointment.................................................. 52 9.3 Term and Compensation........................................ 52 9.4 Claims Review................................................ 52 9.5 Plan Administrator Actions................................... 54 9.6 Investment Manager........................................... 54 9.7 Benefit Payment Directions................................... 54 9.8 Nondiscrimination............................................ 55 9.9 Advisors 55 9.10 Records and Reports.......................................... 55 9.11 Indemnification.............................................. 55
iii
Page 9.12 Power and Duties of the Plan Administrator................... 56 9.13 Participating Company to Supply Information.................. 57 9.14 Self-Interest................................................ 58 ARTICLE X - THE FUND ......................................................... 59 10.1 Designation of Trustee....................................... 59 10.2 Exclusive Benefit............................................ 59 10.3 No Interest in Fund.......................................... 59 10.4 Trustee ..................................................... 59 10.5 Investments.................................................. 59 10.6 Fund ........................................................ 60 10.7 Qualifying Employer Securities............................... 61 ARTICLE XI - AMENDMENT OR TERMINATION OF THE PLAN............................. 62 11.1 Power of Amendment and Termination........................... 62 11.2 Merger ...................................................... 62 ARTICLE XII - TOP-HEAVY PROVISIONS............................................ 63 12.1 General ..................................................... 63 12.2 Definitions.................................................. 63 12.3 Minimum Contribution for Non-Key Employees................... 67 12.4 Social Security.............................................. 68 12.5 Adjustment to Maximum Benefit Limitation..................... 69 ARTICLE XIII - GENERAL PROVISIONS............................................. 70 13.1 No Employment Rights......................................... 70 13.2 Governing Law................................................ 70 13.3 No Interest in Fund.......................................... 70 13.4 Spendthrift Clause........................................... 70 13.5 Incapacity................................................... 70 SCHEDULE A - PARTICIPATING COMPANIES.......................................... 72
iv RADIAN GROUP INC. SAVINGS INCENTIVE PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997 PREAMBLE WHEREAS, Radian Group Inc. (formerly known as, CMAC Investment Corporation) (the "Company") adopted the Radian Group Inc. Savings Incentive Plan (formerly known as, the CMAC Investment Corporation Savings Incentive Plan) (the "Plan"), effective November 1, 1992, for the benefit of its eligible employees and the eligible employees of the Participating Companies in the United States; and WHEREAS, the Company has amended the Plan several times before; and WHEREAS, the Company desires at this time to amend and restate the Radian Group Inc. Savings Incentive Plan to, among other things, incorporate the applicable provisions of the Uruguay Round Agreement Act, the Uniformed Services Employment and Reemployment Act of 1994, the Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997 (collectively, "GUST") and other amendments which were made to the Plan by the Company since the Plan's last restatement; and WHEREAS, the Company also desires to make other changes; NOW, THEREFORE, effective January 1, 1997 (except as otherwise set forth herein), the Plan is hereby amended and restated as hereinafter set forth. -1- ARTICLE I - DEFINITIONS Except where otherwise clearly indicated by context, the masculine shall include the feminine and the singular shall include the plural, and vice-versa. Any term used herein without an initial capital letter that is used in a provision of the Code with which this Plan must comply to meet the requirements of such applicable Code Section and with which the Plan would not comply if such term were not interpreted as used in such provision, shall have as used herein the meaning that it has so used in such provision of the Code. 1.1 "Account" means the entries maintained in the records of the Trustee which represent the Participant's interest in the Fund. The term "Account" shall refer, as the context indicates, to any or all of the following subaccounts: (a) "Matching Contribution Account" - the Account to which are credited Matching Contributions allocated to a Participant, and adjustments related thereto. (b) "Rollover Contribution Account" - the Account to which are credited a Participant's Rollover Contributions and adjustments related thereto. (c) "Salary Reduction Contribution Account" - the Account to which are credited a Participant's Salary Reduction Contributions and adjustments related thereto. (d) "Voluntary Savings Account" - the Account to which are credited a Participant's Voluntary Contributions prior to January 1, 1994, and adjustments related thereto. Effective January 1, 1994, Voluntary Contributions are not permitted to be made to the Plan. -2- (e) "Discretionary Contribution Account" - the Account to which are credited Discretionary Contributions allocated to a Participant, and adjustments related thereto. 1.2 "Actual Deferral Percentage" means, for any Eligible Employee for a given Plan Year, the ratio of: (a) the sum of (1) such Eligible Employee's Salary Reduction Contributions for the Plan Year, plus (2) in the case of any Highly Compensated Eligible Employee, his elective deferrals for the year under any other qualified retirement plan maintained by the Participating Company or any Affiliated Company; to (b) the Eligible Employee's Compensation for the Plan Year while a Participant. 1.3 "Affiliated Company" means, with respect to the Company: (a) any corporation that is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company; (b) any member of an affiliated service group, as determined under Section 414(m) of the Code, of which the Company is a member; (c) any trade or business that is under common control with the Company, as determined under Section 414(c) of the Code; and -3- (d) any other entity required to be aggregated with the Company pursuant to Regulations under Section 414(o) of the Code. 1.4 "Age" means, for any individual, his age as of his nearest birthday, except that an individual attains Age 70 1/2 on the corresponding date in the sixth calendar month following the month in which his 70th birthday falls (or the last day of such sixth month if there is no such corresponding date therein). 1.5 "Annuity Starting Date" means the first day on which all events have occurred which entitle the Participant to a benefit from the Plan. 1.6 "Average Actual Deferral Percentage" means, for a specified group of Eligible Employees for a Plan Year, the average of the Actual Deferral Percentages for such Eligible Employees for the Plan Year. 1.7 "Average Contribution Percentage" means, for a specified group of Eligible Employees for a Plan Year, the average of the Contribution Percentages for such Eligible Employees for the Plan Year. 1.8 "Beneficiary" means the person or persons designated by the Participant to receive the value of his vested Account upon his death; provided, that, in the case of a married Participant, his Beneficiary shall automatically be his Spouse unless his Spouse has consented to the designation of another Beneficiary pursuant to Section 6.9. 1.9 "Board of Directors" means the Board of Directors of the Company. 1.10 "Code" means the Internal Revenue Code of 1986, as amended. 1.11 "Company" means Radian Group Inc., a Pennsylvania Corporation, or any successor or assignee which adopts this Plan in writing. -4- 1.12 "Company Stock" means any tradable class of voting common stock of the Company or an Affiliated Company which satisfies the meaning of "qualifying employer security" under Section 407 of ERISA. 1.13 "Compensation" means, for any Eligible Employee, for any Plan Year or Limitation Year, as the case may be: (a) except as otherwise provided, his base pay from a Participating Company for the Plan Year, but exclusive of overtime, bonuses, commissions, or other forms of special payments. (b) for the purpose of the definitions of Actual Deferral Percentage and Contribution Percentage in this Article (except as otherwise provided in such definitions), his "Compensation" as such word is defined in 415(c)(3) of the Code or such other definition of Compensation that satisfies the requirements of Code regulation Section 1.414(s)-1(c)(2) or 1.414(s)-1(c)(3), determined on a consistent basis with regard to all Eligible Employees for a determination period. (c) for the purpose of the definition of "Highly Compensated Employee" in this Article (except as otherwise provided in such definition), his "Compensation" as such word is defined in Section 415(c)(3) of the Code, but including amounts that are excluded from gross income under a plan described in Sections 125, 132(f) or 401(k) of the Code. (d) For each Plan Year or Limitation Year, as the case may be, Compensation for all purposes under the Plan, shall be limited to $170,000, as adjusted pursuant to the procedure in Section 401(a)(17)(B) of the Code. 1.14 "Contribution Percentage" means for any Eligible Employee for a given Plan Year, the ratio of: -5- (a) the sum of: (1) the Matching Contributions made on behalf of such Eligible Employee for the Plan Year, plus (2) in the case of any Eligible Employee who is a Highly Compensated Employee, any employee contributions and employer matching contributions under any other qualified retirement plan maintained by the Participating Company or any Affiliated Company; to (b) the Eligible Employee's Compensation for the Plan Year while a Participant. 1.15 "Discretionary Contributions" means the amounts which may be contributed by a Participating Company pursuant to Section 3.5. 1.16 "Early Retirement Date" means, for any Participant, effective January 1, 1994, the date a Participant attains age 55 and completes six Years of Service. 1.17 "Eligible Employee" means an Employee who is employed by a Participating Company and who is classified by the Participating Company as a common law employee, except that Employees whose employment is covered by a collective bargaining agreement shall not be Eligible Employees unless such agreement specifically provides for their participation in the Plan. For purposes of determining eligibility under the Plan, the classification to which an individual is assigned by a Participating Company shall be final and conclusive, regardless of whether a court, a governmental agency or other entity subsequently finds such individual should have been assigned a different classification. 1.18 "Employee" means an individual who is reported on payroll records as a common law employee of a Participating Company or Affiliated Company. An individual who is not a common law employee of a Participating Company or -6- Affiliate Company shall be deemed a common law employee by such Company if he is a leased employee with respect to whose services such Participating Company or Affiliate Company is the recipient within the meaning of Code Section 414(n) or (o) but to whom Code Section 414(n)(5) does not apply, and then only if the coverage requirements of Code Section 410(b) would otherwise not be met. 1.19 "Employment Commencement Date" means, for any Employee, the date on which he is first entitled to be credited with an "Hour of Service" described in Section 1.24(a)(1). For each employee of Amerin Guaranty Corporation, as of the date Amerin Guaranty Corporation merged with the Company, "Employment Commencement Date" shall be the date recognized as such by Amerin Guaranty Corporation. 1.20 "Entry Date" means each January 1st, April 1st, July 1st and October 1st next following the month during which the end of an Eligible Employee's Probationary Period occurs. 1.21 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.22 "Fund" means the fund established for this Plan, administered under the Trust Agreement, out of which benefits payable under this Plan shall be paid. 1.23 "Highly Compensated Employee" means any Employee who (a) (1) was a 5-percent owner (as defined in Section 415(c)(3) of the Code) at any time during the Plan Year or the preceeding Plan Year; or (2) for the preceding Plan Year, received Compensation from a Participating Company in excess of $80,000 (as adjusted pursuant to Sections 414(q) and 415(d) of the Code) and was in the top-paid group (as defined in Section 414(q)(3) of the Code) of Employees; -7- (b) A former Employee shall be treated as a Highly Compensated Employee if such Employee was a Highly Compensated Employee when such Employee separated from service or such Employee was a Highly Compensated Employee at any time after the Employee's 55th birthday. 1.24 "Hour of Service" means, for any Employee: (a) except as provided in (b): (1) each hour for which he is directly or indirectly paid or entitled to payment by a Participating Company or an Affiliated Company for the performance of employment duties; or (2) each hour for which he is entitled, either by award or agreement, to back pay from a Participating Company or an Affiliated Company, irrespective of mitigation of damages; or (3) each hour for which he is directly or indirectly paid or entitled to payment by a Participating Company or an Affiliated Company on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), jury duty, layoff, leave of absence, or military duty; or (b) Anything to the contrary in Subsection (a) notwithstanding: (1) No Hours of Service shall be credited to an Employee for any period during which payments are made or due him under a plan maintained solely for the purpose of complying with applicable workers' compensation, unemployment compensation, or disability insurance laws. -8- (2) No more than 501 Hours of Service shall be credited to an Employee under Paragraph (a)(3) of this definition on account of any single continuous period during which no duties are performed by him, except to the extent otherwise provided in the Plan. (3) No Hours of Service shall be credited to an Employee with respect to payments solely to reimburse for medical or medically related expenses. (4) No Hours of Service shall be credited twice. (5) Hours of Service shall be credited at least as liberally as required by the rules set forth, in U.S. Department of Labor Reg. Section 2530.200b-2(b) and (c). (c) Notwithstanding the foregoing, an Employee who is employed on a full-time basis shall be credited with ten Hours of Service for each day he is entitled to be credited with at least one Hour of Service. For purposes hereof, an Employee shall be considered to be employed on a full-time basis if he is expected to normally work at least 20 hours per week or, in the case of an Employee who works on a seasonal or temporary basis, is expected to normally work at least 30 weeks in a year at 35 or more hours per week. 1.25 "Investment Medium" means any fund, contract, obligation, or other mode of investment to which a Participant may direct the investment of the assets of his Account, including Company Stock 1.26 "Matching Contributions" means the amounts contributed by a Participating Company pursuant to Section 3.5. -9- 1.27 "Non-Highly Compensated Employee" means an Employee who is not a Highly Compensated Employee. For purposes of applying the nondiscrimination testing provisions under Section 3.7, an Employee's status as a Non-Highly Compensated Employee in the preceding Plan Year is determined without regard to his status in the current Plan Year. 1.28 "Normal Retirement Age" means, for any Participant, the first day of the calendar month coincident with or next following the date on which he attains Age 65. 1.29 "Participant" means any Eligible Employee who enters the Plan pursuant to Section 2.1 or a former Eligible Employee with an Account under the Plan. 1.30 "Participating Company" means the Company and each Affiliated Company which is authorized by the Board of Directors to adopt this Plan by action of its board of directors or other governing body. The Participating Companies are listed in Schedule A. 1.31 "Period of Severance" means, effective January 1, 1998, a Plan Year during which an Employee has not completed more than 500 Hours of Service due to a Separation from Service. An Employee who leaves employment in a "qualified absence," shall be credited, solely to avoid a Period of Severance, with the Hours of Service with which such Employee would have been credited but for the absence; or, if such hours cannot be determined, with eight Hours of Service per normal workday. The total number of hours to be treated as Hours of Service under this definition shall not exceed 501. The hours described in this definition shall be credited either for the Plan Year in which the absence from work begins, if the Employee would be prevented from incurring a Period of Severance in such Plan Year because the period of absence is treated as Hours of Service under this definition, or, in any other case, for the Plan Year next following the one in which the absence from work begins. -10- "Period of Severance" prior to January 1, 1998, shall mean the period beginning on the Separation from Service date and ending on the date when an Employee returns to employment with the Participating Company or Affiliated Company. As of December 31, 1997, any Period of Service less than a whole year shall be disregarded. Notwithstanding the above, with respect to an Employee who leaves employment in a "qualified absence," his Period of Severance shall commence on the second anniversary of his Separation from Service date. As used herein, "qualified absence" with respect to an Employee, shall mean an absence from employment with a Participating Company or Affiliated Company by reason of (1) the pregnancy of the Employee, (2) the birth or adoption of a child of the Employee, or (3) for the caring of such Employee's child immediately after birth or adoption. The Plan Administrator may require such information as it deems appropriate to confirm the reasons for any duration of any such absence. 1.32 "Plan" means the Radian Group Inc. Savings Incentive Plan, a profit-sharing plan, as set forth herein. 1.33 "Plan Administrator" or "Administrator" means the individuals appointed by the Board of Directors to supervise the administration of the Plan, as provided in Article IX. 1.34 "Plan Year" means each 12 consecutive-month period that begins on January 1 and ends on the next following December 31. 1.35 "Probationary Period" means for any Eligible Employee, that period of time beginning on the Employment Commencement Date and ending on the ninetieth day following such Employment Commencement Date. 1.36 "Required Beginning Date" means, for any Participant: (a) if he attained Age 70-1/2 on or after January 1, 1996, the April 1 of the calendar year following the calendar year in which occurs the later of (i) -11- his attainment of Age 70-1/2 or (ii) his Separation from Service; provided, however, if he is a 5-percent owner (within the meaning of Code Section 416) of a Participating Company, clause (ii) shall not apply; (b) if he attained age 70-1/2 before January 1, 1988, and is not a 5-percent owner (within the meaning of Code Section 416) of a Participating Company, April 1 of the calendar year following the later of the calendar year in which he has a Separation from Service or the calendar year in which he attained Age 70-1/2; (c) if he attained age 70-1/2 before January 1, 1988, and is a 5-percent owner (within the meaning of Code Section 416) of a Participating Company, the later of December 31, 1987 or April 1 of the calendar year following the calendar year in which he attained Age 70-1/2; (d) if he attained age 70-1/2 before January 1, 1989 and after December 31, 1987, is not a 5-percent owner (within the meaning of Code Section 416) of a Participating Company, and has not had a Separation from Service before January 1, 1989, April 1, 1990; (e) if he attains age 70-1/2 on or after January 1, 1989, April 1 of the calendar year next following the calendar year in which he attains Age 70-1/2. 1.37 "Rollover Contributions" means, for any Eligible Employee, his rollover contributions as provided in Section 3.9. 1.38 "Salary Reduction Contributions" means, for any Participant, pre-tax contributions made by the Participating Company on his behalf as provided in Section 3.1. 1.39 "Separation from Service" means, for any Employee, his death, retirement, resignation, discharge or any absence that causes him to cease to be an Employee. -12- 1.40 "Spouse" means the person to whom the Participant is married on his Annuity Starting Date (without regard to whether the marriage terminates at a later date). 1.41 "Total Disability" shall mean a disability which: (a) is deemed by the Plan Administrator, to be of a potentially permanent nature on the basis of the Participant's demonstration to the Plan Administrator that he is entitled to both benefits under a long-term disability plan of a Participating Company and disability benefits under the Social Security Act (prior to January 1, 2002, the Plan Administrator's determination of the potentially permanent nature of the disability is based upon medical certification); (b) prevents an Employee from continuing to perform, for a Participating Company or Affiliated Company, the duties of his customary job or any other available job for which he is qualified by training or experience, and (c) results from illness or injury which is not self-inflicted and does not result from alcoholism or the use of narcotics. 1.42 "Trust Agreement" means the agreement and declaration of trust executed for purposes of the Plan. 1.43 "Trustee" means the corporate trustee or one or more individuals collectively appointed and acting under the Trust Agreement. 1.44 "Valuation Date" means, effective, January 1, 2000, each day on which the stock exchange is open. Prior to January 1, 2000, "Valuation Date" means each March 31st, June 30th, September 30th and December 31st. -13- 1.45 "Voluntary Contributions" means a Participant's after-tax contributions, if any, made to the Plan prior to January 1, 1994, as provided in Section 3.2. 1.46 "Year of Service" for purposes of determining the vesting percentage under Section 5.1, shall mean, effective January 1, 1998, each Plan Year during which an Employee is credited with at least 1,000 Hours of Service. Prior to January 1, 1998, "Year of Service" shall mean the aggregate of all time commencing with an Employee's Employment (or Re-employment) Commencement Date and ending on the earlier of his Separation from Service or December 31, 1997. If re-employed prior to December 31, 1997, but within 12 months of his Separation from Service Date, an Employee shall receive credit for any such Period of Severance. When aggregating an Employee's Period of Service, fractional periods will be expressed in months, with an Employee receiving credit for a month if he works one day in a month. For purposes of determining the percentage under Section 5.1, any Period of Service less than a whole year after calculating the aggregated Period of Service shall be disregarded. Notwithstanding the above, an Employee as of January 1, 1998, shall be credited with the number of Years of Service equal to the number of 1-year Periods of Service credited to the Employee as of that date, plus the Employee shall receive credit, in the Plan Year beginning on January 1, 1998, for 190 Hours of Service for each month credited to the Employee as of December 31, 1998. For all purposes under the Plan, Years of Service shall be computed by taking into account employment with Reliance Insurance Company and any other predecessor employer as required by Section 414(a)(1) of the Code or under regulations prescribed pursuant to Section 414(a)(2) of the Code. -14- ARTICLE II - ELIGIBILITY TO PARTICIPATE 2.1 Eligibility to Participate. Each Eligible Employee who has completed the Probationary Period shall be eligible to participate as of his Entry Date. 2.2 Participation and Service Upon Reemployment. Participation in the Plan shall cease upon termination of employment with a Participating Company. Upon the reemployment of any former Participant who had previously been employed by a Participating Company, he shall again participate in the Plan on the date of his re-employment by a Participating Company or, if later, the Entry Date coincident with or next following, the date he becomes an Eligible Employee. 2.3 Data. Each Eligible Employee shall furnish to the Plan Administrator such data as the Plan Administrator may consider necessary for the determination of the Eligible Employee's rights and benefits under the Plan and shall otherwise cooperate fully with the Plan Administrator in the administration of the Plan. 2.4 Transfers. If a Participant is transferred to employment with a member of the controlled group of corporations of which a Participating Company is a part, his participation under the Plan shall be suspended; provided, however, that during the period of his employment in such ineligible position: (a) subject to the reemployment provisions of Section 2.2, service for vesting purposes shall continue to accrue, (b) he shall cease to have any right to enter into a salary reduction agreement with a Participating Company pursuant to Section 3.1, (c) his Matching Contribution Account, Discretionary Contribution Account, and Salary Reduction Account shall receive no Employer Contribution allocations under Sections 3.1 and 3.5, -15- (d) his Account shall continue to participate in income allocations pursuant to Section 4.3, and (e) the withdrawal privileges under Sections 7.1 and 7.2 shall continue to apply. 2.5 Reemployment after Military Service. Effective December 12, 1994, notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Code Section 414(u). -16- ARTICLE III - CONTRIBUTIONS TO THE PLAN 3.1 Salary Reduction Contributions. (a) When a Participant files an election to have pre-tax Salary Reduction Contributions made on his behalf, he shall elect the percentage by which his Compensation shall be reduced on account of such pre-tax Salary Reduction Contributions. Subject to Sections 3.7 and 3.8, this percentage may be made in any whole increment from one percent (1%) to fifteen percent (15%) of such Compensation. (b) Each Participant may elect to make Salary Reduction Contributions by filing a written notice of such election with the Plan Administrator at least 15 days in advance of the effective date of such election on a form provided for that purpose. Such notice shall authorize the Participating Company to reduce such Participant's Compensation by an amount determined in accordance with Section 3.1(a) above and to make Salary Reduction Contributions on such Participant's behalf in the amount of such reduction. Such election shall be effective on the Entry Date following receipt of his election by the Plan Administrator. (c) Salary Reduction Contributions made on behalf of a Participant for any calendar year shall not exceed $10,500 (as adjusted in accordance with Section 402(g) of the Code and regulations thereunder). To the extent necessary to satisfy this limitation for any calendar year: (1) elections under Subsection (a) of this Section shall be prospectively restricted; and, (2) after application of Subparagraph (1), the excess Salary Reduction Contributions (with earnings thereon, but reduced by -17- any amounts previously distributed ) shall be paid to the Participant on or before the April 15 first following the calendar year in which such excess Salary Reduction Contributions were made. 3.2 Voluntary Contributions. (a) Effective January 1, 1994, Voluntary Contributions shall not be permitted to be made under this Plan. Voluntary Contributions made prior to January 1, 1994 shall be maintained in each Participant's Voluntary Contribution Account and shall be subject to the Plan provisions as herein set forth. (b) Prior to January 1, 1994, Participants were permitted to make Voluntary Contributions under this Plan in an amount which when added to the amount, if any, of any voluntary contributions to other qualified plans of the Participating Company, did not exceed 10% of their Compensation while Participants, and which amount was subject to the provisions of Sections 3.7 and 3.8. Voluntary Contributions are credited to a Participant's Voluntary Savings Account and amounts credited to such Account shall be 100 percent vested and nonforfeitable at all times. Contributions made hereunder by Participants are not intended to be deductible by Participants under Section 219(a) of the Code. 3.3 Change of Percentage Rate. A Participant may change the percentage of Compensation designated by him as his contribution rate under Section 3.1 to any percentage permitted, and such percentage shall remain in effect until so changed. Any such change, elected on a form provided for that purpose, shall become effective as soon as practicable following receipt of the request for change by the Plan Administrator. 3.4 Discontinuance of Salary Reduction Contributions. A Participant may discontinue his Salary Reduction Contributions at any time. Such discontinuance -18- shall become effective the next pay period after receipt of the discontinuance, on the form provided for that purpose by the Plan Administrator. A Participant who discontinues his Salary Reduction Contributions may resume his Salary Reduction Contributions as soon as practicable following his execution of a new election. 3.5 Employer Contributions. (a) Matching Contributions. Subject to the limitations set forth in Sections 3.7 and 3.8, for each Plan Year, each Participating Company shall make a Matching Contribution to the Fund on behalf of each Participant who makes Salary Reduction Contributions for such Plan Year. Such Matching Contribution shall be equal to the greater of (1) 25% of the Participant's Salary Reduction Contributions up to 5% of his Compensation (1.25% of Compensation), or (2) the amount determined by the Board of Directors, in its discretion, to make as a Matching Contribution as of the last day of the Plan Year. Matching Contributions will be credited only to the Accounts of those Participants who are employed by the Participating Company on the last day of the Plan Year, unless such Participant died, retired or incurred a Total Disability during the Plan Year, and has not elected to receive an early distribution of his Account. (b) Discretionary Contributions. Reserved for future use. (c) Payment. All contributions made pursuant to this Section 3.5, shall be made in cash or Company Stock from the Participating Company's current or accumulated earnings as computed in accordance with accepted accounting practices, before deduction of federal income taxes and reserves for contingencies, if any, other than reasonable reserves of a type or character allowed or allowable as deductions for federal income tax purposes, and before deduction of any contributions hereunder. In no event, however, shall the Participating Company contributions for any year (whether made pursuant to Section 3.1 or otherwise) exceed the -19- amount deductible for such year for income tax purposes as a contribution to the Fund under the applicable provisions of the Code. 3.6 Timing of Contributions. Contributions for any Plan Year under Section 3.5 shall be made no later than the last date on which amounts so paid may be deducted for Federal income tax purposes for the taxable year of the Company in which the Plan Year ends. All Contributions made under Section 3.5 are expressly conditioned upon their deductibility for Federal income tax purposes. 3.7 Limitation on Salary Reduction Contributions and Matching Contributions and Prevention of Violation. (a) The Average Actual Deferral Percentage for the group of Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the greater of: (1) one hundred twenty-five percent (125%) of the Average Actual Deferral Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; or (2) the lesser of: (A) two hundred percent (200%) of the Average Actual Deferral Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; or (B) two percent (2%) plus the Average Actual Deferral Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year. -20- (b) The Average Contribution Percentage for the group of Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the greater of: (1) one hundred twenty-five percent (125%) of the Average Contribution Percentage of the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; or (2) the lesser of: (A) two hundred percent (200%) of the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; or (B) two percent (2%) plus the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year. (c) To prevent the multiple use of the alternative method described in (a)(2) and (b)(2), above: the sum of the Average Actual Deferral Percentage and the Average Contribution Percentage for the group of Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the greater of: (1) the sum of: -21- (A) one hundred twenty-five percent (125%) of the greater of the Average Actual Deferral Percentage or the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; plus (B) the lesser of: (i) two hundred percent (200%) of the lesser of the Average Actual Deferral Percentage or the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; or (ii) two percent (2%) plus the lesser of the Average Actual Deferral Percentage or the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; or (2) the sum of: (A) one-hundred twenty-five percent (125%) of the lesser of the Average Actual Deferral Percentage or the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; plus (B) the lesser of: -22- (i) two hundred percent (200%) of the greater of the Average Actual Deferral Percentage or the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year; or (ii) two percent (2%) plus the greater of the Average Actual Deferral Percentage or the Average Contribution Percentage for the group of all other Eligible Employees who are Non-Highly Compensated Employees for the preceding Plan Year. (d) If the Plan and any other plan(s) maintained by a Participating Company or an Affiliated Company are treated as a single plan for purposes of Section 401(a)(4) or Section 410(b) of the Code, the limitations in Subsections (a) through (c) of this Section shall be applied by treating the Plan and such other plan(s) as a single plan. (e) The application of this Section shall satisfy Sections 401(k) and 401(m) of the Code and regulations thereunder and such other requirements as may be prescribed by the Secretary of the Treasury. (f) The Plan Administrator shall monitor the level of Participant's Salary Reduction Contributions and Matching Contributions. If the limits of this Section have been exceeded, corrective action shall be taken as set forth below. (g) (1) The Average Actual Deferral Percentage for the group of Eligible Employees who are Highly Compensation Employees shall be -23- reduced to the extent necessary to satisfy Subsection (a) of this Section. (2) The reduction shall be accomplished by reducing the Highly Compensated Employees' Salary Reduction Contributions in order of their Actual Deferral Percentages, beginning with the Highly Compensated Employee(s) with the highest dollar amount of Salary Reduction Contributions, until Subsection (a) of this Section is satisfied. (3) (A) To the extent practicable, the Plan Administrator shall prospectively limit a Highly Compensated Employee's Salary Reduction Contributions to reduce his Actual Deferral Percentage to the extent necessary to satisfy Subsection (a) of this Section. (B) In addition, the remaining difference between a Highly Compensated Employee's Actual Deferral Percentage and the Highly Compensated Employee's adjusted maximum Actual Deferral Percentage, at the Plan Administrator's direction, shall be paid to the Highly Compensated Eligible Employee, with earnings attributable thereto, but not later than the end of the year immediately following the close of the Plan Year for which the Salary Reduction Contributions were made. (h) (1) The Average Contribution Percentage for the Highly Compensated Employees shall be reduced to the extent necessary to satisfy at least one of the tests in Subsection (b) of this Section. (2) The reduction shall be accomplished by reducing the Highly Compensated Employees' Matching Contributions under this -24- Plan in order of their Contribution Percentages, beginning with the Highly Compensated Employee(s) with the highest dollar amount of Matching Contributions, until Subsection (b) of this Section is satisfied. (3) Not later than the end of the Plan Year following the Plan Year for which such contributions were made, the remaining difference between a Highly Compensated Employee's Contribution Percentage and the Highly Compensated Employee's maximum permissible Contribution Percentage, with earnings attributable thereto, at the Plan Administrator's direction, shall be treated as a forfeiture of the Highly Compensated Employee's Matching Contributions for the Plan Year to the extent such Contributions are forfeitable (which forfeiture shall be used to reduce future Matching Contributions), or paid to the Highly Compensated Employee to the extent such contributions are nonforfeitable. (i) The Average Contribution Percentage and/or the Average Actual Deferral Percentage for the Highly Compensated Employees shall be reduced to the extent necessary to satisfy the test in Subsection (c) of this Section. The reduction shall be accomplished in the same manner as is set forth in Subsections (g) or (h) of this Section, whichever is appropriate, and shall be charged against the Highly Compensated Employees' Accounts in the following order of priority: (1) Matching Contribution Accounts, and (2) Salary Reduction Accounts; provided, however, that for any Participant who is also a participant in any other qualified retirement plan maintained by a Participating Company or any Affiliated Company under which the Participant -25- makes employee contributions or elective deferrals or is credited with employer matching contributions for such year, the Plan Administrator shall coordinate corrective actions under this Plan and such other plan for the year. (j) If the Plan and any other plan maintained by a Participating Company or an Affiliated Company are treated as a single plan pursuant to Subsection (e) of this Section, the Plan Administrator shall coordinate actions under this Plan and such other plan for the year. 3.8 Maximum Allocation. The provisions of this Section shall be construed to comply with Section 415 of the Code. (a) Notwithstanding anything in this Article to the contrary, in no event shall the sum of: (1) any Matching Contributions, Salary Reduction Contributions and other employer contributions; (2) any forfeitures, and (3) any employee contributions allocated for any Limitation Year to any Participant (prior to any distribution of such amounts pursuant to Section 3.1 or Section 3.7) under this and any other defined contribution plan maintained by the Participating Company or any 50% Affiliated Company, exceed the lesser of $30,000 (adjusted for increases in the cost-of-living in accordance with Section 415(d)(1) of the Code) or twenty-five percent (25%) of such Participant's Compensation (as defined in -26- Section 3.8(e)) for the Limitation Year. For purposes of this Section 3.8, Limitation Year shall mean the Plan Year. (b) If the amount otherwise allocable to the Account of a Participant would exceed the amount described in Subsection (a) of this Section as a result of the reallocation of forfeitures, a reasonable error in estimating the Participant's Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 401(g)(3)) or such other circumstances as permitted by law, the Plan Administrator shall determine which portion, if any, of such excess amount is attributable to the Participant's Salary Reduction Contributions and/or Matching Contributions and the following rules shall apply in the following order: (1) Amounts attributable to Matching Contributions shall be held in a suspense account by the Trustee and shall be used in the earliest Plan Year or Plan Years to reduce future Matching Contributions to the Plan; amounts held in the suspense account shall share in investment gains and losses of the Fund. (2) Amounts attributable to Salary Reduction Contributions shall be distributed to the Participant. (c) If, in any Limitation Year beginning prior to January 1, 2000, a Participant in this Plan is also a participant in one or more defined benefit plans maintained by the Participating Company or any 50% Affiliated Company, the annual benefit referred to in Subsection (c)(1) below shall be reduced, if necessary, so that the sum of the fractions described in (1) and (2) below does not exceed 1.0 for such Limitation Year. -27- (1) Defined Benefit Fraction - a fraction, the numerator of which is the Participant's projected annual benefit under all such defined benefit pension plans determined as of the close of the limitation years of such plans, and the denominator of which is the lesser of: (A) 1.25 x $90,000 (or such other dollar limitation in effect for the Limitation Year under Section 415(b)(1)(A) of the Code); or (B) one hundred forty percent (140%) of the Participant's highest average Compensation over any three consecutive calendar years. For the purpose of this Paragraph (1), "projected annual benefit" means the annual benefit to which a Participant would be entitled under the terms of a defined benefit plan if he had continued employment until his normal retirement date under such plan and if his compensation counted for the purpose of such plan had continued at the same rate. (2) Defined Contribution Fraction - a fraction, the numerator of which is the sum of the annual additions to the Participant's accounts under all defined contribution plans sponsored by the Participating Company or any 50% Affiliated Company for all limitation years, and the denominator which is the sum of the lesser of the following amounts, determined for each of such limitation years and for each prior limitation year of service with a Participating Company or 50% Affiliated Company: (A) 1.25 x $30,000 (or such other dollar limitation in effect for the Limitation Year under Section 415(c)(1)(A) of the Code); or (B) thirty-five percent (35%) of the Participant's Compensation for such limitation year. (d) For purposes of this Section, "50% Affiliated Company" means an Affiliated -28- Company, but determined with "more than 50%" substituted for the phrase "at least 80%" in Section 1563(a) of the Code. (e) For purposes of this Section, "Compensation" means the Participant's wages, salary, fees for professional services, and other amounts received for personal services rendered in the course of employment with a Participating Company or an Affiliated Company with respect to such Limitation Year, including, but not limited to: commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, taxable amounts received by the Participant through accident or health insurance for personal injury or sickness or from a self-insured medical expense reimbursement plan, moving expenses paid or reimbursed by a Participating Company or an Affiliated Company in excess of any amount deductible by the Participant, wages or payments in lieu of wages received on account of absence from work for permanent and total disability, the amount included in his taxable income as a result of the grant of a nonqualified stock option by a Participating Company or an Affiliated Company, the amount includible in his gross income as the result of an election described in Section 83(b) of the Code, and any amount which is contributed or deferred by a Participating Company or an Affiliated Company at the election of the Participant and which is not includable in the gross income of the Participant by reason of Sections 125, 132(f), 401(k) or 457 of the Code; and excluding: (1) contributions made by an employer on his behalf to a qualified plan to the extent that, before the application of Section 415 of the Code to that plan, such contributions are not includible in his gross income for the year in which contributed; -29- (2) employer contributions on his behalf to a simplified employee pension plan; (3) any distributions from a plan of deferred compensation, except that any amounts received by him pursuant to an unfunded non-qualified plan shall be included in the year that such amounts are included in gross income; (4) amounts realized from the exercise of a non-qualified stock option or from stock or property which is currently taxable under Section 83 of the Code; (5) amounts realized from the sale, exchange, or other disposition of stock acquired through the exercise of a qualified or incentive stock option; and (6) other amounts which receive special tax benefits, such as premiums for group term life insurance to the extent not includible in gross income, or contributions made by an employer toward the purchase of an annuity contract described in Section 403(b) of the Code. 3.9 Rollover Contributions. (a) A Participant or an Eligible Employee (including an Employee who is not eligible to participate in this Plan because he has not satisfied the eligibility requirements of Section 2.1) may transfer, or have transferred directly to the Fund from any qualified retirement plan of a former employer, all or a portion of his interest in the distributing plan, except that: -30- (1) the interest being transferred shall not include assets from any plan to the extent that the Plan Administrator determines that such interest would impose upon this Plan requirements as to form of distribution that would not otherwise apply hereunder; and (2) the interest being transferred shall not contain nondeductible contributions made to the distributing plan by the Participant or Eligible Employee unless the transfer to the Fund is directly from the funding agent of the distributing plan. (b) In addition, a Participant or an Eligible Employee who has established an individual retirement account to hold distributions received from qualified retirement plans of former employers may, with the consent of the Plan Administrator, transfer all of the assets of such individual retirement account to the Fund. Such individual retirement account shall not contain nondeductible contributions made by the Participant or Eligible Employee while he was a participant in the plans of his former employers. (c) The distributions transferred by a Participant or an Eligible Employee from another qualified retirement plan or from an individual retirement account shall be credited to the Participant's or Eligible Employee's Rollover Account. A Participant or Employee Eligible shall be fully vested at all times in his Rollover Account. (d) The Plan shall not accept a distribution from any other qualified retirement plan or from an individual retirement account unless the following conditions are met: (1) the distribution being transferred must come directly from the fiduciary of the plan of the former employer, or it must come from the Participant or Eligible Employee within 60 days after the -31- Participant or Eligible Employee receives a distribution from such other qualified retirement plan or individual retirement account; (2) distributions from a plan for a self-employed person shall not be transferred to this Plan, unless the transfer is directly to the Fund from the funding agent of the distributing plan; (3) the distribution being transferred will not cause the Plan to be a direct or indirect transferee of a plan to which the joint and survivor annuity requirements of Sections 401(a)(11) and 417 of the Code apply; and (4) the distribution being transferred will not cause the Plan, by operation of Code Section 411(d)(6), to provide an optional form of benefit payment that differs from the forms provided in Article VI. -32- ARTICLE IV - PARTICIPANTS' ACCOUNTS 4.1 Accounts. All Contributions and earnings thereon may be invested in one commingled Fund for the benefit of all Participants. However, in order that the interest of each Participant may be accurately determined and computed, a separate Account shall be maintained for each Participant. These Accounts shall represent the Participants' individual interest in the Fund. All Contributions shall be credited to Participants' Accounts as set forth in Article III. 4.2 Valuation. The value of each Investment Medium in the Fund shall be computed by the Trustee as of the close of business on each Valuation Date on the basis of the fair market value of the assets of the Fund. 4.3 Apportionment of Gain or Loss. The value of each Investment Medium in the Fund shall be apportioned pro rata among the Participant's Accounts which are invested in such Investment Medium at the current Valuation Date. -33- ARTICLE V - VESTING 5.1 Nonforfeitable Amounts. (a) A Participant shall have a 100% nonforfeitable interest at all times in his Salary Reduction, Rollover Contribution and Voluntary Savings Accounts. (b) A Participant shall be vested in his Matching Contribution and Discretionary Contribution Accounts based on his Years of Service in accordance with the following table:
Years of Service Vested Percentage ---------------- ----------------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100%
A Participant also shall have a 100% nonforfeitable interest in his Matching Contribution and Discretionary Contribution Accounts upon the attainment of his Normal Retirement Age, Total Disability or upon his death prior to Separation from Service. 5.2 Period of Severance and Loss of Service. A Participant's Years of Service shall be canceled if he incurs a Period of Severance before his Normal Retirement Age and at a time when his vested percentage in his Matching Contribution Account under Subsection 5.1(b) is zero, or he has no Matching Contribution Account under the Plan. -34- 5.3 Restoration of Service. (a) The Years of Service of a Participant whose Years of Service have been canceled pursuant to Section 5.2 shall be restored to his credit if he thereafter completes a Year of Service at a time when a Period of Severance is less than the greater of (1) the number of Years of Service to his credit when the first such Separation from Service occurred, or (2) five. (b) If any other Participant has had a five-year Period of Severance and subsequently becomes an Eligible Employee again, Years of Service after such five-year period shall not be taken into account in increasing the vested percentage of his Account as of his Separation from Service. 5.4 Forfeitures and Restoration of Forfeited Amounts upon Reemployment. (a) The nonvested portion of a terminated Participant's Account shall become a forfeiture as of last day of the Plan Year in which he incurs a Separation from Service. (b) Amounts forfeited from a Participant's Matching Contribution Account under Subsection (a) of this Section shall be used by the Participating Companies to reduce future Matching Contributions. (c) If a Participant who has received a distribution whereby any part of his Account has been forfeited subsequently becomes an Eligible Employee again prior to incurring a five-year Period of Severance, the amount forfeited, if any, from his previous Matching Contribution Account or Discretionary Contribution Account under Subsection (a) shall be -35- restored to his new Matching Contribution Account or Discretionary Contribution Account. (d) If a Participant has had a five-year Period of Severance and subsequently becomes an Eligible Employee again, the amount forfeited under Subsection (a) of this Section shall not be restored to his Matching Contribution Account or Discretionary Contribution Account under any circumstances. -36- ARTICLE VI - DISTRIBUTIONS 6.1 General. The vested interest of each Participant in the Fund shall be distributed in the manner, in the amount, and at the time provided in this Article, except as provided in Article VII and except in the event of the termination of the Plan. All distributions shall be made in the form of cash. 6.2 Normal Retirement. A Participant who has a Separation from Service on his Normal Retirement Age shall have his Account paid to him in a single lump sum. 6.3 Early Retirement. A Participant who has a Separation from Service on his Early Retirement Date may request to have his Account paid to him in a single lump sum. 6.4 Late Retirement. A Participant who has a Separation from Service after his Normal Retirement Age shall participate in the Plan on the same basis as other Participants. When such a Participant has a Separation from Service, his Account shall be paid to him in a single lump sum. 6.5 Death. If a Participant dies prior to his Annuity Starting Date, his vested Account shall be paid to his Beneficiary in a single lump sum. 6.6 Total Disability. (a) If a Participant who is an Employee suffers a Total Disability and has a Separation from Service, his Account shall be paid to him in a single lump sum following the determination of his Total Disability and his Separation from Service. If the value of his Account is $5,000 ($3,500 prior to January 1, 1998) or less, his Account shall not be paid to him until (1) he submits his written consent to such distribution not more than 90 days prior to the Annuity Starting Date or (2) he attains his Normal Retirement Date, or (3) he dies. -37- (b) The Plan Administrator shall provide to each such Participant a notice that he has the right to defer his Annuity Starting Date until the earlier of his Normal Retirement Age or his death. Such notice shall be furnished not less than 30 days nor more than 90 days prior to any Annuity Starting Date that occurs prior to the earlier of his Normal Retirement Date or his death. 6.7 Valuation for Distribution. For the purposes of paying any vested Account balance to a Participant or his beneficiaries under the provisions of this Article, the value of the Fund and the amount of the Participant's interest shall be determined in accordance with the provisions of Article VI as of the Valuation Date coincident with or immediately following the later of the date of the Participant's Separation from Service or the date the properly executed distribution request forms are processed for payment by the Plan Administrator. 6.8 Payment of Benefits. The value of a Participant's vested Account may also be paid in installment payments over a period not to exceed 120 months, with the amount of each installment to be equal to the value of the vested Participant's interest in the Plan on the Annuity Starting Date, multiplied by a fraction, the numerator of which is one and the denominator of which is the number of remaining installments due (including the installment in question). 6.9 Timing of Distribution. (a) Except as provided in Subsections (b) through (d) of this Section and Section 6.11, a Participant's benefit shall be paid as soon as practicable after the later of the date of the Participant's Separation from Service or the date the properly executed distribution request forms are processed for payment by the Plan Administrator. (b) A Participant's Annuity Starting Date shall be no later than the 60th day after the close of the Plan Year in which the Participant attains his -38- Normal Retirement Age or has a Separation from Service, whichever occurs last. (c) If a Participant dies before his Annuity Starting Date, his entire Account under the Plan shall be distributed to his Beneficiary as soon as administratively practicable after the Plan Administrator processes a request for the payment of the benefit. (d) Notwithstanding anything in the Plan to the contrary, the form and the timing of all distributions under the Plan shall be in accordance with regulations issued by the Department of the Treasury under Section 401(a)(9) of the Code, including the incidental death benefit requirements of Section 401(a)(9)(G) of the Code, the provision of which are incorporated herein by reference. Notwithstanding anything in the Plan to the contrary, with respect to distributions under the Plan made on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the regulations under Section 401(a)(9) of the Code that were proposed on January 17, 2001 (the 2001 Proposed Regulations). Minimum distributions under the Plan shall continue to be made in accordance with the 2001 Proposed Regulations until the calendar year beginning before the effective date of the final regulations under Section 401(a)(9) of the Code or such other date as may be published by the Internal Revenue Service. A Participant who has not terminated service with a Participating Company shall be required to withdraw in any Plan Year only the minimum amount required to satisfy section 401(a)(9) of the Code based on the life expectancy or, if elected by the Participant, the joint life expectancies of the Participant and his Beneficiary. The Participant will not be offered the option to have his life expectancy recalculated under the rule of Section 401(a)(9) of the Code. -39- 6.10 Beneficiary Designation. (a) A Participant may designate the Beneficiary or Beneficiaries who shall receive his Account balance, upon his death. Such designation shall be made by executing and filing with the Plan Administrator a written instrument in such form as may be prescribed by the Plan Administrator for that purpose. Except as otherwise provided in this Section, the Participant may also revoke or change, at any time and from time to time, any Beneficiary designations previously made. Such revocations and/or changes shall be made by executing and filing with the Plan Administrator a written instrument in such form as may be prescribed by the Plan Administrator for that purpose. If a Participant names a trust as Beneficiary, a change in the identity of the trustees or in the instrument governing such trust shall not be deemed a change in Beneficiary. (b) No designation, revocation, or change of Beneficiaries shall be valid and effective unless and until filed with the Plan Administrator. (c) A Participant who does not establish to the satisfaction of the Plan Administrator that he has no Spouse may not designate someone other than his Spouse to be his Beneficiary unless: (1) (A) such Spouse (or the Spouse's legal guardian if the Spouse is legally incompetent) executes a written instrument whereby such Spouse consents not to receive such benefit and consents either: -40- (i) to the specific Beneficiary or Beneficiaries designated by the Participant; or (ii) to the Participant's right to designate any Beneficiary without further consent by the Spouse; (B) such instrument acknowledges the effect of the election to which the Spouse's consent is being given; and (C) such instrument is witnessed by a Plan representative or notary public; or (2) the Participant: (A) establishes to the satisfaction of the Plan Administrator that his Spouse cannot be located; or (B) furnishes a court order to the Plan Administrator establishing that the Participant is legally separated or has been abandoned (within the meaning of local law), unless a qualified domestic relations order (as defined in Section 414(p) of the Code) pertaining to such Participant provides that the Spouse's consent must be obtained; or (3) the Spouse has previously given consent in accordance with this Subsection and consented to the Participant's right to designate any Beneficiary without further consent by the Spouse. The consent of a Spouse in accordance with this Subsection (c) shall not be effective with respect to other spouses of the Participant prior to the Participant's Annuity Starting Date, and an election to which Paragraph (2) of this Subsection (c) applies shall become -41- void if the circumstances causing the consent of the Spouse not to be required no longer exist prior to the Participant's Annuity Starting Date. (d) If a Participant has no Beneficiary under Subsection (a) of this Section, or if the Participant's Beneficiary(ies) predecease the Participant, or if the Beneficiary(ies) cannot be located by the Plan Administrator, the interest of the deceased Participant shall be paid in the following order of priority: first, to the Participant's children, if any; and second, to the Participant's estate. 6.11 Treatment of Terminated Vested Participant (a) In the case of a Participant who has a Separation from Service (other than by reason of retirement, death, or Total Disability) and who has a nonforfeitable interest in his Account which is $5,000 ($3,500 prior to January 1, 1998) or less, the nonforfeitable interest of such Participant, valued in accordance with Article IV, shall be paid to such Participant in a single lump sum as soon as practicable following 60 days after his Separation from Service. (b) (1) In case of a Participant who has a Separation from Service (other than by reason of retirement under Article VI, death, or Total Disability) and who has a nonforfeitable interest in his Account which is more than $5,000 ($3,500 prior to January 1, 1998), the nonforfeitable interest of such Participant, valued in accordance with Article IV, shall be paid to such Participant as soon as practicable following the Valuation Date coincident with or next following his Separation from Service, provided the Participant submits his written consent to the distribution not more than 90 days prior to the Annuity Starting Date. -42- A Participant may elect in writing (not more than 90 days prior to the Annuity Starting Date) to have his nonforfeitable interest paid to him any time after his Separation from Service. Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the latest of the close of the Plan Year in which: (A) the Participant attains age 65; (B) occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (C) the Participant terminates service with the Participating Companies and Affiliated Companies. Notwithstanding the foregoing, the failure of a Participant to consent to a distribution while a benefit is immediately distributable shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section. (2) The Plan Administrator shall notify a Participant that he has the right to defer distribution until the earlier of what would have been his Normal Retirement date or his death, prior to obtaining his written consent. Such notice shall be furnished not less than 30 days nor more than 90 days prior to the Annuity Starting Date that occurs prior to what would have been the Participant's Normal Retirement Age, or his death if earlier. 6.12 Direct Rollover. (a) Effective January 1, 1993, notwithstanding any provisions of the Plan to the contrary, a Participant, Spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, may elect pursuant to the procedures established by the Plan Administrator not less than 30 days prior to the date of the -43- distribution to have all or a portion, if applicable, of an "eligible rollover distribution" within the meaning of Code Section 402(c)(4), paid directly to (1) an individual retirement account described in Code Section 408(a); (2) an individual retirement annuity described in Code Section 408(b); (3) an annuity plan described in Code Section 403(a); or (4) a qualified trust described in Code Section 401(a) that accepts such "eligible rollover distribution." However, in the case of an "eligible rollover distribution" to a Spouse, payment may only be made to an individual retirement account or individual retirement annuity. (b) A distribution to which this Section 6.12 applies, may commence less than 30 days after the notice required under section 1.411(a)-11(c) of Code Regulation is given, provided that (1) the Plan Administrator clearly informs the Participant that he has the right to a period of a least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution. (2) the Participant, after receiving the notice, affirmatively elects a distribution. -44- ARTICLE VII - WITHDRAWALS 7.1 Non-Hardship In-Service Withdrawals. The following withdrawals shall be governed by the provisions of Sections 7.3 through 7.7 of the Plan: (a) A Participant who has a Voluntary Savings Account may withdraw such subaccount by submitting a written request to the Plan Administrator specifying the amount to be withdrawn 15 days before the date such withdrawal will be made. (b) A Participant may withdraw any portion of his vested Account balance upon his attainment of Age 59-1/2. (c) A Participant may withdraw of any portion of his Rollover Contribution Account. 7.2 Hardship Withdrawals Subject to Code Section 401(k). (a) A Participant may apply in writing to the Plan Administrator for a hardship withdrawal from his Matching Contribution Account if his vested percentage is 100%, Salary Reduction Contribution Account or Rollover Contribution Account at any time. The withdrawal must satisfy the criteria set forth below, and may be approved or disapproved at the discretion of the Plan Administrator. Hardship withdrawals from a Participant's Salary Reduction Contribution Account are not permitted from income on a Participant's Salary Reduction Contributions, except to the extent of earnings on or before December 31, 1988, nor are such withdrawals permitted to include Employer Contributions which were treated as pre-tax contributions as a result of the application of the special nondiscrimination requirements under rules prescribed by the Secretary of the Treasury for employer contributions that are used to -45- meet the vesting and withdrawal restrictions for Salary Reduction Contributions. The amount withdrawn shall be governed by the provisions of Sections 7.3 through 7.7. (b) A withdrawal under this Section shall be permitted only if the Plan Administrator finds that: (1) it is made on account of immediate and heavy financial need (as defined in Subsection (c) of this Section) of the Participant; and (2) it is necessary (as defined in Subsection (d) of this Section) to satisfy such immediate and heavy financial need. (c) A Participant shall be deemed to have an immediate and heavy financial need if the Participant requests distribution on account of: (1) medical expenses described in Section 213(d) of the Code and incurred by the Participant, his Spouse, or any of the Participant's dependents (as defined in Section 152 of the Code); (2) costs directly related to the purchase (excluding mortgage payments) of a principal residence of the Participant; (3) the payment of tuition, related expenses and room and board for the next 12-months of post-secondary education for the Participant, his Spouse, children, or dependents; (4) payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of his principal residence; or (5) such other circumstances or events as may be prescribed by the Secretary of the Treasury or his delegate. -46- (d) A withdrawal shall be deemed to be necessary to satisfy an immediate and heavy financial need if: (1) the amount of the withdrawal does not exceed the amount of the Participant's immediate and heavy financial need and may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from such withdrawal; (2) the Participant has obtained all currently permissible distributions (other than hardship distributions) and non-taxable loans, if any, under this and all other plans maintained by the Participating Companies and all Affiliated Companies; and (3) the Participant is not permitted to make Salary Reduction Contributions or elective contributions and employee contribution deferrals (other than mandatory contributions under a defined benefit plan) under any plan maintained by the Participating Company or any Affiliated Company for a period of 12 months commencing on the date of his receipt of the withdrawal; and (4) in the calendar year next following the calendar year of a withdrawal under this Section by a Participant, the Participant is not permitted to make Salary Reduction Contributions under this Plan and elective deferrals under any other qualified retirement plan maintained by the Participating Company or any Affiliated Company in excess of: (A) the dollar amount described in Subsection (c) of Section 3.1 for such year, minus (B) the total Salary Reduction Contributions under this Plan and elective deferrals under such other plan made by the Participant during the calendar year of the withdrawal. -47- (e) If a Participant withdraws any amount from his Salary Reduction Account, or withdraws any elective deferrals under any other qualified retirement plan maintained by the Participating Company or any Affiliated Company, which other plan conditions such withdrawal upon the Participant's being subject to rules similar to those stated in this Paragraph (e), such Participant: (1) may not make Salary Reduction Contributions under this Plan for a period of 12-months commencing on the date of his receipt of the withdrawal; and (2) in the calendar year next following the calendar year of such withdrawal, may not make Salary Reduction Contributions in excess of: (A) the dollar amount described in Subsection (c) of Section 3.1 for such year, minus (B) the total Salary Reduction Contributions under this Plan and elective deferrals under any other qualified plan made by the Participant during the calendar year of the withdrawal. 7.3 Amount and Payment of Withdrawals. The amount of any withdrawal will be determined on the basis of the value of the Participant's Account as of the Valuation Date coincident with or immediately preceding the date of the withdrawal. The minimum amount that may be withdrawn under Section 7.2 is five hundred ($500) dollars. 7.4 Withdrawals Not Subject to Replacement. A Participant may not repay any portion of his Account withdrawn under this Plan. 7.5 Investment Medium to be Charged with Withdrawal. Unless otherwise elected by the Participant, the withdrawal will be made out of the Participant's interest in the various Investment Media in proportion to the Participant's share in such Investment Media. -48- 7.6 Order of Withdrawals. Withdrawals from the Plan shall be charged against the Participant's Account in the following order: first from the Voluntary Savings Account, if any; second from the Rollover Contribution Account, if any; third from the Matching Contribution Account, if any; and fourth from the Salary Reduction Contribution Account, if any. The nonforfeitable balance in each Account must be reduced to zero before the Participant may make a withdrawal from the next Account in sequence. 7.7 Timing of Withdrawals. A Participant may make only two hardship withdrawals, pursuant to Section 7.2, in any Plan Year or 12-month period and only one withdrawal in any Plan Year or 12-month period pursuant to Sections 7.1(a), (b) and (c). -49- ARTICLE VIII - LOANS TO PARTICIPANTS 8.1 Loan Application. Each Participant shall be eligible to make an application for a loan from the Plan. All applications shall be made to the Plan Administrator on forms which it prescribes, and the Plan Administrator shall rule upon such applications in a uniform and nondiscriminatory manner in accordance with the rules and guidelines set forth in this Article. 8.2 Loan Approval. No more than one application for a loan shall be approved per Participant during any Plan Year. In no event shall a Participant be permitted to have more than one loan from this Plan outstanding at any time. 8.3 Amount of Loan. (a) Subject to the limits on loan amounts in Subsections (b) and (c) below, a Participant may borrow from the subaccounts in his Account in the following order: (1) the Voluntary Savings Account, (2) the Salary Reduction Contribution Account, (3) the Rollover Contribution Account, (4) the Matching Contribution Account. (b) The minimum loan amount shall be $1,000.00. (c) The total amount of a Participant's outstanding loans under this Plan and all other plans qualified under Section 401(a) of the Code which are sponsored by the Participating Company or any Affiliated Company -50- shall not exceed the lesser of (1) $50,000, reduced by the excess of the highest outstanding loan balance during the 12-months before the new loan is made over the outstanding loan balance on the date of the new loan, or (2) fifty percent (50%) of the value of the Participant's vested interest in the subaccounts listed in (a). 8.4 Terms of Loan. (a) Each loan shall be evidenced by the Participant's execution of a personal installment note on such form as shall be supplied by the Plan Administrator. Each such note shall specify the period of repayment, which shall be no longer than 60 months from the date on which the loan is distributed, except that in the event of a purchase of a primary residence, the period may be up to 25 years. Each note shall also specify the interest rate, which shall be equal to (1) the rate a banking institution charges its most creditworthy customers as of the first day of the calendar month in which the completed loan application is received by the Plan Administrator, plus (2) one percentage point. All loans from the Plan shall be nonrenewable. (b) All loans shall be repaid in equal installments through payroll deductions or in such other manner as the Plan Administrator may determine. A Participant may repay the outstanding balance of any loan in one lump sum at any time by notifying the Plan Administrator of his or her intent to do so and by forwarding to the Plan Administrator payment in full of the then outstanding balance, plus interest accrued to the date of payment. The amount of principal and interest repaid by a Participant shall be credited to a Participant's Account as each repayment is made. (c) In the event of (1) the death of a Participant, -51- (2) the termination of the Participant's employment with the Participating Company and its affiliates for any reason, or (3) the discontinuance of a Participant's Compensation before a loan is repaid in full, the unpaid balance thereof, with interest due thereon, shall become due and payable. The Trustee shall satisfy the indebtedness from the amount of the Participant's vested interest in his Account before making any payments otherwise due hereunder to the Participant or his Beneficiary. 8.5 Loan Fees. (a) The Administrator shall assess a one-time loan origination fee, payable in cash at the time the funds are distributed or charged against the Account of a Participant who makes a loan from the Plan. (b) The amount of the loan origination fee shall be set by the Plan Administrator as of the beginning of each Plan Year, and shall remain in effect throughout such Plan Year. Fees shall be specified in flat dollar amounts, and shall not vary according to the amount of the loan. 8.6 Suspension of Repayments. Loan repayments will be suspended under this Plan as permitted under Section 414(u)(4) of the Code. 8.7 Additional Rules. The Plan Administrator may establish additional rules relating to Participant loans under the Plan, which rules shall be applied on a uniform and nondiscriminatory basis. -52- ARTICLE IX - PLAN ADMINISTRATION 9.1 Plan Administrator. The Company shall be the Plan Administrator for purposes of ERISA and for purposes of satisfying any requirement imposed now or in the future through Federal or state legislation to report and disclose to any Federal or state department or agency, or to any Participant, Spouse or Beneficiary, any information respecting the establishment or maintenance of this Plan. 9.2 Appointment. The Company shall appoint an Administrator which shall be an individual or a committee of three (3) or more persons to perform the duties as Plan Administrator. All references to Plan Administrator in this Plan also include Administrator. Any individual, including but not limited to Employees and Participants, may be appointed to be an Administrator. 9.3 Term and Compensation. The Administrator as appointed in Section 9.2 shall serve until his resignation or dismissal by the Company. Vacancies shall be filled in the same manner as the original appointments. To resign, the Administrator shall give written notice which shall be effective on the earlier of the appointment of his successor or the passing of thirty (30) days after such notice is mailed or personally delivered to the Company. The Administrator shall serve as such without compensation. 9.4 Claims Review. (a) The Plan Administrator shall interpret this Plan and shall make all determinations with regard to the administration and application of this Plan. All such determinations shall be final, conclusive and binding except to the extent that they are appealed with regard to benefit claims under the following procedure. In the event that the claim of any person to all or any part of any payment or benefit under this Plan shall be denied, the Plan Administrator shall provide to the claimant, within -53- sixty (60) days after receipt of such claim, a written notice setting forth, in a manner calculated to be understood by the claimant: (1) the specific reason or reasons for the denial; (2) specific references to the pertinent Plan provision or provisions on which the denial is based; (3) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation as to why such material or information is necessary; and (4) an explanation of the Plan's claims procedure. (b) Within sixty (60) days after receipt of the material described in Section 9.4(a), the claimant or his duly authorized representative shall have a reasonable opportunity to appeal the claim denial to the Plan Administrator for a full and fair review. The claimant or his duly authorized representative may: (1) request a review upon written notice to the Plan Administrator; (2) review pertinent documents; and (3) submit issues and comments in writing. (c) Not later than sixty (60) days after receipt of a request for review, a decision by the Plan Administrator shall be made unless special circumstances require an extension of time for processing, in which event a decision shall be rendered as soon as possible, but in no event later than one hundred twenty (120) days after such receipt. The Plan -54- Administrator shall notify the Participant in writing of any such extension of time before such extension begins. (d) The Plan Administrator's decision on review shall be written and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, with specific references to the pertinent Plan provision or provisions on which the decision is based; provided, however, if a written decision is not provided within the period described in Section 9.4(c), the claim shall be deemed to have been denied. 9.5 Plan Administrator Actions. Except as otherwise specifically provided in the Plan, every decision and action of a committee acting as Plan Administrator shall be by a majority vote of the committee or without a formal meeting by the written consent of a majority of the members of the committee then in office. The committee shall select a Secretary and any other officers deemed necessary who shall be authorized to bind the Plan Administrator by their signatures, and shall adopt rules governing its procedures consistent with the terms of this Plan. The committee shall keep a permanent record of its meetings and actions. 9.6 Investment Manager. All contributions so received together with the income therefrom shall be managed, invested and reinvested by the Trustee, subject, however, to the right of the Company to appoint and employ an Investment Manager or Managers, to manage and/or invest and reinvest the Trust Fund, or any part thereof, in which event the Investment Manager shall be certified as such to the Trustee by the Company and the Trustee shall not be liable for the acts or omissions of such Investment Manager or Managers or be under any obligation to manage or invest the assets of the Trust Fund which are subject to management by such Investment Manager or Managers. An authorized officer of any such Investment Manager shall certify in writing to the Trustee the names of all persons who shall act on behalf of the Investment Manager with respect to the Trust Fund, and the Trustee may rely thereon in its dealings with such Investment Manager. Where -55- appropriate, references in this Plan to Trustee may be interpreted to include any Investment Manager appointed under this Section. 9.7 Benefit Payment Directions. The Plan Administrator shall direct the Trustee or shall cause the Trustee to be directed in writing to make benefit payments from the Trust Fund to Participants, Spouses or Beneficiaries who qualify for such payments under the Plan. Such written order to the Trustee shall specify the name of each such recipient, his address, his Social Security number, and the amount and frequency of such payments. 9.8 Nondiscrimination. The Plan Administrator shall act and shall direct the Trustee to act or cause such action with respect to any Plan benefits or any other matter under the powers of the Plan Administrator under this Plan in a uniform and nondiscriminatory manner toward all Participants and Employees under substantially similar sets of facts and shall not permit discrimination in favor of any officers, owners or Highly Compensated Employees of the Participating Companies. 9.9 Advisors. The Plan Administrator may employ such counsel (who may be counsel for the Company), consultants, accountants, and other individuals as it shall deem advisable. All costs and expenses of the Plan Administrator and the fees of legal counsel, consultants, accounts, and other agents shall be paid by the Participating Companies, or the Participating Companies shall cause such costs and expenses to be paid by the Trustee out of the Trust Fund as provided in Section 10.6. 9.10 Records and Reports. The Plan Administrator shall keep all records relating to Participants (including former Participants) and obtain annual reports from the Trustee and any Investment Manager and collect from the Trustee and any such Investment Manager and other sources any such records as are necessary for proper operation of the Plan. The Plan Administrator shall make an annual report of the assets and liabilities of the Plan and a brief description of the Plan's operation for the immediately preceding Plan Year to the Participating Companies and shall make such report and any other such records available to the Participating Companies, or any -56- Participant, Spouse or Beneficiary for examination during business hours except that a Participant, Spouse or Beneficiary shall examine only such records as pertain exclusively to the examining Participant, Spouse or Beneficiary and the Plan and Trust Agreement as currently in effect or hereafter amended. 9.11 Indemnification. The Company shall indemnify and hold harmless the Plan Administrator, any member thereof and any Employee who may act on behalf of the Company in the administration of this Plan from and against any liability, loss, cost or expense (including reasonable attorneys' fees) incurred at any time as a result of or in connection with any claims, demands, actions or causes of action of any Participants, any person claiming through or under any of them, or any other person, party or authority claiming to have an interest in this Plan or Trust Fund or standing to act for any persons or groups having an interest in this Plan or Trust Fund, for or on account of, any of the acts or omissions (or alleged acts or omissions) of the Plan Administrator, any member thereof or any such employee, except to the extent resulting from such person's willful misconduct. 9.12 Power and Duties of the Plan Administrator. The Plan Administrator shall have absolute discretionary authority to interpret this Plan and make determinations as to eligibility for benefits, or construe any other terms of the Plan. Benefits under this Plan shall be paid only if the Plan Administrator decides in his discretion the claimant is entitled to them. The Plan Administrator shall supervise the administration and enforcement of the Plan according to the terms and provisions of this Plan and shall have all powers necessary to accomplish these purposes, including, without limitation and in addition to any other powers described in this Article 9, the right, power, authority and duty: (a) to make rules, regulations and bylaws for the administration of the Plan which are not inconsistent with the terms and provisions of this Plan, provided such rules, regulations and bylaws are evidenced in writing and copies thereof are delivered to the Trustee and to the Company; -57- (b) to construe all terms, provisions, conditions and limitations of the Plan (in all cases, the construction necessary for the Plan to qualify under the applicable provisions of the Code shall control); (c) to correct any defect or supply any omission or reconcile any inconsistency that may appear in the Plan, in such manner and to such extent as it shall deem expedient to carry the Plan into effect for the greatest benefit of all interested parties; (d) to determine all questions relating to eligibility; (e) to determine the amount, manner and time of payment of any Plan benefits and to prescribe procedures to be followed by distributee in obtaining benefits; (f) to prepare, file and distribute, in such manner as the Plan Administrator determines to be appropriate, such information and material as is required by the reporting and disclosure requirements of ERISA; (g) to make a determination as to the right of any person to a benefit under the Plan; I (h) to receive and review reports from the Trustee and any Investment Manager as to the financial condition of the Trust Fund including its receipts and disbursements; and (i) to delegate, in its sole discretion, any of its powers or duties to subcommittees, task forces or study groups at such times in such manner as it shall deem expedient to administer and enforce the Plan in a uniform and non-discriminatory manner for the benefit of all interested parties. -58- 9.13 Participating Company to Supply Information. The Participating Companies shall supply full and timely information to the Plan Administrator relating to the Compensation of all Participants, their ages, their retirement, death or other cause for termination of employment and such other pertinent facts as the Plan Administrator may require. The Participating Companies also shall supply such information to the Trustee and every Investment Manager as necessary for the Trustee and each such Investment Manager to carry out its duties. When making a determination in connection with the Plan, the Plan Administrator shall be entitled to rely upon information furnished by the Participating Companies; provided the Plan Administrator shall resolve any factual dispute under this Plan by giving weight to all information available to him. 9.14 Self-Interest. Neither the Plan Administrator nor any member of the committee, if any, shall have any right to vote or decide upon any matter related directly or indirectly to him or any right of his to claim any benefit under the Plan. In any case in which a committee member is so disqualified to act, and the remaining members cannot agree, the Participating Company shall appoint a temporary substitute member to exercise all the powers of the disqualified member concerning the matter in which he is disqualified. -59- ARTICLE X - THE FUND 10.1 Designation of Trustee. The Company, by appropriate resolution of its Board of Directors, shall name and designate a Trustee and shall enter into a Trust Agreement. The Company shall have the power, by appropriate resolution of its Board of Directors, to amend the Trust Agreement, remove the Trustee, and designate a successor Trustee, as provided in the Trust Agreement. All of the assets of the Plan shall be held by the Trustee for use in accordance with the Plan. 10.2 Exclusive Benefit. Prior to the satisfaction of all liabilities under the Plan in the event of termination of the Plan, no part of the corpus or income of the Fund shall be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries or for administrative expenses not otherwise paid by the Participating Companies, except as expressly provided in this Plan and in the Trust Agreement. 10.3 No Interest in Fund. No person shall have any interest in or right to any part of the assets or income of the Fund, except to the extent expressly provided in this Plan and in the Trust Agreement. 10.4 Trustee. The Trustee shall be the named fiduciary with respect to management and control of Plan assets held by it and shall have exclusive and sole responsibility for the custody and investment thereof in accordance with the Trust Agreement. 10.5 Investments. (a) The Trustee shall invest Salary Reduction Contribution Accounts, Voluntary Savings Accounts, Matching Contribution Accounts and Rollover Contribution Accounts paid to it and income thereon in such Investment Media as each Participant may select from among the Investment Media established by the Plan Administrator, subject to the -60- provisions of Section 10.5(c). Such investments acquired in the manner prescribed by the Plan shall be held by or for the Trustee. (b) A Participant shall select one or more of the Investment Media in which his Account shall be invested, except as provided in Subsection (c), and the percentage thereof (in multiples of 1%) that shall be invested in each Investment Medium selected, in accordance with the rules prescribed by the Plan Administrator. (c) Matching Contributions shall be invested in Company Stock until such time as the Participant may transfer all or portion of Company Stock to one or more Investment Media in accordance with rules prescribed by the Plan Administrator. (d) Except as provided in Subsection (c), a Participant may transfer, effective as of the following Valuation Date, such portion of the value of his interest in any Investment Medium to another Investment Medium. A Participant may change his selection of the Investment Media in which subsequent contributions to his Accounts shall be invested, effective as of the following Valuation Date. Such investment changes shall be made via a toll-free number or internet website provided to Participants by the Plan Administrator for such purpose. (e) The amounts contributed by all Participants to each Investment Medium shall be commingled for investment purposes. 10.6 Fund. The contributions deposited by the Participating Companies in the Fund shall constitute a fund held for the benefit of Participants and their eligible Beneficiaries under and in accordance with this Plan. No part of the principal or income of the Fund shall be used for, or diverted to, purposes other than for the exclusive benefit of such Participants and their eligible Beneficiaries (including necessary administrative costs); provided, that in the case of a contribution made by the Participating Company as a mistake of fact, or for which a tax deduction is -61- disallowed, in whole or in part, by the Internal Revenue Service, or which is conditioned upon the initial qualification of the Plan under Section 401(a) of the Code and such initial qualification cannot be obtained, the Participating Company shall be entitled to a refund of said contributions, subject to investment loss, but not investment gain. Any such refund of contributions described in this Section must be made within one year after payment of a contribution made as a mistake of fact, or within one year after disallowance of the tax deduction, to the extent of such disallowance, or within one year of the date on which the initial qualification of the Plan is denied by the Internal Revenue Service, as the case may be. 10.7 Qualifying Employer Securities. The Trustee shall be empowered to acquire and hold Company Stock in an amount sufficient to invest any Matching Contributions made to the Plan pursuant to Section 3.5. -62- ARTICLE XI - AMENDMENT OR TERMINATION OF THE PLAN 11.1 Power of Amendment and Termination. (a) It is the intention of each Participating Company that this Plan will be permanent. However, each Participating Company reserves the right to terminate its participation in this Plan at any time by action of its board of directors or other governing body. Furthermore, the Company reserves the power to amend or terminate the Plan at any time by action of the Board of Directors. (b) Each amendment to the Plan shall be binding on each Participating Company. Any amendment or termination of the Plan shall become effective as of the date designated by the Board of Directors. Except as expressly provided elsewhere in the Plan, prior to the satisfaction of all liabilities with respect to the benefits provided under this Plan, no amendment or termination shall cause any part of the monies contributed hereunder to revert to the Participating Companies or to be diverted to any purpose other than for the exclusive benefit of Participants and their beneficiaries. Upon termination or partial termination of the Plan, or upon complete discontinuance of contributions, the rights of all affected persons to benefits accrued to the date of such termination shall be nonforfeitable. Upon termination of the Plan, Accounts shall be distributed in accordance with applicable law. 11.2 Merger. The Plan shall not be merged with or consolidated with, nor shall its assets be transferred to, any other qualified retirement plan unless each Participant would receive a benefit after such merger, consolidation, or transfer (assuming the Plan then terminated) which is of actuarial value equal to or greater than the benefit he would have received from his Account if the Plan had been terminated on the day before such merger, consolidation, or transfer. -63- ARTICLE XII - TOP-HEAVY PROVISIONS 12.1 General. The following provisions shall apply automatically to the Plan and shall supersede any contrary provisions for each Plan Year in which the Plan is a Top-Heavy Plan (as defined below). It is intended that this Article shall be construed in accordance with the provisions of Section 416 of the Code. 12.2 Definitions. The following definitions shall supplement those set forth in Article II of the Plan: (a) "Aggregation Group" means this Plan and each other qualified retirement plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of a Participating Company or an Affiliated Company: (1) in which a Key Employee is a participant; or (2) which enables any plan in which a Key Employee participates to meet the requirements of Sections 401(a)(4) and 410 of the Code; (3) or without the inclusion of which, the plans in the Aggregation Group would be Top-Heavy Plans, but, with the inclusion of which, the plans in the Aggregation Group are not Top-Heavy Plans and, taken together, meet the requirements of Sections 401(a)(4) and 410 of the Code. (b) "Determination Date" means, for any Plan Year, the last day of the preceding Plan Year, except that for the first Plan Year it means the last day thereof. (c) "Key Employee" means, with respect to any Plan Year: -64- (1) any Employee or former Employee who at any time during the 60-month period ending on the Determination Date was: (A) an officer of a Participating Company having Compensation for a Plan Year during such period greater than fifty percent (50%) of the amount in effect under Section 415(b)(1)(A) of the Code for the calendar year in which such Plan Year ends; provided, that no more than 50 Employees (or, if less, the greater of three Employees or ten percent (10%) of the greatest number of Employees, including leased employees within the meaning of Section 414(n) of the Code, employed by all Participating Companies and all Affiliated Companies during such 60-month period shall be treated as officers; or (B) one of the ten Employees having Compensation greater than the amount described in Section 415(c)(1)(A) of the Code and owning (or considered as owning, within the meaning of Section 318 of the Code) the largest interests in any Participating Company or Affiliated Company, provided that such interest exceeds one-half of one percent (0.5%) of the total share ownership of the Participating Company or Affiliated Company, the total number of individuals described in this Subparagraph (B) being limited to ten for the entire 60-month period; or (C) a five-percent (5%) owner of a Participating Company, or (D) a one-percent (1%) owner of a Participating Company having Compensation in excess of $150,000; or -65- (2) a beneficiary of an individual described in Paragraph (1) of this Subsection. Determinations under this Subsection shall be made in accordance with Section 416(i) of the Code. (d) "Key Employee Ratio" means, for any Determination Date, the ratio of the amount described in Paragraph (1) of this Subsection to the amount described in Paragraph (2) of this Subsection, after deducting from each such amount any portion thereof described in Paragraph (3) of this Subsection, where: (1) the amount described in this Paragraph is the sum of: (A) the present value of all accrued benefits of Key Employees under all qualified defined benefit plans included in the Aggregation Group: (B) the balances in all of the accounts of Key Employees under all qualified defined contribution plans included in the Aggregation Group: and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any Key Employee during the period of five Plan Years ending on the Determination Date, except any benefit paid on account of death to the extent it exceeds the accrued benefits or account balances immediately prior to death; (2) the amount described in this Paragraph is the sum of: (A) the present value of all accrued benefits of all participants under all qualified defined benefit plans included in the Aggregation Group; -66- (B) the balances in all of the accounts of all participants under all qualified defined contribution plans included in the Aggregation Group; and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any participant during the period of five Plan Years ending on the Determination Date; and (3) the amount described in this Paragraph is the sum of: (A) all rollover contributions (or fund to fund transfers) to the Plan by an Employee from a plan sponsored by an employer which is not a Participating Company or an Affiliated Company; (B) any amount that is included in Paragraphs (1) and (2) of this Subsection for a person who is a Non-Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year; and (C) any amount that is included in Paragraphs (1) and (2) of this Subsection for a person who has not performed any services for any Participating Company during the five-year period ending on the Determination Date. The present value of accrued benefits under any defined benefit plan shall be determined under the method used for accrual purposes for all plans maintained by all Participating Companies and Affiliated Companies if a single method is used by all such plans, or, otherwise, the slowest accrual method permitted under Section 411(b)(1)(C) of the Code. (e) "Non-Key Employee" means, for any Plan Year: -67- (1) an Employee or former Employee who is not a Key Employee with respect to such Plan Year; or (2) a beneficiary of an individual described in Paragraph of this Subsection. (f) "Super Top-Heavy Plan" means, for any Plan Year, each plan in the Aggregation Group for such Plan Year if, as of the applicable Determination Date, the Key Employee Ratio exceeds ninety percent (90%). (g) "Top-Heavy Compensation" means, for any Participant for any Plan Year, the average of his annual Compensation over the period of five consecutive Plan Years (or, if shorter, the longest period of consecutive Plan Years during which the Participant was in the employ of any Participating Company) yielding the highest average, disregarding Compensation for Plan Years after the close of the last Plan Year in which the Plan was a Top-Heavy Plan. Compensation shall mean Compensation as defined in Section 3.8. (h) "Top-Heavy Plan" means, for any Plan Year, each plan in the Aggregation Group for such Plan Year if, as of the applicable Determination Date, the Key Employee Ratio exceeds sixty percent (60%). (i) "Year of Top-Heavy Service" means, for any Participant, a Plan Year in which he completes 1,000 or more Hours of Service, excluding Plan Years in which the Plan is not a Top-Heavy Plan. 12.3 Minimum Contribution for Non-Key Employees. -68- (a) In each Plan Year in which the Plan is a Top-Heavy Plan, each Eligible Employee who is a Non-Key Employee (except an Eligible Employee who is a Non-Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year) and who is an Employee on the last day of such Plan Year will receive a total minimum Participating Company or Affiliated Company contribution (including forfeitures) under all plans described in Paragraphs (a)(1) and (a)(2) of Section 12.2 of not less than three percent (3%) of the Eligible Employee's Compensation for the Plan Year. (b) The percentage set forth in Subsection (a) shall be reduced to the percentage at which contributions, including forfeitures, are made (or are required to be made) for a Plan Year for the Key Employee for whom such percentage is the highest for that Plan Year. This percentage shall be determined for each Key Employee by dividing the contribution for such Key Employee by his Compensation for the Plan Year. All defined contribution plans required to be included in an Aggregation Group shall be treated as one plan for the purpose of this Section; however, this Section shall not apply to any plan which is required to be included in the Aggregation Group if such plan enables a defined benefit plan in the group to meet the requirements of Section 401(a)(4) or Section 410 of the Code. (c) If a Non-Key Employee described in Subsection (a) participates in both a defined benefit plan and a defined contribution plan described in Paragraphs (a)(1) and (a)(2) of Section 12.2, the Participating Company is not required to provide such Employee with both the minimum benefit under the defined benefit plan and the minimum contribution. In such event, the Non-Key Employee shall receive the minimum benefit under the defined benefit plan. -69- 12.4 Social Security. The Plan, for each Plan Year in which it is a Top Heavy Plan, must meet the requirements of this Article without regard to any Social Security or similar contributions or benefits. 12.5 Adjustment to Maximum Benefit Limitation. (a) For each Plan Year beginning prior to January 1, 2000, in which the Plan is a Super Top-Heavy Plan, the 1.25 factor in the defined benefit and defined contribution fractions described in Subsection (c) of Section 3.8 shall be reduced to 1.0. The adjustment described in this Subsection shall not apply to a Participant during any period in which the Participant earns no additional accrued benefit under any defined benefit plan and has no employer contributions, forfeitures, or voluntary nondeductible contributions allocated to his accounts under any defined contribution plan. (b) If, in any Plan Year in which the Plan is a Top-Heavy Plan but not a Super Top Heavy Plan, the Aggregation Group includes a defined benefit plan, the minimum Company contribution described in Section 12.3(a) for each Non-Key Employee who is not covered under a defined benefit plan shall be increased to four percent (4%), and the minimum Company contribution described in Section 12.3(c) for each Non-Key Employee who is covered under a defined benefit plan (but who does not have a minimum benefit under the defined benefit plan) equal to the lesser of: (1) three percent (3%) of his Top-Heavy Compensation multiplied by his Years of Top-Heavy Service, or (2) thirty percent (30%) of his Top-Heavy Compensation) -70- shall be increased to seven and one-half percent (7-1/2%). -71- ARTICLE XIII - GENERAL PROVISIONS 13.1 No Employment Rights. Neither the action of the Company in establishing the Plan, nor of any Participating Company in adopting the Plan, nor any provisions of the Plan, nor any action taken by the Company, any Participating Company or the Plan Administrator shall be construed as giving to any Employee the right to be retained in the employ of the Company or any Participating Company, or any right to payment except to the extent of the benefits provided under the terms of the Plan, and which are to be paid from the Fund. 13.2 Governing Law. Except to the extent superseded by ERISA, all questions pertaining to the validity, construction, and operation of the Plan shall be determined in accordance with the laws of the Commonwealth of Pennsylvania. 13.3 No Interest in Fund. No person shall have any interest in, or right to, any part of the principal or income of the Fund, except as and to the extent expressly provided in this Plan and in the Trust Agreement. 13.4 Spendthrift Clause. No benefit payable at any time under this Plan and no interest or expectancy herein shall be anticipated, assigned, or alienated by any Participant or Beneficiary, or subject to attachment, garnishment, levy, execution, or other legal or equitable process, except for any benefit payable pursuant to a qualified domestic relations order as defined in Section 414(p) of the Code. Except as provided above, any attempt to alienate or assign a benefit hereunder, whether currently or hereafter payable, shall be void. 13.5 Incapacity. If the Plan Administrator deems any Participant who is entitled to receive payments hereunder incapable of receiving or disbursing the same by reason of Age, illness, infirmity, or incapacity of any kind, the Plan Administrator may direct the Trustee to apply such payments directly for the comfort, support, and maintenance of such Participant, or to pay the same to any responsible person caring for the Participant who is determined by the Plan Administrator to be qualified to receive and disburse such payments for the Participant's benefit; and the receipt by -72- such person shall be a complete acquittance for the payment of the benefit. Payments pursuant to this Section shall be complete discharge to the extent thereof of any and all liability of the Participating Companies, the Plan Administrator, the Trustee, and the Fund. IN WITNESS WHEREOF, Radian Group Inc. has caused this amendment and restatement of the Plan to be executed by its duly authorized party on this ______________ day of __________________, 2002. [ SEAL] RADIAN GROUP INC. Attest:______________________________ By:________________________________ Its:_______________________________ -73- SCHEDULE A PARTICIPATING COMPANIES Radian Group Inc. RadianExpress.com Inc. Radian Guaranty Inc. Radian Insurance Inc. Radian Services L.L.C. -74- EX-10.11 12 w56746ex10-11.txt RADIAN 1992 STOCK OPTION PLAN EXHIBIT 10.11 RADIAN GROUP INC. 1992 STOCK OPTION PLAN ------------------------------- ARTICLE I Purposes 1.1 Purposes of Plan. The purpose of this Radian Group Inc. 1992 Stock Option Plan (the "Plan") is to provide incentives to selected Key Employees of the Company and/or its Affiliates who contribute, and are expected to contribute, materially to the success of the Company and its Affiliates, to provide a means of rewarding outstanding performance and to enhance the interest of such Key Employees in the Company's continued success and progress by providing them a proprietary interest in the Company. In addition, this Plan is intended to provide incentives to non-employee members of the Board of Directors to continue to provide services to the Company or its Affiliates. Further, this Plan is designed to enhance the Company's ability to maintain a competitive position in attracting and retaining the qualified key personnel and directors necessary for the continued success and progress of the Company. ARTICLE II Definitions 2.1 Certain terms used herein shall have the meaning below stated, subject to the provisions of Section 7.1. "Affiliate" means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Company, except that when used in connection with an Incentive Stock Option, "Affiliate" means a Subsidiary. "Board" or "Board of Directors" means the Board of Directors of the Company. "Chairman" means the Chairman of the Board of the Company. "Change of Control" shall be deemed to have taken place if (i) any Person (except for the Employee or his family, the Company or any employee benefit plan of the Company or of any Affiliate, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such employee benefit plan), together will all Affiliates and Associates of such Person shall become the Beneficial Owner in the aggregate of 20% or more of the shares of the Company then outstanding and entitled to vote for directors generally, (ii) any Person (except the Employee and his family), together with all Affiliates and Associates of such Person purchases substantially all of the assets of the Company, or (iii) during any twenty-four -1- (24) month period, individuals who at the beginning of such period constituted the Board cease for any reason to constitute a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of at least seventy-five percent (75%) of the directors who were not directors at the beginning of such period was approved by a vote of at least seventy-five percent (75%) of the directors in office at the time of such election or nomination who were directors at the beginning of such period. For purposes of this definition, "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act; "Person" shall mean any individual, firm, corporation, partnership or other entity; and "Beneficial Owner" shall mean: (i) that such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for payment, purchase or exchange; (ii) that such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including without limitation, pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial Owner" of any security under this subsection (ii) as a result of an oral or written agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable successor report); or (iii) where voting securities are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy described in the proviso to subsection (ii) above) or disposing of any voting securities of the Company; provided, however, that nothing in this definition shall cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of any securities acquired through such Person's participation in good faith in a firm commitment underwriting until expiration of forty (40) days after the date of such acquisition. "Code" means the Internal Revenue Code of 1986, as amended. -2- "Committee" means the Stock Option and Compensation Committee appointed by the Board to administer the Plan pursuant to Article VII. "Common Stock" means, subject to the provisions of Section 10.2, the presently authorized common stock of the Company, par value $.001 per share. "Company" means CMAC Investment Corporation. "Disability" means (subject to Section 6.2) a physical or mental impairment of sufficient severity such that an Employee is both eligible for and in receipt of benefits under the long-term disability program maintained by the Company. "Eligible Director" means a person who is an incumbent, non-employee member of the Board, including those who are members of the Committee, at the time the Plan is initially approved by the stockholders or who is elected as a non-employee member of the Board subsequent to that date. "Employee" means an employee (including an officer) of the Company or of an Affiliate except that when used in connection with an Incentive Stock Option, "Employee" means an employee (including an officer) of the Company or of a Subsidiary. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the closing price at which the Common Stock shall have been sold regular way on the New York Stock Exchange on the date as of which such value is being determined or, if no sales occurred on such day, then on the next preceding day on which there were such sales, or, if at any time the Common Stock shall not be listed on the New York Stock Exchange, the fair market value as determined by the Committee on the basis of available prices for such Common Stock or in such manner as may be authorized by applicable regulations under the Code. "Incentive Stock Option" means an option to purchase Common Stock granted by the Company to a Key Employee pursuant to Section 5.1 which is intended to meet the requirements of Section 422 of the Code and which is labeled an Incentive Stock Option. "Key Employee" means an Employee selected to participate in the Plan pursuant to the terms hereof. "1933 Act" means the Securities Act of 1933, as amended. "Non-Statutory Option" means an option to purchase Common Stock, granted by the Company to a Key Employee or an Eligible Director pursuant to Section 4.2 or 5.1, which is not an Incentive Stock Option. "Option" means an Incentive Stock Option or a Non-Statutory Option. -3- "Plan" means the CMAC Investment Corporation 1992 Stock Option Plan, as set forth herein and as amended from time to time. "Stock Appreciation Right" means a right granted by the Company to a Key Employee pursuant to Section 5.4 to earn additional compensation for services rendered based upon the appreciation of the Fair Market Value of Common Stock. "Subsidiary" means a subsidiary or parent corporation, as defined in Sections 424(e) and (f) of the Code, with respect to the Company. ARTICLE III Stockholder Approval; Reservation of Shares 3.1 Stockholder Approval. This Plan, provided that it has been approved by the holders of a majority of the Company's Common Stock entitled to vote, shall become effective upon the date that the Registration Statement relating to an initial public offering by the Company as described in Section 4.2 hereof shall be declared effective by the Securities and Exchange Commission. 3.2 Shares Reserved Under Plan. Subject to adjustment under the provisions of Section 10.2 hereof, the maximum number of shares of Common Stock which may be issued and sold under this Plan is 1,800,000 shares. The maximum number of shares of Common Stock for which any Key Employee may be granted Options under the Plan is limited to 75,000 per year. Such shares may be either authorized and unissued shares or shares issued and thereafter acquired by the Company. Shares issued pursuant to this Plan shall be subject to all applicable provisions of the Certificate of Incorporation and By-Laws of the Company in existence at the time of issuance of such shares and at all times thereafter. If Options (and any related Stock Appreciation Rights) granted under this Plan shall terminate or cease to be exercisable by reason of expiration, surrender for cancellation or otherwise without having been wholly exercised, new Options (and any related Stock Appreciation Rights) may be granted under this Plan covering the number of shares to which such termination or cessation relates. ARTICLE IV Participation in Plan 4.1 General Eligibility to Receive Options and Stock Appreciation Rights. Options and Stock Appreciation Rights under this Plan may be granted to officers and other Key Employees of the Company or an Affiliate. 4.2 Option Grants to Eligible Directors. Notwithstanding any other provision of this Plan (other than Section 3.2 hereof limiting the number of shares issuable hereunder), an Eligible Director shall receive a Non-Statutory Option to purchase 4,500 shares of Common Stock on the date he or she first becomes a member of the Board. Thereafter, upon the completion of each three year period of service on the Board, each Eligible Director will receive -4- an additional Non-Statutory Option to purchase 4,500 shares of Common Stock. Options granted pursuant to this Section 4.2 shall have a per share exercise price equal to the Fair Market Value of a share of Common Stock on the date of grant; provided, however, that with respect to the Options initially granted under this Plan in connection with the Company's initial public offering of Common Stock (the "IPO"), the purchase price per share will be the price per share at which Common Stock is first offered to the public pursuant to the IPO (the "IPO Price"). Options granted pursuant to this Section 4.2 shall become vested and exercisable with respect to one-third of the shares of Common Stock underlying the Option on each anniversary following the date of grant, provided the optionee remains a director of the Company. Options granted pursuant to this Section 4.2 shall be exercisable for ten years after the date of grant, provided that (subject to Section 6.4) the optionee remains a director of the Company. Notwithstanding any other provision of the Plan, this Section 4.2 may not be amended more than once every six months, except for amendments necessary to conform the Plan to changes in the provisions of, or the regulations relating to, the Code. 4.3 Participation Not Guarantee of Employment. Nothing in this Plan or in the instrument evidencing the grant of an Option or Stock Appreciation Right shall in any manner be construed to limit in any way the right of the Company or an Affiliate to terminate a Key Employee's employment at any time, without regard to the effect of such termination on any rights such Key Employee would otherwise have under this Plan, or give any right to such a Key Employee to remain employed by the Company or an Affiliate in any particular position or at any particular rate of compensation. ARTICLE V Options and Stock Appreciation Rights 5.1 Grants of Options. (a) Grant. The Committee may grant Incentive Stock Options and/or Non-Statutory Options to Key Employees. Eligible Directors of the Company may only be granted Non-Statutory Options. All Options under this Plan shall be granted within ten years of the date on which this Plan is adopted or the date the Plan is approved by the stockholders of the Company, whichever is earlier. (b) Option Price. The purchase price per share of Common Stock under an Incentive Stock Option shall be not less than 100 percent of the Fair Market Value per share of such Common Stock on the date the Option is granted. The purchase price per share of Common Stock under each Non-Statutory Option shall be determined by the Committee, but shall be not less than 90% of the Fair Market Value per share of such Common Stock on the date such Non-Statutory Option is granted; provided, however, that with respect to the Options initially granted under this Plan in connection with the IPO, the purchase price per share will be the IPO Price. The Option price may be subject to adjustment in accordance with the provisions of Section 10.2 hereof. -5- (c) Option Agreements. Options and any Stock Appreciation Rights attached to such Options shall be evidenced by Option Agreements in such form and containing such terms and conditions as the Committee shall approve, which terms and conditions need not be the same for all Options. (d) Options Nontransferable. Options shall not be transferable except in accordance with Section 5.1(d)(1) below or by will or the laws of descent and distribution (or to a designated beneficiary in the event of an optionee's death) or, in the case of a nonstatutory stock option, if permitted in any specific case by the Committee in their sole discretion, pursuant to a qualified domestic relations order as defined under the Code or Title I of ERISA, or the rules thereunder. Except as provided above, Options will be exercisable during the lifetime of an optionee only by such optionee or his or her guardian or legal representative. Nothing contained herein shall be deemed inconsistent with the provisions herein set forth pertaining to the exercise of an option by the estate of a deceased holder. (e) Transferability of Nonstatutory Stock Options. Notwithstanding the foregoing, the Committee may provide that a Grantee may transfer Nonstatutory Stock Options to family members, one or more trusts for the benefit of family members, or one or more partnerships of which family members are the only partners, according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer. (f) Substitution and Cancellation. The Committee, in its sole discretion, may grant to a Key Employee or an Eligible Director who has been granted an Option under this Plan, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price lower (or higher) than the purchase price provided in the Option so surrendered and canceled and containing such other terms as the Committee may deem appropriate, subject to such limitations or restrictions with respect to Incentive Stock Options as may be imposed by the Code. 5.2 Exercise of Options. (a) Term of Options; Vesting. The term of an Option and any related Stock Appreciation Right granted under this Plan to a Key Employee shall be ten (10) years from the date of grant. An Option shall become 100% vested at the earliest of the following times if the optionee is an Employee at such time: (i) the Employee's normal retirement date, (ii) the Employee's death or Disability, (iii) five years from the date of grant or (iv) the occurrence of a Change of Control. Each Option shall vest and become exercisable in cumulative installments to the extent of 25% of the number of shares originally covered thereby on and after the second, third, fourth and fifth anniversaries of the grant of the Option, if the optionee is an Employee on such anniversary. In its sole discretion, the Committee may prescribe shorter installments or accelerate the exercisability of any Option at any time. In addition, any option granted to an Eligible Director shall become 100% vested upon a Change of Control. -6- (b) Payment on Exercise. No shares of Common Stock shall be issued on the exercise of an Option unless paid for in full at the time of purchase. Payment for shares of Common Stock purchased upon the exercise of an Option shall be made in cash or, with the consent of the Committee, in whole or in part in such shares of Common Stock held for at least six months valued at the then Fair Market Value thereof. Stock certificates for the shares of Common Stock so paid will be issued and delivered to the person entitled thereto only at the Company's office in Philadelphia, PA. No person shall have any rights as a stockholder with respect to any share of Common Stock covered by an Option unless and until such person shall have become the holder of record of such share, and, except as otherwise permitted in Section 10.2 hereof, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property or distributions or other rights) in respect of such share for which the record date is prior to the date on which such person shall have become the holder of record thereof. (c) Exercise upon Dissolution, Liquidation or Winding Up. If at any time after an Option or Stock Appreciation Right has become exercisable and prior to its exercise and expiration, a voluntary dissolution, liquidation (other than a liquidation into another corporation which agrees to continue this Plan) or winding up of the affairs of the Company shall be proposed, the Company shall cause notice in writing to be mailed to each person holding an Option or Stock Appreciation Right under this Plan, which notice shall be mailed not less than twenty days prior to the closing of the transfer books of the Company or the record date for determination of the holders of Common Stock of the Company entitled to participate in such dissolution, liquidation or winding up, as the case may be, to the end that during such notice period the holder of any Option or Stock Appreciation Right, to the extent that the same is then exercisable by such holder, may, subject to the terms of Article V hereof, either (i) purchase Common Stock in accordance with the terms of the Option and be entitled, in respect of the number of shares so purchased, with respect to such proposed dissolution, liquidation or winding up of the affairs of the Company, or (ii) exercise such Stock Appreciation Right(s) and be paid in cash, or to the extent paid in shares of Common Stock, be entitled to all of the rights of other holders of Common Stock with respect to such proposed dissolution, liquidation or winding up of the affairs of the Company. Each Option and Stock Appreciation Right at the time outstanding and all rights thereunder shall terminate at the close of business on the twentieth day after mailing of such notice to the holder of such Option or Stock Appreciation Right or on the record date for determination of holders of Common Stock entitled to participate in such dissolution, liquidation or winding up, whichever is later. (d) Notice. If an optionee desires to exercise all of part of such optionee's currently exercisable Options or Stock Appreciation Rights, such optionee shall notify the Secretary of the Company, in writing or by telephone, as designated in the Options or Stock Appreciation Rights which the optionee wishes to exercise. The date of such notice shall be referred to herein as the "Notice Date". Within three days after the Notice Date (the "Election Date"), the Secretary of the Company will inform the optionee of the Committee's determination regarding exercisability of the Options. (e) Receipt. In the event that the optionee exercises Stock Appreciation Rights, the optionee will receive an amount determined pursuant to the provisions of Section 5.4 -7- (less applicable withholding taxes) within five days of the Election Date. In the event that an optionee exercises Options, the optionee shall comply with all requirements set forth in the Option Agreement in connection with the purchase of shares of Common Stock under this Plan. 5.3 Incentive Stock Options. (a) Annual Limitation. Any other provision of this Plan notwithstanding, but subject to the limitation of Section 3.2 relating to the aggregate number of shares subject to this Plan, the aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Employee during any calendar year (under this Plan and any other plans of the Company and its Subsidiaries) shall not exceed $100,000. The limitation set forth herein shall apply as and to the extent required to enable Incentive Stock Options to qualify under Section 422 of the Code and, if such Section 422 is amended, the Committee shall have the power to make corresponding changes in the limitation set forth herein. (b) Incentive Stock Options Granted to Ten Percent Stockholders. No Incentive Stock Option shall be granted to any Key Employee who owns, directly or indirectly pursuant to Section 424(d) of the Code, stock possessing more than ten (10) percent of the total combined voting power of all classes of stock of the Company or any Subsidiary, unless at the time such Incentive Stock Option is granted, the price of the Incentive Stock Option is at least 110 percent of the Fair Market Value of the Common Stock subject to the Incentive Stock Option and such Incentive Stock Option, by its terms, is not exercisable after the expiration of five (5) years from the date such Incentive Stock Option is granted. (c) Notice. Each Key Employee shall give prompt notice to the Company of any disposition of shares acquired upon exercise of an Incentive Stock Option if such disposition occurs within either two years after the date of grant or one year after the date of transfer of such shares to the Key Employee upon the exercise of such Incentive Stock Option. (d) Consent. To the extent appropriate to avoid a "modification" or other event described in Section 424(h) of the Code, a Key Employee's rights under an Incentive Stock Option (including the rights to pay the exercise price in Common Stock, to exercise a related Stock Appreciation Right and to receive cash, shares, or a combination upon exercise of a related Stock Appreciation Right) shall be set forth in the Option Agreement at the date of grant, so as to preclude any requirement that further Committee consent be given after the date of grant. 5.4 Stock Appreciation Rights Attached to Options. (a) Award. The Committee may award a Stock Appreciation Right with respect to any shares of Common Stock covered by any Option granted under this Plan to a Key Employee and such Stock Appreciation Right shall be granted as of the time of the grant of the related Option. (b) Terms and Conditions. Each Stock Appreciation Right shall be subject to the same terms and conditions as the related Option with respect to the date of -8- expiration, limitations on transferability and eligibility to exercise. A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only when the Fair Market Value of the shares of Common Stock subject to such Incentive Stock Option exceeds the exercise price of such Incentive Stock Option. No Stock Appreciation Right may be exercised after the related Option becomes nonexercisable. Stock Appreciation Rights shall be payable, at the election of the Committee, in the form of cash, Common Stock or a combination thereof. (c) Amount of Compensation. The amount of compensation which shall be payable pursuant to the exercise of a Stock Appreciation Right shall be equal to the excess of the Fair Market Value of one share of Common Stock on the date the Secretary of the Company receives notice of the exercise of such Stock Appreciation Right over the purchase price per share under the related Option as determined under Section 5.1(b) hereof, multiplied by the number of Option shares with respect to which the Stock Appreciation Right is exercised. (d) Termination of Option. Upon the exercise of a Stock Appreciation Right, the related Option shall cease to be exercisable as to the number of shares of Common Stock with respect to which such Stock Appreciation Right was exercised. ARTICLE VI Termination of Relationship with the Company 6.1 Termination of Employment. Unless earlier terminated in accordance with its terms, an Option or Stock Appreciation Right shall terminate 90 days after any of the following: (a) voluntary termination of employment by the Key Employee, with or without consent of the Company, (b) termination of employment of the Key Employee by the Company or any of its Affiliates, with or without cause, or (c) termination of employment of the Key Employee for any other reason (except as set forth in Section 6.2 below) including retirement under a retirement plan maintained by the Company, or because the Affiliate employing such Key Employee ceases to be an Affiliate of the Company and such Employee does not, prior thereto or contemporaneously therewith, become a Key Employee of the Company or of another Affiliate. 6.2 Death or Disability. If a Key Employee's employment is terminated as a result of Disability or death, such Employee, or such Employee's legal representatives in the event of death, shall be entitled to exercise the Option or Stock Appreciation Right in whole or in part at any time within one year following the Disability (defined in accordance with Section 422(c)(6) of the Code in the case of an Incentive Stock Option) or death of such Key Employee. -9- 6.3 Employment. For all purposes of this Plan, and any Option or Stock Appreciation Right granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). 6.4 Eligible Director. Upon an Eligible Director ceasing to be an Eligible Director of the Company for any reason (except as a result of becoming an Employee of the Company or an Affiliate or as a result of his retirement, Disability or death), such non-employee director's Options shall terminate after 90 days. In the event of an Eligible Director's death or Disability, any outstanding Options shall remain exercisable for one year from the date of death or Disability, but in no event shall such period extend beyond the original term of the Option. ARTICLE VII Administration Plan 7.1 The Committee. The Plan shall be administered and interpreted by a committee of the Board (the "Committee"); provided, however, that grant decisions made hereunder shall be made by at least two persons, each of whom may be (i) "outside directors" as defined under Section 162(m) of the Internal Revenue Code, and (ii) "non-employee directors" as defined under Rule 16b-3 of the Securities Exchange Act of 1934 or any successor provisions and shall satisfy the requirements of Section 12 hereof. The Board may appoint a subcommittee for this purpose, in which case references herein to the "Committee": shall mean the subcommittee as appropriate. A majority of the Committee shall constitute a quorum thereof and the actions of a majority of the Committee at a meeting at which a quorum is present, or actions unanimously approved in writing by all members of the Committee, shall be the actions of the Committee. Vacancies occurring on the Committee shall be filled by the Board. The Committee shall have the full and final authority to interpret this Plan and the agreements evidencing Options and Stock Appreciation Rights granted hereunder (which agreements need not be identical), to prescribe, amend and rescind rules and regulations, if any, relating to this Plan and to make all determinations necessary or advisable for the administration of this Plan. The Committee's determination in all matters referred to herein shall be conclusive and binding for all purposes and upon all persons including, but without limitation, the Company, the stockholders of the Company, the Committee and each of the members thereof, and Employees of the Company, and their respective successors in interest. 7.2 Liability of Committee. No member of the Committee shall be liable for anything done or omitted to be done by such member or by any other member of the Committee in connection with this Plan, except for the willful misconduct or gross negligence of such member. The Committee shall have the power to engage outside consultants, auditors or other professional help to assist in the fulfillment of the Committee's duties under this Plan at the Company's expense. 7.3 Determinations of the Committee. In making its determinations concerning the Key Employees who shall receive Options and Stock Appreciation Rights, as well as the number of shares to be covered thereby and time or times at which they shall be granted, the Committee shall take into account the nature of the services rendered by the respective Key -10- Employees, their past, present and potential contribution to the Company's success and such other factors as the Committee may deem relevant. The Committee shall also determine the form of Option Agreements to be issued under this Plan and the terms and conditions to be included therein, provided such terms and conditions are not inconsistent with the terms of this Plan. The Committee may, in its discretion or in accordance with a direction from the Board, waive any provisions of any Option Agreement, provided such waiver is not inconsistent with the terms of this Plan as then in effect. ARTICLE VIII Amendment and Termination of Plan 8.1 Amendment of Plan. (a) Generally. This Plan may be amended at any time and from time to time by the Board of Directors of the Company but no amendment which (1) decreases the minimum Option price provided in this Plan, (2) extends the period during which Options and Stock Appreciation Rights may be granted under this Plan, or (3) changes the class of Key Employees eligible to receive Options and Stock Appreciation Rights shall be effective unless and until the same is approved by the affirmative vote, in person or proxy, of the holders of a majority of the shares of Common Stock of the Company present and entitled to vote at a meeting held to take such action at which a quorum is present. No termination or amendment of this Plan, without the consent of the holder of any Option or Stock Appreciation Right then existing, may terminate such holder's Option or Stock Appreciation Right or materially and adversely affect such holder's rights thereunder. (b) Amendments Relating to Incentive Stock Options. To the extent applicable, this Plan is intended to permit the issuance of Incentive Stock Options in accordance with the provisions of Section 422 of the Code. The Plan may be modified or amended at any time, both prospectively and retroactively, and in such manner as to affect Incentive Stock Options previously granted (after taking account of Section 424(h) of the Code, relating to "modifications", etc.), if such amendment or modification is necessary for this Plan and the Incentive Stock Options granted hereunder to qualify under said provisions of the Code. 8.2 Termination. The Board may at any time terminate this Plan as of any date specified in a resolution adopted by the Board. If not earlier terminated, this Plan shall terminate on the tenth anniversary of the effective date of the Plan. No Options or Stock Appreciation Rights may be granted after this Plan has terminated. After this Plan shall terminate, the function of the Committee will be limited to supervising the administration of Options and Stock Appreciation Rights previously granted. ARTICLE IX Exchange Act Compliance -11- 9.1 Additional Restrictions Under Rule 16b-3. Unless an optionee could otherwise transfer option shares issued hereunder without incurring liability under Section 16(b) of the Exchange Act, at least six months must elapse from the date of acquisition of an Option to the date of disposition of the shares issued upon exercise of the Option. 9.2 Compliance with Rule 16b-3. It is the intent of the Company that this Plan comply in all respects with applicable provisions of Rule 16b-3 under the Exchange Act in connection with any grant of Options to or other transaction by an optionee who is subject to Section 16 of the Exchange Act. Accordingly, if any provision of this Plan or any agreement relating to an Option does not comply with the requirements of Rule 16b-3 as then applicable to any such optionee, such provision will be construed or deemed amended to the extent necessary to conform to such requirements with respect to such person. In addition, the Committee shall have no authority to make any amendment, alteration, suspension, discontinuation, or termination of the Plan or any agreement hereunder or take other action if such authority would cause an optionee's transactions under the Plan not to be exempt under Rule 16b-3 under the Exchange Act. ARTICLE X Miscellaneous Provisions 10.1 Restrictions Upon Resale of Unregistered Stock. If the shares of Common Stock that have been transferred to a Key Employee or Eligible Director pursuant to the terms of this Plan are not registered under the 1933 Act, pursuant to an effective registration statement, such Key Employee or Eligible Director, if the Committee shall deem it advisable, may be required to represent and agree in writing (i) that any shares of Common Stock acquired by such Key Employee or Eligible Director pursuant to this Plan will not be sold except pursuant to an effective registration statement under the 1933 Act, or pursuant to an exemption from registration under the 1933 Act and (ii) that such Key Employee or Eligible Director is acquiring such shares of Common Stock for his or her own account and not with a view to the distribution thereof. 10.2 Adjustment. In the event of any change (through recapitalization, merger, consolidation, stock dividend, split up, combination or exchange of shares or otherwise) in the character or amount of the Company capital stock (or any other transaction described in Section 424(a) of the Code) after any Option or Stock Appreciation Right is granted hereunder and prior to the exercise thereof, (i) the Option, to the extent that it has not been exercised, shall entitle the holder to such number and kind of securities as such holder would have been entitled to had such holder actually owned the stock subject to the Option at the time of the occurrence of such change and (ii) any outstanding Stock Appreciation Rights shall be similarly adjusted. If any other event shall occur, prior to the exercise of an Option granted hereunder, which shall increase or decrease the amount of capital stock outstanding and which the Committee, in its sole discretion, shall determine equitably requires an adjustment in the number of shares which the holder should be permitted to acquire or the number of Stock Appreciation Rights such holder should be entitled to exercise, such adjustment as the Committee shall determine may be made, and when so made shall be effective and binding for all purposes of this Plan. -12- 10.3 Withholding of Taxes. Each Key Employee who exercises an Option to purchase Common Stock or Stock Appreciation Rights shall agree to pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any taxes of any kind required by law to be withheld with respect to the transfer to such Employee of such shares of Common Stock. 10.4 Use of Proceeds. The proceeds from the sale of Common Stock pursuant to Options granted under this Plan shall constitute general funds of the Company and may be used for such corporate purposes as the Company may determine. 10.5 Other Grants. Options and Stock Appreciation Rights may be granted under this Plan from time to time in substitution for stock options and/or stock appreciation rights held by employees of other corporations who are or are about to become employees of the Company as the result of a merger or consolidation of the employing corporation with the Company, or the acquisition by the Company of the assets of the employing corporation, or the acquisition by the Company of stock of the employing corporation as the result of which it becomes an Affiliate of the Company. Further, Stock Appreciation Rights may be granted under the Plan from time to time in connection with stock options assumed by the Company as part of any such merger, consolidation or acquisition. The terms and conditions of the substituted Options or related Stock Appreciation Rights so granted may vary from the terms and conditions set forth herein to such extent as the Committee may deem appropriate to conform, in whole or in part, to the provisions of the substituted stock incentives. 10.6 Other Benefits. Nothing contained herein shall prevent the Company from establishing other incentive plans in which Key Employees and Eligible Directors in the Plan may also participate. No award under this Plan shall be considered as compensation in calculating any insurance, pension or other benefit for which the recipient is eligible unless any such insurance, pension or other benefit is granted under a plan which expressly provides that compensation under this Plan (and specifying the type of such compensation) shall be considered as compensation under such plan. -13- EX-10.28 13 w56746ex10-28.txt CREDIT AGREEMENT DATED FEBRUARY 8 2002 EXHIBIT 10.28 ================================================================================ CREDIT AGREEMENT between RADIAN GROUP INC. and FIRST UNION NATIONAL BANK, as Lender $50,000,000 364-Day Revolving Credit Facility Dated as of February 8, 2002 ================================================================================ TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS 1.1 Defined Terms .................................................... 1 1.2 Accounting Terms ................................................. 14 1.3 Other Terms; Construction ........................................ 14 ARTICLE II AMOUNT AND TERMS OF THE LOANS 2.1 Commitment ....................................................... 14 2.2 Borrowings ....................................................... 14 2.3 Disbursements .................................................... 15 2.4 Note ............................................................. 16 2.5 Termination of Commitment ........................................ 16 2.6 Mandatory Payments and Prepayments ............................... 16 2.7 Voluntary Prepayments ............................................ 17 2.8 Interest ......................................................... 17 2.9 Fees ............................................................. 18 2.10 Interest Periods ................................................. 19 2.11 Conversions and Continuations .................................... 20 2.12 Method of Payments; Computations ................................. 20 2.13 Recovery of Payments ............................................. 21 2.14 Use of Proceeds .................................................. 21 2.15 Increased Costs; Change in Circumstances; Illegality; etc ........ 21 2.16 Taxes ............................................................ 23 2.17 Compensation ..................................................... 24 ARTICLE III CONDITIONS OF BORROWING 3.1 Conditions of Initial Borrowing .................................. 24 3.2 Conditions of All Borrowings ..................................... 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Corporate Organization and Power ................................. 27 4.2 Authorization; Enforceability .................................... 28 4.3 No Violation ..................................................... 28
i 4.4 Governmental and Third-Party Authorization; Permits .............. 28 4.5 Litigation ....................................................... 29 4.6 Taxes ............................................................ 29 4.7 Subsidiaries ..................................................... 29 4.8 Full Disclosure .................................................. 29 4.9 Margin Regulations ............................................... 30 4.10 No Material Adverse Change ....................................... 30 4.11 Financial Matters ................................................ 30 4.12 Ownership of Properties .......................................... 31 4.13 ERISA ............................................................ 31 4.14 Environmental Matters ............................................ 32 4.15 Compliance With Laws ............................................. 33 4.16 Regulated Industries ............................................. 33 4.17 Insurance ........................................................ 33 4.18 Material Contracts ............................................... 33 4.19 Reinsurance Agreements ........................................... 33 ARTICLE V AFFIRMATIVE COVENANTS 5.1 Financial Statements ............................................. 34 5.2 Statutory Financial Statements ................................... 35 5.3 Other Business and Financial Information ......................... 35 5.4 Corporate Existence; Franchises; Maintenance of Properties ....... 38 5.5 Compliance with Laws ............................................. 38 5.6 Payment of Obligations ........................................... 38 5.7 Insurance ........................................................ 38 5.8 Maintenance of Books and Records; Inspection ..................... 38 5.9 Permitted Acquisitions ........................................... 39 5.10 Dividends ........................................................ 39 5.11 Further Assurances ............................................... 39 ARTICLE VI FINANCIAL COVENANTS 6.1 Maximum Consolidated Debt to Consolidated Total Capitalization ... 39 ARTICLE VII NEGATIVE COVENANTS 7.1 Merger; Consolidation ............................................ 40 7.2 Indebtedness ..................................................... 40 7.3 Liens ............................................................ 41 7.4 Disposition of Assets ............................................ 43 7.5 Investments and Acquisitions ..................................... 43
ii 7.6 Restricted Payments .............................................. 44 7.7 Transactions with Affiliates ..................................... 44 7.8 Certain Amendments ............................................... 44 7.9 Limitation on Certain Restrictions ............................... 45 7.10 Fiscal Year ...................................................... 45 7.11 Accounting Changes ............................................... 45 7.12 Ratings .......................................................... 45 ARTICLE VIII EVENTS OF DEFAULT 8.1 Events of Default ................................................ 45 8.2 Remedies: Termination of Commitment, Acceleration, etc ........... 47 8.3 Remedies: Set-Off ................................................ 48 ARTICLE IX MISCELLANEOUS 9.1 Fees and Expenses ................................................ 48 9.2 Indemnification .................................................. 49 9.3 Governing Law; Consent to Jurisdiction ........................... 49 9.4 Waiver of Trial by Jury .......................................... 50 9.5 Notices .......................................................... 51 9.6 Amendments, Waivers, etc ......................................... 51 9.7 Assignments, Participations ...................................... 51 9.8 No Waiver ........................................................ 52 9.9 Successors and Assigns ........................................... 52 9.10 Survival ......................................................... 52 9.11 Severability ..................................................... 53 9.12 Construction ..................................................... 53 9.13 Confidentiality .................................................. 53 9.14 Counterparts; Effectiveness ...................................... 53 9.15 Disclosure of Information ........................................ 53 9.16 Entire Agreement ................................................. 54
iii EXHIBITS Exhibit A Form of Note Exhibit B-1 Form of Notice of Borrowing Exhibit B-2 Form of Notice of Conversion/Continuation Exhibit C-1 Form of GAAP Compliance Certificate Exhibit C-2 Form of SAP Compliance Certificate Exhibit D Form of Legal Opinion SCHEDULES Schedule 4.4 Consents and Filings Schedule 4.5 Litigation Schedule 4.6 Taxes Schedule 4.7 Subsidiaries Schedule 4.18 Material Contracts Schedule 4.19 Reinsurance Agreements Schedule 7.2 Indebtedness Schedule 7.3 Liens Schedule 7.5 Investments Schedule 7.7 Transactions With Affiliates iv CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of the 8th day of February, 2002 (this "Agreement"), is made between RADIAN GROUP INC., a Delaware corporation with its principal offices in Philadelphia, Pennsylvania (the "Borrower"), and FIRST UNION NATIONAL BANK ("First Union" or "Lender"). RECITALS A. The Borrower has requested that the Lender make available to the Borrower a revolving credit facility in the aggregate principal amount of $50,000,000. The Borrower will use the proceeds of this facility to provide for the working capital and general corporate requirements of the Borrower and its subsidiaries, to pay certain transaction fees and expenses in connection herewith and to finance permitted acquisitions by the Borrower or any of its subsidiaries. B. The Lender is willing to make available to the Borrower the credit facility described herein subject to and on the terms and conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual provisions, covenants and agreements herein contained, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Defined Terms. For purposes of this Agreement, in addition to the terms defined elsewhere herein, the following terms shall have the meanings set forth below (such meanings to be equally applicable to the singular and plural forms thereof): "Account Designation Letter" shall mean a letter from the Borrower to the Lender, duly completed and signed by an Authorized Officer and in form and substance satisfactory to the Lender, listing any one or more accounts to which the Borrower may from time to time request the Lender to forward the proceeds of any Loans made hereunder. "Acquisition" shall mean any transaction or series of related transactions, consummated on or after the date hereof, by which the Borrower directly, or indirectly through one or more Subsidiaries, (i) acquires any going business, or all or substantially all of the assets, of any Person, whether through purchase of assets, merger or otherwise, or (ii) acquires securities or other ownership interests of any Person having at least a majority of combined voting power of the then outstanding securities or other ownership interests of such Person. "Adjusted LIBOR Rate" shall mean, at any time with respect to any Loan, a rate per annum equal to the LIBOR Rate as in effect at such time plus the Applicable Margin Percentage. 1 "Affiliate" shall mean, as to any Person, each other Person that directly, or indirectly through one or more intermediaries, owns or controls, is controlled by or under common control with such Person. For purposes of this definition, with respect to any Person "control" shall mean (i) the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, or (ii) the beneficial ownership of securities or other ownership interests of such Person having 10% or more of the combined voting power of the then outstanding securities or other ownership interests of such Person ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors or other governing body of such Person. Notwithstanding the foregoing, (x) no individual shall be an "Affiliate" of any Person or of any of its Subsidiaries solely by reason of such individual being a director, officer or employee of such Person or any of its Subsidiaries; and (y) the Lender shall not be an Affiliate of the Borrower or any of its Subsidiaries. "Agreement" shall mean this Credit Agreement, as amended, modified or supplemented from time to time. "Annual Statement" shall mean, with respect to any Insurance Subsidiary for any fiscal year, the annual financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile and in accordance with the laws of such jurisdiction, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. "Applicable Margin Percentage" shall mean, at any time from and after the Closing Date, (a) for purposes of determining the Adjusted LIBOR Rate, (i) 0.55% if the ratio of Consolidated Indebtedness to Consolidated Total Capitalization is equal to or less than .2 : 1.0 and (ii) 0.625% if the ratio of Consolidated Indebtedness to Consolidate Total Capitalization is greater than .2 : 1.0; and (b) for purposes of calculating the commitment fee payable pursuant to SECTION 2.9(b), (i) 0.125% if the ratio of Consolidated Indebtedness to Consolidated Total Capitalization is equal to or less than .2 : 1.0 and (ii) 0.15% if the ratio of Consolidated Indebtedness to Consolidated Total Capitalization is greater than .2 : 1.0. On each Adjustment Date (as hereinafter defined), the Applicable Margin Percentage for LIBOR Loans and the commitment fee payable pursuant to SECTION 2.9(b) shall be adjusted effective as of such date (based upon the calculation of the ratio of Consolidated Indebtedness to Consolidated Total Capitalization as of the last day of the fiscal period to which such Adjustment Date relates) in accordance with this definition; provided, however, that, notwithstanding the foregoing or anything else herein to the contrary, if at any time the Borrower shall have failed to deliver the financial statements and a Compliance Certificate as required by SECTION 5.1(a) or SECTION 5.1(b), as the case may be, and SECTION 5.3(a), or if at any time an Event of Default shall have occurred and be continuing, then at the election of the Lender, at all times from and including the date on which such statements and Compliance Certificate are required to have been delivered (or the date of occurrence of such Event of Default, as the case may be) to the date on which the same shall have been delivered (or such Event of Default cured or waived, as the case may be), each Applicable Margin Percentage shall be determined in accordance with this definition as if the ratio of Consolidated Indebtedness to Consolidated Total Capitalization was greater than .2 : 1.0 (notwithstanding the actual ratio). For purposes of this definition, "Adjustment Date" shall mean, with respect to any fiscal period of the Borrower beginning with the fiscal quarter ending March 31, 2002, the fifth 2 (5th) day (or, if such day is not a Business Day, the next succeeding Business Day) after delivery by the Borrower in accordance with SECTION 5.1(a) or SECTION 5.1(b), as the case may be, of (i) financial statements as of the end of and for such fiscal period and (ii) a duly completed Compliance Certificate with respect to such fiscal period. Until the first Adjustment Date, each Applicable Margin Percentage shall be determined in accordance with this definition based upon a ratio of Consolidated Indebtedness to Consolidated Total Capitalization as set forth in the pro forma Covenant Compliance Worksheet required to be delivered pursuant to SECTION 3.1(k). "Authorized Officer" shall mean, with respect to any action specified herein, any officer of the Borrower duly authorized by resolution of the board of directors of the Borrower to take such action on its behalf, and whose signature and incumbency shall have been certified to the Lender by the secretary or an assistant secretary of the Borrower. "Bankruptcy Code" shall mean 11 U.S.C. Sections 101 et seq., as amended from time to time, and any successor statute. "Base Rate" shall mean the higher of (i) the per annum interest rate publicly announced from time to time by First Union in Charlotte, North Carolina, to be its prime commercial lending rate (which may not necessarily be its best lending rate), as adjusted to conform to changes as of the opening of business on the date of any such change in such prime rate, and (ii) the Federal Funds Rate plus 0.5% (50 basis points) per annum, as adjusted to conform to changes as of the opening of business on the date of any such change in the Federal Funds Rate. "Base Rate Loan" shall mean, at any time, any Loan that bears interest at such time at the Base Rate. "Borrower" shall mean Radian Group Inc. "Borrower Margin Stock" shall mean shares of capital stock of the Borrower that are held by the Borrower or any of its Subsidiaries and that constitute Margin Stock. "Borrowing" shall mean the incurrence by the Borrower (including as a result of conversions and continuations of outstanding Loans pursuant to SECTION 2.11) on a single date of a group of Loans of a single Type and, in the case of LIBOR Loans, as to which a single Interest Period is in effect. "Borrowing Date" shall mean, with respect to any Borrowing, the date upon which such Borrowing is made. "Business Day" shall mean (i) any day other than a Saturday or Sunday, a legal holiday or a day on which commercial banks in Charlotte, North Carolina or Philadelphia, Pennsylvania are required by law to be closed and (ii) in respect of any determination relevant to a LIBOR Loan, any such day that is also a day on which tradings are conducted in the London interbank Eurodollar market. "Capital Stock" shall mean (i) with respect to any Person that is a corporation, any and all shares, interests or equivalents in capital stock (whether voting or nonvoting, and whether common or preferred) of such corporation, and (ii) with respect to any Person that is not a 3 corporation, any and all partnership, membership, limited liability company or other equity interests of such Person; and in each case, any and all warrants, rights or options to purchase any of the foregoing. "Cash Equivalents" shall mean (i) securities issued or unconditionally guaranteed by the United States of America or any agency or instrumentality thereof, backed by the full faith and credit of the United States of America and maturing within ninety (90) days from the date of acquisition, (ii) commercial paper issued by any Person organized under the laws of the United States of America, maturing within ninety (90) days from the date of acquisition and, at the time of acquisition, having a rating of at least A-1 or the equivalent thereof by Standard & Poor's or at least P-1 or the equivalent thereof by Moody's, (iii) time deposits and certificates of deposit maturing within ninety (90) days from the date of issuance and issued by a bank or trust company organized under the laws of the United States of America or any state thereof that has combined capital and surplus of at least $500,000,000 and that has (or is a subsidiary of a bank holding company that has) a long-term unsecured debt rating of at least A or the equivalent thereof by Standard & Poor's or at least A2 or the equivalent thereof by Moody's, (iv) repurchase obligations with a term not exceeding seven (7) days with respect to underlying securities of the types described in clause (i) above entered into with any bank or trust company meeting the qualifications specified in clause (iii) above, and (v) money market funds at least 95% of the assets of which are continuously invested in securities of the type described in clause (i) above. "Closing Date" shall mean February 8, 2002, the date on which this Agreement has become effective. "Commitment" shall mean $50,000,000, as such amount may be reduced pursuant to the terms hereof. "Compliance Certificate" shall mean a fully completed and duly executed certificate in the form of EXHIBIT C-1 or EXHIBIT C-2, together, for purposes of EXHIBIT C-1, with a Covenant Compliance Worksheet. "Consolidated Indebtedness" shall mean, as of any date of determination, the aggregate (without duplication) of all Indebtedness (whether or not reflected on the Borrower's or any Subsidiary's balance sheet) of the Borrower and its Subsidiaries as of such date, determined on a consolidated basis in accordance with GAAP, excluding reimbursement obligations in respect of letters of credit issued for the benefit of any Insurance Subsidiary or the Borrower in the ordinary course of its business to support the payment of obligations arising under insurance and reinsurance contracts and weather and similar swap agreements, but only in each case to the extent such letters of credit (i) are not drawn upon and (ii) are collateralized by cash or Cash Equivalents. "Consolidated Net Worth" shall mean, as of any date of determination, the net worth of the Borrower and its Subsidiaries as of such date, determined on a consolidated basis in accordance with GAAP but excluding any Disqualified Capital Stock and without regard to the requirements of Statement of Financial Accounting Standards No. 115 issued by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants. 4 "Consolidated Total Capitalization" shall mean, as of any date of determination, Consolidated Net Worth as of such date plus Consolidated Indebtedness as of such date. "Contingent Obligation" shall mean, with respect to any Person, any direct or indirect liability of such Person with respect to any Indebtedness, liability or other obligation (the "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor in respect thereof to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof; provided, however, that, with respect to the Borrower and its Subsidiaries, the term Contingent Obligation shall not include insurance policies, financial guarantees or surety bonds issued by the Borrower or any of its Subsidiaries in the ordinary course of their respective businesses or endorsements for collection or deposit in the ordinary course of business; provided further, that any Contingent Obligation with respect to a Person and a primary obligor which are the Borrower or any of its Subsidiaries, shall only be counted one time with respect to the Borrower and its Subsidiaries taken as a whole. "Covenant Compliance Worksheet" shall mean a fully completed worksheet in the form of Attachment A to EXHIBIT C-1. "Credit Documents" shall mean this Agreement, the Note, the Fee Letter, any Hedge Agreement to which the Borrower and Lender are parties, and all other agreements, instruments, documents and certificates now or hereafter executed and delivered to the Lender by or on behalf of the Borrower or any of its Subsidiaries with respect to this Agreement and the transactions contemplated hereby, in each case as amended, modified, supplemented or restated from time to time. "Default" shall mean any event or condition that, with the passage of time or giving of notice, or both, would constitute an Event of Default. "Disqualified Capital Stock" shall mean, with respect to any Person, any Capital Stock of such Person that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event or otherwise, (i) matures or is mandatorily redeemable or subject to any mandatory repurchase requirement, pursuant to a sinking fund obligation or otherwise, (ii) is redeemable or subject to any mandatory repurchase requirement at the sole option of the holder thereof, or (iii) is convertible into or exchangeable for (whether at the option of the issuer or the holder thereof) (a) debt securities or (b) any Capital Stock referred to in (i) or (ii) above, in each case under (i), (ii) or (iii) above at any time on or prior to the first anniversary of the Maturity Date; provided, however, that only the portion of Capital Stock that so matures or is mandatorily redeemable, is so redeemable at the option of the 5 holder thereof, or is so convertible or exchangeable on or prior to such date shall be deemed to be Disqualified Capital Stock. "Dollars" or "$" shall mean dollars of the United States of America. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. "ERISA Affiliate" shall mean any Person (including any trade or business, whether or not incorporated) that would be deemed to be under "common control" with, or a member of the same "controlled group" as the Borrower or any of its Subsidiaries, within the meaning of Sections 414(b), (c), (m) or (o) of the Internal Revenue Code or Section 4001 of ERISA. "ERISA Event" shall mean any of the following with respect to a Plan or Multiemployer Plan, as applicable: (i) a Reportable Event with respect to a Plan or a Multiemployer Plan, (ii) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan that results in liability under Section 4201 or 4204 of ERISA, or the receipt by the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA, (iii) the distribution by the Borrower or any ERISA Affiliate under Section 4041 or 4041A of ERISA of a notice of intent to terminate any Plan or the taking of any action to terminate any Plan, (iv) the commencement of proceedings by the PBGC under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a notice from any Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan, (v) the institution of a proceeding by any fiduciary of any Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce Section 515 of ERISA, which is not dismissed within thirty (30) days, (vi) the imposition upon the Borrower or any ERISA Affiliate of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, or the imposition or threatened imposition of any Lien upon any assets of the Borrower or any ERISA Affiliate as a result of any alleged failure to comply with the Internal Revenue Code or ERISA in respect of any Plan, (vii) the engaging in or otherwise becoming liable for a nonexempt Prohibited Transaction by the Borrower or any ERISA Affiliate, (viii) a violation of the applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the Internal Revenue Code by any fiduciary of any Plan for which the Borrower or any of its ERISA Affiliates may be directly or indirectly liable or (ix) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Internal Revenue Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower or an ERISA Affiliate fails to timely provide security to such Plan in accordance with the provisions of such sections. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, accusations, allegations, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of its business and not in response to any third party action or request of any kind) or proceedings relating in any way to any actual or alleged violation of or liability under 6 any Environmental Law or relating to any permit issued, or any approval given, under any such Environmental Law (collectively, "Claims"), including, without limitation, (i) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Substances or arising from alleged injury or threat of injury to human health or the environment. "Environmental Laws" shall mean any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, rules of common law and orders of courts or Governmental Authorities, relating to the protection of human health or occupational safety or the environment, now or hereafter in effect and in each case as amended from time to time, including, without limitation, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Substances. "Event of Default" shall have the meaning given to such term in SECTION 8.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. "Federal Funds Rate" shall mean, for any period, a fluctuating per annum interest rate (rounded upwards, if necessary, to the nearest 1/100 of one percentage point) equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Lender from three federal funds brokers of recognized standing selected by the Lender. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System or any successor thereto. "Fee Letter" shall mean the letter from the Lender to the Borrower, dated November 7, 2001, relating to certain fees payable by the Borrower in respect of the transactions contemplated by this Agreement, as amended, modified or supplemented from time to time. "Financial Officer" shall mean, with respect to the Borrower, the chief financial officer, the chief executive officer, any vice president - finance, the principal accounting officer, controller or treasurer of the Borrower. "First Union" shall mean First Union National Bank, and its successors and assigns. "Fitch" shall mean Fitch, Inc., and its successors and assigns. "GAAP" shall mean generally accepted accounting principles, as set forth in the statements, opinions and pronouncements of the Accounting Principles Board, the American 7 Institute of Certified Public Accountants and the Financial Accounting Standards Board, consistently applied and maintained, as in effect from time to time (subject to the provisions of SECTION 1.2). "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any central bank thereof, any municipal, local, city or county government, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Hazardous Substances" shall mean any substances or materials (i) that are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any Environmental Law, (ii) that are defined by any Environmental Law as toxic, explosive, corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous, (iii) the presence of which require investigation or response under any Environmental Law, (iv) that constitute a nuisance, trespass or health or safety hazard to Persons or neighboring properties, (iv) that consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance, or (v) that contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas. "Hedge Agreement" shall mean any interest or foreign currency rate swap, cap, collar, option, hedge, forward rate or other similar agreement or arrangement designed to protect against fluctuations in interest rates or currency exchange rates, including any swap agreements (as defined in 11 U.S.C. Section 101). "Historical Statutory Statements" shall have the meaning given to such term in SECTION 4.11(c). "Indebtedness" shall mean, with respect to any Person (without duplication), (i) all indebtedness and obligations of such Person for borrowed money or in respect of loans or advances of any kind, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all reimbursement obligations of such Person with respect to surety bonds, letters of credit and bankers' acceptances (in each case, whether or not drawn or matured and in the stated amount thereof), (iv) all obligations of such Person to pay the deferred purchase price of property or services, other than trade accounts payable arising and accrued expenses incurred, in the ordinary course of business, (v) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (vi) all obligations of such Person as lessee under leases that are or are required to be, in accordance with GAAP, recorded as capital leases, to the extent such obligations are required to be so recorded, (vii) all Disqualified Capital Stock issued by such Person, with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any (for purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined 8 pursuant to this Agreement, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the board of directors or other governing body of the issuer of such Disqualified Capital Stock), (viii) the net termination obligations of such Person under any Hedge Agreements, calculated as of any date as if such agreement or arrangement were terminated as of such date, (ix) all Contingent Obligations of such Person and (x) all indebtedness referred to in clauses (i) through (x) above secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person. "Insurance Regulatory Authority" shall mean, with respect to any Insurance Subsidiary, the insurance department or similar Governmental Authority charged with regulating insurance companies or insurance holding companies, in its jurisdiction of domicile and, to the extent that it has regulatory authority over such Insurance Subsidiary, in each other jurisdiction in which such Insurance Subsidiary conducts business or is licensed to conduct business. "Insurance Subsidiary" shall mean any direct or indirect Subsidiary of the Borrower that is regulated and licensed to conduct an insurance business by an Insurance Regulatory Authority or that is otherwise required to be regulated thereby in accordance with the applicable Requirements of Law of its jurisdiction of domicile. "Interest Period" shall have the meaning given to such term in SECTION 2.10. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. "Investment Policy" shall mean the Investment Policy of the Insurance Subsidiaries as of the date hereof, as referenced in SCHEDULE 7.5. "LIBOR Loan" shall mean, at any time, any Loan that bears interest at such time at the Adjusted LIBOR Rate. "LIBOR Rate" shall mean, with respect to each LIBOR Loan comprising part of the same Borrowing for any Interest Period, an interest rate per annum obtained by dividing (i) (y) the rate of interest (rounded upward, if necessary, to the nearest 1/16 of one percentage point) appearing on Telerate Page 3750 (or any successor page) or (z) if no such rate is available, the rate of interest determined by the Lender to be the rate or the arithmetic mean of rates (rounded upward, if necessary, to the nearest 1/16 of one percentage point) at which Dollar deposits in immediately available funds are offered by First Union to first-tier banks in the London interbank Eurodollar market, in each case under (y) and (z) above at approximately 11:00 a.m., London time two (2) Business Days prior to the first day of such Interest Period for a period substantially equal to such Interest Period and in an amount substantially equal to the amount of the LIBOR Loan comprising part of such Borrowing, by (ii) the amount equal to 1.00 minus the Reserve Requirement (expressed as a decimal) for such Interest Period. "Lender" shall mean First Union National Bank, and its successors and assigns 9 "Lending Office" shall mean the office of the Lender designated as its "Lending Office" on its signature page hereto or such other office as may be otherwise designated in writing from time to time by the Lender to the Borrower. The Lender may designate separate Lending Offices as provided in the foregoing sentence for the purposes of making or maintaining different Types of Loans, and, with respect to LIBOR Loans, such office may be a domestic or foreign branch or Affiliate of the Lender. "Licenses" shall mean any and all licenses (including provisional licenses), certificates of need, accreditations, permits, franchises, rights to conduct business, approvals (by a Governmental Authority or otherwise), consents, qualifications, operating authority and any other authorizations. "Lien" shall mean any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including, without limitation, the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing. "Loans" shall have the meaning given to such term in SECTION 2.1. "Margin Stock" shall have the meaning given to such term in Regulation U. "Material Adverse Change" shall mean a material adverse change in the condition (financial or otherwise), operations, prospects, business, properties or assets of the Borrower and its Subsidiaries, taken as a whole. "Material Adverse Effect" shall mean a material adverse effect upon (i) the condition (financial or otherwise), operations, prospects, business, properties or assets of the Borrower or its Subsidiaries, taken as a whole, (ii) the ability of the Borrower or any Subsidiary to perform its obligations under this Agreement or any of the other Credit Documents to which it is a party or (iii) the legality, validity or enforceability of this Agreement or any of the other Credit Documents or the rights and remedies of the Lender hereunder and thereunder. "Material Contract" shall have the meaning given to such term in SECTION 4.18. "Material Insurance Subsidiaries" shall mean Radian Guaranty Inc., Amerin Guaranty Corporation, Radian Reinsurance Inc. (formerly known as Enhance Reinsurance Company), Radian Asset Assurance Inc. (formerly known as Asset Guaranty Insurance Company) and any other direct or indirect Insurance Subsidiary of the Borrower whose total statutory assets exceed 10% of the combined statutory assets (without duplication) of all Insurance Subsidiaries of the Borrower, taken as a whole, or whose gross written premiums exceed 10% of combined gross written premiums of all such Insurance Subsidiaries, taken as a whole. "Material Subsidiary" shall mean any Subsidiary of the Borrower that as of such time either (i) is a Material Insurance Subsidiary or (ii) meets the definition of a "significant subsidiary" contained as of the date hereof in Regulation S-K of the Securities and Exchange Commission or any governmental authority superseding to its principal functions. 10 "Maturity Date" shall mean February 7, 2003. "Moody's" shall mean Moody's Investors Services, Inc., and its successors and assigns. "Multiemployer Plan" shall mean any "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate makes, is making or is obligated to make contributions or has made or been obligated to make contributions. "NAIC" shall mean the National Association of Insurance Commissioners and any successor thereto. "Note" shall mean the promissory note of the Borrower in substantially the form of EXHIBIT A, together with any amendments, modifications and supplements thereto, substitutions therefor and restatements thereof. "Notice of Borrowing" shall have the meaning given to such term in SECTION 2.2(b). "Notice of Conversion/Continuation" shall have the meaning given to such term in SECTION 2.11(b). "Obligations" shall mean all principal of and interest (including, to the greatest extent permitted by law, post-petition interest) on the Loans, and all fees, expenses, indemnities and other obligations owing, due or payable at any time by the Borrower to the Lender or any other Person entitled thereto, under this Agreement or any of the other Credit Documents, and all payment and other obligations owing or payable at any time by the Borrower to the Lender or any Affiliate of any Lender under or in connection with any Hedge Agreement permitted by this Agreement. "Participant" shall have the meaning given to such term in SECTION 9.7. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any successor thereto. "Permitted Acquisition" shall mean (a) any Acquisition with respect to which all of the following conditions are satisfied: (i) any Capital Stock given as consideration in connection therewith shall be Capital Stock of the Borrower, (ii) in the case of an Acquisition involving the acquisition of control of Capital Stock of any Person, immediately after giving effect to such Acquisition such Person (or the surviving Person, if the acquisition is effected through a merger or consolidation) shall be the Borrower or a Wholly Owned Subsidiary, and (iii) all of the conditions and requirements of SECTION 5.9 applicable to such Acquisition are satisfied; or (b) any other Acquisition to which the Lender shall have given its prior written consent and with respect to which all of the conditions and requirements set forth in this definition and in SECTION 5.9, and in or pursuant to any such consent, have been satisfied or waived in writing by the Lender. "Permitted Liens" shall have the meaning given to such term in SECTION 7.3. 11 "Person" shall mean any corporation, association, joint venture, partnership, limited liability company, organization, business, individual, trust, government or agency or political subdivision thereof or any other legal entity. "Plan" shall mean any "employee pension benefit plan" within the meaning of Section 3(2) of ERISA that is subject to the provisions of Title IV of ERISA (other than a Multiemployer Plan) and to which the Borrower or any ERISA Affiliate may have any liability. "Prohibited Transaction" shall mean any transaction described in (i) Section 406 of ERISA that is not exempt by reason of Section 408 of ERISA or by reason of a Department of Labor prohibited transaction individual or class exemption or (ii) Section 4975(c) of the Internal Revenue Code that is not exempt by reason of Section 4975(c)(2) or 4975(d) of the Internal Revenue Code. "Quarterly Statement" shall mean, with respect to any Insurance Subsidiary for any fiscal quarter, the quarterly financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. "Regulations D, T, U and X" shall mean Regulations D, T, U and X, respectively, of the Federal Reserve Board, and any successor regulations. "Reinsurance Agreement" shall mean any agreement, contract, treaty, certificate or other arrangement whereby any Insurance Subsidiary agrees to transfer, cede or retrocede to another insurer or reinsurer (other than to an Affiliate of such Insurance Subsidiary) all or part of the liability assumed or assets held by such Insurance Subsidiary under a policy or policies of insurance issued by such Insurance Subsidiary or under a reinsurance agreement assumed by such Insurance Subsidiary. "Reportable Event" shall mean (i) any "reportable event" within the meaning of Section 4043(c) of ERISA for which the 30-day notice under Section 4043(a) of ERISA has not been waived by the PBGC (including any failure to meet the minimum funding standard of, or timely make any required installment under, Section 412 of the Internal Revenue Code or Section 302 of ERISA, regardless of the issuance of any waivers in accordance with Section 412(d) of the Internal Revenue Code), (ii) any such "reportable event" subject to advance notice to the PBGC under Section 4043(b)(3) of ERISA, (iii) any application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Internal Revenue Code, and (iv) a cessation of operations described in Section 4062(e) of ERISA. "Requirement of Law" shall mean, with respect to any Person, the charter, articles or certificate of organization or incorporation and bylaws or other organizational or governing documents of such Person, and any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any arbitrator or court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject or otherwise pertaining to any or all of the transactions contemplated by this Agreement and the other Credit Documents. 12 "Reserve Requirement" shall mean, with respect to any Interest Period, the reserve percentage (expressed as a decimal) in effect from time to time during such Interest Period, as provided by the Federal Reserve Board, applied for determining the maximum reserve requirements (including, without limitation, basic, supplemental, marginal and emergency reserves) applicable to First Union under Regulation D with respect to "Eurocurrency liabilities" within the meaning of Regulation D, or under any similar or successor regulation with respect to Eurocurrency liabilities or Eurocurrency funding. "Responsible Officer" shall mean, with respect to the Borrower, the president, the chief executive officer, the chief financial officer, any executive officer, the General Counsel (if also an officer holding a title of at least Senior Vice President), or any other Financial Officer of the Borrower, and any other officer or similar official thereof responsible for the administration of the obligations of the Borrower in respect of this Agreement. "Standard & Poor's" shall mean Standard & Poor's Ratings Services, a division of McGraw-Hill Companies, Inc., its successors and assigns. "Statutory Accounting Practices" or "SAP" shall mean, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Insurance Regulatory Authority of its state of domicile, consistently applied and maintained and in conformity with those used in the preparation of the most recent statutory financial statements described in SECTION 4.11(c) (except where changes are required by the relevant Insurance Regulatory Authority) and the Annual Statement. "Subsidiary" shall mean, with respect to any Person, any corporation or other Person of which more than fifty percent (50%) of the outstanding Capital Stock having ordinary voting power to elect a majority of the board of directors, board of managers or other governing body of such Person, is at the time, directly or indirectly, owned by such Person and one or more of its other Subsidiaries or a combination thereof (irrespective of whether, at the time, securities of any other class or classes of any such corporation or other Person shall or might have voting power by reason of the happening of any contingency). When used without reference to a parent entity, the term "Subsidiary" shall be deemed to refer to a Subsidiary of the Borrower. "Termination Date" shall mean the Maturity Date or such earlier date of termination of the Commitment pursuant to SECTION 2.5 or SECTION 8.2. "Type" shall have the meaning given to such term in SECTION 2.2(a) "Unfunded Pension Liability" shall mean, with respect to any Plan or Multiemployer Plan, the excess of its benefit liabilities under Section 4001(a)(16) of ERISA over the current value of its assets, determined in accordance with the applicable assumptions used for funding under Section 412 of the Code for the applicable plan year. "Unutilized Commitment" shall mean, at any time, the Commitment less the aggregate principal amount of all Loans that are outstanding at such time. "Wholly Owned" shall mean, with respect to any Subsidiary of any Person, that 100% of the outstanding Capital Stock of such Subsidiary is owned, directly or indirectly, by such Person. 13 1.2 Accounting Terms. Except as specifically provided otherwise in this Agreement, all accounting terms used herein that are not specifically defined shall have the meanings customarily given them, and all financial computations shall be made, in accordance with GAAP (or, to the extent that such terms apply solely to any Insurance Subsidiary or if otherwise expressly required, SAP) as in effect as of the date of this Agreement applied on a basis consistent with the application used in preparing the most recent financial statements of the Borrower and any such Insurance Subsidiary. Notwithstanding the foregoing, in the event that any changes in GAAP or SAP after the date hereof are required to be applied to the transactions described herein and would affect the computation of the financial covenants contained in ARTICLE VI, such changes shall be followed in the computation of such financial covenants only from and after the date this Agreement shall have been amended to take into account any such changes, provided the parties agree to negotiate in good faith to so amend this Agreement as soon as practicable after such a change. References to amounts on particular exhibits, schedules, lines, pages and columns of any Annual Statement or Quarterly Statement are based on the format promulgated by the NAIC for the 2000 Annual Statements and Quarterly Statements. In the event such format is changed in future years so that different information is contained in such items or they no longer exist, or if the Annual Statement or Quarterly Statement is replaced by the NAIC or by any Insurance Regulatory Authority after the date hereof such that different forms of financial statements are required to be furnished by any Insurance Subsidiary in lieu thereof, such references shall be to information consistent with that reported in the referenced item in the 2000 Annual Statements or Quarterly Statements, as the case may be. 1.3 Other Terms; Construction. Unless otherwise specified or unless the context otherwise requires, all references herein to sections, annexes, schedules and exhibits are references to sections, annexes, schedules and exhibits in and to this Agreement, and all terms defined in this Agreement shall have the defined meanings when used in any other Credit Document or any certificate or other document made or delivered pursuant hereto. ARTICLE II AMOUNT AND TERMS OF THE LOANS 2.1 Commitment. The Lender agrees, subject to and on the terms and conditions of this Agreement, to make loans (each, a "Loan," and collectively, the "Loans") to the Borrower, from time to time on any Business Day during the period from and including the Closing Date to but not including the Termination Date, in an aggregate principal amount at any time outstanding not greater than its Commitment at such time, provided that no Borrowing shall be made if, immediately after giving effect thereto, the aggregate principal amount of Loans outstanding at such time would exceed the Commitment at such time. Subject to and on the terms and conditions of this Agreement, the Borrower may borrow, repay and reborrow Loans. 2.2 Borrowings. (a) The Loans shall, at the option of the Borrower and subject to the terms and conditions of this Agreement, be either (i) Base Rate Loans or (ii) LIBOR Loans (each, a "Type" of Loan), provided that (x) all Loans comprising the same Borrowing shall, unless otherwise 14 specifically provided herein, be of the same Type, and (y) no Borrowing of LIBOR Loans may be made at any time prior to the third (3rd) Business Day after the Closing Date. (b) In order to make a Borrowing (other than Borrowings involving continuations or conversions of outstanding Loans, which shall be made pursuant to SECTION 2.11), the Borrower will give the Lender written notice not later than 11:00 a.m., Charlotte time, three (3) Business Days prior to each Borrowing to be comprised of LIBOR Loans and not later than one (1) Business Day prior to each Borrowing to be comprised of Base Rate Loans; provided, however, that the request for the Borrowing of the Loan to be made on the Closing Date may, at the discretion of the Lender, be given later than the times specified hereinabove. Each such notice (each, a "Notice of Borrowing") shall be irrevocable, shall be given in the form of EXHIBIT B-1 and shall specify (1) the aggregate principal amount and initial Type of the Loans to be made pursuant to such Borrowing, (2) in the case of a Borrowing of LIBOR Loans, the initial Interest Period to be applicable thereto, and (3) the requested date of such Borrowing (the "Borrowing Date"), which shall be a Business Day. Notwithstanding anything to the contrary contained herein: (i) the aggregate principal amount of each Borrowing comprised of Base Rate Loans shall not be less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof (or, if less, in the amount of the aggregate Unutilized Commitments), and the aggregate principal amount of each Borrowing comprised of LIBOR Loans shall not be less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof; (ii) if the Borrower shall have failed to designate the Type of Loans comprising a Borrowing, the Borrower shall be deemed to have requested a Borrowing comprised of Base Rate Loans; and (iii) if the Borrower shall have failed to select the duration of the Interest Period to be applicable to any Borrowing of LIBOR Loans, then the Borrower shall be deemed to have selected an Interest Period with a duration of one month; (c) Not later than 1:00 p.m., Charlotte time, on the requested Borrowing Date, the Lender will make such amounts available to the Borrower. 2.3 Disbursements. (a) The Borrower hereby authorizes the Lender to disburse the proceeds of each Borrowing in accordance with the terms of any written instructions from any of the Authorized Officers, provided that the Lender shall not be obligated under any circumstances to forward amounts to any account not listed in an Account Designation Letter. The Borrower may at any time deliver to the Lender an Account Designation Letter listing any additional accounts or deleting any accounts listed in a previous Account Designation Letter. (b) The Lender may, at its option, make and maintain any Loan at, to or for the account of any of its Lending Offices, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan to or for the account of the Lender in accordance with the terms of this Agreement. 15 2.4 Note. (a) The Loans shall be evidenced by a Note appropriately completed substantially in the form of EXHIBIT A by the Borrower. (b) The Note shall (i) be executed by the Borrower, (ii) be payable to the order of the Lender, (iii) be dated as of the Closing Date, (iv) be in a stated principal amount equal to the Commitment, (v) bear interest in accordance with the provisions of SECTION 2.8, as the same may be applicable from time to time to the Loans made by the Lender, and (vi) be entitled to all of the benefits of this Agreement and the other Credit Documents and subject to the provisions hereof and thereof. (c) The Lender will record on its internal records the amount and Type of each Loan made by it and each payment received by it in respect thereof and will, in the event of any transfer of its Note, either endorse on the reverse side thereof or on a schedule attached thereto (or any continuation thereof) the outstanding principal amount and Type of the Loans evidenced thereby as of the date of transfer; provided, however, that the failure of the Lender to make any such recordation or provide any such information, or any error therein, shall not affect the Borrower's obligations under this Agreement or the Note. 2.5 Termination of Commitment. (a) The Commitment shall be automatically and permanently terminated on the Termination Date. (b) At any time and from time to time after the date hereof, upon not less than five (5) Business Days' prior written notice to the Agent, the Borrower may terminate in whole or reduce in part the aggregate Unutilized Commitments, provided that any such partial reduction shall be in an aggregate amount of not less than $5,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof. The amount of any termination or reduction made under this subsection (b) may not thereafter be reinstated. 2.6 Mandatory Payments and Prepayments. (a) Except to the extent due or paid sooner pursuant to the provisions of this Agreement, the aggregate outstanding principal of the Loans shall be due and payable in full on the Maturity Date. (b) In the event that, at any time, the aggregate principal amount of Loans outstanding at such time shall exceed the Commitment at such time (after giving effect to any concurrent termination or reduction thereof), the Borrower will immediately prepay the outstanding principal amount of the Loans in the amount of such excess. (c) Each payment or prepayment of a LIBOR Loan made pursuant to the provisions of this Section on a day other than the last day of the Interest Period applicable thereto shall be made together with all amounts required under SECTION 2.17 to be paid as a consequence thereof. 16 2.7 Voluntary Prepayments. At any time and from time to time, the Borrower shall have the right to prepay the Loans, in whole or in part, without premium or penalty (except as provided in clause (iii) below), upon written notice given to the Lender not later than 11:00 a.m., Charlotte time, three (3) Business Days prior to each intended prepayment of LIBOR Loans and one (1) Business Day prior to each intended prepayment of Base Rate Loans, provided that (i) each partial prepayment shall be in an aggregate principal amount of not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof, (ii) no partial prepayment of a LIBOR Loan made pursuant to any single Borrowing shall reduce the outstanding principal amount of the remaining LIBOR Loan under such Borrowing to less than $3,000,000 or to any greater amount not an integral multiple of $1,000,000 in excess thereof, and (iii) unless made together with all amounts required under SECTION 2.17 to be paid as a consequence of such prepayment, a prepayment of a LIBOR Loan may be made only on the last day of the Interest Period applicable thereto. Each such notice shall specify the proposed date of such prepayment and the aggregate principal amount and Type of the Loans to be prepaid (and, in the case of LIBOR Loans, the Interest Period of the Borrowing pursuant to which made), and shall be irrevocable and shall bind the Borrower to make such prepayment on the terms specified therein. Loans prepaid pursuant to this Section may be reborrowed, subject to the terms and conditions of this Agreement. 2.8 Interest. (a) The Borrower will pay interest in respect of the unpaid principal amount of each Loan, from the date of Borrowing thereof until such principal amount shall be paid in full, (i) at the Base Rate, as in effect from time to time during such periods as such Loan is a Base Rate Loan, and (ii) at the Adjusted LIBOR Rate, as in effect from time to time during such periods as such Loan is a LIBOR Loan. (b) Upon the occurrence and during the continuance of any default by the Borrower in the payment of any principal of or interest on any Loan, any fees or other amount hereunder when due (whether at maturity, pursuant to acceleration or otherwise), and upon the occurrence and during the continuance of any other Event of Default, all outstanding principal amounts of the Loans and, to the greatest extent permitted by law, all interest accrued on the Loans and all other accrued and outstanding fees and other amounts hereunder, shall, at the option of the Lender, bear interest at a rate per annum equal to the interest applicable from time to time thereafter to such Loans (whether the Base Rate or Adjusted LIBOR Rate) plus 2% (or, in the case of fees and other amounts, at the Base Rate plus 2%) and, in each case, such default interest shall be payable on demand. To the greatest extent permitted by law, interest shall continue to accrue after the filing by or against the Borrower of any petition seeking any relief in bankruptcy or under any law pertaining to insolvency or debtor relief. (c) Accrued (and theretofore unpaid) interest shall be payable as follows: (i) in respect of each Base Rate Loan (including any Base Rate Loan or portion thereof paid or prepaid pursuant to the provisions of SECTION 2.6, except as provided hereinbelow), in arrears on the last Business Day of each calendar quarter, beginning with the first such day to occur after the Closing Date; provided, that in the event the Loans are repaid or prepaid in full and the Commitment has been terminated, 17 then accrued interest in respect of all Base Rate Loans shall be payable together with such repayment or prepayment on the date thereof; (ii) in respect of each LIBOR Loan (including any LIBOR Loan or portion thereof paid or prepaid pursuant to the provisions of SECTION 2.6, except as provided hereinbelow), in arrears (y) on the last Business Day of the Interest Period applicable thereto (subject to the provisions of clause (iv) in SECTION 2.10) and (z) in addition, in the case of a LIBOR Loan with an Interest Period having a duration of six months or longer, on each date on which interest would have been payable under clause (y) above had successive Interest Periods of three months' duration been applicable to such LIBOR Loan; provided, that in the event all of the LIBOR Loan made pursuant to a single Borrowing is repaid or prepaid in full, then accrued interest in respect of such LIBOR Loan shall be payable together with such repayment or prepayment on the date thereof; and (iii) in respect of any Loan, at maturity (whether pursuant to acceleration or otherwise) and, after maturity, on demand. (d) Nothing contained in this Agreement or in any other Credit Document shall be deemed to establish or require the payment of interest to the Lender at a rate in excess of the maximum rate permitted by applicable law. If the amount of interest payable for the account of the Lender on any interest payment date would exceed the maximum amount permitted by applicable law to be charged by the Lender, the amount of interest payable for its account on such interest payment date shall be automatically reduced to such maximum permissible amount. In the event of any such reduction affecting the Lender, if from time to time thereafter the amount of interest payable for the account of the Lender on any interest payment date would be less than the maximum amount permitted by applicable law to be charged by the Lender, then the amount of interest payable for its account on such subsequent interest payment date shall be automatically increased to such maximum permissible amount, provided that at no time shall the aggregate amount by which interest paid for the account of the Lender has been increased pursuant to this sentence exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to the previous sentence. (e) The Lender shall promptly notify the Borrower upon determining the interest rate for each Borrowing of LIBOR Loans after its receipt of the relevant Notice of Borrowing or Notice of Conversion/Continuation, and upon each change in the Base Rate; provided, however, that the failure of the Lender to provide the Borrower with any such notice shall not affect any obligations of the Borrower nor result in any liability on the part of the Lender to the Borrower. Each such determination (including each determination of the Reserve Requirement) shall, absent manifest error, be conclusive and binding on all parties hereto. 2.9 Fees. The Borrower agrees to pay to the Lender: (a) on the date of execution of this Agreement, the fees described in paragraph (2) of the Fee Letter; and 18 (b) a commitment fee for each calendar quarter (or portion thereof) for the period from the date of this Agreement to the Termination Date, at a per annum rate equal to the Applicable Margin Percentage in effect for such fee from time to time during such quarter on the Unutilized Commitment, calculated on the basis of a 360-day year for the actual days elapsed commencing on the execution date of this Agreement, payable in arrears (i) on the last Business Day of each calendar quarter, beginning with the first such day to occur after the Closing Date, and (ii) on the Termination Date. 2.10 Interest Periods. Concurrently with the giving of a Notice of Borrowing or Notice of Conversion/Continuation in respect of any Borrowing comprised of Base Rate Loans to be converted into, or LIBOR Loans to be continued as, LIBOR Loans, the Borrower shall have the right to elect, pursuant to such notice, the interest period (each, an "Interest Period") to be applicable to such LIBOR Loans, which Interest Period shall, at the option of the applicable Borrower be a one, two, three or six-month period; provided, however, that: (i) all LIBOR Loans comprising a single Borrowing shall at all times have the same Interest Period; (ii) the initial Interest Period for any LIBOR Loan shall commence on the date of the Borrowing of such LIBOR Loan (including the date of any continuation of, or conversion into, such LIBOR Loan), and each successive Interest Period applicable to such LIBOR Loan shall commence on the day on which the next preceding Interest Period applicable thereto expires; (iii) LIBOR Loans may not be outstanding under more than four (4) separate Interest Periods at any one time (for which purpose Interest Periods shall be deemed to be separate even if they are coterminous); (iv) if any Interest Period otherwise would expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless such next succeeding Business Day falls in another calendar month, in which case such Interest Period shall expire on the next preceding Business Day; (v) the Borrower may not select any Interest Period that begins prior to the Closing Date or that expires after the Maturity Date; (vi) if any Interest Period begins on a day for which there is no numerically corresponding day in the calendar month during which such Interest Period would otherwise expire, such Interest Period shall expire on the last Business Day of such calendar month; and (vii) if, upon the expiration of any Interest Period applicable to a Borrowing of LIBOR Loans, the applicable Borrower shall have failed to elect a new Interest Period to be applicable to such LIBOR Loans, then the Borrower shall be deemed to have elected to convert such LIBOR Loans into Base Rate Loans as of the expiration of the then current Interest Period applicable thereto. 19 2.11 Conversions and Continuations. (a) The Borrower shall have the right, on any Business Day occurring on or after the Closing Date, to elect (i) to convert all or a portion of the outstanding principal amount of any Base Rate Loans into LIBOR Loans, or to convert any LIBOR Loans the Interest Periods for which end on the same day into Base Rate Loans, or (ii) upon the expiration of any Interest Period, to continue all or a portion of the outstanding principal amount of any LIBOR Loans the Interest Periods for which end on the same day for an additional Interest Period, provided that (x) any such conversion of LIBOR Loans into Base Rate Loans shall involve an aggregate principal amount of not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof; any such conversion of Base Rate Loans into, or continuation of, LIBOR Loans shall involve an aggregate principal amount of not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof; and no partial conversion of LIBOR Loans made pursuant to a single Borrowing shall reduce the outstanding principal amount of such LIBOR Loans to less than $3,000,000 or to any greater amount not an integral multiple of $1,000,000 in excess thereof, (y) except as otherwise provided in SECTION 2.15(D), LIBOR Loans may be converted into Base Rate Loans only on the last day of the Interest Period applicable thereto (and, in any event, if a LIBOR Loan is converted into a Base Rate Loan on any day other than the last day of the Interest Period applicable thereto, the Borrower will pay, upon such conversion, all amounts required under SECTION 2.17 to be paid as a consequence thereof), and (z) no conversion of Base Rate Loans into LIBOR Loans or continuation of LIBOR Loans shall be permitted during the continuance of a Default or Event of Default. (b) The Borrower shall make each such election by giving the Lender written notice not later than 11:00 a.m., Charlotte time, three (3) Business Days prior to the intended effective date of any conversion of Base Rate Loans into, or continuation of, LIBOR Loans and one (1) Business Day prior to the intended effective date of any conversion of LIBOR Loans into Base Rate Loans. Each such notice (each, a "Notice of Conversion/Continuation") shall be irrevocable, shall be given in the form of EXHIBIT B-2 and shall specify (x) the date of such conversion or continuation (which shall be a Business Day), (y) in the case of a conversion into, or a continuation of, LIBOR Loans, the Interest Period to be applicable thereto, and (z) the aggregate amount and Type of the Loans being converted or continued. In the event that the Borrower shall fail to deliver a Notice of Conversion/Continuation as provided herein with respect to any outstanding LIBOR Loans, such LIBOR Loans shall automatically be converted to Base Rate Loans upon the expiration of the then current Interest Period applicable thereto (unless repaid pursuant to the terms hereof). In the event the Borrower shall have failed to select in a Notice of Conversion/Continuation the duration of the Interest Period to be applicable to any conversion into, or continuation of, LIBOR Loans, then the Borrower shall be deemed to have selected an Interest Period with a duration of one month. 2.12 Method of Payments; Computations. (a) All payments by the Borrower hereunder shall be made without setoff, counterclaim or other defense, in Dollars and in immediately available funds to the Lender, prior to 1:00 p.m., Charlotte time, on the date payment is due. Any payment made as required hereinabove, but after 1:00 p.m., Charlotte time, shall be deemed to have been made on the next succeeding Business Day. If any payment falls due on a day that is not a Business Day, then 20 such due date shall be extended to the next succeeding Business Day (except that in the case of LIBOR Loans to which the provisions of clause (iv) in SECTION 2.10 are applicable, such due date shall be the next preceding Business Day), and such extension of time shall then be included in the computation of payment of interest, fees or other applicable amounts. (b) The Lender may, but shall not be obligated to, debit the amount of any such payment not made as and when required hereunder to any ordinary deposit account of the Borrower with the Lender (with prompt notice to such Borrower); provided, however, that the failure to give such notice shall not affect the validity of such debit by the Lender. (c) All computations of interest and fees hereunder (including computations of the Reserve Requirement) shall be made on the basis of a year consisting of (i) in the case of interest on Base Rate Loans, 365/366 days, as the case may be, and (ii) in all other instances, 360 days and in each case under (i) and (ii) above, with regard to the actual number of days (including the first day, but excluding the last day) elapsed. 2.13 Recovery of Payments. The Borrower agrees that to the extent it makes a payment or payments to or for the account of the Lender, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy, insolvency or similar state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, the Obligation intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been received. 2.14 Use of Proceeds. The proceeds of the Loans shall be used (i) to provide for the working capital and general corporate requirements of the Borrower and its Subsidiaries; (ii) to pay certain transaction fees and expenses in connection with the Credit Documents in amounts acceptable to the Lender; and (iii) to finance Permitted Acquisitions by the Borrower or any of its Subsidiaries. 2.15 Increased Costs; Change in Circumstances; Illegality; etc. (a) If, at any time after the date hereof and from time to time, the introduction of or any change in any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by the Lender with any guideline or request from any such Governmental Authority (whether or not having the force of law) given or made after the date hereof, shall (i) subject the Lender to any tax or other charge, or change the basis of taxation of payments to the Lender, in respect of any of its LIBOR Loans or any other amounts payable hereunder or its obligation to make, fund or maintain any LIBOR Loans (other than any change in the rate or basis of tax on the overall net income of the Lender), (ii) impose, modify or deem applicable any reserve, special deposit or similar requirement (but excluding any reserves to the extent actually included within the Reserve Requirement in the calculation of the LIBOR Rate) against assets of, deposits with or for the account of, or credit extended by, the Lender, or (iii) impose on the Lender or its applicable Lending Office any other condition, and the result of any of the foregoing shall be to increase the cost to the Lender of making or maintaining any LIBOR Loans or to reduce the amount of any sum received or receivable by the Lender hereunder, the 21 Borrower will, promptly upon demand therefor by the Lender, pay to the Lender such additional amounts as shall compensate the Lender for such increase in costs or reduction in return. (b) If, at any time after the date hereof and from time to time, the Lender shall have reasonably determined that the introduction of or any change in any applicable law, rule or regulation regarding capital adequacy or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by the Lender with any guideline or request from any such Governmental Authority (whether or not having the force of law) given or made after the date hereof, has or would have the effect, as a consequence of the Lender's Commitment or Loans, of reducing the rate of return on the capital of the Lender or any Person controlling the Lender to a level below that which the Lender or controlling Person could have achieved but for such introduction, change or compliance (taking into account the Lender's or controlling Person's policies with respect to capital adequacy), the Borrower will, promptly upon demand therefor by the Lender therefor, pay to the Lender such additional amounts as will compensate the Lender or controlling Person for such reduction in return. (c) If, on or prior to the first day of any Interest Period, (y) the Lender shall have determined that adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate for such Interest Period or (z) the Lender shall have determined that the rate of interest referred to in the definition of "LIBOR Rate" upon the basis of which the Adjusted LIBOR Rate for LIBOR Loans for such Interest Period is to be determined will not adequately and fairly reflect the cost to the Lender of making or maintaining LIBOR Loans during such Interest Period, the Lender will forthwith so notify the applicable Borrower. Upon such notice, (i) all then outstanding LIBOR Loans shall automatically, on the expiration date of the respective Interest Periods applicable thereto (unless then repaid in full), be converted into Base Rate Loans, (ii) the obligation of the Lender to make, to convert Base Rate Loans into, or to continue, LIBOR Loans shall be suspended (including pursuant to the Borrowing to which such Interest Period applies), and (iii) any Notice of Borrowing or Notice of Conversion/Continuation given at any time thereafter with respect to LIBOR Loans shall be deemed to be a request for Base Rate Loans, in each case until the Lender shall have determined that the circumstances giving rise to such suspension no longer exist and the Lender shall have so notified the applicable Borrower. (d) Notwithstanding any other provision in this Agreement, if, at any time after the date hereof and from time to time, the Lender shall have determined in good faith that the introduction of or any change in any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance with any guideline or request from any such Governmental Authority (whether or not having the force of law), has or would have the effect of making it unlawful for the Lender to make or to continue to make or maintain LIBOR Loans, the Lender will forthwith so notify the applicable Borrower. Upon such notice, (i) each of the Lender's then outstanding LIBOR Loans shall automatically, on the expiration date of the respective Interest Period applicable thereto (or, to the extent any such LIBOR Loan may not lawfully be maintained as a LIBOR Loan until such expiration date, upon such notice), be converted into a Base Rate Loan, (ii) the obligation of the Lender to make, to convert Base Rate Loans into, or to continue, LIBOR Loans shall be suspended (including pursuant to any Borrowing for which the Lender has received a Notice of Borrowing but for which the Borrowing Date has not arrived), 22 and (iii) any Notice of Borrowing or Notice of Conversion/Continuation given at any time thereafter with respect to LIBOR Loans shall, as to the Lender, be deemed to be a request for a Base Rate Loan, in each case until the Lender shall have determined that the circumstances giving rise to such suspension no longer exist and shall have so notified the applicable Borrower. (e) Determinations by the Lender for purposes of this Section of any increased costs, reduction in return, market contingencies, illegality or any other matter shall, absent manifest error, be conclusive, provided that such determinations are made in good faith. No failure by the Lender at any time to demand payment of any amounts payable under this Section shall constitute a waiver of its right to demand payment of any additional amounts arising at any subsequent time. Nothing in this Section shall require or be construed to require the Borrower to pay any interest, fees, costs or other amounts in excess of that permitted by applicable law. 2.16 Taxes. (a) Any and all payments by the Borrower hereunder or under any Note shall be made, in accordance with the terms hereof and thereof, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, other than net income and franchise taxes imposed on the Lender by the United States or any political subdivision or taxing authority thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the Note to the Lender, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), the Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower will make such deductions, (iii) the Borrower will pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower will deliver to the Lender evidence of such payment. (b) The Borrower will indemnify the Lender for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section) paid by the Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be made within thirty (30) days from the date the Lender makes written demand therefor. (c) If the Lender subsequently recovers, or receives a permanent net tax benefit with respect to, any amount of Taxes (i) previously paid by it and as to which it has been indemnified by or on behalf of the Borrower or (ii) previously deducted by the Borrower (including, without limitation, any Taxes deducted from any additional sums payable under clause (i) of subsection (a) above), the Lender shall reimburse the Borrower to the extent of the amount of any such recovery or permanent net tax benefit (but only to the extent of indemnity payments made, or additional amounts paid, by or on behalf of the Borrower under this Section with respect to the Taxes giving rise to such recovery or tax benefit); provided, however, that the Borrower, upon the request of the Lender, agrees to repay to the Lender the amount paid over to 23 the Borrower (together with any penalties, interest or other charges), in the event the Lender is required to repay such amount to the relevant taxing authority or other Governmental Authority. 2.17 Compensation. The Borrower will compensate the Lender upon demand for all losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by the Lender to fund or maintain LIBOR Loans) that the Lender may incur or sustain (i) if for any reason the Borrower does not consummate (other than due to a default by the Lender) a Borrowing or continuation of, or conversion into, a LIBOR Loan does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion/Continuation, (ii) if any repayment, prepayment or conversion of any LIBOR Loan occurs on a date other than the last day of an Interest Period applicable thereto (including as a consequence of acceleration of the maturity of the Loans pursuant to SECTION 8.2), (iii) if any prepayment of any LIBOR Loan is not made on any date specified in a notice of prepayment given by the Borrower or (iv) as a consequence of any other failure by the Borrower to make any payments with respect to any LIBOR Loan when due hereunder. Calculation of all amounts payable to the Lender under this Section shall be made as though the Lender had actually funded its relevant LIBOR Loan through the purchase of a Eurodollar deposit bearing interest at the LIBOR Rate in an amount equal to the amount of such LIBOR Loan, having a maturity comparable to the relevant Interest Period; provided, however, that the Lender may fund its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section. Determinations by the Lender for purposes of this Section of any such losses, expenses or liabilities shall, absent manifest error, be conclusive, provided that such determinations are made in good faith. ARTICLE III CONDITIONS OF BORROWING 3.1 Conditions of Initial Borrowing. The obligation of the Lender to make a Loan in connection with the initial Borrowing hereunder is subject to the satisfaction of the following conditions precedent: (a) The Lender shall have received the following, each dated as of the Closing Date (unless otherwise specified): (i) A Note in the amount of the Commitment, duly completed in accordance with the relevant provisions of SECTION 2.4 and executed by the Borrower; and (ii) the favorable opinion of Howard S. Yaruss, General Counsel of the Borrower, in substantially the form of EXHIBIT D, addressed to the Lender and addressing such other matters as the Lender may reasonably request, together with such opinions of local counsel as the Lender may require. (b) The Lender shall have received a certificate signed by the president, the chief executive officer or the chief financial officer of the Borrower, in form and substance 24 satisfactory to the Lender, certifying that (i) all representations and warranties of the Borrower, contained in this Agreement and the other Credit Documents are true and correct as of the Closing Date, both immediately before and after giving effect to the consummation of the transactions contemplated hereby, the making of the initial Loan hereunder and the application of the proceeds thereof, (ii) no Default or Event of Default has occurred and is continuing, both immediately before and after giving effect to the consummation of the transactions contemplated hereby, the making of the initial Loan hereunder and the application of the proceeds thereof, (iii) both immediately before and after giving effect to the consummation of the transactions contemplated hereby, the making of the initial Loan hereunder and the application of the proceeds thereof, no Material Adverse Change has occurred with respect to the Borrower, since December 31, 2000, and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change with respect to the Borrower, and (iv) all conditions to the initial extensions of credit hereunder set forth in this Section and in SECTION 3.2 have been satisfied or waived as required hereunder. (c) The Lender shall have received a certificate of the secretary or an assistant secretary of the Borrower, in form and substance satisfactory to the Lender, certifying (i) that attached thereto is a true and complete copy of the articles or certificate of incorporation and all amendments thereto of the Borrower, certified as of a recent date by the Secretary of State (or comparable Governmental Authority) of its jurisdiction of incorporation, and that the same has not been amended since the date of such certification and, (ii) that attached thereto is a true and complete copy of the bylaws of the Borrower, as then in effect and as in effect at all times from January 1, 2001 and including the date of such certificate, and as to the incumbency and genuineness of the signature of each officer of the Borrower executing this Agreement or any of such other Credit Documents, and attaching all such copies of the documents described above. (d) The Lender shall have received a certificate as of a recent date of the good standing of each of the Borrower and its Material Subsidiaries under the laws of its jurisdiction of incorporation, from the Secretary of State (or comparable Governmental Authority) of such jurisdiction. (e) The Lender shall have received a certificate of compliance as of a recent date of each Material Insurance Subsidiary issued by the Insurance Regulatory Authority of its jurisdiction of legal domicile. (f) All legal matters, documentation, and corporate or other proceedings incident to the transactions contemplated hereby shall be satisfactory in form and substance to the Lender; all licenses, approvals, permits and consents of any Governmental Authorities or other Persons required in connection with the execution and delivery of this Agreement and the other Credit Documents and the consummation of the transactions contemplated hereby and thereby shall have been obtained, without the imposition of conditions that are not acceptable to the Lender, and all related filings, if any, shall have been made, and all such approvals, permits, consents and filings shall be in full force and effect and the Lender shall have received such copies thereof as it shall have requested; all applicable waiting periods shall have expired without any adverse action being taken by any Governmental Authority having jurisdiction; and no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before, and no order, injunction or decree shall have been entered by, any court or 25 other Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain substantial damages in respect of, or that is otherwise related to or arises out of, this Agreement, any of the other Credit Documents or the consummation of the transactions contemplated hereby or thereby, or that, in the opinion of the Lender, could reasonably be expected to have a Material Adverse Effect. (g) The Lender shall have received certified reports from an independent search service satisfactory to it listing any judgment or tax lien filing or Uniform Commercial Code financing statement that names the Borrower or any Material Insurance Subsidiary as debtor and the results thereof shall be satisfactory to the Lender. (h) Since December 31, 2000, both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement, there shall not have occurred any Material Adverse Change with respect to the Borrower or any of its Subsidiaries or any event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change with respect to the Borrower or any of its Subsidiaries. (i) The Borrower shall have paid (i) to the Lender, the unpaid balance of the fees described in the Fee Letter and the fees described in SECTION 2.9 and (ii) all other fees and expenses of the Lender required hereunder or under any other Credit Document to be paid on or prior to the Closing Date (including fees and expenses of counsel) in connection with this Agreement and the transactions contemplated hereby. (j) The Lender shall have received the financial statements as described in SECTION 4.11, all of which shall be in form and substance satisfactory to the Lender. (k) The Lender shall have received a Covenant Compliance Worksheet, duly completed and certified by the chief financial officer of the Borrower and in form and substance satisfactory to the Lender, demonstrating the Borrower's compliance with the financial covenant set forth in SECTION 6.1, determined as of September 30, 2001. (l) The Lender shall be satisfied with the actuarial review and valuation statement of, and opinion as to the adequacy of, the loss and loss adjustment expense reserve positions as of December 31, 2000 of each Insurance Subsidiary, with respect to its insurance business then in force, prepared and given by an independent actuarial firm acceptable to the Lender; and such review, valuation and opinion shall not differ in any material and negative respect from any such materials previously delivered to the Lender. (m) The Lender shall have received satisfactory confirmation from Standard & Poor's and Fitch that the current financial strength rating of each Material Insurance Subsidiary is "AA-" or better and from Moody's that the current rating of each Material Insurance Subsidiary (other than Radian Asset Assurance Inc. which is not rated by Moody's) is "Aa3" or better. (n) The Lender shall have received an Account Designation Letter, together with written instructions from an Authorized Officer, including wire transfer information, directing the payment of the proceeds of the initial Loan to be made hereunder. 26 (o) All Indebtedness of the Borrower and its Subsidiaries not permitted under SCHEDULE 7.2 shall have been satisfied, and all Liens and guaranties in connection therewith shall have been released and the Lender shall have received satisfactory evidence thereof. (p) The Lender shall have received such other documents, certificates, opinions and instruments in connection with the transactions contemplated hereby as it shall have reasonably requested. 3.2 Conditions of All Borrowings. The obligation of the Lender to make any Loans hereunder, including the initial Loan, is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or date of issuance: (a) The Lender shall have received a Notice of Borrowing in accordance with SECTION 2.2(b); (b) Each of the representations and warranties contained in ARTICLE IV and in the other Credit Documents shall be true and correct on and as of such Borrowing Date (including the Closing Date, in the case of the initial Loan made hereunder) or date of issuance with the same effect as if made on and as of such date, both immediately before and after giving effect to the Loans to be made (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct as of such date); and (c) No Default or Event of Default shall have occurred and be continuing on such date, both immediately before and after giving effect to the Loans to be made on such date. Each giving of a Notice of Borrowing and the consummation of each Borrowing shall be deemed to constitute a representation by the Borrower that the statements contained in subsections (b) and (c) above are true, both as of the date of such notice or request and as of the relevant Borrowing Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement and to induce the Lender to extend the credit contemplated hereby, the Borrower represents and warrants to the Lender as follows: 4.1 Corporate Organization and Power. Each of the Borrower and its Material Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the full corporate power and authority to execute, deliver and perform the Credit Documents to which it is or will be a party, to own and hold its property and to engage in its business as presently conducted, and (iii) is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction where the nature of its business or the ownership of its properties requires it to be so qualified, except where the failure to be so qualified would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect. 27 4.2 Authorization; Enforceability. The Borrower has taken, or on the Closing Date will have taken, all necessary corporate action to execute, deliver and perform each of the Credit Documents to which it is or will be a party, and has, or on the Closing Date (or any later date of execution and delivery) will have, validly executed and delivered each of the Credit Documents to which it is or will be a party. This Agreement constitutes, and each of the other Credit Documents upon execution and delivery will constitute, the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, by general equitable principles or by principles of good faith and fair dealing. 4.3 No Violation. The execution, delivery and performance by the Borrower of this Agreement and each of the other Credit Documents to which it is or will be a party, and compliance by it with the terms hereof and thereof, do not and will not (i) violate any provision of its articles or certificate of incorporation or bylaws or contravene any other Requirement of Law applicable to it, (ii) conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any material indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it is subject, (iii) result in a revocation, suspension, termination, impairment, probation, limitation, non-renewal, forfeiture, declaration of ineligibility, loss of status of, or loss of any other rights (each a, "License Impairment") with respect to, any Licenses applicable to the business, operations or properties of the Borrower and its Subsidiaries, except where such License Impairment would not, individually or in the aggregate, have a Material Adverse Effect, or (iv) result in or require the creation or imposition of any Lien upon any of its properties or assets. Except for the prohibition on Radian Reinsurance Inc. and Radian Asset Assurance Inc. making any dividend payments to the Borrower prior to February 28, 2003 without the consent of the New York Insurance Department, no Subsidiary is a party to any agreement or instrument or otherwise subject to any restriction or encumbrance that restricts or limits its ability to make dividend payments or other distributions in respect of its Capital Stock, to repay Indebtedness owed to the Borrower or any other Subsidiary, to make loans or advances to the Borrower or any other Subsidiary, or to transfer any of its assets or properties to the Borrower or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents or applicable Requirements of Law. 4.4 Governmental and Third-Party Authorization; Permits. (a) No consent, approval, authorization or other action by, notice to, or registration or filing with, any Governmental Authority or other Person is or will be required as a condition to or otherwise in connection with the due execution, delivery and performance by the Borrower of this Agreement or any of the other Credit Documents to which it is or will be a party or the legality, validity or enforceability hereof or thereof, other than (i) consents, authorizations and filings that have been (or on or prior to the Closing Date will have been) made or obtained and that are (or on the Closing Date will be) in full force and effect, which consents, authorizations and filings are listed on SCHEDULE 4.4 and (ii) consents and filings the failure to obtain or make which would not, individually or in the aggregate, have a Material Adverse Effect. 28 (b) The Borrower and its Subsidiaries have, and are in good standing with respect to, all governmental approvals, Licenses, permits and authorizations necessary to conduct its business as presently conducted and to own or lease and operate its properties, except for those the failure to obtain which would not be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect. 4.5 Litigation. Except as disclosed on SCHEDULE 4.5, there are (i) no actions, investigations, suits or proceedings pending or, to the knowledge of the Borrower, threatened, at law, in equity or in arbitration, before any court, other Governmental Authority, the Insurance Regulatory Authority or other Person, against or affecting the Borrower or any of its Subsidiaries, or any of their respective properties that would, if adversely determined, be reasonably likely to have a Material Adverse Effect, or (ii) no actions, investigations, suits or proceedings pending or, to the knowledge of the Borrower, threatened, at law, in equity or in arbitration, before any court, other Governmental Authority, or other Person, with respect to this Agreement or any of the other Credit Documents. 4.6 Taxes. The Borrower and its Subsidiaries have timely filed all federal tax returns, and all material state and local tax returns and reports required to be filed by it and have paid all taxes, assessments, fees and other charges levied upon it or upon its properties that are shown thereon as due and payable, other than those that are being contested in good faith and by proper proceedings and for which adequate reserves have been established in accordance with GAAP. Such returns accurately reflect in all material respects all liability for taxes of the Borrower and its Subsidiaries for the periods covered thereby. There is no ongoing audit or examination or, to the knowledge of the Borrower, other investigation by any Governmental Authority of the tax liability of the Borrower or any of its Subsidiaries, and there is no unresolved claim by any Governmental Authority concerning the tax liability of the Borrower or any of its Subsidiaries for any period for which tax returns have been or were required to have been filed, other than claims for which adequate reserves have been established in accordance with GAAP or would not, individually or in the aggregate, have a Material Adverse Effect. Except as set forth on SCHEDULE 4.6, neither the Borrower nor any of its Subsidiaries has waived or extended or has been requested to waive or extend the statute of limitations relating to the payment of any taxes. 4.7 Subsidiaries. SCHEDULE 4.7 sets forth a list, as of the date hereof, of all of the Subsidiaries of the Borrower and, as to each such Subsidiary, the percentage ownership (direct and indirect) of the Borrower in each class of its capital stock and each direct owner thereof. Except for shares of capital stock or other ownership interests expressly indicated on SCHEDULE 4.7, there are no shares of capital stock, ownership interests, warrants, rights, options or other equity securities, or other Capital Stock of any Subsidiary of the Borrower outstanding or reserved for any purpose. All outstanding shares of capital stock or ownership interests of each Subsidiary of the Borrower are duly and validly issued, fully paid and nonassessable. 4.8 Full Disclosure. All factual information heretofore or contemporaneously furnished to the Lender in writing by or on behalf of the Borrower or any of its Subsidiaries for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all other such factual information hereafter furnished to the Lender in writing by or on behalf of the Borrower or any of its Subsidiaries when taken as a whole will be, true and accurate in all material respects on the date as of which such information is dated or certified (or, if such 29 information has been amended or supplemented, on the date as of which any such amendment or supplement is dated or certified) and not made incomplete by omitting to state a material fact necessary to make the statements contained therein, in light of the circumstances under which such information was provided, not misleading. 4.9 Margin Regulations. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No proceeds of the Loans will be used, directly or indirectly, to purchase or carry any Margin Stock, to extend credit for such purpose or for any other purpose that would violate or be inconsistent with Regulations T, U or X or any provision of the Exchange Act. 4.10 No Material Adverse Change. There has been no Material Adverse Change since December 31, 2000, and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change. 4.11 Financial Matters. (a) The Borrower has heretofore furnished to the Lender copies of (i) the audited consolidated balance sheets of the Borrower and its Subsidiaries as of December 31, 2000, 1999, and 1998, and the related statements of income, cash flows and stockholders' equity for the fiscal years then ended, together with the opinion of Deloitte & Touche LLP thereon, and (ii) the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as of September 30, 2001, and the related statements of income, cash flows and stockholders' equity for the nine-month period then ended. Such financial statements have been prepared in accordance with GAAP (subject, with respect to the unaudited financial statements, to the absence of notes required by GAAP and to normal year-end adjustments) and present fairly the financial condition of the Borrower and its Subsidiaries on a consolidated basis as of the respective dates thereof and the consolidated results of operations of the Borrower and its Subsidiaries for the respective periods then ended. Except as fully reflected in the most recent financial statements referred to above and the notes thereto, there are no material liabilities or obligations with respect to the Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due). (b) Each of the Borrower and its Subsidiaries, after giving effect to the consummation of the transactions contemplated hereby, (i) has capital sufficient to carry on its businesses as conducted and as proposed to be conducted, (ii) has assets with a fair saleable value, determined on a going concern basis, (y) not less than the amount required to pay the probable liability on its existing debts as they become absolute and matured and (z) greater than the total amount of its liabilities (including identified contingent liabilities, valued at the amount that can reasonably be expected to become absolute and matured), and (iii) does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay such debts and liabilities as they mature. (c) The Borrower has heretofore furnished to the Lender copies of (i) the Annual Statements of each of its Material Insurance Subsidiaries as of December 31, 2000, 1999 and 1998, and for the fiscal years then ended, and (ii) the Quarterly Statements of each of its Material Insurance Subsidiaries as of the end of the first three fiscal quarters of 2001, and for the fiscal 30 quarters then ended, each as filed with the relevant Insurance Regulatory Authority (collectively, the statements referenced in clauses (i) and (ii) above, the "Historical Statutory Statements"). The Historical Statutory Statements (including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities) have been prepared in accordance with SAP where required (except as may be reflected in the notes thereto and subject, with respect to the Quarterly Statements, to the absence of notes required by SAP and to normal year-end adjustments), were in compliance in all material respects with applicable Requirements of Law when filed and present fairly the financial condition of the respective Insurance Subsidiaries covered thereby as of the respective dates thereof and the results of operations, changes in capital and surplus and cash flow of the respective Insurance Subsidiaries covered thereby for the respective periods then ended. Except for liabilities and obligations disclosed or provided for in the Historical Statutory Statements (including, without limitation, reserves, policy and contract claims and statutory liabilities), no Insurance Subsidiary had, as of the date of its respective Historical Statutory Statements, any material liabilities or obligations of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due) that, in accordance with SAP, would have been required to have been disclosed or provided for in such Historical Statutory Statements. All books of account of each Insurance Subsidiary fully and fairly disclose all of its material transactions, properties, assets, investments, liabilities and obligations, are in its possession and are true, correct and complete in all material respects. (d) Within the last three (3) years, neither the Borrower nor any of its Subsidiaries has received any "management letter" from any certified public accountants in connection with any annual, interim or special audit that disclosed any findings that were material and adverse to the Borrower. 4.12 Ownership of Properties. Each of the Borrower and its Subsidiaries (i) has good and marketable title to all real property owned by it, (ii) holds interests as lessee under valid leases in full force and effect with respect to all material leased real and personal property used in connection with its business, (iii) possesses or has rights to use licenses, patents, copyrights, trademarks, service marks, trade names and other assets sufficient to enable it to continue to conduct its business substantially as heretofore conducted and without any material conflict with the rights of others, and (iv) has good title to all of its other properties and assets reflected in the most recent financial statements referred to in SECTION 4.11 (except as sold or otherwise disposed of since the date thereof in the ordinary course of business), in each case under (i), (ii), (iii) and (iv) above free and clear of all Liens other than Permitted Liens. 4.13 ERISA. (a) Each of the Borrower and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA, and each Plan is and has been administered in compliance in all material respects with all applicable Requirements of Law, including, without limitation, the applicable provisions of ERISA and the Internal Revenue Code. No ERISA Event (i) has occurred within the five-year period prior to, and including, the Closing Date, or (ii) to the knowledge of the Borrower, is reasonably expected to occur with respect to any Plan. No Plan has any Unfunded Pension Liability as of the most recent annual valuation date applicable 31 thereto, and neither the Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. (b) Neither the Borrower nor any ERISA Affiliate has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any ERISA Affiliate would become subject to any liability under ERISA if the Borrower or any ERISA Affiliate were to withdraw completely from all Multiemployer Plans as of the most recent valuation date. No Multiemployer Plan is in "reorganization" or is "insolvent" within the meaning of such terms under ERISA. 4.14 Environmental Matters. (a) No Hazardous Substances are or have been generated, used, located, released, treated, disposed of or stored by the Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any other Person (including any predecessor in interest) or otherwise, in, on or under any portion of any real property, leased or owned, of the Borrower or any of its Subsidiaries, except in material compliance with all applicable Environmental Laws, and no portion of any such real property or, to the knowledge of the Borrower, any other real property at any time leased, owned or operated by the Borrower or any of its Subsidiaries has been contaminated by any Hazardous Substance; and no portion of any real property, leased or owned, of the Borrower or any of its Subsidiaries has been or is presently the subject of an environmental audit, assessment or remedial action. (b) No portion of any real property, leased or owned, of the Borrower or any of its Subsidiaries has been used by the Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any other Person, as or for a mine, a landfill, a dump or other disposal facility, a gasoline service station, or (other than for petroleum substances stored in the ordinary course of business) a petroleum products storage facility; no portion of such real property or any other real property at any time leased, owned or operated by the Borrower or any of its Subsidiaries has, pursuant to any Environmental Law, been placed on the "National Priorities List" or "CERCLIS List" (or any similar federal, state or local list) of sites subject to possible environmental problems; and there are not and have never been, any underground storage tanks situated on any real property, leased or owned, of the Borrower or any of its Subsidiaries. (c) All activities and operations of the Borrower and its Subsidiaries are in compliance with the requirements of all applicable Environmental Laws, except to the extent the failure so to comply, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. Each of the Borrower and its Subsidiaries has obtained all licenses and permits under Environmental Laws necessary to its respective operations; all such licenses and permits are being maintained in good standing; and each of the Borrower and its Subsidiaries is in compliance with all terms and conditions of such licenses and permits, except for such licenses and permits the failure to obtain, maintain or comply with which would not be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect. Neither the Borrower nor any of its Subsidiaries is involved in any suit, action or proceeding, or has received any notice, complaint or other request for information from any Governmental Authority or other Person, with respect to any actual or alleged Environmental Claims that, if adversely determined, would be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect; and, to the knowledge of either Borrower, there are no threatened actions, suits, proceedings or investigations with respect to any such Environmental Claims, nor any basis therefor. 32 4.15 Compliance With Laws. Each of the Borrower and its Subsidiaries has timely filed all material reports, documents and other materials required to be filed by it under all applicable Requirements of Law with any Governmental Authority and Insurance Regulatory Authority, as the case may be, has retained all material records and documents required to be retained by it under all applicable Requirements of Law, and is otherwise in compliance with all applicable Requirements of Law in respect of the conduct of its business and the ownership and operation of its properties, except for such Requirements of Law the failure to comply with which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 4.16 Regulated Industries. Neither the Borrower nor any of its Subsidiaries is (i) an "investment company," a company "controlled" by an "investment company," or an "investment advisor," within the meaning of the Investment Company Act of 1940, as amended, or (ii) a "holding company," a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.17 Insurance. The assets, properties and business of the Borrower and its Subsidiaries are insured against such hazards and liabilities, under such coverages and in such amounts, as are customarily maintained by prudent companies similarly situated and under policies issued by insurers of recognized responsibility. 4.18 Material Contracts. SCHEDULE 4.18 lists, as of the Closing Date, each "material contract" (within the meaning of 601(b)(10) of Regulation S-K under the Exchange Act other than, to the extent applicable, any contract involving an employee loan in an amount less than $60,000) that is not listed in the Borrower's most recent annual report filed on Form 10-K or any quarterly report filed on Form 10-Q since that time and to which the Borrower or any of its Subsidiaries is a party, by which any of them or their respective properties is bound or to which any of them is subject (collectively, "Material Contracts"), and also indicates the parties, subject matter and term thereof. As of the Closing Date, (i) each Material Contract is in full force and effect and is enforceable by the Borrower or the applicable Subsidiary in accordance with its terms, and (ii) neither the Borrower nor any of its Subsidiaries (nor, to the knowledge of the Borrower, any other party thereto) is in breach of or default under any Material Contract in any material respect or has given notice of termination or cancellation of any Material Contract. 4.19 Reinsurance Agreements. Except as set forth on Schedule F to the Annual Statements for the Material Insurance Subsidiaries, for the fiscal year ending December 31, 2000, and except as set forth on SCHEDULE 4.19, there were no material liabilities outstanding as of September 30, 2001 under any Reinsurance Agreement and since September 30, 2001, except as previously disclosed in writing by the Borrower to the Lender pursuant to this Agreement, and no Material Insurance Subsidiary has incurred any material liabilities under any Reinsurance Agreement that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Each such Reinsurance Agreement (except any Reinsurance Agreement that has expired by its terms in the ordinary course) is in full force and effect; none of the Material Insurance Subsidiaries or, to the knowledge of the Borrower, any other party thereto, is in breach of or default under any such contract; and the Borrower has no reason to believe that the financial condition of any other party to any such contract is impaired such that a 33 default thereunder by such party could reasonably be anticipated. Each such Reinsurance Agreement (except any Reinsurance Agreement that has expired by its terms in the ordinary course) is qualified under all applicable Requirements of Law to receive the statutory credit assigned to such Reinsurance Agreement in the relevant Annual Statement or Quarterly Statement at the time prepared. ARTICLE V AFFIRMATIVE COVENANTS The Borrower covenants and agrees that, until the termination of the Commitment and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder: 5.1 Financial Statements. The Borrower will deliver to the Lender: (a) As soon as available and in any event within sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first such fiscal quarter ending after the date hereof, unaudited consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal quarter and unaudited consolidated statements of income, cash flows and stockholders' equity for the Borrower and its Subsidiaries for the fiscal quarter then ended and for that portion of the fiscal year then ended, in each case setting forth comparative consolidated figures as of the end of and for the corresponding period in the preceding fiscal year, all in reasonable detail and prepared in accordance with GAAP (subject to the absence of notes required by GAAP and subject to normal year-end adjustments) applied on a basis consistent with that of the preceding quarter or containing disclosure of the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such quarter; and (b) As soon as available and in any event within one hundred (100) days after the end of each fiscal year, beginning with the fiscal year ending December 31, 2001, an audited consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and audited consolidated statements of income, cash flows and stockholders' equity for the Borrower and its Subsidiaries for the fiscal year then ended, including the notes thereto, in each case setting forth comparative figures as of the end of and for the preceding fiscal year, all in reasonable detail and certified by the independent certified public accounting firm regularly retained by the Borrower or another independent certified public accounting firm of recognized national standing reasonably acceptable to the Lender, together with a report thereon by such accountants that is not qualified as to going concern or scope of audit and to the effect that such financial statements present fairly the consolidated financial condition and results of operations of the Borrower and its Subsidiaries as of the dates and for the periods indicated in accordance with GAAP applied on a basis consistent with that of the preceding year or containing disclosure of the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such year. 34 5.2 Statutory Financial Statements. The Borrower will deliver to the Lender: (a) As soon as available and in any event within sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first fiscal quarter ending after the date hereof, a Quarterly Statement of each Insurance Subsidiary as of the end of such fiscal quarter and for that portion of the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with SAP; and (b) As soon as available and in any event within one hundred (100) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 2001, (i) an Annual Statement of each Insurance Subsidiary as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with SAP; and (c) As soon as available and in any event within one hundred fifty (150) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 2001, the combined Annual Statement of the Insurance Subsidiaries as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with SAP. 5.3 Other Business and Financial Information. The Borrower will deliver, or cause to be delivered, to the Lender: (a) Concurrently with each delivery of the financial statements described in SECTIONS 5.1 and 5.2, Compliance Certificates in the form of EXHIBITS C-1 and C-2 with respect to the period covered by the financial statements then being delivered, executed by a Financial Officer of the Borrower, together, with respect to the Compliance Certificate delivered with the financial statements described in Section 5.1, with a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in SECTION 6.1 as of the last day of the period covered by such financial statements; (b) Promptly upon filing with the relevant Insurance Regulatory Authority and in any event within one hundred (100) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 2001, a copy of each Insurance Subsidiary's "Statement of Actuarial Opinion" (or equivalent information should the relevant Insurance Regulatory Authority not require such a statement) as to the adequacy of such Insurance Subsidiary's loss reserves for such fiscal year, together with a copy of its management discussion and analysis in connection therewith, each in the format prescribed by the applicable insurance laws of such Insurance Subsidiary's jurisdiction of domicile; (c) Promptly upon the sending, filing or receipt thereof, copies of (i) all financial statements, reports, notices and proxy statements that the Borrower or any of its Subsidiaries shall send or make available generally to its shareholders, (ii) all regular, periodic and special reports, registration statements and prospectuses (other than on Form S-8) that the Borrower or any of its Subsidiaries shall render to or file with the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. or any national securities exchange, and (iii) all press releases and other statements made available generally by the Borrower or any of its 35 Subsidiaries to the public concerning material developments in the business of the Borrower or any of its Subsidiaries; (iv) all significant filings made under applicable state insurance holding company acts by the Borrower or any of its Subsidiaries, including, without limitation, filings seeking approval of material transactions with Affiliates; and (vi) all material information sent to rating agencies, including without limitation Moody's, Standard & Poor's, A.M. Best & Company and Fitch. (d) Promptly upon receipt thereof, copies of any "management letter" submitted to the Borrower or any of its Subsidiaries by its certified public accountants in connection with each annual, interim or special audit that discloses any finding that is material and adverse to the Borrower, and promptly upon completion thereof, any response reports from the Borrower or any such Subsidiary in respect thereof; (e) Promptly upon (and in any event within five (5) Business Days after) any Responsible Officer of the Borrower obtaining knowledge thereof, written notice of any of the following: (i) the occurrence of any Default or Event of Default, together with a written statement of a Responsible Officer of the Borrower specifying the nature of such Default or Event of Default, the period of existence thereof and the action that the Borrower has taken and proposes to take with respect thereto; (ii) the institution or threatened institution of any action, suit, investigation or proceeding against or affecting the Borrower or any of their respective Subsidiaries, including any such investigation or proceeding by any Governmental Authority (other than routine periodic inquiries, investigations or reviews), that would, if adversely determined, be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect, and any material development in any litigation or other proceeding previously reported pursuant to SECTION 4.5 or this subsection; (iii) the receipt by the Borrower or any of its Subsidiaries from any Governmental Authority or Insurance Regulatory Authority of (y) any written notice asserting any failure by the Borrower or their respective Subsidiaries to be in compliance with applicable Requirements of Law or that threatens the taking of any action against the Borrower or its Subsidiaries or sets forth circumstances that, if taken or adversely determined, would be reasonably likely to have a Material Adverse Effect, or (z) any notice of any actual or threatened suspension, limitation or revocation of, failure to renew, or imposition of any restraining order, escrow or impoundment of funds in connection with, any license, permit, accreditation or authorization of the Borrower or any of its Subsidiaries, where such action would be reasonably likely to have a Material Adverse Effect; (iv) the occurrence of any ERISA Event, together with (x) a written statement of a Responsible Officer of the Borrower, specifying the details of such ERISA Event and the action that the Borrower has taken and proposes to take with respect thereto, (y) a copy of any notice with respect to such ERISA Event that may be required 36 to be filed with the PBGC and (z) a copy of any notice delivered by the PBGC to the Borrower or its ERISA Affiliate, as the case may be, with respect to such ERISA Event; (v) the occurrence of any material default under, or any proposed or threatened termination or cancellation of, any Material Contract or other material contract or agreement to which the Borrower or any of its Subsidiaries is a party, the termination or cancellation of which would be reasonably likely to have a Material Adverse Effect; (vi) the occurrence of any of the following: (x) the assertion of any Environmental Claim against or affecting the Borrower or any of its Subsidiaries or any of their respective real property, leased or owned; (y) the receipt by the Borrower or any of its Subsidiaries of notice of any alleged violation of or noncompliance with any Environmental Laws; or (z) the taking of any remedial action by the Borrower, any of its Subsidiaries or any other Person in response to the actual or alleged generation, storage, release, disposal or discharge of any Hazardous Substances on, to, upon or from any real property leased or owned by the Borrower or any of its Subsidiaries; but in each case under clauses (x), (y) and (z) above, only to the extent the same would be reasonably likely to have a Material Adverse Effect; (vii) the occurrence of any actual changes in any insurance statute or regulation governing the investment or dividend practices of any Insurance Subsidiary that would be reasonably likely to have a Material Adverse Effect; and (viii) any other matter or event that has, or would be reasonably likely to have, a Material Adverse Effect, together with a written statement of a Responsible Officer of the Borrower setting forth the nature and period of existence thereof and the action that the Borrower has taken and proposes to take with respect thereto; (f) Promptly, notice of (i) the occurrence of any material amendment or modification (other than expiration) to any Reinsurance Agreement (whether entered into before or after the Closing Date), including any such agreements that are in a runoff mode on the Closing Date, which amendment or modification would be reasonably likely to have a Material Adverse Effect, or (ii) the receipt by the Borrower or any of its Subsidiaries of any written notice of any denial of coverage or claim, litigation or arbitration with respect to any Reinsurance Agreement to which it is a ceding party which would be reasonably likely to have a Material Adverse Effect; (g) As promptly as reasonably possible, such other information about the business, condition (financial or otherwise), operations or properties of the Borrower or any of its Subsidiaries (including any Plan and any information required to be filed under ERISA) as the Lender may from time to time reasonably request. (h) As soon as available and in any event within ninety (90) days after the end of each fiscal year, an actuarial review and valuation statement of, and opinion as to the adequacy of, the loss and loss adjustment expense reserve positions as of end of such fiscal year of each Material Insurance Subsidiary, with respect to its insurance business then in force, prepared and given by an independent actuarial firm acceptable to the Lender. 37 5.4 Corporate Existence; Franchises; Maintenance of Properties. The Borrower will, and will cause each of its Subsidiaries to, (i) maintain and preserve in full force and effect their respective organizational or corporate existence, except as expressly permitted otherwise by SECTION 7.1, (ii) obtain, maintain and preserve in full force and effect all other rights, Licenses, franchises, permits, certifications, approvals, authorizations required by Governmental Authorities or the Insurance Regulatory Authority, as the case may be, and necessary to the ownership, occupation or use of their respective properties or the conduct of their respective business, except to the extent the failure to do so would not be reasonably likely to have a Material Adverse Effect, and (iii) keep all material properties in good working order and condition (normal wear and tear excepted) and from time to time make all necessary repairs to and renewals and replacements of such properties, except to the extent that any of such properties are obsolete or are being replaced. 5.5 Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, comply in all respects with all Requirements of Law applicable in respect of the conduct of their respective business and the ownership and operation of their respective properties, except to the extent the failure so to comply would not be reasonably likely to have a Material Adverse Effect. 5.6 Payment of Obligations. The Borrower will, and will cause each of its Subsidiaries to (i) pay all liabilities and obligations as and when due (subject to any applicable subordination provisions), except to the extent failure to do so would not be reasonably likely to have a Material Adverse Effect, and (ii) pay and discharge all taxes, assessments and governmental charges or levies imposed upon them, upon their respective income or profits or upon any of their respective properties, prior to the date on which penalties would attach thereto, and all lawful claims that, if unpaid, might become a Lien upon any of the properties of the Borrower or any of its Subsidiaries; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim that is being contested in good faith and by proper proceedings and as to which the Borrower or such Subsidiary is maintaining adequate reserves with respect thereto in accordance with GAAP or SAP, as the case may be. 5.7 Insurance. The Borrower will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurance companies insurance with respect to its assets, properties and business, against such hazards and liabilities, of such types and in such amounts, as is customarily maintained by companies in the same or similar businesses similarly situated. 5.8 Maintenance of Books and Records; Inspection. The Borrower will, and will cause each of its Subsidiaries to, (i) maintain adequate books, accounts and records, in which full, true and correct entries shall be made of all financial transactions in relation to their respective business and properties, and prepare all financial statements required under this Agreement, in each case in accordance with GAAP or SAP, as the case may be, and in compliance with the requirements of any Governmental Authority having jurisdiction over them, and (ii) permit employees or agents of the Lender to inspect their respective properties and examine or audit their respective books, records, working papers and accounts and make copies and memoranda of them, and to discuss their respective affairs, finances and accounts with their respective officers and employees and, upon notice to the Borrower the independent public 38 accountants of the Borrower, and its Subsidiaries (and by this provision the Borrower authorizes such accountants to discuss the finances and affairs of the Borrower and its Subsidiaries), all at such times and from time to time, upon reasonable notice and during business hours, as may be reasonably requested. 5.9 Permitted Acquisitions. Subject to the requirements contained in the definition of Permitted Acquisition, and subject to the other terms and conditions of this Agreement, the Borrower may from time to time on or after the Closing Date effect Permitted Acquisitions, provided that, with respect to each Permitted Acquisition no Default or Event of Default shall have occurred and be continuing at the time of the consummation of such Permitted Acquisition or would exist immediately after giving effect thereto. 5.10 Dividends. The Borrower will take all action necessary to cause its Subsidiaries to make such dividends, distributions or other payments to the Borrower as shall be necessary for the Borrower to make payments of the principal of and interest on the Loans in accordance with the terms of this Agreement. In the event the approval of any Governmental Authority or other Person is required in order for any such Subsidiary to make any such dividends, distributions or other payments to the Borrower, or for the Borrower to make any such principal or interest payments, the Borrower will forthwith exercise its best efforts and take all actions permitted by law and necessary to obtain such approval. 5.11 Further Assurances. The Borrower will, and will cause each of its Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments, modifications or supplements hereto and restatements hereof and any other agreements, instruments or documents and to effect, confirm or further assure or protect and preserve the interests, rights and remedies of the Lender under this Agreement and the other Credit Documents. ARTICLE VI FINANCIAL COVENANTS The Borrower covenants and agrees that, until the termination of the Commitment and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder: 6.1 Maximum Consolidated Debt to Consolidated Total Capitalization. The ratio of Consolidated Indebtedness to Consolidated Total Capitalization shall at all times not be greater than .3 : 1.0. ARTICLE VII NEGATIVE COVENANTS The Borrower covenants and agrees that, until the termination of the Commitment and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder: 39 7.1 Merger; Consolidation. The Borrower will not, and will not permit or cause any of its Material Subsidiaries to, liquidate, wind up or dissolve, or enter into any consolidation, merger or other combination, or agree to do any of the foregoing; provided, however, that: (i) the Borrower may merge or consolidate with another Person so long as (x) the Borrower is the surviving entity, (y) unless such other Person is a Wholly Owned Subsidiary immediately prior to giving effect thereto, such merger or consolidation shall constitute a Permitted Acquisition and the applicable conditions and requirements of SECTION 5.9 shall be satisfied, and (z) immediately after giving effect thereto, no Default or Event of Default would exist; and (ii) any Subsidiary may merge or consolidate with another Person so long as (x) the surviving entity is the Borrower or a Subsidiary, (y) unless such other Person is a Wholly Owned Subsidiary immediately prior to giving effect thereto, such merger or consolidation shall constitute a Permitted Acquisition and the applicable conditions and requirements of SECTION 5.9 shall be satisfied, and (z) immediately after giving effect thereto, no Default or Event of Default would exist. 7.2 Indebtedness. The Borrower will not, and will not permit or cause any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness other than: (i) Indebtedness incurred under this Agreement and the Note; (ii) Indebtedness existing on the Closing Date and described in SCHEDULE 7.2; (iii) accrued expenses (including salaries, accrued vacation and other compensation), current trade or other accounts payable and other current liabilities arising in the ordinary course of business and not incurred through the borrowing of money, provided that the same shall be paid when due except to the extent being contested in good faith and by appropriate proceedings; (iv) Indebtedness of any Subsidiary to the Borrower; provided that no Default has occurred and is continuing and no Default shall occur as a result of the incurrence of such Indebtedness; (v) Indebtedness of any Subsidiary to any wholly-owned Subsidiary of the Borrower; provided that that no Default has occurred and is continuing and no Default shall occur as a result of the incurrence of such Indebtedness; (vi) purchase money Indebtedness of the Borrower and its Subsidiaries incurred solely to finance the payment of all or part of the purchase price of any equipment, real property or other fixed assets acquired in the ordinary course of business, including Indebtedness in respect of capital lease obligations, and any renewals, refinancings or replacements thereof (subject to the limitations on the principal amount thereof set forth in this clause (iv)), which Indebtedness shall not exceed $10,000,000 in aggregate principal amount outstanding at any time; 40 (vii) Indebtedness in connection with Permitted Liens; (viii) Indebtedness of the Borrower; provided that no Default has occurred and is continuing and no Default shall occur as a result of the incurrence of such Indebtedness; and provided further that, with respect to Indebtedness to third parties, such Indebtedness shall either rank pari passu or be subordinated in right and time of payment to the Obligations and, with respect to Indebtedness of the Borrower to any Subsidiary, such Indebtedness is subordinated in right and time of payment to the Obligations, in form and substance reasonably satisfactory to the Lender. For purposes of determining whether the incurrence of new Indebtedness on any particular date will cause a Default hereunder, such new Indebtedness, along with any other Indebtedness outstanding as of such date, shall be deemed to be the outstanding Indebtedness as of the last day of the previous fiscal quarter; and (ix) Indebtedness of any Insurance Subsidiary of the Borrower involved primarily in providing reinsurance to major financial guarantors that is incurred to obtain and maintain a soft capital facility to support such Insurance Subsidiary's reinsurance or financial guaranty direct insurance business in the ordinary course in such amount as the applicable rating agencies deem necessary, provided that recourse on such facility must be limited to the pledged recoveries of such Insurance Subsidiary; and provided further that no Default has occurred and is continuing and no Default shall occur as a result of the incurrence of such Indebtedness. 7.3 Liens. The Borrower will not, and will not permit or cause any of its Material Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer to exist, any Lien upon or with respect to any part of its property or assets, whether now owned or hereafter acquired, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the Uniform Commercial Code of any state or under any similar recording or notice statute, or agree to do any of the foregoing, other than the following (collectively, "Permitted Liens"): (i) Liens in existence on the Closing Date and set forth on SCHEDULE 7.3; (ii) Liens imposed by law, such as Liens of carriers, warehousemen, mechanics, materialmen, repairmen and landlords, and other similar Liens incurred in the ordinary course of business for sums not constituting borrowed money that are not overdue for a period of more than thirty (30) days or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP (if so required); (iii) Liens (other than any Lien imposed by ERISA, the creation or incurrence of which would result in an Event of Default under SECTION 8.1(I)) incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure the performance of letters of credit, bids, tenders, statutory obligations, surety and 41 appeal bonds, leases, government contracts and other similar obligations (other than obligations for borrowed money) entered into in the ordinary course of business; (iv) Liens for taxes, assessments or other governmental charges or statutory obligations that are not delinquent or remain payable without any penalty or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP (if so required); (v) Liens securing the purchase money Indebtedness permitted under clause (v) of SECTION 7.2, provided that any such Lien (i) shall attach to such property concurrently with or within ten (10) days after the acquisition thereof by the Borrower or such Subsidiary, (ii) shall not exceed the lesser of (y) the fair market value of such property or (z) the cost thereof to the Borrower or such Subsidiary and (iii) shall not encumber any other property of the Borrower or any of its Subsidiaries; (vi) any attachment or judgment Lien not constituting an Event of Default under SECTION 8.1(h) that is being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP (if so required); (vii) Liens arising from the filing, for notice purposes only, of financing statements in respect of true leases; (viii) Liens on Borrower Margin Stock, to the extent the fair market value thereof exceeds 25% of the fair market value of the assets of the Borrower and its Subsidiaries (including Borrower Margin Stock); (ix) with respect to any real property occupied by the Borrower or any of its Subsidiaries, all easements, rights of way, restrictions, licenses, similar encumbrances on title and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of property or minor imperfections in title thereto which, in the aggregate, are not material in amount, that do not materially interfere with the ordinary conduct of the business of the Borrower; (x) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (xi) Liens upon real or tangible personal property acquired after the Effective Date by the Borrower or any of its Subsidiaries, each of which Liens either existed on such property prior to the time of its acquisition by the Borrower or any of its Subsidiaries and was not created in anticipation thereof or was created solely for the purpose of securing Indebtedness incurred to finance, refinance or refund the cost (including the cost of construction) of such property; provided, that (A) no such Lien shall extend to or cover any property of the Borrower or such Subsidiary other than the property so acquired and improvements thereon, and (B) the principal amount of Indebtedness secured by any such Lien shall not exceed 80% of the fair market value (as 42 determined in good faith by a senior financial officer of the Borrower) of such property at the time it was acquired; (xii) Liens on property of any corporation, partnership, limited liability company or other legal entity that becomes a Subsidiary of the Borrower after the Effective Date; provided, that such Liens are in existence at the time such entity becomes a Subsidiary of the Borrower and were not created in anticipation thereof; and (xiii)any extension, renewal or replacement of the foregoing; provided that the Liens permitted by this clause shall not extend to or cover any additional Indebtedness or property (other than a substitution of like property). 7.4 Disposition of Assets. The Borrower will not, and will not permit or cause any of its Subsidiaries to, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) all or any portion of its assets, business or properties (including, without limitation, any Capital Stock of any Subsidiary) or enter into any arrangement with any Person providing for the lease by the Borrower or any Subsidiary as lessee of any asset that has been sold or transferred by the Borrower or such Subsidiary to such Person, or agree to do any of the foregoing, except for: (i) sales of inventory or other assets and licenses or leases of intellectual property and other assets, in each case in the ordinary course of business; (ii) the sale or exchange of used or obsolete equipment to the extent (A) the proceeds of such sale are applied towards, or such equipment is exchanged for, replacement equipment or (B) such equipment is no longer necessary for the operations of the Borrower or its applicable Subsidiary in the ordinary course of business; or (iii) the sale, lease or other disposition of assets by a Subsidiary to another Subsidiary if, immediately after giving effect thereto, no Default or Event of Default would exist. 7.5 Investments and Acquisitions. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, purchase, own, invest in or otherwise acquire any Capital Stock, evidence of indebtedness or other obligation or security or any interest whatsoever in any other Person, or make or permit to exist any loans, advances or extensions of credit to, or any investment in cash or by delivery of property in, any other Person, or purchase or otherwise acquire (whether in one or a series of related transactions) any portion of the assets, business or properties of another Person (including pursuant to an Acquisition), or create or acquire any Subsidiary, or become a partner or joint venturer in any partnership or joint venture (collectively, "Investments"), or make a commitment or otherwise agree to do any of the foregoing, other than: (i) Investments by the Borrower and its Subsidiaries to the extent permitted under applicable Requirements of Law and in compliance at all times with the: (A) the requirements of the Lloyd's insurance market, if applicable, (B) all applicable insurance laws and regulations of any other relevant jurisdictions relating to investments by an Insurance Subsidiary and (C) the limitations set forth in the Investment Policy; 43 (ii) Investments constituting operating deposit accounts with banks and accounts receivable arising in the ordinary course of business on ordinary business terms; (iii) Permitted Acquisitions; (iv) Investments existing on the Closing Date and either (y) disclosed on the financial statements required under SECTION 4.11 and delivered pursuant to SECTION 3.1(j) or (z) described in SCHEDULE 7.5. and (v) Travel and similar advances by the Borrower and its Subsidiaries in the ordinary course of business and loans to employees, officers and directors of the Borrower and its Subsidiaries, provided that such travel or similar advances and loans to employees, officers and directors at any one time do not exceed, in the aggregate, $3,000,000 for the Borrower and its Subsidiaries 7.6 Restricted Payments. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, declare or make any dividend payment, or make any other distribution of cash, property or assets, in respect of any of its Capital Stock or any warrants, rights or options to acquire its Capital Stock, or set aside funds for any of the foregoing, except that: (i) the Borrower may declare and make dividend payments or other distributions payable solely in its common stock; (ii) each Wholly Owned Subsidiary of the Borrower may declare and make dividend payments or other distributions to the Borrower or another Wholly Owned Subsidiary of the Borrower, to the extent not prohibited under applicable Requirements of Law; and (iii) the Borrower may declare and make dividend payments payable solely in cash; provided that no Default has occurred and is continuing. 7.7 Transactions with Affiliates. The Borrower will not, and will not permit or cause any of its Subsidiaries to, enter into any transaction (including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service) with any officer, director, stockholder or other Affiliate of the Borrower or any Subsidiary, except in the ordinary course of its business and upon fair and reasonable terms that are in all material respects as advantageous to the Borrower and its Subsidiaries as the Borrower would be reasonably able to obtain in a comparable arm's length transaction with a Person other than an Affiliate of the Borrower or such Subsidiary; provided, however, that nothing contained in this Section shall prohibit transactions described on SCHEDULE 7.7, the payment by the Borrower of reasonable and customary fees to members of its board of directors or transactions otherwise expressly permitted under this Agreement. 7.8 Certain Amendments. The Borrower will not, and will not permit or cause any of its Subsidiaries to amend, modify or change any provision of its articles or certificate of incorporation or organization or bylaws or operating agreement, as the case may be, or the terms 44 of any class or series of its Capital Stock, other than in a manner that would not reasonably be likely to adversely affect the Lender. 7.9 Limitation on Certain Restrictions. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on (i) the ability of the Borrower and its Subsidiaries to perform and comply with their respective obligations under the Credit Documents or (ii) the ability of any Subsidiary of the Borrower to make any dividend payments or other distributions in respect of its Capital Stock, to repay Indebtedness owed to the Borrower or any other Subsidiary, to make loans or advances to the Borrower or any other Subsidiary, or to transfer any of its assets or properties to the Borrower or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents or applicable Requirements of Law; it being understood that Radian Reinsurance Inc. and Radian Asset Assurance Inc. are prohibited from making any dividend payments to the Borrower prior to February 28, 2003 without the consent of the New York State Insurance Department. 7.10 Fiscal Year. The Borrower will not, and will not permit or cause any of its Subsidiaries to, change the ending date of its fiscal year to a date other than December 31. 7.11 Accounting Changes. The Borrower will not, and will not permit or cause any of its Subsidiaries to, make or permit any material change in its accounting policies or reporting practices, except as may be required by GAAP or SAP, as the case may be. 7.12 Ratings. The Borrower will not permit or cause the financial strength rating of any Material Insurance Subsidiary by (a) Fitch and Standard & Poor's, respectively, to be lower than "AA-" at any time or (b) Moody's to be lower than "Aa3" at any time; provided that the Borrower shall not be required to maintain or obtain a financial strength rating for Radian Asset Assurance Inc. from Moody's. ARTICLE VIII EVENTS OF DEFAULT 8.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) The Borrower shall fail to pay (i) any principal of any Loan, any fee or any other Obligation or (ii) when due or any interest on any Loan within three (3) days after the date when due; (b) The Borrower shall fail to observe, perform or comply with any condition, covenant or agreement contained in any of SECTIONS 2.14, 5.1, 5.2, 5.3(a), 5.3(e)(i), 5.3(e)(iii), 5.4(i) or 5.9 or in ARTICLE VI or ARTICLE VII; (c) The Borrower or any of its Subsidiaries shall fail to observe, perform or comply with any condition, covenant or agreement contained in this Agreement or any of the other Credit Documents other than those enumerated in subsections (a) and (b) above, and such failure 45 (i) is deemed by the terms of the relevant Credit Document to constitute an Event of Default or (ii) shall continue unremedied for any grace period specifically applicable thereto or, if no such grace period is applicable, for a period of thirty (30) days after the earlier of (y) the date on which a Responsible Officer of the Borrower acquires knowledge thereof and (z) the date on which written notice thereof is delivered by the Lender to the Borrower; (d) Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries in this Agreement, any of the other Credit Documents or in any certificate, instrument, report or other document furnished in connection herewith or therewith or in connection with the transactions contemplated hereby or thereby shall prove to have been false or misleading in any material respect as of the time made, deemed made or furnished; (e) The Borrower or any of its Subsidiaries shall (i) fail to pay when due (whether by scheduled maturity, acceleration or otherwise and after giving effect to any applicable grace period) any principal of or interest on any Indebtedness (other than the Indebtedness incurred pursuant to this Agreement) having an aggregate principal amount of at least $15,000,000, or (ii) fail to observe, perform or comply with any condition, covenant or agreement contained in any agreement or instrument evidencing or relating to any such Indebtedness, or any other event shall occur or condition exist in respect thereof, and the effect of such failure, event or condition is to cause, or permit the holder or holders of such Indebtedness (or a trustee or agent on its or their behalf) to cause (with the giving of notice, lapse of time, or both), such Indebtedness to become due, or to be prepaid, redeemed, purchased or defeased, prior to its stated maturity having an aggregate principal amount of at least $15,000,000; (f) The Borrower or any of its Subsidiaries shall (i) file a voluntary petition or commence a voluntary case seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts or any other relief under the Bankruptcy Code, the insurance laws applicable to any Insurance Subsidiary, or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any petition or case of the type described in subsection (g) below, (iii) apply for or consent to the appointment of or taking possession by a custodian, trustee, receiver or similar official for or of itself or all or a substantial part of its properties or assets, (iv) fail generally, or admit in writing its inability, to pay its debts generally as they become due, (v) make a general assignment for the benefit of creditors or (vi) take any corporate action to authorize or approve any of the foregoing; (g) Any involuntary petition or case shall be filed or commenced against the Borrower or any of its Subsidiaries seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts, the appointment of a custodian, trustee, receiver or similar official for it or all or a substantial part of its properties or any other relief under the Bankruptcy Code, the insurance laws applicable to any Insurance Subsidiary, or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, and such petition or case shall continue undismissed and unstayed for a period of sixty (60) days; or an order, judgment or decree approving or ordering any of the foregoing shall be entered in any such proceeding; 46 (h) Any one or more money judgments, writs or warrants of attachment, executions or similar processes involving an aggregate amount (exclusive of amounts fully bonded or covered by insurance as to which the surety or insurer, as the case may be, has acknowledged its liability in writing) in excess of $10,000,000 shall be entered or filed against the Borrower or any of its Subsidiaries or any of their respective properties and the same shall not be dismissed, stayed or discharged for a period of thirty (30) days; (i) Any ERISA Event or any other event or condition shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result thereof, together with all other ERISA Events and other events or conditions then existing, the Borrower and the respective ERISA Affiliates have incurred or would be reasonably likely to incur liability to any one or more Plans or Multiemployer Plans or to the PBGC (or to any combination thereof) that has or would be reasonably likely to have a Material Adverse Effect; (j) Any one or more Licenses, permits, accreditations or authorizations of the Borrower or any of its Subsidiaries shall be suspended, limited or terminated or shall not be renewed, or any other action shall be taken, by any Governmental Authority in response to any alleged failure by the Borrower, any of its Subsidiaries to be in compliance with applicable Requirements of Law, and such action, individually or in the aggregate, has or would be reasonably likely to have a Material Adverse Effect; (k) Any one or more Environmental Claims shall have been asserted against the Borrower or any of its Subsidiaries (or a reasonable basis shall exist therefor); the Borrower has incurred or would be reasonably likely to incur liability as a result thereof; and such liability, individually or in the aggregate, has or would be reasonably likely to have a Material Adverse Effect; or (l) Any of the following shall occur: (i) any Person or group of Persons acting in concert as a partnership or other group, shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become, after the date hereof, the "beneficial owner" (within the meaning of such term under Rule 13d-3 under the Exchange Act) of securities of the Borrower representing 20% or more of the combined voting power of the then outstanding securities of the Borrower ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors; or (ii) the Board of Directors of the Borrower shall cease to consist of a majority of the individuals who constituted the Board of Directors as of the date hereof or who shall have become a member thereof subsequent to the date hereof after having been nominated, or otherwise approved in writing, by at least a majority of individuals who constituted the Board of Directors of the Borrower as of the date hereof (or their replacements approved as herein required). 8.2 Remedies: Termination of Commitment, Acceleration, etc. Upon and at any time after the occurrence and during the continuance of any Event of Default, the Lender may take any or all of the following actions at the same or different times: (a) Declare the Commitment to be terminated, whereupon the same shall terminate (provided that, upon the occurrence of an Event of Default pursuant to SECTION 8.1(f) or SECTION 8.1(g), the Commitment shall automatically be terminated); 47 (b) Declare all or any part of the outstanding principal amount of the Loans to be immediately due and payable, whereupon the principal amount so declared to be immediately due and payable, together with all interest accrued thereon and all other amounts payable under this Agreement, the Note and the other Credit Documents, shall become immediately due and payable without presentment, demand, protest, notice of intent to accelerate or other notice or legal process of any kind, all of which are hereby knowingly and expressly waived by the Borrower (provided that, upon the occurrence of an Event of Default pursuant to SECTION 8.1(f) or SECTION 8.1(g), all of the outstanding principal amount of the Loans and all other amounts described in this subsection (b) shall automatically become immediately due and payable without presentment, demand, protest, notice of intent to accelerate or other notice or legal process of any kind, all of which are hereby knowingly and expressly waived by the Borrower); and (c) Exercise all rights and remedies available to it under this Agreement, the other Credit Documents and applicable law. 8.3 Remedies: Set-Off. In addition to all other rights and remedies available under the Credit Documents or applicable law or otherwise, upon and at any time after the occurrence and during the continuance of any Event of Default, the Lender may, and is hereby authorized by the Borrower, at any such time and from time to time, to the fullest extent permitted by applicable law, without presentment, demand, protest or other notice of any kind, all of which are hereby knowingly and expressly waived by the Borrower, to set off and to apply any and all deposits (general or special, time or demand, provisional or final) and any other property at any time held (including at any branches or agencies, wherever located), and any other Indebtedness at any time owing, by the Lender to or for the credit or the account of the Borrower against any or all of the Obligations now or hereafter existing, whether or not such Obligations may be contingent or unmatured, the Borrower hereby granting to the Lender a continuing security interest in and Lien upon all such deposits and other property as security for such Obligations. The Lender agrees promptly to notify the Borrower after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. ARTICLE IX MISCELLANEOUS 9.1 Fees and Expenses. The Borrower agrees (i) whether or not the transactions contemplated by this Agreement shall be consummated, to pay upon demand all reasonable out-of-pocket costs and expenses of the Lender (including, without limitation, the reasonable fees and expenses of counsel to the Lender) in connection with (y) the Lender's due diligence investigation in connection with, and the preparation, negotiation, execution, and delivery of, this Agreement and the other Credit Documents, and any amendment, modification or waiver hereof or thereof or consent with respect hereto or thereto, and (z) the administration, monitoring and review of the Loans (including, without limitation, out-of-pocket expenses for travel, meals, long-distance telephone calls, wire transfers, facsimile transmissions and copying and with respect to the engagement of appraisers, consultants, auditors or similar Persons by the Lender at any time, whether before or after the Closing, to render opinions concerning the financial 48 condition of the Borrower), (ii) to pay upon demand all reasonable out-of-pocket costs and expenses of the Lender (including, without limitation, reasonable attorneys' fees and expenses) in connection with (y) any refinancing or restructuring of the credit arrangement provided under this Agreement, whether in the nature of a "work-out," in any insolvency or bankruptcy proceeding or otherwise and whether or not consummated, and (z) the enforcement, attempted enforcement (except to the extent relating to any claim by the Lender against the Borrower that is unsuccessful because the Lender's rights were not violated) or preservation of any rights or remedies under this Agreement or any of the other Credit Documents, whether in any action, suit or proceeding (including any bankruptcy or insolvency proceeding) or otherwise, and (iii) to pay and hold the Lender harmless from and against all liability for any intangibles, documentary, stamp or other similar taxes, fees and excises, if any, including any interest and penalties, and any finder's or brokerage fees, commissions and expenses (other than any fees, commissions or expenses of finders or brokers engaged by the Lender), that may be payable in connection with the transactions contemplated by this Agreement and the other Credit Documents. 9.2 Indemnification. The Borrower agrees, whether or not the transactions contemplated by this Agreement shall be consummated, to indemnify and hold the Lender and its directors, officers, employees, agents and Affiliates (each, an "Indemnified Person") harmless from and against any and all claims, losses, damages, obligations, liabilities, penalties, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any kind or nature whatsoever, whether direct, indirect or consequential (collectively, "Indemnified Costs"), that may at any time be imposed on, incurred by or asserted against any such Indemnified Person as a result of, arising from or in any way relating to the preparation, execution, performance or enforcement of this Agreement or any of the other Credit Documents, any of the transactions contemplated herein or therein or any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loans (including, without limitation, in connection with the actual or alleged generation, presence, discharge or release of any Hazardous Substances on, into or from, or the transportation of Hazardous Substances to or from, any real property at any time owned or leased by the Borrower or any of its Subsidiaries, any other Environmental Claims or any violation of or liability under any Environmental Law), or any action, suit or proceeding (including any inquiry or investigation) by any Person, whether threatened or initiated, related to any of the foregoing, and in any case whether or not such Indemnified Person is a party to any such action, proceeding or suit or a subject of any such inquiry or investigation; provided, however, that no Indemnified Person shall have the right to be indemnified hereunder for any Indemnified Costs to the extent determined by a final and nonappealable judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Person. All of the foregoing Indemnified Costs of any Indemnified Person shall be paid or reimbursed by the Borrower, as and when incurred and upon demand. 9.3 Governing Law; Consent to Jurisdiction. THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS (EXCLUDING NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1401). THE PARTIES HERETO HEREBY DECLARE THAT IT IS THEIR INTENTION THAT THIS AGREEMENT SHALL BE REGARDED AS MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND 49 THAT THE LAWS OF SAID STATE SHALL BE APPLIED IN INTERPRETING ITS PROVISIONS IN ALL CASES WHERE LEGAL INTERPRETATION SHALL BE REQUIRED. EACH OF THE PARTIES HERETO AGREES (A) THAT THIS AGREEMENT INVOLVES AT LEAST $250,000; AND (B) THAT THIS AGREEMENT HAS BEEN ENTERED INTO BY THE PARTIES HERETO IN EXPRESS RELIANCE UPON NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1401. NOTWITHSTANDING THE FOREGOING CHOICE OF LAW, THE BORROWER AND THE LENDER HEREBY CONSENT TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE COURT WITHIN MECKLENBURG COUNTY, NORTH CAROLINA OR NEW YORK COUNTY, NEW YORK OR ANY FEDERAL COURT LOCATED WITHIN THE WESTERN DISTRICT OF THE STATE OF NORTH CAROLINA OR THE SOUTHERN DISTRICT OF THE STATE OF NEW YORK FOR ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE OTHER CREDIT DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS, OR ANY PROCEEDING TO WHICH THE LENDER OR THE BORROWER IS A PARTY. INCLUDING ANY ACTIONS BASED UPON, ARISING OUT OF, OR IN CONNECTION WITH ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE LENDER OR THE BORROWER. THE BORROWER AND THE LENDER EACH IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE RIGHT OF APPEAL) BY ANY JUDGMENT RENDERED OR RELIEF GRANTED THEREBY AND FURTHER WAIVES ANY OBJECTION THAT IT MAY HAVE BASED ON LACK OF JURISDICTION OR IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY SUCH PROCEEDING. EACH OF THE BORROWER AND THE LENDER CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO IT AT ITS ADDRESS SET FORTH HEREINBELOW, AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER POSTAGE PREPAID AND PROPERLY ADDRESSED. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE LENDER OR THE BORROWER, AS THE CASE MAY BE, TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. 9.4 Waiver of Trial by Jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS TO WHICH IT IS A PARTY, OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 50 9.5 Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed (via certified mail), telegraphed, telexed, telecopied, cabled or delivered to the party to be notified at the following addresses: (a) if to the Borrower, to Radian Group Inc., 1601 Market Street, Philadelphia, PA 19103, Attention: Chief Financial Officer, Telecopy No. (215) 963-9658, with a copy to the Treasurer and General Counsel; (b) if to the Lender, to First Union National Bank, Financial Institutions Group, 1339 Chestnut Street, 3rd Floor, Philadelphia, Pennsylvania 19101-4819, Attention: Kimberly Shaffer, Telecopy No. (267) 321-7102; or in each case, to such other address as any party may designate for itself by like notice to all other parties hereto. All such notices and communications shall be deemed to have been given (i) if mailed (via certified or registered mail) as provided above by any method other than overnight delivery service, on the third Business Day after deposit in the mails, (ii) if mailed by overnight delivery service, telegraphed, telexed, telecopied or cabled, when delivered for overnight delivery, delivered to the telegraph company, confirmed by telex answerback, transmitted by telecopier or delivered to the cable company, respectively, or (iii) if delivered by hand, upon delivery; provided that Notices of Borrowing, Notices of Conversion/Continuation and any notices required to be delivered to the Lender pursuant to SECTIONS 5.3(e) and 5.3(f) shall not be effective until received by the Lender. 9.6 Amendments, Waivers, etc. No amendment, modification, waiver or discharge or termination of, or consent to any departure by the Borrower from, any provision of this Agreement or any other Credit Document, shall be effective unless in a writing signed by the Lender, and then the same shall be effective only in the specific instance and for the specific purpose for which given 9.7 Assignments, Participations. (a) The Lender may assign to one or more assignees (each, an "Assignee") all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the outstanding Loans made by it, the Note held by it); provided, however, that any such assignment (other than an assignment to an Affiliate of the Lender) shall not be made without the prior written consent of the Borrower, which consent shall not be unreasonably withheld (provided that the Borrower's consent shall not be required in the event a Default or Event of Default shall have occurred and be continuing). (b) The Lender may, without the consent of the Borrower, sell to one or more other Persons (each, a "Participant") participations in any portion comprising less than all of its rights and obligations under this Agreement (including, without limitation, a portion of its Commitment, the outstanding Loans made by it, the Note); provided, however, that the Lender's obligations under this Agreement shall remain unchanged and the Lender shall remain solely responsible for the performance of such obligations, and no Participant shall have any rights under this Agreement or any of the other Credit Documents, each Participant's rights against the 51 Lender in respect of any participation to be those set forth in the participation agreement, and all amounts payable by the Borrower hereunder shall be determined as if the Lender had not granted such participation. (c) Nothing in this Agreement shall be construed to prohibit the Lender from pledging or assigning all or any portion of its rights and interest hereunder or under the Note to any Federal Reserve Bank as security for borrowings therefrom; provided, however, that no such pledge or assignment shall release the Lender from any of its obligations hereunder. (d) The Lender or Participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the Assignee or Participant or proposed Assignee or Participant any information relating to the Borrower furnished to it by or on behalf of any other party hereto, provided that such Assignee or Participant or proposed Assignee or Participant shall keep such information confidential to the same extent required of the Lender under SECTION 9.13. 9.8 No Waiver. The rights and remedies of the Lender and the Borrower expressly set forth in this Agreement and the other Credit Documents are cumulative and in addition to, and not exclusive of, all other rights and remedies available at law, in equity or otherwise. No failure or delay on the part of either party hereto in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege or be construed to be a waiver of any Default or Event of Default. No course of dealing between the Borrower and the Lender or their agents or employees shall be effective to amend, modify or discharge any provision of this Agreement or any other Credit Document or to constitute a waiver of any Default or Event of Default. No notice to or demand upon the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Lender to exercise any right or remedy or take any other or further action in any circumstances without notice or demand. 9.9 Successors and Assigns. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, and all references herein to any party shall be deemed to include its successors and assigns; provided, however, that (i) the Borrower shall not sell, assign or transfer any of its respective rights, interests, duties or obligations under this Agreement without the prior written consent of the Lender and (ii) any Assignees and Participants shall have such rights and obligations with respect to this Agreement and the other Credit Documents as are provided for under and pursuant to the provisions of SECTION 9.7. 9.10 Survival. All representations, warranties and agreements made by or on behalf of the Borrower or any of its Subsidiaries in this Agreement and in the other Credit Documents shall survive the execution and delivery hereof or thereof and the making and repayment of the Loans. In addition, notwithstanding anything herein or under applicable law to the contrary, the provisions of this Agreement and the other Credit Documents relating to indemnification or payment of fees, costs and expenses, including, without limitation, the provisions of SECTIONS 2.15(a), 2.15(b), 2.16, 2.17, 9.1 and 9.2, shall survive the payment in full of all Loans, 52 the termination of the Commitment, and any termination of this Agreement or any of the other Credit Documents. 9.11 Severability. To the extent any provision of this Agreement is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Agreement in any jurisdiction. 9.12 Construction. The headings of the various articles, sections and subsections of this Agreement have been inserted for convenience only and shall not in any way affect the meaning or construction of any of the provisions hereof. Except as otherwise expressly provided herein and in the other Credit Documents, in the event of any inconsistency or conflict between any provision of this Agreement and any provision of any of the other Credit Documents, the provision of this Agreement shall control. 9.13 Confidentiality. The Lender agrees to keep confidential, pursuant to its customary procedures for handling confidential information of a similar nature and in accordance with safe and sound banking practices, all nonpublic information provided to it by or on behalf of the Borrower or any of its Subsidiaries in connection with this Agreement or any other Credit Document; provided, however, that the Lender may disclose such information (i) to its directors, employees and agents and to its auditors, counsel and other professional advisors (so long as such persons have been advised of the confidential nature of such information), (ii) at the demand or request of any bank regulatory authority, court, other Governmental Authority or Insurance Regulatory Authority having or asserting jurisdiction over the Lender, as may be required pursuant to subpoena or other legal process, or otherwise in order to comply with any applicable Requirement of Law (provided that, to the extent reasonably possible, the Borrower is provided with timely notice of such demand or request so that the Borrower may seek an appropriate protective order with the reasonable cooperation of the Lender (at the Borrower's expense)), (iii) in connection with any proceeding to enforce its rights hereunder or under any other Credit Document or any other litigation or proceeding related hereto or to which it is a party, (iv) to the extent the same has become publicly available other than as a result of a breach of this Agreement and (v) pursuant to and in accordance with the provisions of SECTION 9.7(d). 9.14 Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by the Lender and the Borrower of written or telephonic notification of such execution and authorization of delivery thereof. 9.15 Disclosure of Information. The Borrower agrees and consents to the Lender's disclosure of information relating to this transaction to Gold Sheets and other similar bank trade publications. Such information will consist of deal terms and other information customarily found in such publications. 53 9.16 Entire Agreement. THIS AGREEMENT AND THE OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH (A) EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND THERETO RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF, (B) SUPERSEDE ANY AND ALL PRIOR AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, ORAL OR WRITTEN, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF INCLUDING, WITHOUT LIMITATION, THE COMMITMENT LETTER FROM FIRST UNION TO THE BORROWER, DATED NOVEMBER 7, 2001, BUT SPECIFICALLY EXCLUDING THE FEE LETTER, AND (C) MAY NOT BE AMENDED, SUPPLEMENTED, CONTRADICTED OR OTHERWISE MODIFIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. [Signatures contained on following pages] 54 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first above written. RADIAN GROUP INC. By: ________________________________ Title: ________________________________ S-1 FIRST UNION NATIONAL BANK By: ________________________________ Title: ________________________________ Instructions for wire transfers to the Lender: First Union National Bank ABA Routing No. 053000219 Account Name: GL Account Number: 01459168111011 Attention: Romonia Lester Reference: Radian Group Inc. Address for notices as a Lender: First Union National Bank Financial Institutions Group 1339 Chestnut Street, 3rd Floor Philadelphia, Pennsylvania 19101-4819 Attention: Kimberly Shaffer Telephone: (267) 321-7033 Telecopy: (267) 321-7102 Lending Office: First Union National Bank 201 S. College Street, CP 17 Charlotte, North Carolina 28288-1183 Attention: Romonia Lester Telephone: (704) 383-5364 Telecopy: (704) 383-7201 S-2 SCHEDULE 4.4 CONSENTS AND FILINGS None. SCHEDULE 4.5 LITIGATION IN DECEMBER 2000, A COMPLAINT SEEKING CLASS ACTION STATUS ON BEHALF OF A NATIONWIDE CLASS OF HOME MORTGAGE BORROWERS WAS FILED AGAINST RADIAN GUARANTY INC. IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA (GREENSBORO DIVISION). THE COMPLAINT ALLEGES THAT RADIAN GUARANTY INC. VIOLATED SECTION 8 OF RESPA. THE COMPLAINT ASSERTS THAT THE PRICING OF POOL INSURANCE, CAPTIVE REINSURANCE CONTRACT UNDERWRITING, PERFORMANCE NOTES AND OTHER UNIDENTIFIED STRUCTURED TRANSACTIONS, SHOULD BE INTERPRETED AS IMPUTED KICKBACKS MADE IN EXCHANGE FOR THE REFERRAL OF PRIMARY MORTGAGE INSURANCE BUSINESS, WHICH ACCORDING TO THE COMPLAINT, IS A SETTLEMENT SERVICE UNDER RESPA. THE COMPLAINT SEEKS INJUNCTIVE RELIEF AND DAMAGES OF 3X THE AMOUNT OF ANY MORTGAGE INSURANCE PREMIUMS PAID BY PERSONS WHO WERE REFERRED TO RADIAN GUARANTY INC. TO THE ALLEGED AGREEMENT OR UNDERSTANDING. THE PLAINTIFFS IN THE LAWSUIT ARE REPRESENTED BY THE SAME GROUP OF PLAINTIFFS' ATTORNEYS WHO FILED SIMILAR LAWSUITS AGAINST OTHER PROVIDERS OF PRIMARY MORTGAGE INSURANCE IN FEDERAL COURT IN GEORGIA. THE GEORGIA COURT DISMISSED THOSE SUITS FOR A FAILURE TO STATE A CLAIM. THREE OF THOSE LAWSUITS WERE SETTLED PRIOR TO APPEAL; TWO ARE CURRENTLY ON APPEAL. RADIAN GUARANTY HAS RESPONDED TO THE COMPLAINT BY FILING A MOTION TO DISMISS. A SIMILAR ACTION FOCUSING ON POOL INSURANCE WAS FILED IN FEBRUARY 2001 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS. SCHEDULE 4.6 TAXES IN CONNECTION WITH A ROUTINE SALES TAX AUDIT OF RADIAN REINSURANCE INC. (F/K/A ENHANCE REINSURANCE COMPANY) BY THE STATE OF NEW YORK, RADIAN REINSURANCE AGREED TO EXTEND THE STATUTE OF LIMITATIONS RELATED TO THE PAYMENT OF SALES TAXES WHICH ARE THE SUBJECT OF SUCH AUDIT, DUE TO DELAYS IN THE COMPLETION OF THE AUDIT AS A RESULT OF THE EVENTS OF 9/11/01. IN CONNECTION WITH A ROUTINE SALES TAX AUDIT OF RADIAN GUARANTY INC, RADIAN GUARANTY AGREED TO EXTEND THE STATUTE OF LIMITATIONS RELATED TO THE PAYMENT OF SALES TAXES WHICH ARE THE SUBJECT OF SUCH AUDIT. {ADD DESCRIPTION OF AUDIT} SCHEDULE 4.7 SUBSIDIARIES (A) AMERIN GUARANTY CORPORATION (i) 100% of the outstanding capital stock owned directly by Borrower (ii) direct owner: 100% Radian Group Inc. (B) AMERIN INVESTOR SERVICES CORPORATION (i) 100% of the outstanding capital stock owned directly by Borrower (ii) direct owner: 100% Radian Group Inc. (C) AMERIN RE CORPORATION (i) 100% of the outstanding capital stock owned directly by Borrower (ii) direct owner: 100% Radian Group Inc. (D) CMAC INVESTMENT MANAGEMENT CORP. (i) 100% of the outstanding capital stock owned directly by Borrower (ii) direct owner: 100% Radian Group Inc. (E) ENHANCE FINANCIAL SERVICES GROUP INC. (i) 100% of the outstanding capital stock owned directly by Borrower (ii) direct owner: 100% Radian Group Inc. (F) RADIAN GUARANTY INC. (i) 100% of the outstanding capital stock owned by Borrower (ii) direct owner: 100% Radian Group Inc. (G) RADIAN MORTGAGE REINSURANCE COMPANY (i) 100% of the outstanding capital stock owned directly by Borrower (ii) direct owner: 100% Radian Group Inc. (H) RADIANEXPRESS.COM INC. (i) 100% of the outstanding capital stock owned directly by Borrower (ii) direct owner: 100% Radian Group Inc. (I) COMMONWEALTH MORTGAGE ASSURANCE COMPANY OF ARIZONA (i) 100% of the outstanding capital stock indirectly owned by Borrower (ii) direct owner: 100% Radian Guaranty Inc. (J) COMMONWEALTH MORTGAGE ASSURANCE COMPANY OF TEXAS (i) 100% of the outstanding capital stock indirectly owned by Borrower (ii) direct owner: 100% Radian Guaranty Inc. (K) RADIAN INSURANCE INC. (i) 100% of the outstanding capital stock indirectly owned by Borrower (ii) direct owner: 100% Radian Guaranty Inc. (L) RADIAN SERVICES LLC (i) 100% of the outstanding membership interests indirectly owned by Borrower (ii) direct owner: 100% Radian Guaranty Inc. (M) ALEGIS GROUP INC. (i) 100% of the outstanding common stock owned indirectly by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (N) ASSET GUARANTY UK REPRESENTATIVES LIMITED (to be renamed Radian UK Representatives Limited) (i) 100% of the outstanding common shares owned indirectly by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (O) CREDIT-BASED ASSET SERVICING AND SECURITIZATION, INC. (i) 100% of the outstanding common stock owned indirectly by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (P) CREDIT2B.COM INC. (i) 85.7% of the outstanding equity owned indirectly by Borrower 14.3% of the outstanding equity owned by former officers of Credit2B.com Inc. (ii) direct owners: - 100% of the Voting Convertible Preferred Stock (which represents 85.7% of the voting power and is convertible into 85.7% of the outstanding common stock):Enhance Financial Services Group Inc. - 100% of the outstanding common stock (which represents 14.3% of the voting power) is owned by a group of former officers of Credit2B.com none of whom have more that 4.6% of the voting power (please note that operations at Credit2B.com have been shut down since 3/01) (Q) ENHANCE REINSURANCE (BERMUDA) LIMITED. (to be renamed Radian Reinsurance (Bermuda) Limited) (i) 100% of the outstanding common shares owned indirectly by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (R) ENHANCE C-BASS RESIDUAL FINANCE CORPORATION (i) 100% of the outstanding common stock indirectly owned by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (S) ENHANCE CONSUMER SERVICES LLC (i) 100% of the outstanding membership interests indirectly owned by Borrower) (ii) direct owner: 100% Enhance Financial Services Group Inc. (T) LLS INC. (i) 100% of the outstanding common stock owned indirectly by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (U) GUARANTY RISK SERVICES INC. (i) 100% of the outstanding common stock owned indirectly by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (V) RADIAN ASSET ASSURANCE INC. (f/k/a Asset Guaranty Insurance Company) (i) 100% of the outstanding common stock owned indirectly by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (W) RADIAN REINSURANCE INC (f/k/a Enhance Reinsurance Company) (i) 100% of the outstanding common stock indirectly owned by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (X) SINGER ASSET FINANCE COMPANY, L.L.C. (i) 100% of the outstanding membership interests indirectly owned by Borrower (ii) direct owner: 100% Enhance Financial Services Group Inc. (Y) VAN-AMERICAN COMPANIES, INC. (i) 95.8% of the outstanding common stock and 100% of the outstanding preferred stock owned indirectly by Borrower (ii) direct owners - 95.8% of the common stock, 100% of the non-cumulative senior preferred stock; 100% of the non-cumulative convertible preferred stock owned by Radian Asset Assurance Inc. - 4.2% of the common stock is owned by current and former employees of Van-American Companies, Inc. In addition, certain employees of Van-American Companies, Inc. own options to purchase common stock of Van-American Companies, Inc. which if fully exercised would not materially dilute the Borrower's interest in Van-American Companies, Inc. (Z) VAN-AMERICAN INSURANCE COMPANY, INC. (i) interest owned indirectly by Borrower through its interest in 95.8% of the outstanding common stock and 100% of the outstanding preferred stock of Van-American Companies, Inc. (ii) direct owner: 100% of the common stock (only class outstanding) owned by Van American Companies, Inc. (AA) VAN-AMERICAN INSURANCE AGENCY, INC. (i) interest owned indirectly by Borrower through its interest in 95.8% of the outstanding common stock and 100% of the outstanding preferred stock of Van-American Companies, Inc. (ii) direct owner: 100% of the common stock (only class outstanding) owned by Van American Companies, Inc. (BB) VAN-AMERICAN COAL SALES, INC. (i) interest owned indirectly by Borrower through its interest in 95.8% of the outstanding common stock and 100% of the outstanding preferred stock of Van-American Companies, Inc. (ii) direct owner: 100% of the common stock (only class outstanding) owned by Van-American Insurance Company, Inc. (CC) VAN-AMERICAN BUSINESS SERVICES, INC. (i) interest owned indirectly by Borrower through its interest in 95.8% of the outstanding common stock and 100% of the outstanding preferred stock of Van-American Companies, Inc. (ii) direct owner: 100% of the common stock (only class outstanding) owned by Van-American Insurance Company, Inc. (DD) RESIDUAL INTEREST INVESTMENTS LP (i) 100% of the outstanding general and limited partnership interests indirectly owned by Borrower (ii) direct owners: Enhance C-BASS Residual Finance Corporation 0.8% general partnership interest; Enhance Financial Services Group Inc. 99.2% limited partnership interest. (EE) AG INTERMEDIARIES, INC. (i) 85.7% of the outstanding common stock owned indirectly by Borrower (ii) direct owner: 100% Credit2B.com Inc. (FF) ALEGIS CORPORATION (i) 100% of the outstanding common stock owned indirectly by Borrower (ii) direct owner: 100% Alegis Group Inc. SCHEDULE 4.18 MATERIAL CONTRACTS 1. The contents of Schedule 7.2 are incorporated herein by reference. 2. Registration Rights Agreement, made and entered into as of January 11, 2002, by and among Radian Group Inc., Banc of America Securities LLC and Lehman Brothers Inc, in relation to the Convertible Debentures. 3. Credit Agreement between Radian Asset Assurance Inc. (f/k/a Asset Guaranty Insurance Company) and Deutsche Bank AG, dated as of February 27, 2001 and the related Promissory Note and Pledge and Security Agreement executed in connection therewith. This is one of the two soft capital facilities contemplated by Section 7.2(ix) providing $25 million of soft capital. 4. Credit Agreement among Radian Reinsurance Inc. (f/k/a Enhance Reinsurance Company), Deutsche Bank AG, as agent and other banks from time to time a party thereto dated as of November 7, 2001 and the related Promissory Notes and Pledge and Security Agreement executed in connection therewith. This is one of the two soft capital facilities contemplated by Section 7.2(ix) providing $90 million of soft capital. SCHEDULE 4.19 REINSURANCE AGREEMENTS None. SCHEDULE 7.2 INDEBTEDNESS 1. Indenture dated as of March 5, 1993 between Enhance Financial Services Group Inc. and The Chase Manhattan Bank, as Trustee, and $75 million principal amount of 6 3/4% Debentures due 2003 issued pursuant thereto. 2. Indenture, dated as of May 29, 2001 between Radian Group Inc. and First Union National Bank, as Trustee and $250 million principal amount of 7.75% Debentures Due June 1, 2011 issued pursuant thereto. 3. Indenture, dated as of January 11, 2002, between Radian Group Inc., and First Union National Bank, as Trustee; and $200 million principal amount of 2.25% Senior Convertible Debentures Due January 1, 2021 issued pursuant thereto (the "Convertible Debentures"). 4. Guaranty of Radian Group Inc. to BofA, dated as of December 28, 2001, guaranteeing up to $25 million of the obligations of Sherman Financial Group LLC, an affiliate of the Company. ("Sherman Financial"), to BofA pursuant to a Credit Agreement, dated as of May 27, 1999, as amended to date including without limitation the Fourth Amendment to Credit Agreement, dated as of December 28, 2001, between BofA and Sherman Financial. SCHEDULE 7.3 LIENS ENHANCE REINSURANCE COMPANY Pitney Bowes Credit UCC-1 NY - Department of State 76547 4/16/97 Lessor/Lessee: Corporation All equipment relating to leased dated 1/31/97 Lottery Receivables UCC-1 NY - Department of State 203445 10/22/01 Debtor's right to receive Company One, LLC payments from the CO State Lottery from 2001 - 2024, specifically the Sales Agreements Deutsche Bank AG New UCC-1 NY - Department of State 220273 11/13/01 DEBTOR LISTED AS ENHANCE York Branch REINSUANCE COMPANY Comprehensive Deutsche Bank AG New UCC Amendment NY - Department of State 234594 11/30/01 Changing name of Debtor to York Branch read: Enhance Reinsurance Company
In addition, liens in form and substance similar to the UCC-1 and amendment thereto filed by Deutsche Bank AG New York Branch (Nos. 220273 and 234594) arising from and related to the Credit facility for Radian Reinsurance Inc. (formerly known as Enhance Reinsurance Company) as set forth on Schedule 4.18, have or will be filed shortly by Deutsche Bank for Radian Asset Assurance Inc. and arising from and relating to the Credit facility for Radian Asset Assurance Inc. as set forth on Schedule 4.18. SCHEDULE 7.5 INVESTMENTS None. SCHEDULE 7.7 TRANSACTIONS WITH AFFILIATES None. EX-10.29 14 w56746ex10-29.txt CREDIT AGREEMENT DATED FEBRUARY 27 2001 EXHIBIT 10.29 ================================================================================ CREDIT AGREEMENT among ASSET GUARANTY INSURANCE COMPANY, VARIOUS BANKS, and DEUTSCHE BANK AG, NEW YORK BRANCH, as Agent ---------- Dated as of February 27, 2001 ---------- ================================================================================ TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION........................................... 1 Section 1.01 Defined Terms............................................................. 1 Section 1.02 Principles of Construction................................................ 10 SECTION 2. AMOUNT AND TERMS OF CREDIT........................................................... 11 Section 2.01 The Loans................................................................. 11 Section 2.02 Amount of Each Borrowing.................................................. 11 Section 2.03 Notice of Borrowing....................................................... 11 Section 2.04 Disbursement of Funds..................................................... 11 Section 2.05 Notes..................................................................... 11 Section 2.06 Interest.................................................................. 12 Section 2.07 Capital Adequacy.......................................................... 12 SECTION 3. COMMITMENT FEES, FEES; AND TERMINATIONS, EXTENSIONS AND INCREASES OF COMMITMENTS AND CONTINGENT COMMITMENTS.................................................................... 13 Section 3.01 Fees...................................................................... 13 Section 3.02 Voluntary Termination of Unutilized Commitments........................... 13 Section 3.03 Mandatory Termination of Commitments...................................... 13 Section 3.04 Expiry Date............................................................... 14 SECTION 4. PREPAYMENTS; PAYMENTS................................................................ 15 Section 4.01 Voluntary Prepayments..................................................... 15 Section 4.02 Mandatory Prepayments..................................................... 15 Section 4.03 Method and Place of Payment............................................... 15 Section 4.04 Net Payments.............................................................. 15 Section 4.05 Limitations on Sources of Payment......................................... 16 SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS................................................ 16 Section 5.01 Execution of Agreement; Notes............................................. 16 Section 5.02 No Default; Representations and Warranties................................ 16 Section 5.03 Opinions of Counsel....................................................... 16 Section 5.04 Corporate Documents; Proceedings.......................................... 16 Section 5.05 Security Agreement........................................................ 17 Section 5.06 Covered Portfolio, etc.................................................... 17 Section 5.07 Requisite Approvals....................................................... 17 Section 5.08 Litigation................................................................ 17 Section 5.09 Fees, etc................................................................. 18
(i)
Page ---- SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS............................................ 18 Section 6.01 Loss Threshold Incurrence Date............................................ 18 Section 6.02 Notice of Borrowing....................................................... 18 SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS........................................... 18 Section 7.01 Corporate Status.......................................................... 18 Section 7.02 Corporate Power and Authority............................................. 18 Section 7.03 No Violation.............................................................. 19 Section 7.04 Governmental Approvals.................................................... 19 Section 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; etc... 19 Section 7.06 Litigation................................................................ 20 Section 7.07 True and Complete Disclosure.............................................. 20 Section 7.08 Use of Proceeds; Margin Regulations....................................... 20 Section 7.09 Tax Returns and Payments.................................................. 20 Section 7.10 Compliance with ERISA..................................................... 20 Section 7.11 Capitalization............................................................ 21 Section 7.12 Subsidiaries.............................................................. 21 Section 7.13 Compliance with Statutes, etc............................................. 21 Section 7.14 Investment Company Act.................................................... 22 Section 7.15 Public Utility Holding Company Act........................................ 22 Section 7.16 Compliance with Insurance Law............................................. 22 Section 7.17 Covered Portfolio......................................................... 23 SECTION 8. AFFIRMATIVE COVENANTS................................................................ 23 Section 8.01 Information Covenants..................................................... 23 Section 8.02 Books, Records and Inspections............................................ 25 Section 8.03 Corporate Franchises...................................................... 25 Section 8.04 Compliance with Statutes, etc............................................. 25 Section 8.05 ERISA..................................................................... 25 Section 8.06 Performance of Obligations................................................ 26 Section 8.07 Use of Proceeds........................................................... 26 Section 8.08 Conduct of Business....................................................... 26 Section 8.09 Underwriting Criteria..................................................... 26 Section 8.10 Collection of Pledged Recoveries and Pledged Premiums..................... 26 Section 8.11 Pledged Reserve Release Notice............................................ 26 Section 8.12 Registry.................................................................. 27 SECTION 9. NEGATIVE COVENANTS................................................................... 27 Section 9.01 Liens..................................................................... 27 Section 9.02 Consolidation, Merger, Sale of Assets, etc................................ 27 SECTION 10. EVENTS OF DEFAULT................................................................... 28 Section 10.01 Payments................................................................. 28
(ii)
Page ---- Section 10.02 Representations, etc..................................................... 28 Section 10.03 Covenants................................................................ 29 Section 10.04 Default Under Other Agreements........................................... 29 Section 10.05 Bankruptcy, etc.......................................................... 29 Section 10.06 Security Agreement....................................................... 29 Section 10.07 Judgments................................................................ 30 Section 10.08 Change of Control........................................................ 30 SECTION 11. THE AGENT........................................................................... 30 Section 11.01 Appointment.............................................................. 30 Section 11.02 Nature of Duties......................................................... 30 Section 11.03 Lack of Reliance on the Agent............................................ 31 Section 11.04 Certain Rights of the Agent.............................................. 31 Section 11.05 Reliance................................................................. 31 Section 11.06 Indemnification.......................................................... 32 Section 11.07 The Agent in Its Individual Capacity..................................... 32 Section 11.08 Resignation by the Agent................................................. 32 SECTION 12. MISCELLANEOUS....................................................................... 33 Section 12.01 Payment of Expenses, etc................................................. 33 Section 12.02 Right of Setoff.......................................................... 33 Section 12.03 Notices.................................................................. 34 Section 12.04 Benefit of Agreement..................................................... 34 Section 12.05 No Waiver; Remedies Cumulative........................................... 36 Section 12.06 Calculations; Computations............................................... 37 Section 12.07 Governing Law; Submission to Jurisdiction; Venue......................... 37 Section 12.08 Counterparts............................................................. 37 Section 12.09 Effectiveness............................................................ 37 Section 12.10 Headings Descriptive..................................................... 38 Section 12.11 Amendment or Waiver...................................................... 38 Section 12.12 Survival................................................................. 38 Section 12.13 Exclusions from Covered Portfolio........................................ 38 Section 12.14 Confidentiality.......................................................... 39
(iii) SCHEDULES Schedule I Commitments Schedule II Reinsurance Agreements Schedule III Subsidiaries of the Borrower EXHIBITS Exhibit A Notice of Borrowing Exhibit B Note Exhibit C Opinion of Samuel Bergman, Counsel to the Borrower Exhibit D Officers' Certificate of the Borrower Exhibit E Pledge and Security Agreement Exhibit F Assignment and Assumption Agreement (iv) CREDIT AGREEMENT, dated as of February 27, 2001, among ASSET GUARANTY INSURANCE COMPANY, a New York stock insurance company, (the "Borrower"), the Banks party hereto from time to time, and DEUTSCHE BANK AG, NEW YORK BRANCH, acting in its capacity as Agent pursuant to Section 11 (in such capacity, the "Agent"). W I T N E S S E T H : WHEREAS, subject to and upon the terms and conditions herein set forth, the Banks are willing to make available to the Borrower the credit facility provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. Section 1.01 Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" shall mean, with respect to any Person, any other Person (other than an individual) directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person; provided, however, that an Affiliate of the Borrower shall include any Person that directly or indirectly owns more than 10% of the Borrower and any officer or director of the Borrower or any such Person. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall mean Deutsche Bank AG, New York Branch, in its capacity as Agent for the Banks hereunder, and shall include any successor to the Agent appointed pursuant to Section 11.08. "Agreement" shall mean this Credit Agreement, as modified, supplemented or amended from time to time. "Applicable Margin" shall mean a percentage per annum equal to 2.0%. "Assignment and Assumption Agreement" shall mean any Assignment and Assumption Agreement substantially in the form of Exhibit F entered into pursuant to the terms hereof. "Authorized Officer" shall mean the president, any vice president, the chief financial officer or the treasurer of the Borrower. "Average Annual Debt Service" as of a specified date with respect to an Insured Obligation shall mean the applicable Retained Percentage times the sum of (i) the aggregate outstanding principal amount of such Insured Obligation and (ii) the aggregate amount of interest thereafter required to be paid on such Insured Obligation (giving effect to all mandatory sinking fund payments or other regularly scheduled required redemptions, prepayments or other retirement of principal), divided by the number of whole and fractional years from the date of determination to the latest maturity date of such Insured Obligation, and as of a specified date with respect to the Covered Portfolio shall mean the sum of the Annual Average Debt Service as of such date of all Insured Obligations contained in the Covered Portfolio. In the event that an Insured Obligation bears interest at a variable rate, the interest thereon for purposes of the determination of Average Annual Debt Service shall be calculated at the rate employed by the Borrower to compute average annual debt service with respect to such Insured Obligation in accordance with its customary business practices. "Bank" shall mean the banks listed on the signature pages hereof on the Effective Date as well as any institution which becomes a Bank hereunder pursuant to Section 12.04(b). "Base Rate" shall mean the higher of (i) 1/4 of 1% in excess of the Federal Funds Rate and (ii) the Prime Lending Rate. "Bankruptcy Code" shall have the meaning provided in Section 10.05. "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrower's Rating" shall mean the Borrower's claims-paying ability rating. "Borrowing" shall mean the borrowing of Loans on a given date. "Business Day" shall mean any day except Saturday, Sunday and any day which shall be in New York City a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close. "Change of Control" shall mean and include the occurrence of any of the following events: any Person, entity or "group" (within the meaning of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, but expressly excluding Radian) (i) shall have acquired, directly or indirectly, beneficial ownership of 20% or more of any outstanding class of capital stock of the Borrower having ordinary voting power in the election of directors, provided that any Person, entity or group shall be permitted to acquire up to 25% of the outstanding capital stock of any such class in a transaction approved before the consummation of same by a majority of the directors of the Borrower or (ii) shall have obtained the power (whether or not exercised) to elect the majority of the Board of Directors of the Borrower. Notwithstanding the preceding sentence of this definition of "Change of Control," the transactions contemplated by that certain Agreement and Plan of Merger, dated as of November 13, 2000, among Enhance, GOLD Acquisition Corp. and Radian, which is described in a Joint Proxy Statement of Enhance and -2- Radian dated as of January 26, 2001, shall not be deemed to be a "Change of Control" for purposes of this Agreement, the other Credit Documents or any other agreements, instruments or documents to be executed in connection with the transactions contemplated by this Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all "Collateral" as defined in the Security Agreement. "Collateral Account" shall have the meaning set forth in the Security Agreement. "Collateral Agent" shall have the meaning set forth in the Security Agreement. "Commitment" shall mean, for each Bank, the amount set forth opposite such Bank's name in Schedule I hereto directly below the column entitled "Commitment", as the same may be (i) reduced from time to time pursuant to Section 3.02 and/or 3.03 and (ii) adjusted from time to time as a result of assignments to or from such Bank pursuant to Section 3.04 or 12.04. "Commitment Fees" shall have the meaning provided in Section 3.01(a). "Commitment Period" initially shall mean the period commencing on the Effective Date and ending on the Expiry Date and, from and after the date of any extension of the Expiry Date, shall mean the period commencing on the date which is seven years prior to the Expiry Date and ending on the Expiry Date. "Contingent Obligation" shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business or obligations under insurance or reinsurance contracts entered into in the ordinary course of business to secure reinsurance obligations. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the -3- maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Covered Portfolio" shall mean and include each Insured Obligation as of the Effective Date and each Insured Obligation issued thereafter and prior to the Loss Threshold Incurrence Date other than any Insured Obligation which is excluded from the Covered Portfolio pursuant to Section 12.13. "Credit Documents" shall mean this Agreement, each Note and the Security Agreement. "Credit Event" shall mean the making of any Loan. "Cumulative Losses" for a specified period shall mean the aggregate Losses of the Borrower determined cumulatively during such period without regard to Pledged Recoveries; provided, however, that the aggregate amount of Cumulative Losses related to (i) health care providers of any kind (including long term care providers) cannot exceed 10% of the Total Coverage Amount, (ii) universities, colleges, dormitory authorities and other higher educational authorities cannot exceed 10% of the Total Coverage Amount and (iii) health care providers of any kind (including long term care providers) and universities, colleges, dormitory authorities and other higher educational authorities cannot exceed 15% of the Total Coverage Amount. "Declining Bank" shall have the meaning provided in Section 3.04(b). "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Loan" shall mean, with respect to any Bank at any time, the Loan or portion of any Loan required to be made by such Bank to the Borrower pursuant to Section 2.01 at or prior to such time that has not been made by such Bank as of such time. "Defaulting Bank" shall mean, at any time, any Bank that, at such time, owes a Defaulted Loan. "Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States. "Effective Date" shall have the meaning provided in Section 12.09. "Eligible Transferee" shall mean and include a commercial bank, financial institution or other "accredited investor" (as defined in Regulation D of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder) assigned, or the parent of which is assigned, an unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody's and S&P. -4- "Enhance" shall mean Enhance Financial Services Group Inc. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement, and to any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean any person (as defined in Section 3(9) of ERISA) which together with the Borrower or any of its Subsidiaries would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Event of Default" shall have the meaning provided in Section 10. "Expiry Date" shall have the meaning set forth in Section 3.04(a). "Extending Bank" shall have the meaning provided in Section 3.04(b). "Extension Request" shall have the meaning set forth in Section 3.04(a). "Federal Funds Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Fees" shall mean all amounts payable pursuant to or referred to in Section 3.01. "holder of any Note" shall mean any Federal Reserve Bank to which a Bank has pledged its Note to the extent such Federal Reserve Bank has foreclosed upon such Note. "Increasing Extending Bank" shall have the meaning provided in Section 3.04(b). "Indebtedness" shall mean, as to any Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person for borrowed money or for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person and all drafts drawn thereunder, (iii) all liabilities secured by any Lien on any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized under leases under which such Person is the lessee and (v) all Contingent Obligations of such Person. "Installment Premiums" shall mean any and all premiums which are required to be paid or claimed to be required to be paid to or for the account of the Borrower in respect of -5- Insured Obligations in the Covered Portfolio on a periodic basis rather than by payment in full on the date of the effectiveness of the relevant Insurance Contract. "Insurance Contracts" shall have the meaning set forth in Section 7.16. "Insured Obligation" shall mean "municipal obligation bonds", "special revenue bonds", "industrial development bonds" and "utility first mortgage obligations" which the Borrower is permitted to insure under the provisions of Section 6904 (b) (1) (A), (B) or (C) of the New York Insurance Law (without regard to clause (J) thereof) as in effect on the Effective Date and issued by the United States of America, a state thereof or the District of Columbia, a municipality or governmental unit or other political subdivision of the foregoing or any public agency or instrumentality, in any event to the extent that the payment of principal thereof, together with interest thereon, is insured, reinsured or otherwise guaranteed by the Borrower. "Lending Office" shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019 or such other office, Subsidiary or Affiliate of the Agent as the Agent may from time to time specify as such to the Borrower. "Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any other similar recording or notice statute, and any lease having substantially the same effect as any of the foregoing). "Loan" shall have the meaning provided in Section 2.01. "Loss" shall mean at any time the aggregate sum of (i) the amount paid by the Borrower at such time or required at such time to be paid by the Borrower on claims under an Insurance Contract with respect to an Insured Obligation in the Covered Portfolio by reason of the failure by the issuer thereof or other obligor with respect thereto to pay insured amounts on such Insured Obligations when due (including adjustment expenses with respect to such claims), plus (ii) Permitted Reserves at such time minus (iii) amounts paid at such time or reasonably expected by the Borrower at such time to be paid to the Borrower under reinsurance agreements (whether facultative or treaty) and similar arrangements with respect to the claims referred to in clause (i) provided that, without limiting the generality of the foregoing, the term "Loss" shall not include any damages or penalties required to be paid by the Borrower in respect of an Insurance Contract by reason of the breach by the Borrower of its obligations thereunder or the cancellation or termination thereof other than in accordance with its terms. "Loss Threshold Incurrence Date" shall mean the date on which the Borrower has Cumulative Losses (net of recoveries) during the relevant Commitment Period equal to the greater of $100,000,000 and 7% of Average Annual Debt Service as of any date of determination thereof. -6- "Majority Banks" shall mean at any time Banks owed at least 51% of the aggregate principal amount of the Loans outstanding at such time or, if no Loans are outstanding at such time, Banks holding at least 51% of the aggregate Commitments at such time; provided, however, that if any Bank shall be a Defaulting Bank at such time, there shall be excluded from the determination of Majority Banks at such time (i) the aggregate principal amount of the Loans owing to such Bank and outstanding at such time and (ii) the Commitment of such Bank at such time. "Majority Participants" shall have the meaning set forth in Section 12.04. "Margin Stock" shall have the meaning provided in Regulation U of the Board of Governors of the Federal Reserve System. "Moody's" shall mean Moody's Investors Service, Inc. "Multiemployer Plan" shall mean any multiemployer plan as defined in Section 4001(1)(3) of ERISA, which is contributed to by (or to which there is an obligation to contribute of) the Borrower, a Subsidiary of the Borrower or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Borrower, a Subsidiary of the Borrower or an ERISA Affiliate contributed to or had an obligation to contribute to such plan. "Note" shall have the meaning provided in Section 2.05. "Notice of Borrowing" shall have the meaning provided in Section 2.03. "Notice Office" shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019, or such other office as the Agent may hereafter designate in writing as such to the Borrower. "Obligations" shall mean all amounts owing to the Agent, Collateral Agent or any Bank pursuant to the terms of this Agreement or any other Credit Document. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA or any successor thereto. "Payment Office" shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019, or such other office as the Agent may hereafter designate in writing as such to the Borrower. "Permitted Liens" shall have the meaning set forth in Section 9.01. "Permitted Reserves" shall mean, with respect to any Insured Obligation, an amount equal to the reserves established in accordance with the Borrower's statutory accounting practices which are deemed necessary or prudent in the reasonable judgment of the Borrower by reason of the failure or anticipated failure by the issuer of such Insured Obligation or other -7- obligor with respect thereto to pay such Insured Obligation when due, all as reflected on the Borrower's books and which are or will be reported by the Borrower in its statutory financial statements. "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code, which is maintained or contributed to by (or to which there is an obligation to contribute of), or at any time during the five calendar years preceding the date of this Agreement was maintained or contributed to by (or to which there was an obligation to contribute of), the Borrower or an ERISA Affiliate. "Pledged Premiums" shall mean at any time on and after the Loss Threshold Incurrence Date (i) any and all Installment Premiums which are paid or payable to the Borrower at such time with respect to an Insurance Contract covering any defaulted Insured Obligations in the Covered Portfolio minus (ii) the aggregate amount of such Installment Premiums referred to in the next preceding clause (i) paid or payable to any Person other than the Borrower at such time under reinsurance agreements (whether facultative or treaty) and similar arrangements. "Pledged Recoveries" shall mean at any time on and after the Loss Threshold Incurrence Date any and all moneys and other payments, property and other consideration and compensation received or receivable by or for the account of the Borrower at such time (excluding the aggregate amount of any and all monies, payments, property, consideration and compensation paid or payable to any Person other than the Borrower under reinsurance agreements (whether facultative or treaty) and similar arrangements) as repayment or reimbursement of, or otherwise in respect of or arising out of, the payment of a claim by the Borrower under an Insurance Contract covering any Insured Obligation in the Covered Portfolio (without regard to whether such claim was paid from the proceeds of a Loan), whether from the issuer thereof or any other Person including without limitation under or pursuant to (i) such Insurance Contract, any reimbursement agreement, guaranty, letter of credit, mortgage, security agreement, pledge agreement or other contract, agreement or arrangement with respect to such Insurance Contract, other than such items described in (ii) through (ix) below, (ii) any account or account receivable, (iii) any compromise, settlement or similar arrangement with respect to such payment, (iv) any voluntary payment or gift, (v) any reinsurance of such Insured Obligation to the extent that payment or expected payment under such reinsurance was not deducted in determining the Loss attributed to the Borrower's payment or required payment of such claim, (vi) any contractual, statutory, common law or other right of subrogation, (vii) any realization upon any mortgage, security interest or other Lien, (viii) any cause of action, whether sounding in tort, contract or otherwise, and any judicial, arbitration or other proceeding by or before any court, agency, tribunal, association or other governmental or private body, or (ix) any other legal or equitable right or claim, whether or not similar to the foregoing), less the out-of-pocket costs -8- and expenses, including without limitation attorneys fees and court costs, actually incurred by the Borrower in connection with the collection or other realization of such moneys and other payments, property and other consideration and compensation. "Pledged Reserves Account" shall have the meaning set forth in the Security Agreement. "Pledged Reserves Account Funds" shall mean at any time the aggregate amount of proceeds of Loans borrowed hereunder for the purpose of establishing or maintaining Permitted Reserves, such proceeds to be deposited in the Pledged Reserves Account in accordance with Section 2.1(b) of the Security Agreement. "Pledged Reserve Release Notice" shall have the meaning set forth in Section 8.11. "Pledged Reserve Repayment Date" shall mean the date on which the Borrower delivers the Pledged Reserve Release Notice required by Section 8.11. "Prime Lending Rate" shall mean the rate as announced by Deutsche Bank AG, New York Branch, from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Deutsche Bank AG, New York Branch, may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Radian" shall mean Radian Group Inc. "Replacement Bank" shall have the meaning provided in Section 3.04(b). "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Retained Percentage" of an Insured Obligation shall mean the percentage of risk assumed by the Borrower under Insurance Contracts with respect thereto. "Security Agreement" shall have the meaning provided in Section 5.05. "S&P" shall mean Standard & Poor's Corporation. "Subsidiary" shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsid- -9- iaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time. "Taxes" shall have the meaning provided in Section 4.04. "Total Coverage Amount" shall mean, at the time of any determination thereof, the sum of (i) the aggregate Commitment of all Banks under the Loan Facility at such time and (ii) the dollar amount of Cumulative Losses (net of recoveries) at such time that results in the occurrence of the Loss Threshold Incurrence Date. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan means the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent plan year, determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by the Plan's actuary in the most recent annual valuation of the Plan, exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. "United States" and "U.S." shall each mean the United States of America. "Unutilized Commitment" shall mean, for any Bank, at any time, the Commitment of such Bank at such time less the aggregate principal amount of all Loans made by such Bank pursuant to Section 2.01 prior to such time. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. Section 1.02 Principles of Construction. (a) All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Agreement unless otherwise specified. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) The term generally accepted accounting principles means generally accepted accounting principles in the United States, and all accounting terms not specifically defined herein shall be construed in accordance therewith. -10- SECTION 2. AMOUNT AND TERMS OF CREDIT. Section 2.01 The Loans. Subject to and upon the terms and conditions set forth herein, each Bank severally agrees, at any time and from time to time prior to the Expiry Date, to make loans (each a "Loan" and, collectively, the "Loans") to the Borrower, provided, however, that the principal amount of any Loan made by a Bank at any time pursuant to this Section 2.01 shall not exceed the Unutilized Commitment of such Bank at such time. Once repaid, Loans incurred hereunder may not be reborrowed. Section 2.02 Amount of Each Borrowing. The aggregate principal amount of each Borrowing hereunder shall not (i) be less than $1,000,000, and if greater, shall be in an integral multiple of $100,000 and (ii) exceed the lesser of (a) Cumulative Losses incurred after the occurrence of the Loss Threshold Incurrence Date less the aggregate principal amount of all Loans previously made and (b) the aggregate Unutilized Commitments of all Banks as in effect on the date such Borrowing is made. Section 2.03 Notice of Borrowing. Whenever the Borrower desires to make a Borrowing hereunder, it shall give the Agent at its Notice Office at least two Business Days' prior notice made hereunder, provided that any such notice shall be deemed to have been given on a certain day only if given before 12:00 Noon (New York time) on such day. Each such notice (each a "Notice of Borrowing") shall be in the form of Exhibit A, appropriately completed to specify the aggregate principal amount of the Loans to be made pursuant to such Borrowing, and the date of such Borrowing (which shall be a Business Day). Section 2.04 Disbursement of Funds. No later than 11:00 A.M. (New York time) on the date specified in each Notice of Borrowing, (i) each Bank will make available at the Payment Office of the Agent its pro rata portion (in accordance with the Commitment of such Bank and the aggregate Commitments of all of the Banks as in effect on such date) of the amount of the Borrowing requested to be made on such date, in Dollars and in immediately available funds and (ii) the Agent will make available to the Borrower the aggregate of the amounts so made available by the Banks on such day at its Payment Office. Section 2.05 Notes. The Borrower's obligation to pay the principal of, and interest on, the Loans made by each Bank shall be evidenced by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B with blanks appropriately completed in conformity herewith (each a "Note" and, collectively, the "Notes"). Each Note shall (i) be payable to the order of such Bank and be dated the Effective Date if such Bank shall be a party hereto on the Effective Date or the effective date of the Assignment and Assumption Agreement pursuant to which it becomes a party hereto if such Bank shall become a party hereto after the Effective Date, (ii) be in a stated principal amount equal to such Bank's Commitment and be payable in the principal amount of the Loans evidenced thereby, (iii) mature, with respect to each Loan evidenced thereby, on the Expiry Date, (iv) bear interest as provided in the appropriate clause of Section 2.06 in respect of the Loans evidenced thereby and (v) be entitled to the benefits of this Agreement and be secured by the Security Agreement. Each Bank will note on -11- its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of its Note endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation shall not affect the Borrower's obligations in respect of such Loans. Section 2.06 Interest. (a) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Loan from the date the proceeds thereof are made available to the Borrower until the maturity thereof (whether by acceleration or otherwise) at a rate per annum which shall be equal to the Base Rate in effect from time to time plus the Applicable Margin. (b) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan and any other overdue amount payable by the Borrower hereunder shall bear interest from the date payment thereof was due until (but not including) the date of actual payment at a rate per annum equal to 4.0% per annum in excess of the Base Rate in effect from time to time. (c) Accrued (and theretofore unpaid) interest shall be payable (i) in respect of each Loan, quarterly in arrears on the last Business Day of each March, June, September and December, and (ii) in respect of each Loan, on any prepayment (on the amount prepaid), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. Section 2.07 Capital Adequacy. If any Bank determines at any time that any applicable law or governmental rule, regulation, order or request (whether or not having the force of law) concerning capital adequacy, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency, will have the effect of increasing the amount of capital required or expected to be maintained by such Bank based on the existence of its Commitment hereunder or its obligations hereunder, then the Borrower shall pay to such Bank, upon its written demand therefor, such additional amounts as shall be required to compensate such Bank for the increased cost to such Bank as a result of such increase of capital. In determining such additional amounts, such Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable, provided that such Bank's determination of compensation owing under this Section 2.07 shall, absent manifest error, be final and conclusive and binding on all the parties hereto. Each Bank, upon determining that any additional amounts will be payable pursuant to this Section 2.07, will give prompt written notice thereof to the Borrower, which notice shall show the basis for the calculation of such additional amounts. The failure to give any such notice shall not be deemed to be a waiver of any of the Borrower's obligations to pay additional amounts pursuant to this Section 2.07, provided that the Borrower shall not be required to pay any such amounts until it receives written notice from a Bank in accordance with this Section 2.07. -12- SECTION 3. COMMITMENT FEES, FEES; AND TERMINATIONS, EXTENSIONS AND INCREASES OF COMMITMENTS AND CONTINGENT COMMITMENTS. Section 3.01 Fees. (a) The Borrower agrees to pay to the Agent for distribution to the Banks pro rata in accordance with their respective Unutilized Commitments a commitment fee (such commitment fee, together with the commitment fee payable pursuant to Section 3.01(b), being the "Commitment Fees") for the period from the Effective Date until the Expiry Date (or such earlier date as the Commitments shall have been terminated) computed at a rate equal to 0.6% per annum on the daily average Unutilized Commitments of the Banks; provided, however, that any Commitment Fee accrued with respect to the Unutilized Commitment of a Defaulting Bank during the period prior to the time such Bank became a Defaulting Bank and unpaid at such time shall not be payable by the Borrower so long as such Bank shall be a Defaulting Bank except to the extent that such Commitment Fee shall otherwise have been due and payable by the Borrower prior to such time; and provided further that no Commitment Fee shall accrue on the Unutilized Commitment of a Defaulting Bank so long as such Bank shall be a Defaulting Bank. (b) Accrued Commitment Fees shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December of each year and on the Expiry Date or upon such earlier date as the Commitments shall be terminated, and shall be based on a 365/366-day year and actual days elapsed. (c) The Borrower shall pay to the Agent such fees in connection with the Credit Documents as may be agreed to from time to time between the Borrower and the Agent. Section 3.02 Voluntary Termination of Unutilized Commitments. Upon at least five Business Days' prior notice to the Agent at its Notice Office, the Borrower shall have the right to terminate the Unutilized Commitments, in whole or in part, in minimum aggregate amounts of $1,000,000 (or, if greater, in integral multiples of $1,000,000), provided that the Borrower shall concurrently satisfy its obligations, if any, at such time under Section 3.01. Section 3.03 Mandatory Termination of Commitments. (a) The Commitment of each Bank shall be permanently reduced on each date a Loan is made by such Bank pursuant to Section 2.01 by the amount of such Loan. (b) Notwithstanding anything herein to the contrary, the Borrower shall have the right to unilaterally terminate the Commitment of any Bank if, at any time after the Effective Date (with respect to any Bank that is a party hereto on the Effective Date) or at any time after the effective date of the relevant Assignment and Assumption Agreement (with respect to any Bank that becomes a party hereto after the Effective Date pursuant to Section 3.04 or 12.04), the unsecured senior debt rating (or shadow rating as reflected in a letter) of such Bank or its parent shall be downgraded by Moody's or S&P, such termination to be effective 60 days after the Borrower delivers to such Bank a notice of termination. The Borrower shall, concurrent with -13- such termination, pay to such Bank the aggregate amount, if any, owing at such time by the Borrower to such Bank under this Agreement. (c) In addition to any other mandatory Commitment reductions pursuant to this Section 3.03, the Commitment of each Bank shall each terminate in its entirety on the Expiry Date. Section 3.04 Expiry Date. (a) The expiration of the Commitments shall occur on February 27, 2008 (the "Expiry Date"); provided, however, that before (but not earlier than 120 days nor later than 60 days before) each anniversary of the Effective Date, the Borrower may make a written request (an "Extension Request") to the Agent at the Notice Office that the Expiry Date be extended by one calendar year. Such Extension Request (a copy of which shall be forwarded by the Agent to each of the Banks) shall include a certification by a senior officer of the Borrower that no Default or Event of Default has occurred and is continuing and all representations and warranties contained herein and the other Credit Documents are true and correct in all material aspects on and as of the date of the Extension Request (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date shall be required to be true only as of such date). If by the date occurring 30 days next succeeding the Agent's receipt of such Extension Request, any Bank agrees thereto in writing by so indicating on counterparts of the Extension Request and delivering such counterpart to the Borrower, "Expiry Date" as to such Bank shall mean the February 27 occurring in the calendar year next succeeding the Expiry Date then in effect, provided that any failure to so notify the Borrower shall be deemed to be a disapproval by such Bank of the Borrower's Extension Request. The Commitment of any Bank which does not so agree, shall terminate upon the Expiry Date then in effect. No Bank shall be obligated to grant any extension pursuant to this Section 3.04(a), and any such extension shall be in the sole discretion of each Bank. The Borrower shall pay to each Bank which does not so agree all amounts owing under its Note and this Agreement on the effective date of the termination of such Bank's Commitment. (b) If fewer than all of the Banks consent to an Extension Request (each Bank that has not so consented being a "Declining Bank", and each other Bank being an "Extending Bank"), the Borrower shall have the right to require any Declining Bank to assign in full its rights and obligations under this Agreement (i) to any one or more Extending Banks designated by the Borrower that have offered in their returned counterpart of the Extension Request to increase their respective Commitments in an aggregate amount at least equal to the amount of such Declining Bank's Commitment (each such Extending Bank being an "Increasing Extending Bank") and (ii) to the extent of any shortfall in the aggregate amount of extended Commitments to any one or more Eligible Transferees designated by the Borrower that agree to assume all of such rights and obligations (each such Eligible Transferee being a "Replacement Bank"), provided that (1) such Declining Bank shall have received payment of all amounts owing under its Note and this Agreement on the effective date of such assignment, (2) such assignment shall otherwise have occurred in compliance with Section 12.04 including, without limitation, clauses (iii) and (iv) of subsection (b) thereof and (3) the effective date of such assignment shall be the -14- date specified by the Borrower and agreed to by the Replacement Bank or Increasing Extending Bank, as the case may be, which date shall be on or prior to the applicable Expiry Date. SECTION 4. PREPAYMENTS; PAYMENTS. Section 4.01 Voluntary Prepayments. The Borrower shall have the right to prepay the Loans, without premium or penalty, in whole or in part from time to time, provided that the Borrower shall give the Agent at its Notice Office at least three Business Days' prior notice of its intent to prepay the Loans. Section 4.02 Mandatory Prepayments. On each Pledged Reserve Repayment Date, an amount equal to 100% of the Pledged Reserves Account Funds with respect to which the Borrower has delivered a Pledged Reserve Release Notice as required by Section 8.11 shall be applied as a mandatory prepayment of principal of outstanding Loans. Section 4.03 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement or any Note shall be made to the Agent not later than 12:00 Noon (New York time) on the date when due and shall be made in Dollars in immediately available funds at the Agent's Payment Office. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable at the applicable rate during such extension. Section 4.04 Net Payments. All payments made by the Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payment (but excluding any tax imposed on or measured by the net income or gross income or gross receipts of any Bank (other than withholding taxes or taxes in lieu of withholding taxes) pursuant to the laws of the jurisdiction (or any political subdivision or taxing authority thereof or therein) in which the principal office or lending office of such Bank is located or in which such Bank is organized or in which such Bank is doing business through a branch or office from which such jurisdiction treats a Loan as having been made) and all interest, penalties or similar liabilities with respect thereto (collectively, "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes and such additional amounts as may be necessary so that every payment of all amounts due hereunder or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. The Borrower shall also reimburse each Bank, upon its written request, which request shall show the basis for calculation of such reimbursement, for taxes imposed on or measured by the net income of such Bank pursuant to the laws of the jurisdiction (or any political subdivision or taxing authority thereof or therein) in which its principal office or lending office is located or in which such Bank is organized or in which such Bank is doing business through a branch or office from which such jurisdiction treats a Loan as having -15- been made as it shall determine are payable by it in respect of amounts paid to or on behalf of such Bank pursuant to the preceding sentence. The Borrower will furnish to the applicable Bank within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of any tax receipts available to the Borrower evidencing such payment by the Borrower. The Borrower will indemnify and hold harmless each Bank, and reimburse each Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank. Section 4.05 Limitations on Sources of Payment. Notwithstanding any other provision of this Agreement or of any other Credit Document, the obligations of the Borrower to make payments of principal and interest on the Loans and the Notes are limited recourse obligations of the Borrower payable solely from the Pledged Recoveries, the Pledged Premiums, the Pledged Reserves Account Funds and the other Collateral, and none of the Agent, the Collateral Agent, any Bank or any other Person shall be entitled to procure any money judgment against or to levy or foreclose upon or attach any other assets or properties of the Borrower for payment of such obligations; provided, however, that nothing herein contained shall limit, restrict or impair the lien created by the Security Agreement or the right of any Bank to exercise any of its rights herein or in any of the other Credit Documents upon the occurrence of an Event of Default or otherwise, or to bring suit and obtain a judgment against the Borrower (recourse thereon being limited as to payment of principal and interest on the Loans and the Notes as provided in this Section 4.05). SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Agreement shall become effective subject to the satisfaction (or waiver by the Banks) of the following conditions: Section 5.01 Execution of Agreement; Notes. The Borrower and each Bank shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Agent at its Notice Office and there shall have been delivered to each Bank a Note executed by the Borrower in the amount, maturity and as otherwise provided herein. Section 5.02 No Default; Representations and Warranties. There shall exist no Default or Event of Default and all representations and warranties contained herein and in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the Effective Date. Section 5.03 Opinions of Counsel. The Agent shall have received an opinion addressed to it and the Banks and dated the Effective Date from Samuel Bergman, General Counsel for the Borrower, covering the matters set forth in Exhibit C. Section 5.04 Corporate Documents; Proceedings. (a) The Agent shall have received a certificate, dated the Effective Date, signed by the president or any vice president of the Borrower, and attested to by the secretary or any assistant secretary of the Borrower, in the -16- form of Exhibit D with appropriate insertions, together with copies of the charter documents and resolutions of the Borrower referred to in such certificate. (b) All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated in this Agreement and the other Credit Documents shall be satisfactory in form and substance to the Agent, and it shall have received all information and copies of all documents and papers, including records of corporate proceedings and governmental approvals, if any, which the Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. Section 5.05 Security Agreement. The Borrower shall have duly authorized, executed and delivered a Pledge and Security Agreement in the form of Exhibit E (as modified, supplemented or amended from time to time, the "Security Agreement") covering all the Borrower's present and future Collateral, together with: (a) evidence of all filings as may be necessary or, in the opinion of the Collateral Agent, desirable to perfect the security interests purported to be created by the Security Agreement; and (b) evidence that all other actions necessary or, in the opinion of the Collateral Agent, desirable to perfect and protect the security interests purported to be created by the Security Agreement have been taken. Section 5.06 Covered Portfolio, etc. The Agent shall have received a certificate, dated the Effective Date, signed by the president, the chief financial officer or other senior financial officer of the Borrower, setting forth in reasonable detail as of December 31, 2000 (i) each Insured Obligation in the Covered Portfolio and each reinsurance agreement or similar arrangement which covers any material amount of such Insured Obligations, (ii) each default by the issuer of any such Insured Obligation or other obligor with respect thereto which has formed or the Borrower reasonably expects to form the basis of a claim under an Insurance Contract of which the Borrower is aware, (iii) each default by any party to any such reinsurance agreement or similar arrangement of which the Borrower is aware, (iv) each claim paid by the Borrower under any Insurance Contract with respect to such Insured Obligations and (v) the Borrower's reasonable estimate as of December 31, 2000 of Installment Premiums payable with respect to the Covered Portfolio. Section 5.07 Requisite Approvals. All necessary governmental (domestic and foreign) and third party approvals in connection with the transactions contemplated by the Credit Documents and otherwise referred to herein or therein shall have been obtained and remain in effect, and all applicable waiting periods shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon the consummation of the transactions contemplated by the Credit Documents and otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction -17- or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon the making of the Loans. Section 5.08 Litigation. No litigation by any entity (private or governmental) shall be pending or threatened with respect to this Agreement or any documentation executed in connection herewith or the transactions contemplated hereby, or with respect to any material Indebtedness of the Borrower or which any Bank shall determine would reasonably be expected to have a materially adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 5.09 Fees, etc. The Borrower shall have paid to the Agent and to the Banks all costs, fees and expenses (including, without limitation, legal fees and expenses) payable to the Agent and/or the Banks to the extent then due. All of the certificates, legal opinions and other documents and papers referred to in this Section 5, unless otherwise specified, shall have been delivered to the Agent at its Notice Office. SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS. The obligation of the Banks to make Loans is subject, at the time of each such Credit Event, to the satisfaction of the following conditions: Section 6.01 Loss Threshold Incurrence Date. At or prior to the time of each such Credit Event, the Loss Threshold Incurrence Date shall have occurred. Section 6.02 Notice of Borrowing. Prior to the making of each Loan, the Agent shall have received a Notice of Borrowing meeting the requirements of Section 2.03. The acceptance of the proceeds of each Credit Event shall constitute a representation and warranty by the Borrower to each Bank that the Loss Threshold Incurrence Date has occurred. SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In order to induce the Banks to enter into this Agreement, the Borrower makes the following representations, warranties and agreements as of the Effective Date, which shall survive the execution and delivery of this Agreement and the Notes (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date shall be required to be true and correct in all material respects only as of such date): Section 7.01 Corporate Status. The Borrower (i) is a duly organized and validly existing stock insurance company in good standing under the laws of the State of New York, (ii) has the power and authority to own its property and assets and to transact the business in which it is engaged and (iii) is duly qualified as a foreign corporation and in good standing in each jurisdiction where the ownership, leasing or operation of property or the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse -18- effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 7.02 Corporate Power and Authority. The Borrower has the corporate power to execute, deliver and perform the terms and provisions of each of the Credit Documents to which it is party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of such Credit Documents. The Borrower has, or in the case of the Credit Documents other than this Agreement, by the Effective Date will have, duly executed and delivered each of the Credit Documents to which it is party, and each of such Credit Documents constitutes or, in the case of each such other Credit Document when executed and delivered, will constitute, its legal, valid and binding obligation enforceable in accordance with its terms, subject to the qualifications that enforcement of the rights and remedies created hereby or thereby is subject to (i) bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and (ii) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). Section 7.03 No Violation. Neither the execution, delivery or performance by the Borrower of the Credit Documents to which it is a party, nor compliance by it with the terms and provisions thereof, nor the use of the proceeds of the Loans (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (other than Permitted Liens) upon any of the property or assets of the Borrower pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument to which the Borrower is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the Charter or By-Laws of the Borrower. Section 7.04 Governmental Approvals. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the Effective Date), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Credit Document to which the Borrower is a party or (ii) the legality, validity, binding effect or enforceability of any such Credit Document. Section 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; etc. (a) The balance sheet of the Borrower at December 31, 1999, and the related statements of income and retained earnings and changes in financial position of the Borrower for the fiscal year ended on such date, all heretofore furnished to the Banks, present fairly the financial condition of the Borrower at December 31, 1999, and the results of the operations of the Borrower for the fiscal year ended on such date. All such financial statements have been prepared in accordance -19- with generally accepted accounting principles and practices consistently applied and audited by Deloitte & Touche LLP. Since December 31, 1999, there has been no material adverse change in the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower, except as may be set forth in any unaudited quarterly financial statements prepared by the Borrower since the date of the audited financial statements or in a quarterly report on Form 10-Q/A filed by Enhance with the Securities and Exchange Commission (all of which have heretofore been furnished to the Banks). (b) Except as fully reflected in the financial statements delivered pursuant to Section 7.05(a), there are no liabilities or obligations with respect to the Borrower of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in aggregate, would be material to the Borrower. The Borrower does not know of any basis for the assertion against the Borrower of any liability or obligation of any nature whatsoever that is not fully reflected in the financial statements delivered pursuant to Section 7.05(a) which, either individually or in the aggregate, would be material to the Borrower. At December 31, 2000, Average Annual Debt Service was $591,495,481. Section 7.06 Litigation. There are no actions, suits or proceedings pending or, to the best knowledge of the Borrower, threatened (i) with respect to any Credit Document or (ii) that are reasonably likely to materially and adversely affect the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 7.07 True and Complete Disclosure. All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Banks (including without limitation all information contained in the Credit Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Borrower in writing to the Banks will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. Section 7.08 Use of Proceeds; Margin Regulations. All proceeds of each Loan shall be used by the Borrower only to establish and/or maintain Permitted Reserves in the Pledged Reserves Account and/or to pay or reimburse itself for the payment of Losses in respect of the Covered Portfolio, and no part of the proceeds of any Loan will be used by the Borrower to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Loan nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations T, U or X of the Board of Governors of the Federal Reserve System. Section 7.09 Tax Returns and Payments. The Borrower has filed all tax returns required to be filed by it and has paid all income taxes payable by it which have become due pursuant to such tax returns and all other taxes and assessments payable by it which have become -20- due, other than those not yet delinquent and except for those contested in good faith and for which adequate reserves have been established. The Borrower has paid, or has provided adequate reserves (in the good faith judgment of the management of the Borrower) for the payment of, all federal and state income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. Section 7.10 Compliance with ERISA. Each Plan is in substantial compliance with all applicable provisions of ERISA and the Code; no Reportable Event has occurred with respect to any Plan; no Plan has an accumulated or waived funding deficiency or has applied for an extension of any amortization period within the meaning of Section 412 of the Code or Section 302 of ERISA; neither the Borrower nor any ERISA Affiliate has incurred any material liability to or on account of a Plan or a Multiemployer Plan pursuant to Section 409, 502(i), 515, 4201, 4204, 4212, 4062, 4063, 4064 or 4069 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code which has not been satisfied in full or expects to incur any material liability under any of the foregoing sections with respect to any such Plan or Multiemployer Plan; no condition exists which presents a material risk to the Borrower or any ERISA Affiliate of incurring a material liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; neither the Borrower nor any of its ERISA Affiliates is or has ever been a party to, or is or has ever been required to make contributions to, or has terminated any Multiemployer Plan; no Lien imposed under the Code or ERISA on the assets of the Borrower or any ERISA Affiliate exists or is likely to arise on account of any Plan or Multiemployer Plan; and the Borrower does not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any employee pension benefit plan (as defined in Section 3(2) of ERISA) the obligations with respect to which would reasonably be expected to have a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement. Section 7.11 Capitalization. As of the date hereof, the authorized capital stock of the Borrower consists of 100,000 shares of common stock, $150.00 par value per share, all of which are issued and outstanding. All such outstanding shares have been duly and validly issued, and are fully paid and non-assessable. The Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock except as otherwise disclosed in its financial statements. Section 7.12 Subsidiaries. Set forth on Schedule III hereto is a complete and correct list, as of the date hereof, of all of the Subsidiaries of the Borrower, together with, for each subsidiary, (i) the jurisdiction of organization of such Subsidiary, the Persons having an ownership interest therein and (ii) the nature of the ownership represented by such ownership interests. As of the Effective Date, (a) the Borrower and, to the extent applicable, the appropriate Subsidiary owns free and clear of Liens, and has the unencumbered right to vote all outstanding ownership interest in each Person shown to be held by it in Schedule III, (b) all of the issued and -21- outstanding capital stock of each such Person organized as a corporation has been duly and validly issued, and are fully paid and nonassessable, and (c) no Subsidiary of the borrower has any outstanding securities convertible into or exchangeable for capital stock or outstanding any rights to subscribe for or to purchase, or any option for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock except as otherwise disclosed on Schedule III. Section 7.13 Compliance with Statutes, etc.. The Borrower is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as would not reasonably be expected to have, in the aggregate, a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 7.14 Investment Company Act. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 7.15 Public Utility Holding Company Act. The Borrower is not a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.16 Compliance with Insurance Law. The Borrower is duly licensed to transact business as a financial guaranty insurance corporation by the New York Insurance Department and (a) has all other requisite federal, state and other governmental licenses, authorizations, permits, consents and approvals to conduct its insurance and other business as currently conducted and proposed to be conducted in New York and in each jurisdiction in which it writes or issues policies of insurance (including without limitation any form of financial guaranty insurance, certain lines of surety insurance or credit insurance), surety bonds, guaranties, contracts of reinsurance or other undertakings similar to the foregoing (collectively, "Insurance Contracts") or in which it conducts business, except for failures, if any, to have such licenses, authorizations, permits, consents and approvals which singly or in the aggregate would not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents, (b) has made all filings of each of its forms of Insurance Contracts and of its rates and charges with the New York Insurance Department and all other federal, state and other administrative or governmental bodies required for the use thereof and has obtained all requisite approvals thereof, except for failures, if any, to file or to obtain such approvals which singly or in the aggregate would not reasonably be expected to have a material adverse effect on the business, assets, operations or financial condition of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents, (c) has duly -22- established and maintains all reserves required under the New York Insurance Law and other applicable federal, state and other laws, rules and regulations, except for failures, if any, to maintain reserves which would not reasonably be expected to have a material adverse effect on the business, assets, operations, property or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the Credit Documents and (e) is in compliance (and has not received any notice from the New York Insurance Department or similar administrative or governmental body or an authorized representative thereof claiming that it is not in compliance) with the New York Insurance Law and with all other applicable federal, state and other laws relating to its insurance and other businesses, except with respect to failures, if any, to comply which singly or in the aggregate would not reasonably be expected to have a material adverse effect on the business, assets, operations, property or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents. Section 7.17 Covered Portfolio. Substantially all of the Insured Obligations in the Covered Portfolio are insured or reinsured by the Borrower under Insurance Contracts in the form or forms heretofore supplied to the Agent in accordance with the Borrower's underwriting criteria. The Borrower has no reason to believe that its rights included among the Collateral are not valid and binding against the obligors thereunder in accordance with their respective terms, except insofar as enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, except for such Collateral which, in the aggregate, would not reasonably be expected to have a material adverse effect on the right and ability of the Collateral Agent, in accordance with the Security Agreement, to realize upon the Collateral as a whole. Schedule II attached hereto sets forth a listing, as of December 31, 2000, of the reinsurer and the related amounts (both ceded par inforce and ceded principal and interest inforce) of reinsured Insured Obligations as of such date. SECTION 8. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees that on and after the Effective Date and until the Commitments have terminated and the Loans and the Notes, together with interest, Fees and all other obligations incurred hereunder and thereunder, are paid in full: Section 8.01 Information Covenants. The Borrower will furnish to the Agent and, upon the request of any Bank, to such Bank: (a) Quarterly Financial Statements. Within 60 days after the close of each of the first three quarterly accounting periods in each fiscal year of the Borrower, the balance sheet of the Borrower as at the end of such quarterly period and the related statements of income and retained earnings for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be certified by the president, chief financial officer or the treasurer or other senior financial officer of the Borrower, subject to -23- normal year-end audit adjustments which unaudited financial statements are not required to contain footnotes. (b) Annual Financial Statements. Within 180 days after the close of each fiscal year of the Borrower, but in any event as promptly as shall be available, the balance sheet of the Borrower as at the end of such fiscal year and the related combined statements of income and retained earnings and of cash flows for such fiscal year setting forth comparative figures for the preceding fiscal year and audited by Deloitte & Touche LLP, or such other independent certified public accountants of recognized national standing reasonably acceptable to the Agent, together with a report of such accounting firm stating that in the course of its regular audit of the financial statements of the Borrower, the audit was conducted in accordance with generally accepted auditing standards. (c) Management Letters. Promptly after the receipt thereof by the Borrower or any of its Subsidiaries, a copy of any "management letter" received by the Borrower or such Subsidiary from its certified public accountants and the management's responses thereto. (d) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 8.01(a) or 8.01(b), a certificate of the president, chief financial officer or treasurer or other senior financial officer of the Borrower (i) listing the Insured Obligations in the Covered Portfolio (and if the Loss Threshold Incurrence Date has occurred identifying the Insurance Contracts with respect thereto) and calculating in reasonable detail as of the date of such financial statements (A) if such date is prior to the Loss Threshold Incurrence Date, (1) the Borrower's Cumulative Losses (stating separately any Permitted Reserves included therein) for the current Commitment Period and (2) the Average Annual Debt Service, and (B) if such date is on or after the occurrence of the Loss Threshold Incurrence Date, (1) the date of the occurrence thereof, (2) evidence of the occurrence thereof, (3) the amount of Permitted Reserves as of the date of such financial statements, and (4) the aggregate amount of Pledged Recoveries received by or for the account of the Borrower during the current Commitment Period on or prior to the date of such financial statements, (ii) certifying information with respect to reinsured Insured Obligations as of the date of such financial statements in a format comparable to Schedule II attached hereto and (iii) to the effect that, to the best of his knowledge, no Default or Event of Default has occurred and is continuing or, if any Default or Event of Default has occurred and is continuing, specifying the nature and extent thereof. (e) Notice of Default or Litigation. Promptly, and in any event within two Business Days, after an Authorized Officer obtains knowledge thereof, written notice of (i) the occurrence of any event which constitutes a Default or Event of Default, (ii) any litigation or governmental proceeding pending (A) against the Borrower or any of its Subsidiaries which would have a materially adverse effect upon the business, operations, property, assets, liabilities, or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole or (B) with respect to any Credit Document, (iii) any other event which would have a materially adverse effect upon the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (iv) any rating report -24- received by the Borrower published by Moody's, S&P or, if either Moody's or S&P no longer rates the claims-paying ability of the Borrower, any other nationally recognized rating agency which, with the consent of the Borrower, rates the creditworthiness of obligations insured by the Borrower, (v) each Loss in excess of $1,000,000, including without limitation, identification of the Insured Obligation with respect to which such Loss occurred, (vi) each default by the issuer of any Insured Obligation in the Covered Portfolio or other obligor with respect thereto which could form the basis of a claim in excess of $1,000,000 under an Insurance Contract and (vii) each default by any party to a reinsurance agreement or similar arrangement with the Borrower which covers at least $1,000,000 of Insured Obligations in the Covered Portfolio. (f) Other Reports and Filings. Within 10 Business Days following the filing thereof with the Securities and Exchange Commission or any successor thereto, copies of all financial information, proxy materials and other information and reports, if any, which the Borrower or any Affiliate of the Borrower shall file with the Securities and Exchange Commission or any successor thereto. (g) Other Information. From time to time, such other information or documents (financial or otherwise) as any Bank may reasonably request, including, without limitation, information with respect to, and copies of, any relevant reinsurance agreement. Section 8.02 Books, Records and Inspections. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with generally accepted accounting principles in the United States and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent or any Bank to visit and inspect, during regular business hours and under guidance of officers of the Borrower or such Subsidiary, any of the properties of the Borrower or such Subsidiary, and to examine the books of account of the Borrower or such Subsidiary and discuss the affairs, finances and accounts of the Borrower or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as the Agent or such Bank may request. Section 8.03 Corporate Franchises. The Borrower will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises, licenses and patents; provided, however, that nothing in this Section 8.03 shall prevent (i) transactions by the Borrower or any of its Subsidiaries which are permitted as exceptions to the restrictions of Section 9.02 or (ii) the withdrawal by the Borrower of its qualification as a foreign corporation in any jurisdiction where such withdrawal would not have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole. -25- Section 8.04 Compliance with Statutes, etc. The Borrower will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as would not, individually or in the aggregate, have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole. Section 8.05 ERISA. Promptly after an Authorized Officer of the Borrower has received notice or otherwise has knowledge thereof, the Borrower shall deliver to the Agent a written notice describing in reasonable detail the occurrence of any of the following: that a Reportable Event has occurred; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that a Plan has an Unfunded Current Liability giving rise to a Lien under ERISA; or that the Borrower or any ERISA Affiliate will or may incur any material liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan or Multiemployer Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA. Upon written request of the Agent, the Borrower will deliver to each Bank a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. Section 8.06 Performance of Obligations. The Borrower will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement and other debt instrument by which it is bound, except such non-performances as would not, individually or in the aggregate, have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole. Section 8.07 Use of Proceeds. The Borrower will use the proceeds of the Loans only to pay or reimburse itself for the payment of Losses (including establishing and/or maintaining Permitted Reserves in the Pledged Reserves Account) in respect of the Covered Portfolio. Section 8.08 Conduct of Business. The Borrower will continue to engage in business of the same general type as conducted by it on the Effective Date. Section 8.09 Underwriting Criteria. The Borrower shall maintain its criteria for underwriting (including reinsuring) Insurance Contracts substantially as heretofore in effect. -26- Section 8.10 Collection of Pledged Recoveries and Pledged Premiums. The Borrower shall at all times use its commercially reasonable efforts to collect and otherwise realize upon all Pledged Recoveries and Pledged Premiums in compliance with applicable law and in a commercially reasonable manner. Section 8.11 Pledged Reserve Release Notice. The Borrower hereby acknowledges and agrees that if, at any time, it shall cease to maintain all or any portion of Permitted Reserves in respect of which Pledged Reserves Account Funds have been deposited in the Pledged Reserves Account, the Borrower as promptly as possible (and in any event within three Business Days) after it shall cease to maintain such Permitted Reserves shall give written notice thereof (each such notice, a "Pledged Reserve Release Notice") to the Agent and the Collateral Agent which notice shall provide the amount of such Pledged Reserves Account Funds that have been released. Section 8.12 Registry. The Borrower hereby covenants that it shall maintain a register on which it will record the Commitment from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrower's obligations in respect of such Loans. Upon the request of the Borrower, the Agent hereby agrees to use its reasonable efforts to provide to the Borrower such information not otherwise available to the Borrower, as the Borrower shall reasonably request from time to time in order to enable it to fulfill its obligations pursuant to this Section 8.12. SECTION 9. NEGATIVE COVENANTS. The Borrower covenants and agrees that on and after the Effective Date and until the Commitments have terminated and the Loans and the Notes, together with interest, Fees and all other obligations incurred hereunder and thereunder, are paid in full: Section 9.01 Liens. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any Pledged Recoveries, Pledged Premiums, Pledged Reserves Account Funds or other Collateral, provided that the provisions of this Section 9.01 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as "Permitted Liens"): (i) the Lien in favor of the Banks under the Security Agreement or otherwise permitted thereunder; (ii) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles; -27- (iii) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's and mechanics' liens and other similar Liens arising in the ordinary course of business, which relate to Indebtedness which has not been paid when due and payable in accordance with its terms and which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; and (iv) Liens incurred in connection with reinsurer trust agreements entered into pursuant to Section 114 of the New York Insurance Law. Section 9.02 Consolidation, Merger, Sale of Assets, etc. The Borrower will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) all or any substantial part of its property or assets, or purchase or otherwise acquire (in one or a series of related transactions) all or substantially all of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person, or permit any of its Subsidiaries so to do any of the foregoing, except that: (i) each of the Borrower and its Subsidiaries may in the ordinary course of business sell or lease assets; (ii) any Subsidiary may wind up its affairs or liquidate or dissolve into, and may consolidate or merge with or into, the Borrower or any other Subsidiary of the Borrower; (iii) the assets or stock of any Subsidiary of the Borrower may be purchased or otherwise acquired by the Borrower or any other Subsidiary of the Borrower; (iv) the Borrower or any of its Subsidiaries may purchase or otherwise acquire all or substantially all of the properties or assets of any Person (other than the Borrower) or acquire such Person by merger so long as (a) no Default or Event of Default has occurred and is continuing or would occur after giving effect thereto, (b) such purchase, acquisition or merger shall not result in any downgrading of the Borrower's Rating assigned by Moody's or S&P from that in effect immediately prior to such purchase, acquisition or merger and (c) the Borrower shall deliver to the Agent a certificate of the president, chief financial officer or the treasurer of the Borrower stating that such purchase, merger or acquisition complied with the conditions contained in this clause (iv); and (v) the Borrower's indirect Subsidiary, Van-American Insurance Company, may wind up, liquidate or dissolve its affairs and convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) all or any substantial part of its property or assets in accordance with the Run-off Plan approved by the Commonwealth of Kentucky Department of Insurance on or about December 27, 2000. -28- SECTION 10. EVENTS OF DEFAULT. Upon the occurrence of any of the following specified events (each an "Event of Default"): Section 10.01 Payments. The Borrower shall (i) default in the payment when due of any principal of any Loan or any Note or (ii) default, and such default shall continue unremedied for two or more Business Days, in the payment when due of any interest on any Loan or any Note or any Fees or any other amounts owing hereunder or under any Note; or Section 10.02 Representations, etc. Any representation, warranty or statement made by or on behalf of the Borrower herein or in any other Credit Document or in any certificate delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or Section 10.03 Covenants. The Borrower shall (i) default in the due performance or observance by it of any term, covenant or agreement contained in Section 8.01(e)(i), 8.07, 8.08, 8.09, 8.10, 8.11 or 9 or (ii) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Sections 10.01 and 10.02 and clause (i) of this Section 10.03) contained in this Agreement and such default shall continue unremedied for a period of 30 days after written notice to the Borrower by the Agent or, in the event there is no Agent, any Bank; or Section 10.04 Default Under Other Agreements. The Borrower or any of its Subsidiaries shall (i) default in any payment of any Indebtedness (other than the Notes) with an outstanding principal balance in excess of $5,000,000 beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness beyond the grace period as provided therein (other than the Notes) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of any such default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause any such Indebtedness to become due prior to its stated maturity; or any Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or Section 10.05 Bankruptcy, etc. The Borrower or any of its Subsidiaries shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower or any of its Subsidiaries, and the petition is not controverted within 10 days, or is not stayed or dismissed and remains in effect after 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower -29- or any of its Subsidiaries, or the Borrower or any of its Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Subsidiaries, or there is commenced against the Borrower or any of its Subsidiaries any such proceeding which remains undismissed or unstayed for a period of 60 days, or the Borrower or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any of its Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Subsidiaries for the purpose of effecting any of the foregoing; or Section 10.06 Security Agreement. (i) The Security Agreement or any provision thereof shall cease to be in full force and effect, or shall cease in any material respect to give the Collateral Agent for the benefit of the Banks, the Liens, rights, powers and privileges purported to be created thereby, or (ii) the Borrower shall otherwise default in any material respect in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Security Agreement and such default shall continue unremedied for a period of 30 days after written notice to the Borrower by the Agent or, in the event there is no Agent, any Bank; or Section 10.07 Judgments. One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate for the Borrower and its Subsidiaries a liability (not paid or fully covered by insurance) of $3,000,000 or more at any one time, and all such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days after the entry thereof; or Section 10.08 Change of Control. A Change of Control shall occur; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent may or shall upon direction from the Majority Banks, by written notice to the Borrower, take the following actions to the extent permitted below (provided, that, if an Event of Default specified in Section 10.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice to the Borrower as specified below shall occur automatically without the giving of any such notice): if any Event of Default has occurred and is continuing, the Agent may declare the principal of and any accrued interest in respect of all Loans and the Notes and all obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. -30- SECTION 11. THE AGENT. Section 11.01 Appointment. The Banks hereby designate Deutsche Bank AG, New York Branch as Agent (for purposes of this Section 11, the term "Agent" shall also include Deutsche Bank AG, New York Branch in its capacity as Collateral Agent pursuant to the Security Documents) to act as specified herein and in the other Credit Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its officers, directors, agents or employees. Section 11.02 Nature of Duties. The Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement and the Security Agreement. Neither the Agent nor any of its officers, directors, agents or employees shall be liable for any action taken or omitted by it or them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Bank or the holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein. Section 11.03 Lack of Reliance on the Agent. Independently and without reliance upon the Agent, each Bank and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Borrower in connection with the making and the continuance of the Loans and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Borrower and, except as expressly provided in this Agreement, the Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. The Agent shall not be responsible to any Bank or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectability, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of the Borrower or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of the Borrower or the existence or possible existence of any Default or Event of Default. -31- Section 11.04 Certain Rights of the Agent. If the Agent shall request instructions from the Banks with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, the Agent shall be entitled to refrain from such act or taking such action unless and until the Agent shall have received instructions from the Majority Banks or all the Banks to the extent required by Section 12.11; and the Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Bank or the holder of any Note shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Majority Banks or the Banks, as the case may be. Section 11.05 Reliance. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any Person that the Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by the Agent. Section 11.06 Indemnification. To the extent the Agent is not reimbursed and indemnified by the Borrower, each Bank will reimburse and indemnify the Agent for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Agent in performing its duties hereunder or under any other Credit Document, in any way relating to or arising out of this Agreement or any other Credit Document; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Section 11.07 The Agent in Its Individual Capacity. With respect to its obligation to make Loans under this Agreement, the Agent shall have the rights and powers specified herein for a "Bank" and may exercise the same rights and powers as though it was not performing the duties specified herein; and the term "Banks," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Borrower or any Affiliate of the Borrower as if they were not performing the duties specified herein, and may accept fees and other consideration from the Borrower for services in connection with this Agreement and otherwise without having to account for the same to the Banks. Section 11.08 Resignation by the Agent. (a) The Agent may resign from the performance of all its functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days' prior written notice to the Borrower and the Banks. In the case of the resignation by the Agent, such resignation shall take effect upon the appointment of a successor Agent pursuant to Section 11.08(b) or 11.08(c) or as otherwise provided in Section 11.08(d). -32- (b) Upon any such notice of resignation by the Agent, the Banks shall appoint a successor Agent hereunder or thereunder who shall be a commercial bank or trust company reasonably acceptable to the Borrower (it being understood and agreed that any Bank is deemed to be acceptable to the Borrower). (c) If a successor Agent shall not have been so appointed within such 15 Business Day period, the Agent, with the consent of the Borrower, shall then appoint a successor Agent who shall serve as Agent hereunder or thereunder until such time, if any, as the Banks appoint a successor Agent as provided above. (d) If no successor Agent has been appointed pursuant to Section 11.08(b) or 11.08(c) by the 20th Business Day after the date such notice of resignation was given by the Agent, the Agent may appoint any other Bank which agrees to such appointment to act as successor Agent. SECTION 12. MISCELLANEOUS. Section 12.01 Payment of Expenses, etc. The Borrower shall: (i) whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses (a) of the Agent (including, without limitation, the reasonable fees and disbursements of White & Case, LLP, counsel for the Agent) in connection with the preparation, execution and delivery of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein and any amendment, waiver or consent relating hereto or thereto and (b) of the Agent and the Banks in connection with the enforcement of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein (including, without limitation, the reasonable fees and disbursements of counsel for the Agent and the Banks); (ii) pay and hold each Bank harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save such Bank harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iii) except as otherwise provided in Section 4.05, indemnify each Bank, its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, and reasonable costs, expenses and disbursements incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not such Bank is a party thereto) related to the entering into and/or performance of this Agreement or any other Credit Document or the use of the proceeds of any Loans hereunder or the consummation of any transactions contemplated herein or in any other Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such liabilities, obligations, losses, etc., to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). -33- Section 12.02 Right of Setoff. Except as otherwise provided in Section 4.05, in addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights and to the extent permitted by applicable law, during the continuance of an Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special), and any other Indebtedness at any time held or owing by such Bank (including without limitation by branches and agencies of such Bank wherever located) to or for the credit or the account of the Borrower against and on account of the Obligations and liabilities of the Borrower to such Bank under this Agreement or under any of the other Credit Documents, and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not the Bank shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured, provided however that (i) except to the extent provided in the next succeeding clause (ii), no Bank is authorized hereunder to take any of the foregoing actions, nor shall any Bank exercise any other right of setoff or bankers' lien or any other right now or hereafter granted under applicable law with respect to the Pledged Reserves Account or any portion of the Pledged Reserves Account Funds or any Collateral contained in the Pledged Reserves Account (each of the Agent, the Collateral Agent and each Bank hereby waiving, to the extent permitted by applicable law, any such right) and (ii) from and after receipt by the Agent or the Collateral Agent of any Pledged Reserve Release Notice, the Agent, the Collateral Agent or any Bank is authorized to and may exercise, to the extent permitted by applicable law, any of such foregoing actions or such rights only with respect to the amount of Pledged Reserves Account Funds described in such Pledged Reserve Release Notice and the other Collateral contained in the Pledged Reserves Account in an amount equal to the interest and other earnings on such Pledged Reserves Account Funds. Section 12.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered: if to the Borrower or any Bank, at its address listed opposite its name on the signature page hereto; and if to the Agent at its Notice Office; or, as to any Bank or the Agent, at such other address as shall be designated by such party in a written notice to the other parties hereto and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent. All such notices and communications shall not be effective until received by the Agent or the Borrower. Section 12.04 Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, that the Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Banks and, provided further, that, no Bank may transfer or assign its rights or obligations hereunder or under any of the other Credit Documents, except as provided in this Section 12.04, provided further, that no Bank shall transfer, grant or assign any participation under which the participant shall have rights to approve -34- any amendment to or waiver of this Agreement or any of the other Credit Documents (i) except to the extent such amendment or waiver (A) extends the final maturity of any Loan or Note other than in accordance with Section 3.04, or reduces the rate or extends the time of payment of interest or Fees thereon, or reduces the principal amount thereof, or increases the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of any Commitment of any Bank), (B) releases any material portion of the Collateral under the Security Agreement except as shall be otherwise provided in any Credit Document, (C) consents to the assignment or transfer by the Borrower of any of its rights and obligations under any Credit Document, (D) amends the definition of Loss Threshold Incurrence Date other than to increase the dollar amount or the percentage specified therein, (E) reduces the percentage specified in the definition of Majority Participants or (F) amends, modifies or waives any provision of this Section 12.04 or (ii) except to the extent that a Bank may permit its Majority Participants to approve any material written amendment, modification, waiver or release of any other provision of this Agreement or any other Credit Document which would, if effected, materially adversely affect the interests of its participants. "Majority Participants" for purposes of this Section 12.04 shall mean, with respect to each Bank, at any time participants of such Bank participating in at least 51% of the aggregate principal amount of Loans made by such Bank and outstanding at such time, or if no such Loans are outstanding at such time, participants of such Bank participating in at least 51% of the Commitment of such Bank at such time. In the case of any such participation, the participant shall not constitute a "Bank" hereunder and shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against any Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation, except that the participant shall be entitled to the benefits of Section 2.07 or 4.04 of this Agreement to the extent that such Bank would be entitled to such benefits if the participation had not been transferred, granted or assigned. (b) Notwithstanding the foregoing, any Bank (or any Bank together with one or more other Banks) may (and, at the direction of the Borrower following a rating downgrade of such Bank, shall) assign all or a portion of its Commitment and related outstanding rights and Obligations hereunder to one or more Eligible Transferees, each of which assignees shall become a party to this Agreement as a Bank by execution of an Assignment and Assumption Agreement and delivery of such Assignment and Assumption Agreement to the Borrower and the Agent, provided that (i) new Notes will be issued to such new Bank in the stated amount of its assumed Commitment, and to the assigning Bank in the stated amount of the Commitment if any, retained by it, upon the request of such new Bank or assigning Bank and the surrender of the Note previously issued to the assigning Bank (or the execution and delivery to the Borrower of an indemnity satisfactory to the Borrower), such new Notes to be in conformity with the requirements of Section 2.05 to the extent needed to reflect the revised Commitments, (ii) unless such assignment is to an Affiliate of such assigning Bank with the same or higher unsecured senior debt rating, and so long as no Default or Event of Default exists at the time of such assignment, the Borrower shall have consented to such assignment, (iii) at the time of such assignment, the -35- new Bank or (except to the extent the new Bank is an affiliate of the assigning Bank) its parent shall have an unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody's and S&P (A) acceptable to the Borrower (if such assignment is at the direction of the Borrower) or (B) no lower than the unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody's and S&P of the assigning Bank or its parent (if such assignment is not at the direction of the Borrower), (iv) such assignment shall not result in a downgrading of the Borrower's Rating by Moody's or S&P from that in effect immediately prior to such assignment, (v) the assigning Bank shall provide notice of any such assignment to the Agent and the Borrower and the Borrower shall provide notice of same to Moody's and S&P and (vi) the new Bank shall deliver a legal opinion addressed to each of the Borrower, Moody's and S&P dated the effective date of the applicable assignment to the effect that this Agreement constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditor's rights and by equitable principles (regardless of whether enforcement is sought in equity or at law) as the same may be applied in the event of bankruptcy or similar proceedings with respect to such new Bank. To the extent of any assignment pursuant to this Section 12.04(b), the assigning Bank shall be relieved of its obligations hereunder with respect to its assigned Commitment. To the extent that an assignment of all or any portion of a Bank's Commitment and related outstanding Obligations pursuant to this Section 12.04(b) would at the time of such assignment, result in increased costs under Section 2.07 or 4.04 from those being charged by the respective assigning Bank prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes in applicable law, or government rules, regulations, orders or requests after the date of the respective assignment). (c) Upon the execution and delivery of an Assignment and Assumption Agreement in accordance with, and subject to the restrictions of, Section 12.04(b), the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder and under the other Credit Documents have been assigned to it pursuant to such Assignment and Assumption Agreement, have the rights and obligations of a "Bank" hereunder and thereunder. (d) Any Bank claiming any amounts payable pursuant to Section 4.04 shall use reasonable efforts (consistent with legal and regulatory restrictions and subject to overall policy considerations of such Bank) to designate another lending office for its Commitment or Loans or take such other action to minimize such amounts, as may be reasonably requested by the Borrower, provided that such designation is made or such other action is taken on such terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage. (e) Nothing in this Agreement shall prevent or prohibit any Bank from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. -36- (f) Each Bank shall promptly notify the Borrower of any change in the location of its applicable lending office. Section 12.05 No Waiver; Remedies Cumulative. No failure or delay on the part of any Bank or the holder of any Note in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower and any Bank or the holder of any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. Except as otherwise expressly provided herein or in any other Credit Document, the rights, powers and remedies herein or in any other Credit Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which any Bank would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Bank or the holder of any Note to any other or further action in any circumstances without notice or demand. Section 12.06 Calculations; Computations. (a) The financial statements to be furnished to the Banks pursuant to Section 8.01(a) and (b) shall be made and prepared in accordance with generally accepted accounting principles in the United States consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks). (b) All computations of interest hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Section 12.07 Governing Law; Submission to Jurisdiction; Venue. (a) This Agreement and the other Credit Documents and the rights and obligations of the parties hereunder and thereunder shall be construed in accordance with and be governed by the law of the State of New York, without regard to the conflict of law provisions thereof. Any legal action or proceeding against the Borrower with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Borrower irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address set forth opposite its signature below (or to such other address as the Borrower may from time to time notify the Agent in writing), such service to become effective 30 days after such mailing. Except as otherwise provided in Section 4.05, nothing herein shall affect the right of the Agent or any Bank under this Agreement to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. -37- (b) The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in Section 12.07(a) and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Section 12.08 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Agent. Section 12.09 Effectiveness. This Agreement shall become effective on the date (the "Effective Date") on which the Borrower and the Banks shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Agent at its Notice Office and the conditions set forth in Section 5 shall have been satisfied or waived by the Banks, as evidenced by a written notice by the Agent to the Borrower confirming that the Agreement has become effective and setting forth the Effective Date. Section 12.10 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 12.11 Amendment or Waiver. Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Borrower and the Majority Banks and the Agent; provided, however, that no such change, waiver, discharge or termination shall, without the consent of each Bank (other than any Bank that is, at the time of the proposed extension, release, amendment, reduction or consent, a Defaulting Bank; provided, however, that, with respect to any matter described in clause (i) or (ii) of this Section 12.11, the consent of each Defaulting Bank which at such time has a Loan outstanding shall also be required) (i) extend the final maturity of any Loan or Note other than in accordance with Section 3.04 or reduce the rate or extend the time of payment of interest or Fees thereon, or reduce the principal amount thereof, or increase the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of any Commitment of any Bank), (ii) release any material portion of the Collateral under any Security Document except as shall be otherwise provided in any Credit Document, (iii) amend, modify or waive any provision of this Section 12.11, (iv) reduce the percentage specified in the definition of Majority Banks, (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under any Credit Document or (vi) amend the definition of Loss Threshold Incurrence Date other than to increase the dollar amount or the percentage specified therein. -38- Section 12.12 Survival. All indemnities set forth herein including, without limitation, in Sections 2.07, 4.04 and 12.01 shall survive the execution and delivery of this Agreement and the Notes and the making and repayment of the Loans. Section 12.13 Exclusions from Covered Portfolio. In the event that any Bank (or any participant to whom such Bank has transferred, granted or assigned any participation in its rights and obligations hereunder and under the other Credit Documents) is, or upon the occurrence of any contingency would be, obligated under the terms of a line of credit, standby bond purchase agreement, letter of credit, liquidity agreement or similar agreement or arrangement to purchase any Insured Obligation listed in a certificate delivered by the Borrower to the Agent pursuant to Section 5.06 or 8.01(d), such Bank (or such participant) shall promptly notify the Agent, and the Agent shall promptly notify the Borrower, that such Bank (or such participant) is or would be so obligated to purchase such Insured Obligation. Upon delivery by the Agent to the Borrower of any such notice with respect to an Insured Obligation, such Insured Obligation shall, effective upon delivery of such notice by the Agent to the Borrower, be excluded from the Covered Portfolio. Section 12.14 Confidentiality. Each of the Agent and each Bank agrees to take and cause its respective Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentially of all financial information and all other information reasonably identified as "confidential" or "secret" by the Borrower and provided to it by the Borrower or by the Agent on the Borrower's behalf, and neither it nor any of its Affiliates shall use such information other than is connection with or in enforcement of this Agreement and the other Credit Documents or in connection with other business now or hereafter existing or contemplated with the Borrower, except to the extent such information (i) was or becomes generally available to the public other than as a result of a disclosure by the Agent or any Bank or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower, provided that such source is not bound by a confidentiality agreement with the Borrower known to the Agent or such Bank; provided, however, that the Agent or any Bank may disclose such information (a) at the request or pursuant to any requirement of any authority to which the Agent or such Bank is subject or in connection with an examination of the Agent or such Bank by any such authority; (b) pursuant to subpoena or other court process, provided that if not prohibited by law, the Agent or such Bank will make reasonable efforts to provide notice to the Borrower of the receipt of such subpoena prior to delivering confidential material in response thereto, and the Agent and the Banks will cooperate with the Borrower in any attempt to obtain a protective order, at the Borrower's expense, as may be reasonably requested by the Borrower; (c) when required to do so in accordance with the provisions of any applicable law or regulation; (d) to the extent reasonably required in connection with any litigation or proceeding with respect to the transactions contemplated hereby to which the Agent or any Bank or their respective Affiliates may be party; (e) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Credit Document; (f) to the Agent's or such Bank's independent auditors and other professional advisors with a need to know and who agrees to keep such information confidential to the extent required of the Agent or such Bank hereunder; and (g) to -39- any assignee or participant, actual or potential, provided that such Person agrees to keep such information confidential to the same extent required of the Agent or the Bank hereunder. -40- IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized officers to execute and deliver this Agreement as of the date first above written. Address: 335 Madison Avenue ASSET GUARANTY INSURANCE COMPANY 25th Floor New York, New York 10017-4607 By_________________________________ Attention: President Title: DEUTSCHE BANK AG, 31 West 52nd Street NEW YORK BRANCH, New York, New York 10019 Individually and as Agent Attention: John S. McGill By_________________________________ Title: By_________________________________ Title: -41- SCHEDULE I COMMITMENTS
Name Commitment Deutsche Bank AG, $25,000,000 New York Branch ----------- Total $25,000,000 ===========
SCHEDULE II REINSURANCE AGREEMENTS EX-10.30 15 w56746ex10-30.txt CREDIT AGREEMENT DATED NOVEMBER 7, 2001 EXHIBIT 10.30 ================================================================================ CREDIT AGREEMENT among ENHANCE REINSURANCE COMPANY, VARIOUS BANKS and DEUTSCHE BANK AG, NEW YORK BRANCH, as Agent ---------- Dated as of November 7, 2001 ---------- DEUTSCHE BANC ALEX. BROWN INC., as Arranger ================================================================================ TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION...................... 1 Section 1.01 Defined Terms........................................... 1 Section 1.02 Principles of Construction.............................. 10 SECTION 2. AMOUNT AND TERMS OF CREDIT...................................... 10 Section 2.01 The Loans............................................... 10 Section 2.02 Amount of Each Borrowing................................ 11 Section 2.03 Notice of Borrowing..................................... 11 Section 2.04 Disbursement of Funds................................... 11 Section 2.05 Notes................................................... 11 Section 2.06 Interest................................................ 12 Section 2.07 Capital Adequacy........................................ 12 Section 2.08 Obligations of Defaulting Banks......................... 13 SECTION 3. COMMITMENT FEES, FEES; AND TERMINATIONS, EXTENSIONS AND INCREASES OF COMMITMENTS AND CONTINGENT COMMITMENTS..................................................... 13 Section 3.01 Fees.................................................... 13 Section 3.02 Voluntary Termination of Unutilized Commitments and Unutilized Contingent Commitments....................... 14 Section 3.03 Mandatory Termination of Commitments and Contingent Commitments............................................. 14 Section 3.04 Expiry Date............................................. 14 SECTION 4. PREPAYMENTS; PAYMENTS........................................... 15 Section 4.01 Voluntary Prepayments................................... 15 Section 4.02 Mandatory Prepayments................................... 15 Section 4.03 Method and Place of Payment............................. 15 Section 4.04 Net Payments............................................ 16 Section 4.05 Limitations on Sources of Payment....................... 17 SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS........................... 17 Section 5.01 Execution of Agreement; Notes........................... 18 Section 5.02 No Default; Representations and Warranties.............. 18 Section 5.03 Opinions of Counsel..................................... 18 Section 5.04 Corporate Documents; Proceedings........................ 18 Section 5.05 Security Agreement...................................... 18 Section 5.06 Covered Portfolio, etc.................................. 18
(i)
Page ---- Section 5.07 Requisite Approvals..................................... 19 Section 5.08 Litigation.............................................. 19 Section 5.09 Fees, etc............................................... 19 SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS....................... 19 Section 6.01 Loss Threshold Incurrence Date.......................... 19 Section 6.02 Notice of Borrowing..................................... 19 SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS...................... 20 Section 7.01 Corporate Status........................................ 20 Section 7.02 Corporate Power and Authority........................... 20 Section 7.03 No Violation............................................ 20 Section 7.04 Governmental Approvals.................................. 20 Section 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; etc............................ 21 Section 7.06 Litigation.............................................. 21 Section 7.07 True and Complete Disclosure............................ 21 Section 7.08 Use of Proceeds; Margin Regulations..................... 22 Section 7.09 Tax Returns and Payments................................ 22 Section 7.10 Compliance with ERISA................................... 22 Section 7.11 Capitalization.......................................... 23 Section 7.12 No Subsidiaries......................................... 23 Section 7.13 Compliance with Statutes, etc........................... 23 Section 7.14 Investment Company Act.................................. 23 Section 7.15 Public Utility Holding Company Act...................... 23 Section 7.16 Compliance with Insurance Law........................... 23 Section 7.17 Covered Portfolio....................................... 24 SECTION 8. AFFIRMATIVE COVENANTS........................................... 24 Section 8.01 Information Covenants................................... 24 Section 8.02 Books, Records and Inspections.......................... 26 Section 8.03 Corporate Franchises.................................... 27 Section 8.04 Compliance with Statutes, etc........................... 27 Section 8.05 ERISA................................................... 27 Section 8.06 Performance of Obligations.............................. 27 Section 8.07 Use of Proceeds......................................... 28 Section 8.08 Conduct of Business..................................... 28 Section 8.09 Underwriting Criteria................................... 28 Section 8.10 Collection of Pledged Recoveries and Pledged Premiums... 28 Section 8.11 Pledged Reserve Release Notice.......................... 28 Section 8.12 Registry................................................ 28 SECTION 9. NEGATIVE COVENANTS.............................................. 28 Section 9.01 Liens................................................... 28
(ii)
Page ---- Section 9.02 Consolidation, Merger, Sale of Assets, etc.............. 29 SECTION 10. EVENTS OF DEFAULT.............................................. 30 Section 10.01 Payments............................................... 30 Section 10.02 Representations, etc................................... 30 Section 10.03 Covenants.............................................. 30 Section 10.04 Default Under Other Agreements......................... 30 Section 10.05 Bankruptcy, etc........................................ 30 Section 10.06 Security Agreement..................................... 31 Section 10.07 Judgments.............................................. 31 Section 10.08 Change of Control...................................... 31 SECTION 11. THE AGENT...................................................... 31 Section 11.01 Appointment............................................ 31 Section 11.02 Nature of Duties....................................... 32 Section 11.03 Lack of Reliance on the Agent.......................... 32 Section 11.04 Certain Rights of the Agent............................ 32 Section 11.05 Reliance............................................... 33 Section 11.06 Indemnification........................................ 33 Section 11.07 The Agent in Its Individual Capacity................... 33 Section 11.08 Resignation by the Agent............................... 33 SECTION 12. MISCELLANEOUS.................................................. 34 Section 12.01 Payment of Expenses, etc............................... 34 Section 12.02 Right of Setoff........................................ 34 Section 12.03 Notices................................................ 35 Section 12.04 Benefit of Agreement................................... 35 Section 12.05 No Waiver; Remedies Cumulative......................... 37 Section 12.06 Calculations; Computations............................. 38 Section 12.07 Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial.................................. 38 Section 12.08 Counterparts........................................... 39 Section 12.09 Effectiveness.......................................... 39 Section 12.10 Headings Descriptive................................... 39 Section 12.11 Amendment or Waiver.................................... 39 Section 12.12 Survival............................................... 39 Section 12.13 Exclusions from Covered Portfolio...................... 39 Section 12.14 Confidentiality........................................ 40 Section 12.15 Payments Pro Rata...................................... 41
(iii) SCHEDULES Schedule I Commitments Schedule II Email re Reinsured Obligations EXHIBITS Exhibit A Notice of Borrowing Exhibit B Note Exhibit C Matters to be Covered by Opinions of Counsel to the Borrower Exhibit D Officers' Certificate of the Borrower Exhibit E Pledge and Security Agreement Exhibit F Assignment and Assumption Agreement (iv) CREDIT AGREEMENT, dated as of November 7, 2001, among ENHANCE REINSURANCE COMPANY, a New York stock insurance company (the "Borrower"), the Banks party hereto from time to time, and DEUTSCHE BANK AG, NEW YORK BRANCH, acting in its capacity as Agent pursuant to Section 11 (in such capacity, the "Agent"). W I T N E S S E T H : WHEREAS, subject to and upon the terms and conditions herein set forth, the Banks are willing to make available to the Borrower the credit facility provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. Section 1.01 Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" shall mean, with respect to any Person, any other Person (other than an individual) directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person; provided, however, that an Affiliate of the Borrower shall include any Person that directly or indirectly owns more than 10% of the Borrower and any officer or director of the Borrower or any such Person. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall mean Deutsche Bank AG, New York Branch, in its capacity as Agent for the Banks hereunder, and shall include any successor to the Agent appointed pursuant to Section 11.08. "Agreement" shall mean this Credit Agreement, as modified, supplemented or amended from time to time. "Applicable Margin" shall mean a percentage per annum equal to 2.0%. "Assignment and Assumption Agreement" shall mean any Assignment and Assumption Agreement substantially in the form of Exhibit F entered into pursuant to the terms hereof. "Authorized Officer" shall mean the president, any vice president, the chief financial officer or the treasurer of the Borrower. "Average Annual Debt Service" as of a specified date with respect to an Insured Obligation shall mean the applicable Retained Percentage times the sum of (i) the aggregate outstanding principal amount of such Insured Obligation and (ii) the aggregate amount of interest thereafter required to be paid on such Insured Obligation (giving effect to all mandatory sinking fund payments or other regularly scheduled required redemptions, prepayments or other retirement of principal), divided by the number of whole and fractional years from the date of determination to the latest maturity date of such Insured Obligation, and as of a specified date with respect to the Covered Portfolio shall mean the sum of the Annual Average Debt Service as of such date of all Insured Obligations contained in the Covered Portfolio. In the event that an Insured Obligation bears interest at a variable rate, the interest thereon for purposes of the determination of Average Annual Debt Service shall be calculated at the rate employed by the Borrower to compute average annual debt service with respect to such Insured Obligation in accordance with its customary business practices. "Bank" shall mean the banks listed on the signature pages hereof on the Effective Date as well as any institution which becomes a Bank hereunder pursuant to Section 12.04(b). "Bankruptcy Code" shall have the meaning provided in Section 10.05. "Base Rate" shall mean the higher of (i) 1/2 of 1% in excess of the Federal Funds Rate and (ii) the Prime Lending Rate. "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrower's Rating" shall mean the Borrower's claims-paying ability rating. "Borrowing" shall mean the borrowing of Loans on a given date. "Business Day" shall mean any day except Saturday, Sunday and any day which shall be in New York City a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close. "Change of Control" shall mean and include the occurrence of any of the following events: any Person, entity or "group" (within the meaning of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934) other than Radian Group Inc. or any Affiliate thereof (i) shall have acquired, directly or indirectly, beneficial ownership of 20% or more of any outstanding class of capital stock of the Borrower having ordinary voting power in the election of directors, provided that any Person, entity or group shall be permitted to acquire up to 25% of the outstanding capital stock of any such class in a transaction approved before the consummation of same by a majority of the directors of the Borrower or (ii) shall have obtained the power (whether or not exercised) to elect the majority of the Board of Directors of the Borrower. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all "Collateral" as defined in the Security Agreement. "Collateral Account" shall have the meaning provided in the Security Agreement. -2- "Collateral Agent" shall have the meaning provided in the Security Agreement. "Commitment" shall mean, for each Bank, the amount set forth opposite such Bank's name in Part A of Schedule I hereto directly below the column entitled "Commitment", as the same may be (i) reduced from time to time pursuant to Section 3.02 and/or 3.03 and (ii) adjusted from time to time as a result of assignments to or from such Bank pursuant to Section 3.04 or 12.04. "Commitment Fees" shall have the meaning provided in Section 3.01(a). "Commitment Period" initially shall mean the period commencing on the Effective Date and ending on the Expiry Date and, from and after the date of any extension of the Expiry Date, shall mean the period commencing on the date which is seven years prior to the Expiry Date and ending on the Expiry Date. "Contingent Commitment" shall mean for each Part C Bank the amount set forth opposite such Part C Bank's name in Part C of Schedule I hereto directly below the column entitled "Contingent Commitment", as the same may be (i) reduced from time to time pursuant to Section 3.02 and/or 3.03 and (ii) adjusted from time to time as a result of assignments to or from such Part C Bank pursuant to Section 3.04 or 12.04. "Contingent Obligation" shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business or obligations under insurance or reinsurance contracts entered into in the ordinary course of business to secure reinsurance obligations. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Covered Portfolio" shall mean and include each Insured Obligation as of the Effective Date and each Insured Obligation issued thereafter and prior to the Loss Threshold Incurrence Date other than any Insured Obligation which is excluded from the Covered Portfolio pursuant to Section 12.13. -3- "Credit Documents" shall mean this Agreement, each Note and the Security Agreement. "Credit Event" shall mean the making of any Loan. "Cumulative Losses" for a specified period shall mean the aggregate Losses of the Borrower determined cumulatively during such period without regard to Pledged Recoveries. "Declining Bank" shall have the meaning provided in Section 3.04(b). "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Loan" shall mean, with respect to any Bank at any time, the Loan or portion of any Loan required to be made by such Bank to the Borrower pursuant to Section 2.01 at or prior to such time that has not been made by such Bank as of such time. "Defaulting Bank" shall mean, at any time, any Bank that, at such time, owes a Defaulted Loan. "Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States. "Effective Date" shall have the meaning provided in Section 12.09. "Eligible Transferee" shall mean and include a commercial bank, financial institution or other "accredited investor" (as defined in Regulation D of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder) assigned, or the parent of which is assigned, an unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody's and S&P. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement, and to any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean any person (as defined in Section 3(9) of ERISA) which together with the Borrower or any of its Subsidiaries would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Event of Default" shall have the meaning provided in Section 10. "Expiry Date" shall have the meaning provided in Section 3.04(a). "Extending Bank" shall have the meaning provided in Section 3.04(b). "Extension Request" shall have the meaning provided in Section 3.04(a). -4- "Federal Funds Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Fees" shall mean all amounts payable pursuant to or referred to in Section 3.01. "holder of any Note" shall mean any Federal Reserve Bank to which a Bank has pledged its Note to the extent such Federal Reserve Bank has foreclosed upon such Note. "Increasing Extending Bank" shall have the meaning provided in Section 3.04(b). "Indebtedness" shall mean, as to any Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person for borrowed money or for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person and all drafts drawn thereunder, (iii) all liabilities secured by any Lien on any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized under leases under which such Person is the lessee and (v) all Contingent Obligations of such Person. "Installment Premiums" shall mean any and all premiums which are required to be paid or claimed to be required to be paid to or for the account of the Borrower in respect of Insured Obligations in the Covered Portfolio on a periodic basis rather than by payment in full on the date of the effectiveness of the relevant Insurance Contract. "Insurance Contracts" shall have the meaning provided in Section 7.16. "Insured Obligation" shall mean "municipal obligation bonds", "special revenue bonds", "industrial development bonds" and "utility first mortgage obligations" which the Borrower is permitted to insure or reinsure under the provisions of Section 6904 (b) (1) (A), (B) or (C) of the New York Insurance Law (without regard to clause (J) thereof) as in effect on the Effective Date and issued by the United States, a state thereof or the District of Columbia, a municipality or governmental unit or other political subdivision of the foregoing or any public agency or instrumentality, in any event to the extent that the payment of principal thereof and/or interest thereon is insured, reinsured or otherwise guaranteed by the Borrower, and which, as of the Effective Date (with respect to Insured Obligations in the Covered Portfolio as of the Effective Date), or at the time it so insured, reinsured or otherwise guaranteed (with respect to Insured Obligations which are added to the Covered Portfolio after the Effective Date), has an investment grade rating (either directly or by a shadow rating) from Moody's, S&P or Fitch, Inc. "Lending Office" shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019 or such other office, Subsidiary or Affiliate of the Agent as the Agent may from time to time specify as such to the Borrower. -5- "Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any other similar recording or notice statute, and any lease having substantially the same effect as any of the foregoing). "Loan" shall have the meaning provided in Section 2.01(a). "Loss" shall mean at any time the aggregate sum of (i) the amount paid by the Borrower at such time or required at such time to be paid by the Borrower on claims under an Insurance Contract with respect to an Insured Obligation in the Covered Portfolio by reason of the failure by the issuer thereof or other obligor with respect thereto to pay insured amounts on such Insured Obligations when due (including adjustment expenses with respect to such claims), plus (ii) Permitted Reserves at such time, minus (iii) amounts paid at such time or reasonably expected by the Borrower at such time to be paid to the Borrower under reinsurance agreements (whether facultative or treaty) and similar arrangements with respect to the claims referred to in clause (i), minus (iv) any amount received prior to the Loss Threshold Incurrence Date which if received after the Loss Threshold Incurrence Date would constitute a Pledged Recovery, provided that, without limiting the generality of the foregoing, the term "Loss" shall not include any damages or penalties required to be paid by the Borrower in respect of an Insurance Contract by reason of the breach by the Borrower of its obligations thereunder or the cancellation or termination thereof other than in accordance with its terms. "Loss Threshold Incurrence Date" shall mean the date on which the Borrower has Cumulative Losses (net of recoveries) during the relevant Commitment Period equal to the greater of $200,000,000 and 7% of Average Annual Debt Service as of any date of determination thereof. "Majority Banks" shall mean at any time Banks owed at least 51% of the aggregate principal amount of the Loans outstanding at such time or, if no Loans are outstanding at such time, Banks holding at least 51% of the aggregate Commitments at such time; provided, however, that if any Bank shall be a Defaulting Bank at such time, there shall be excluded from the determination of Majority Banks at such time (i) the aggregate principal amount of the Loans owing to such Bank and outstanding at such time and (ii) the Commitment of such Bank at such time. "Majority Participants" shall have the meaning provided in Section 12.04(a). "Margin Stock" shall have the meaning provided in Regulation U of the Board of Governors of the Federal Reserve System. "Moody's" shall mean Moody's Investors Service, Inc. "Multiemployer Plan" shall mean any multiemployer plan as defined in Section 4001(1)(3) of ERISA, which is contributed to by (or to which there is an obligation to contribute -6- of) the Borrower, a Subsidiary of the Borrower or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Borrower, a Subsidiary of the Borrower or an ERISA Affiliate contributed to or had an obligation to contribute to such plan. "Note" shall have the meaning provided in Section 2.05. "Notice of Borrowing" shall have the meaning provided in Section 2.03. "Notice Office" shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019, or such other office as the Agent may hereafter designate in writing as such to the Borrower. "Obligations" shall mean all amounts owing to the Agent, Collateral Agent or any Bank pursuant to the terms of this Agreement or any other Credit Document. "Part B Bank" shall mean each Bank listed on Part B of Schedule I hereto. "Part C Bank" shall mean each Bank listed on Part C of Schedule I hereto. "Part C Loan" shall have the meaning provided in Section 2.08. "Payment Office" shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019, or such other office as the Agent may hereafter designate in writing as such to the Borrower. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA or any successor thereto. "Permitted Liens" shall have the meaning provided in Section 9.01. "Permitted Reserves" shall mean, with respect to any Insured Obligation, an amount equal to the reserves established in accordance with the Borrower's statutory accounting practices which are deemed necessary or prudent in the reasonable judgment of the Borrower by reason of the failure or anticipated failure by the issuer of such Insured Obligation or other obligor with respect thereto to pay such Insured Obligation when due, all as reflected on the Borrower's books and which are or will be reported by the Borrower in its statutory financial statements. "Person" shall mean any individual, partnership, limited liability company, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code, which is maintained or contributed to by (or to which there is an obligation to contribute of), or at any time during the five calendar years preceding the date of this Agreement was maintained or -7- contributed to by (or to which there was an obligation to contribute of), the Borrower or an ERISA Affiliate. "Pledged Premiums" shall mean at any time on and after the Loss Threshold Incurrence Date (i) any and all Installment Premiums which are paid or payable to the Borrower (it being understood that the Borrower is required to remit only those Installment Premiums actually received) at such time with respect to an Insurance Contract covering any defaulted Insured Obligations in the Covered Portfolio minus (ii) the aggregate amount of such Installment Premiums referred to in clause (i) paid or payable to any Person other than the Borrower at such time under reinsurance agreements (whether facultative or treaty) and similar arrangements. "Pledged Recoveries" shall mean at any time on and after the Loss Threshold Incurrence Date any and all moneys and other payments, property and other consideration and compensation received or receivable by or for the account of the Borrower (it being understood that the Borrower is required to remit only that consideration and compensation actually received) at such time (excluding the aggregate amount of any and all monies, payments, property, consideration and compensation paid or payable to any Person other than the Borrower under reinsurance agreements (whether facultative or treaty) and similar arrangements) as repayment or reimbursement of, or otherwise in respect of or arising out of, the payment of a claim by the Borrower under an Insurance Contract covering any Insured Obligation in the Covered Portfolio (without regard to whether such claim was paid from the proceeds of a Loan), whether from the issuer thereof or any other Person including without limitation under or pursuant to (i) such Insurance Contract, any reimbursement agreement, guaranty, letter of credit, mortgage, security agreement, pledge agreement or other contract, agreement or arrangement with respect to such Insurance Contract, other than such items described in (ii) through (ix) below, (ii) any account or account receivable, (iii) any compromise, settlement or similar arrangement with respect to such payment, (iv) any voluntary payment or gift, (v) any reinsurance of such Insured Obligation to the extent that payment or expected payment under such reinsurance was not deducted in determining the Loss attributed to the Borrower's payment or required payment of such claim, (vi) any contractual, statutory, common law or other right of subrogation, (vii) any realization upon any mortgage, security interest or other Lien, (viii) any cause of action, whether sounding in tort, contract or otherwise, and any judicial, arbitration or other proceeding by or before any court, agency, tribunal, association or other governmental or private body, or (ix) any other legal or equitable right or claim, whether or not similar to the foregoing), less the out-of-pocket costs and expenses, including without limitation attorneys fees and court costs, actually incurred by the Borrower in connection with the collection or other realization of such moneys and other payments, property and other consideration and compensation. "Pledged Reserves Account" shall have the meaning provided in the Security Agreement. "Pledged Reserves Account Funds" shall mean at any time the aggregate amount of proceeds of Loans borrowed hereunder for the purpose of establishing or maintaining Permitted Reserves, such proceeds to be deposited in the Pledged Reserves Account in accordance with Section 2.1(b) of the Security Agreement. -8- "Pledged Reserve Release Notice" shall have the meaning provided in Section 8.11. "Pledged Reserve Repayment Date" shall mean the date on which the Borrower delivers the Pledged Reserve Release Notice required by Section 8.11. "Prime Lending Rate" shall mean the rate as announced by Deutsche Bank AG, New York Branch, from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Deutsche Bank AG, New York Branch, may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Replacement Bank" shall have the meaning provided in Section 3.04(b). "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Retained Percentage" of an Insured Obligation shall mean the percentage of risk assumed by the Borrower under Insurance Contracts with respect thereto. "Security Agreement" shall have the meaning provided in Section 5.05. "S&P" shall mean Standard & Poor's Corporation. "Subsidiary" shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time. "Taxes" shall have the meaning provided in Section 4.04(a). "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan means the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent plan year, determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by the Plan's actuary in the most recent annual valuation of the Plan, exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. -9- "United States" and "U.S." shall each mean the United States of America. "Unutilized Commitment" shall mean, for any Bank, at any time, the Commitment of such Bank at such time less the aggregate principal amount of all Loans made by such Bank pursuant to Section 2.01(a) prior to such time. "Unutilized Contingent Commitment" shall mean, for any Part C Bank, at any time, the Contingent Commitment of such Bank at such time less the aggregate principal amount of all Loans made by such Bank pursuant to Section 2.02(b) prior to such time. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. Section 1.02 Principles of Construction. (a) All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Agreement unless otherwise specified. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) The term generally accepted accounting principles means generally accepted accounting principles in the United States, and all accounting terms not specifically defined herein shall be construed in accordance therewith. SECTION 2. AMOUNT AND TERMS OF CREDIT. Section 2.01 The Loans. (a) Subject to and upon the terms and conditions set forth herein, each Bank severally agrees, at any time and from time to time prior to the Expiry Date, to make loans (such loans, together with any loans made pursuant to Section 2.01(b), being each a "Loan" and, collectively, the "Loans") to the Borrower, provided, however, that the principal amount of any Loan made by a Bank at any time pursuant to this Section 2.01(a) shall not exceed the Unutilized Commitment of such Bank at such time. (b) In the event that (i) the Borrower requests a Borrowing under Section 2.01(a) and (ii) any Part B Bank shall fail to make on the date specified in the Notice of Borrowing for such requested Borrowing any Loan or any portion of a Loan required to be made by such Bank hereunder representing such Bank's pro rata portion (in accordance with the Commitment of such Bank and the aggregate Commitments of all of the Banks as in effect on such date) of the amount of such requested Borrowing, then each Part C Bank severally agrees to make a Loan to the Borrower on such date in an amount equal to such Part C Bank's pro rata portion (in accordance with the Contingent Commitment of such Part C Bank and the aggregate Contingent Commitments of all of the Part C Banks as in effect on such date) of such Part B Bank's Defaulted Loan, provided, however, that the principal amount of any Loan made by a Part -10- C Bank at any time pursuant to this Section 2.01(b) shall not exceed the Unutilized Contingent Commitment of such Part C Bank at such time. (c) Once repaid, Loans incurred hereunder may not be reborrowed. Section 2.02 Amount of Each Borrowing. The aggregate principal amount of each Borrowing hereunder shall not (i) be less than $1,000,000, and if greater, shall be in an integral multiple of $100,000 and (ii) exceed the lesser of (a) Cumulative Losses incurred after the occurrence of the Loss Threshold Incurrence Date less the aggregate principal amount of all Loans previously made and (b) the aggregate Unutilized Commitments of all Banks as in effect on the date such Borrowing is made. Section 2.03 Notice of Borrowing. Whenever the Borrower desires to make a Borrowing hereunder, it shall give the Agent at its Notice Office at least two Business Days' prior notice made hereunder, provided that any such notice shall be deemed to have been given on a certain day only if given before 12:00 Noon (New York time) on such day. Each such notice (each a "Notice of Borrowing") shall be in the form of Exhibit A, appropriately completed to specify the aggregate principal amount of the Loans to be made pursuant to such Borrowing, and the date of such Borrowing (which shall be a Business Day). Section 2.04 Disbursement of Funds. (a) No later than 11:00 A.M. (New York time) on the date specified in each Notice of Borrowing, (i) each Bank will make available at the Payment Office of the Agent its pro rata portion (in accordance with the Commitment of such Bank and the aggregate Commitments of all of the Banks as in effect on such date) of the amount of the Borrowing requested to be made on such date, in Dollars and in immediately available funds and (ii) the Agent will make available to the Borrower the aggregate of the amounts so made available by the Banks on such day at its Payment Office. (b) In the event that any Part B Bank shall fail to make available at the Payment Office of the Agent its pro rata portion (in accordance with the Commitment of such Bank and the aggregate Commitments of all of the Banks as in effect on such date) of the amount of the Borrowing requested to be made in any Notice of Borrowing, at or prior to 11:00 A.M. (New York time) on the date specified in such Notice of Borrowing, the Agent shall immediately notify each Part C Bank that such Part B Bank has so defaulted and no later than 1:00 P.M. (New York time) on such date, (i) each Part C Bank will (subject to the proviso at the end of Section 2.01(b)) make available at the Payment Office its pro rata portion (in accordance with the Contingent Commitment of such Part C Bank and the aggregate Contingent Commitments of all of the Part C Banks as in effect on such date) of such Part B Bank's Defaulted Loan, in Dollars and in immediately available funds, and (ii) the Agent will make available to the Borrower the aggregate of the amounts so made available by the Part C Banks on such day at the Payment Office. Section 2.05 Notes. The Borrower's obligation to pay the principal of, and interest on, the Loans made by each Bank shall be evidenced by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B with blanks appropriately completed in conformity herewith (each a "Note" and, collectively, the "Notes"). Each Note -11- shall (i) be payable to the order of such Bank and be dated the Effective Date if such Bank shall be a party hereto on the Effective Date or the effective date of the Assignment and Assumption Agreement pursuant to which it becomes a party hereto if such Bank shall become a party hereto after the Effective Date, (ii) be in a stated principal amount equal to such Bank's Commitment (plus, if such Bank shall be a Part C Bank, such Bank's Contingent Commitment) and be payable in the principal amount of the Loans evidenced thereby, (iii) mature, with respect to each Loan evidenced thereby, on the Expiry Date, (iv) bear interest as provided in the appropriate clause of Section 2.06 in respect of the Loans evidenced thereby and (v) be entitled to the benefits of this Agreement and be secured by the Security Agreement. Each Bank will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of its Note endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation shall not affect the Borrower's obligations in respect of such Loans. Section 2.06 Interest. (a) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Loan from the date the proceeds thereof are made available to the Borrower until the maturity thereof (whether by acceleration or otherwise) at a rate per annum which shall be equal to the Base Rate in effect from time to time plus the Applicable Margin. (b) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan and any other overdue amount payable by the Borrower hereunder shall bear interest from the date payment thereof was due until (but not including) the date of actual payment at a rate per annum equal to 4.0% per annum in excess of the Base Rate in effect from time to time. (c) Accrued (and theretofore unpaid) interest shall be payable (i) in respect of each Loan, quarterly in arrears on the last Business Day of each March, June, September and December, and (ii) in respect of each Loan, on any prepayment (on the amount prepaid), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. Section 2.07 Capital Adequacy. If any Bank determines at any time that the introduction of or change to any applicable law or governmental rule, regulation, order or request (whether or not having the force of law) concerning capital adequacy, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency, in any case occurring after the date hereof, will have the effect of increasing the amount of capital required or expected to be maintained by such Bank based on the existence of its Commitment and/or Contingent Commitment hereunder or its obligations hereunder, then the Borrower shall pay to such Bank, upon its written demand therefor, such additional amounts as shall be required to compensate such Bank for the increased cost to such Bank as a result of such increase of capital. In determining such additional amounts, such Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable, provided that such Bank's determination of compensation owing under this Section 2.07 shall, absent manifest error, be final and conclusive and binding on all the parties hereto. Each Bank, upon determining that any additional amounts will be payable pursuant to this Section 2.07, will give prompt written notice thereof to the Borrower, which notice shall show the basis for the -12- calculation of such additional amounts. The failure to give any such notice shall not be deemed to be a waiver of any of the Borrower's obligations to pay additional amounts pursuant to this Section 2.07, provided that the Borrower shall not be required to pay any such additional amounts (i) until it receives written notice from a Bank in accordance with this Section 2.07 or (ii) with respect to any period prior to 60 days prior to the date any such notice is received, unless the relevant introduction or change has a retroactive effect, in which case the Borrower's obligation to pay additional amounts pursuant to this Section 2.07 may encompass the entire period of retroactivity. Section 2.08 Obligations of Defaulting Banks. Anything contained in this Agreement to the contrary notwithstanding, in the event any Part C Bank makes a Loan pursuant to Section 2.01(b) (a "Part C Loan") because of a Part B Bank failing to make a Loan required to be made pursuant to this Agreement, such Part C Bank, in addition to any other right or remedy it may have pursuant to this Agreement or any other Credit Document, shall be entitled to receive, from such Part B Bank, upon demand, the principal amount of such Part C Loan, plus interest thereon, from the date made until paid, at the Federal Funds Rate for the first three days and at the Base Rate plus 2% per annum thereafter. Upon any such payment by a Part B Bank, such Part B Bank shall be subrogated to the rights of the relevant Part C Bank with respect to the relevant Part C Loan. In addition, for so long as any amounts are owed to any Part C Bank with respect to any Part C Loan, any amounts otherwise owing by a Part B Bank pursuant to this Agreement or any other Credit Document shall be paid on a pro rata basis to the Part C Banks until all amounts with respect to outstanding Part C Loans have been repaid. SECTION 3. COMMITMENT FEES, FEES; AND TERMINATIONS, EXTENSIONS AND INCREASES OF COMMITMENTS AND CONTINGENT COMMITMENTS. Section 3.01 Fees. (a) The Borrower agrees to pay to the Agent for distribution to the Banks pro rata in accordance with their respective Unutilized Commitments a commitment fee (such commitment fee, together with the commitment fee payable pursuant to Section 3.01(b), being the "Commitment Fees") for the period from the Effective Date until the Expiry Date (or such earlier date as the Commitments shall have been terminated) computed at a rate equal to 0.6% per annum on the daily average Unutilized Commitments of the Banks; provided, however, that any Commitment Fee accrued with respect to the Unutilized Commitment of a Defaulting Bank during the period prior to the time such Bank became a Defaulting Bank and unpaid at such time shall not be payable by the Borrower so long as such Bank shall be a Defaulting Bank except to the extent that such Commitment Fee shall otherwise have been due and payable by the Borrower prior to such time; and provided further that no Commitment Fee shall accrue on the Unutilized Commitment of a Defaulting Bank so long as such Bank shall be a Defaulting Bank. (b) The Borrower agrees to pay each Part C Bank a Commitment Fee for the period from the Effective Date until the Expiry Date (or such earlier date as the Contingent Commitment of such Part C Bank shall have been terminated) computed as agreed in writing from time to time by the Borrower and such Part C Bank. -13- (c) Accrued Commitment Fees shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December of each year and on the Expiry Date or upon such earlier date as the Commitments or the Contingent Commitments, as the case may be, shall be terminated, and shall be based on a 365/366-day year and actual days elapsed. (d) The Borrower shall pay to the Agent such fees in connection with the Credit Documents as may be agreed to from time to time between the Borrower and the Agent. Section 3.02 Voluntary Termination of Unutilized Commitments and Unutilized Contingent Commitments. Upon at least five Business Days' prior notice to the Agent at its Notice Office, the Borrower shall have the right to terminate the Unutilized Commitments or the Unutilized Contingent Commitments, or both, in whole or in part, in minimum aggregate amounts of $5,000,000 (or, if greater, in integral multiples of $1,000,000), provided that the Borrower shall concurrently satisfy its obligations, if any, at such time under Section 3.01. Section 3.03 Mandatory Termination of Commitments and Contingent Commitments. (a) The Commitment of each Bank shall be permanently reduced on each date a Loan is made by such Bank pursuant to Section 2.01(a) by the amount of such Loan. In addition, the Contingent Commitment of each Part C Bank shall be permanently reduced on each date a Loan is made pursuant to Section 2.01(a) by any Bank that is not a Part C Bank by an amount equal to 30% of such Loan. The Contingent Commitment of each Part C Bank shall be permanently reduced on each date a Loan is made by such Part C Bank pursuant to Section 2.01(b) by the amount of such Loan. (b) Notwithstanding anything herein to the contrary, the Borrower shall have the right to unilaterally terminate the Commitment and/or Contingent Commitment of any Bank if, at any time after the Effective Date (with respect to any Bank that is a party hereto on the Effective Date) or at any time after the effective date of the relevant Assignment and Assumption Agreement (with respect to any Bank that becomes a party hereto after the Effective Date pursuant to Section 3.04 or 12.04), the unsecured senior debt rating (or shadow rating as reflected in a letter) of such Bank or its parent shall be downgraded by Moody's or S&P, such termination to be effective 60 days after the Borrower delivers to such Bank a notice of termination. The Borrower shall, concurrent with such termination, pay to such Bank the aggregate amount, if any, owing at such time by the Borrower to such Bank under this Agreement. (c) In addition to any other mandatory Commitment reductions pursuant to this Section 3.03, the Commitment of each Bank, and the Contingent Commitment of each Part C Bank, shall each terminate in its entirety on the Expiry Date. Section 3.04 Expiry Date. (a) The expiration of the Commitments and the Contingent Commitments shall occur on November 7, 2008 (the "Expiry Date"); provided, however, that before (but not earlier than 120 days nor later than 60 days before) each anniversary of the Effective Date, the Borrower may make a written request (an "Extension Request") to the Agent at the Notice Office that the Expiry Date be extended by one calendar year. Such Extension Request (a copy of which shall be forwarded by the Agent to each of the Banks) shall -14- include a certification by a senior officer of the Borrower that no Default or Event of Default has occurred and is continuing and all representations and warranties contained herein and the other Credit Documents are true and correct in all material aspects on and as of the date of the Extension Request (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date shall be required to be true only as of such date). If by the date occurring 30 days next succeeding the Agent's receipt of such Extension Request, any Bank agrees thereto in writing by so indicating on counterparts of the Extension Request and delivering such counterpart to the Borrower, "Expiry Date" as to such Bank shall mean the November 7, occurring in the calendar year next succeeding the Expiry Date then in effect, provided that any failure to so notify the Borrower shall be deemed to be a disapproval by such Bank of the Borrower's Extension Request. The Commitment of any Bank which does not so agree, the Contingent Commitment, if any, of each Part C Bank with respect thereto and the Contingent Commitment of such Bank if such Bank is a Part C Bank, shall terminate upon the Expiry Date then in effect. No Bank shall be obligated to grant any extension pursuant to this Section 3.04(a), and any such extension shall be in the sole discretion of each Bank. The Borrower shall pay to each Bank which does not so agree all amounts owing under its Note and this Agreement on the effective date of the termination of such Bank's Commitment and Contingent Commitment, if any. (b) If fewer than all of the Banks consent to an Extension Request (each Bank that has not so consented being a "Declining Bank", and each other Bank being an "Extending Bank"), the Borrower shall have the right to require any Declining Bank to assign in full its rights and obligations under this Agreement (i) to any one or more Extending Banks designated by the Borrower that have offered in their returned counterpart of the Extension Request to increase their respective Commitments (and, if any such Extending Bank is a Part C Bank, its Contingent Commitment) in an aggregate amount at least equal to the amount of such Declining Bank's Commitment (and, if such Declining Bank is a Part C Bank, its Contingent Commitment) (each such Extending Bank being an "Increasing Extending Bank") and (ii) to the extent of any shortfall in the aggregate amount of extended Commitments or extended Contingent Commitments, to any one or more Eligible Transferees designated by the Borrower that agree to assume all of such rights and obligations (each such Eligible Transferee being a "Replacement Bank"), provided that (1) such Declining Bank shall have received payment of all amounts owing under its Note and this Agreement on the effective date of such assignment, (2) such assignment shall otherwise have occurred in compliance with Section 12.04 including, without limitation, clauses (iii) and (iv) of subsection (b) thereof and (3) the effective date of such assignment shall be the date specified by the Borrower and agreed to by the Replacement Bank or Increasing Extending Bank, as the case may be, which date shall be on or prior to the applicable Expiry Date (without giving effect to the relevant requested extension). SECTION 4. PREPAYMENTS; PAYMENTS. Section 4.01 Voluntary Prepayments. The Borrower shall have the right to prepay the Loans, without premium or penalty, in whole or in part from time to time. Section 4.02 Mandatory Prepayments. On each Pledged Reserve Repayment Date, an amount equal to 100% of the Pledged Reserves Account Funds with respect to which -15- the Borrower has delivered a Pledged Reserve Release Notice as required by Section 8.11 shall be applied as a mandatory prepayment of principal of outstanding Loans. Section 4.03 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement or any Note shall be made to the Agent not later than 12:00 Noon (New York time) on the date when due and shall be made in Dollars in immediately available funds at the Agent's Payment Office. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable at the applicable rate during such extension. Section 4.04 Net Payments. (a) All payments made by the Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payment (but excluding any tax imposed on or measured by the net income of any Bank pursuant to the laws of the jurisdiction (or any political subdivision or taxing authority thereof or therein) in which the principal office or lending office of such Bank is located or in which such Bank is organized) or any interest, penalties or similar liabilities with respect thereto (collectively, "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes and such additional amounts as may be necessary so that every payment of all amounts due hereunder or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. The Borrower shall also reimburse each Bank, upon its written request (which request shall set forth the basis for calculation of such reimbursement), for taxes imposed on or measured by the net income of such Bank pursuant to the laws of the jurisdiction (or any political subdivision or taxing authority thereof or therein) in which its principal office or lending office is located or in which such Bank is organized as it shall determine are payable by it in respect of amounts paid to or on behalf of such Bank pursuant to the preceding sentence and for any withholding of taxes as such Bank shall determine are payable by, or withheld from, such Bank, in respect of such amounts so paid to or on behalf of such Bank pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Bank pursuant to this sentence. The Borrower will furnish to the applicable Bank within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of any tax receipts available to the Borrower evidencing such payment by the Borrower. The Borrower will indemnify and hold harmless each Bank, and reimburse each Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank. (b) Each of the Banks organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each of Bank party to this Agreement as of the date of this Agreement, and on the date of the Assignment and Assumption Agreement pursuant to which it becomes a Bank in the case of each of the other Banks, and from time to time thereafter as reasonably requested in writing by the Borrower or the Agent (but only so long thereafter as such Bank remains lawfully able to do so), provide each of the Borrower and the Agent with an original Internal Revenue Service Form -16- W-8BEN or Form W-8ECI (in each case with all appropriate attachments) or, in the case of any Bank that is claiming exemption from United States withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of "portfolio interest", Form W-8BEN (and, if such Bank delivers a Form W-8BEN, a certificate representing that such Bank is not a "bank" for purposes of Section 881(c) of the Internal Revenue Code, certifying that such Bank is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the other Credit Documents or certifying that such Bank is a foreign corporation, partnership, estate or trust). If the forms referred to in this Section 4.04(b) that are provided by a Bank at the time such Bank first becomes a party to this Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Bank provides the appropriate form certifying that a lesser rate applies, whereupon withholding tax at such lesser rate shall be considered excluded from Taxes solely for the period governed by such form. However, if, on the date of the Assignment and Assumption Agreement pursuant to which a Bank assignee becomes a party to this Agreement, the Bank assignor was entitled to payments under Section 4.04(a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent (and only to such extent), the term "Taxes" shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to such Bank assignee on such date. (c) For any period with respect to which any of the Banks has failed to provide the Borrower with the appropriate form, certificate or other document described in Section 4.04(b), such Bank shall not be entitled to payment or indemnification under Section 4.04(a) with respect to Taxes imposed by reason of such failure. (d) Each of the Banks hereby agrees that, upon the occurrence of any circumstances entitling such Bank to additional amounts pursuant to this Section 4.04, such Bank shall, if requested by the Borrower, use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different applicable lending office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, determined by the Bank in its sole discretion, be otherwise disadvantageous to such Bank in any respect. Section 4.05 Limitations on Sources of Payment. Notwithstanding any other provision of this Agreement or of any other Credit Document, the obligations of the Borrower to make payments of principal and interest on the Loans and the Notes are limited recourse obligations of the Borrower payable solely from the Pledged Recoveries, the Pledged Premiums, the Pledged Reserves Account Funds and the other Collateral, and none of the Agent, the Collateral Agent, any Bank or any other Person shall be entitled to procure any money judgment against or to levy or foreclose upon or attach any other assets or properties of the Borrower for payment of such obligations; provided, however, that nothing herein contained shall limit, restrict or impair the lien created by the Security Agreement or the right of any Bank to exercise any of its rights herein or in any of the other Credit Documents upon the occurrence of an Event of Default or otherwise, or to bring suit and obtain a judgment against the Borrower (recourse -17- thereon being limited as to payment of principal and interest on the Loans and the Notes as provided in this Section 4.05). SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Agreement shall become effective subject to the satisfaction (or waiver by the Banks) of the following conditions: Section 5.01 Execution of Agreement; Notes. The Borrower and each Bank shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Agent at its Notice Office and there shall have been delivered to each Bank a Note executed by the Borrower in the amount, maturity and as otherwise provided herein. Section 5.02 No Default; Representations and Warranties. There shall exist no Default or Event of Default and all representations and warranties contained herein and in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the Effective Date. Section 5.03 Opinions of Counsel. The Agent shall have received separate opinions addressed to it and the Banks and dated the Effective Date from Cadwalader, Wickersham & Taft and David Beidler, Senior Vice President and Chief Legal Officer of the Borrower, covering the matters set forth in Exhibit C. Section 5.04 Corporate Documents; Proceedings. (a) The Agent shall have received a certificate, dated the Effective Date, signed by the president or any vice president of the Borrower, and attested to by the secretary or any assistant secretary of the Borrower, in the form of Exhibit D with appropriate insertions, together with copies of the charter documents and resolutions of the Borrower referred to in such certificate. (b) All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated in this Agreement and the other Credit Documents shall be satisfactory in form and substance to the Agent, and it shall have received all information and copies of all documents and papers, including records of corporate proceedings and governmental approvals, if any, which the Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. Section 5.05 Security Agreement. The Borrower shall have duly authorized, executed and delivered a Pledge and Security Agreement in the form of Exhibit E (as modified, supplemented or amended from time to time, the "Security Agreement") covering all the Borrower's present and future Collateral, together with: (a) evidence of all filings as may be necessary or, in the opinion of the Collateral Agent, desirable to perfect the security interests purported to be created by the Security Agreement; and -18- (b) evidence that all other actions necessary or, in the opinion of the Collateral Agent, desirable to perfect and protect the security interests purported to be created by the Security Agreement have been taken. Section 5.06 Covered Portfolio, etc. The Agent shall have received a certificate, dated the Effective Date, signed by the president, the chief financial officer or other senior financial officer of the Borrower, setting forth in reasonable detail as of September 30, 2001 (i) each Insured Obligation in the Covered Portfolio and each reinsurance agreement or similar arrangement which covers any material amount of such Insured Obligations, (ii) each default by the issuer of any such Insured Obligation or other obligor with respect thereto which has formed or the Borrower reasonably expects to form the basis of a claim under an Insurance Contract, in each case to the extent the Borrower has knowledge thereof, (iii) each default by any party to any such reinsurance agreement or similar arrangement, (iv) each claim paid by the Borrower under any Insurance Contract with respect to such Insured Obligations and (v) the Borrower's reasonable estimate as of September 30, 2001 of Installment Premiums payable with respect to the Covered Portfolio. Section 5.07 Requisite Approvals. All necessary governmental (domestic and foreign) and third party approvals in connection with the transactions contemplated by the Credit Documents and otherwise referred to herein or therein shall have been obtained and remain in effect, and all applicable waiting periods shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon the consummation of the transactions contemplated by the Credit Documents and otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon the making of the Loans. Section 5.08 Litigation. No litigation by any entity (private or governmental) shall be pending or threatened with respect to this Agreement or any documentation executed in connection herewith or the transactions contemplated hereby, or with respect to any material Indebtedness of the Borrower or which any Bank shall determine would reasonably be expected to have a materially adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 5.09 Fees, etc. The Borrower shall have paid to the Agent and to the Banks all costs, fees and expenses (including, without limitation, legal fees and expenses) payable to the Agent and/or the Banks to the extent then due. All of the certificates, legal opinions and other documents and papers referred to in this Section 5, unless otherwise specified, shall have been delivered to the Agent at its Notice Office. SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS. The obligation of the Banks to make Loans is subject, at the time of each such Credit Event, to the satisfaction of the following conditions: -19- Section 6.01 Loss Threshold Incurrence Date. At or prior to the time of each such Credit Event, the Loss Threshold Incurrence Date shall have occurred. Section 6.02 Notice of Borrowing. Prior to the making of each Loan, the Agent shall have received a Notice of Borrowing meeting the requirements of Section 2.03. The acceptance of the proceeds of each Credit Event shall constitute a representation and warranty by the Borrower to each Bank that the Loss Threshold Incurrence Date has occurred. SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In order to induce the Banks to enter into this Agreement, the Borrower makes the following representations, warranties and agreements as of the Effective Date, which shall survive the execution and delivery of this Agreement and the Notes (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date shall be required to be true and correct in all material respects only as of such date): Section 7.01 Corporate Status. The Borrower (i) is a duly organized and validly existing stock insurance company in good standing under the laws of New York, (ii) has the power and authority to own its property and assets and to transact the business in which it is engaged and (iii) is duly qualified as a foreign corporation and in good standing in each jurisdiction where the ownership, leasing or operation of property or the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 7.02 Corporate Power and Authority. The Borrower has the corporate power to execute, deliver and perform the terms and provisions of each of the Credit Documents to which it is party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of such Credit Documents. The Borrower has, or in the case of the Credit Documents other than this Agreement, by the Effective Date will have, duly executed and delivered each of the Credit Documents to which it is party, and each of such Credit Documents constitutes or, in the case of each such other Credit Document when executed and delivered, will constitute, its legal, valid and binding obligation enforceable in accordance with its terms, subject to the qualifications that enforcement of the rights and remedies created hereby or thereby is subject to (i) bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and (ii) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). Section 7.03 No Violation. Neither the execution, delivery or performance by the Borrower of the Credit Documents to which it is a party, nor compliance by it with the terms and provisions thereof, nor the use of the proceeds of the Loans (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in -20- the creation or imposition of (or the obligation to create or impose) any Lien (other than Permitted Liens) upon any of the property or assets of the Borrower pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument to which the Borrower is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the certificate of incorporation or by-laws of the Borrower. Section 7.04 Governmental Approvals. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the Effective Date), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Credit Document to which the Borrower is a party or (ii) the legality, validity, binding effect or enforceability of any such Credit Document. Section 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; etc. (a) The balance sheet of the Borrower at December 31, 2000, and the related statements of income and retained earnings and changes in financial position of the Borrower for the fiscal year ended on such date, all heretofore furnished to the Banks, present fairly the financial condition of the Borrower at December 31, 2000, and the results of the operations of the Borrower for the fiscal year ended on such date. All such financial statements have been audited by Deloitte & Touche LLP. Since December 31, 2000, there has been no material adverse change in the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower, except as may be set forth in any unaudited quarterly financial statements prepared by the Borrower since the date of the audited financial statements or in a quarterly report on Form 10-Q/A filed by Radian Group Inc. with the Securities and Exchange Commission (all of which have heretofore been furnished to the Banks). (b) Except as fully reflected in the financial statements delivered pursuant to Section 7.05(a), there are no liabilities or obligations with respect to the Borrower of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in aggregate, would be material to the Borrower. The Borrower does not know of any basis for the assertion against the Borrower of any liability or obligation of any nature whatsoever that is not fully reflected in the financial statements delivered pursuant to Section 7.05(a) which, either individually or in the aggregate, could reasonably be expected to be material to the Borrower. At September 30, 2001, Average Annual Debt Service was $3,712,636,466. (c) The Borrower has delivered to each Bank its annual statements and its financial statements as filed with the New York Insurance Department for the years ended December 31, 1999 and December 31, 2000, and its quarterly statements and its financial statements as filed with the New York Insurance Department for the periods ended March 31 and June 30, 2001. Such annual and quarterly statements and financial statements were prepared in accordance with the statutory accounting principles set forth in the New York Insurance Law, and each such annual statement is a full and true statement of all the assets and liabilities and of -21- the condition and affairs of the Borrower as of such date and of its income and deductions therefrom for the year ended on such date. Section 7.06 Litigation. There are no actions, suits or proceedings pending or, to the best knowledge of the Borrower, threatened (i) with respect to any Credit Document or (ii) that are reasonably likely to materially and adversely affect the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 7.07 True and Complete Disclosure. All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Banks (including without limitation all information contained in the Credit Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Borrower in writing to the Banks will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. Section 7.08 Use of Proceeds; Margin Regulations. All proceeds of each Loan shall be used by the Borrower only to establish and/or maintain Permitted Reserves in the Pledged Reserves Account and/or to pay or reimburse itself for the payment of Losses in respect of the Covered Portfolio, and no part of the proceeds of any Loan will be used by the Borrower to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Loan nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations T, U or X of the Board of Governors of the Federal Reserve System. Section 7.09 Tax Returns and Payments. The Borrower has filed all tax returns required to be filed by it and has paid all income taxes payable by it which have become due pursuant to such tax returns and all other taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith and for which adequate reserves have been established. The Borrower has paid, or has provided adequate reserves (in the good faith judgment of the management of the Borrower) for the payment of, all federal and state income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. Section 7.10 Compliance with ERISA. Each Plan is in substantial compliance with all applicable provisions of ERISA and the Code; no Reportable Event has occurred with respect to any Plan; no Plan has an accumulated or waived funding deficiency or has applied for an extension of any amortization period within the meaning of Section 412 of the Code or Section 302 of ERISA; neither the Borrower nor any ERISA Affiliate has incurred any material liability to or on account of a Plan or a Multiemployer Plan pursuant to Section 409, 502(i), 515, 4201, 4204, 4212, 4062, 4063, 4064 or 4069 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code which has not been satisfied in full or expects to incur any material liability under any of the foregoing sections with respect to any such Plan or Multiemployer Plan; no condition exists which presents a material risk to the Borrower or any ERISA Affiliate of incurring a -22- material liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; neither the Borrower nor any of its ERISA Affiliates is or has ever been a party to, or is or has ever been required to make contributions to, or has terminated any Multiemployer Plan; no Lien imposed under the Code or ERISA on the assets of the Borrower or any ERISA Affiliate exists or is likely to arise on account of any Plan or Multiemployer Plan; and the Borrower does not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any employee pension benefit plan (as defined in Section 3(2) of ERISA) the obligations with respect to which would reasonably be expected to have a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement. Section 7.11 Capitalization. As of the date hereof, the authorized capital stock of the Borrower consists of 100,000 shares of common stock, $40.00 par value per share, all of which are issued and outstanding. All such outstanding shares have been duly and validly issued, and are fully paid and non-assessable. The Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock except as otherwise disclosed in its financial statements. Section 7.12 No Subsidiaries. The Borrower has no Subsidiaries. Section 7.13 Compliance with Statutes, etc.. The Borrower is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not reasonably be expected to have, in the aggregate, a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower. Section 7.14 Investment Company Act. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 7.15 Public Utility Holding Company Act. The Borrower is not a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.16 Compliance with Insurance Law. The Borrower is duly licensed to transact business as a financial guaranty insurance corporation by the New York Insurance Department and (a) has all other requisite federal, state and other governmental licenses, authorizations, permits, consents and approvals to conduct its insurance and other business as currently conducted and proposed to be conducted in New York and in each jurisdiction in which it writes or issues policies of insurance (including without limitation any form of financial -23- guaranty insurance, certain lines of surety insurance or credit insurance), surety bonds, guaranties, contracts of reinsurance or other undertakings similar to the foregoing (collectively, "Insurance Contracts") or in which it conducts business, except for failures, if any, to have such licenses, authorizations, permits, consents and approvals which singly or in the aggregate could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents, (b) has made all filings of each of its forms of Insurance Contracts and of its rates and charges with the New York Insurance Department and all other federal, state and other administrative or governmental bodies required for the use thereof and has obtained all requisite approvals thereof, except for failures, if any, to file or to obtain such approvals which singly or in the aggregate could not reasonably be expected to have a material adverse effect on the business, assets, operations or financial condition of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents, (c) has duly established and maintains all reserves required under the New York Insurance Law and other applicable federal, state and other laws, rules and regulations, except for failures, if any, to maintain reserves which could not reasonably be expected to have a material adverse effect on the business, assets, operations, property or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the Credit Documents and (d) is in compliance (and has not received any notice from the New York Insurance Department or similar administrative or governmental body or an authorized representative thereof claiming that it is not in compliance) with the New York Insurance Law and with all other applicable federal, state and other laws relating to its insurance and other businesses, except with respect to failures, if any, to comply which singly or in the aggregate could not reasonably be expected to have a material adverse effect on the business, assets, operations, property or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents. Section 7.17 Covered Portfolio. Substantially all of the Insured Obligations in the Covered Portfolio are insured or reinsured by the Borrower under Insurance Contracts in the form or forms heretofore supplied to the Agent in accordance with the Borrower's underwriting criteria. The Borrower has no reason to believe that its rights included among the Collateral are not valid and binding against the obligors thereunder in accordance with their respective terms, except insofar as enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, except for such Collateral which, in the aggregate, could not reasonably be expected to have a material adverse effect on the right and ability of the Collateral Agent, in accordance with the Security Agreement, to realize upon the Collateral as a whole. The Borrower has delivered to each Bank, via an email message in the form set forth on Schedule II attached hereto, a listing, as of September 30, 2001, of the reinsurer and the related amounts (both ceded par inforce and ceded principal and interest inforce) of reinsured Insured Obligations as of such date. -24- SECTION 8. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees that on and after the Effective Date and until the Commitments have terminated and the Loans and the Notes, together with interest, Fees and all other obligations incurred hereunder and thereunder, are paid in full: Section 8.01 Information Covenants. The Borrower will furnish to the Agent and, upon the request of any Bank, to such Bank: (a) Quarterly Financial Statements. Within 60 days after the close of each of the first three quarterly accounting periods in each fiscal year of the Borrower, (i) the balance sheet of the Borrower as at the end of such quarterly period and the related statements of income and retained earnings for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be certified by the president, chief financial officer or the treasurer or other senior financial officer of the Borrower, subject to normal year-end audit adjustments which unaudited financial statements are not required to contain footnotes, and (ii) all statutory statements required to be filed for such period with the New York Insurance Department. (b) Annual Financial Statements. Within 120 days after the close of each fiscal year of the Borrower, but in any event as promptly as shall be available, (i) the balance sheet of the Borrower as at the end of such fiscal year and the related combined statements of income and retained earnings and of cash flows for such fiscal year setting forth comparative figures for the preceding fiscal year and audited by Deloitte & Touche LLP, or such other independent certified public accountants of recognized national standing reasonably acceptable to the Agent, together with a report of such accounting firm stating that in the course of its regular audit of the financial statements of the Borrower, the audit was conducted in accordance with generally accepted auditing standards, (ii) if prepared, management's discussions and analysis of the important operational and financial developments during such fiscal year and (iii) all statutory statements required to be filed for such fiscal year with the New York Insurance Department. (c) Management Letters. Promptly after the receipt thereof by the Borrower or any of its Subsidiaries, a copy of any "management letter" received by the Borrower or such Subsidiary from its certified public accountants and the management's responses thereto. (d) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 8.01(a) or 8.01(b), a certificate of the president, chief financial officer or treasurer or other senior financial officer of the Borrower (i) to the extent provided to the Borrower by primary insurers (it being understood that such information is to be provided by the Borrower solely in reliance on the information so provided by such primary insurers without investigation by the Borrower), listing the Insured Obligations in the Covered Portfolio (and if the Loss Threshold Incurrence Date has occurred identifying the Insurance Contracts with respect thereto) and calculating in reasonable detail as of the date of such financial statements (A) if such date is prior to the Loss Threshold Incurrence Date, (1) the Borrower's Cumulative Losses -25- (stating separately any Permitted Reserves included therein) for the current Commitment Period and (2) the Average Annual Debt Service, and (B) if such date is on or after the occurrence of the Loss Threshold Incurrence Date, (1) the date of the occurrence thereof, (2) evidence of the occurrence thereof, (3) the amount of Permitted Reserves as of the date of such financial statements, and (4) the aggregate amount of Pledged Recoveries received by or for the account of the Borrower during the current Commitment Period on or prior to the date of such financial statements, (ii) to the extent provided to the Borrower by primary insurers (it being understood that such information is to be provided by the Borrower solely in reliance on the information so provided by such primary insurers without investigation by the Borrower), certifying information with respect to reinsured Insured Obligations as of the date of such financial statements in a format comparable to the listing referred to in the last sentence of Section 7.17 and (iii) to the effect that, to the best of his knowledge, no Default or Event of Default has occurred and is continuing (and including a specific reference to compliance with Section 8.09) or, if any Default or Event of Default has occurred and is continuing, specifying the nature and extent thereof. (e) Notice of Default or Litigation. Promptly, and in any event within two Business Days, after an Authorized Officer obtains knowledge thereof, written notice of (i) the occurrence of any event which constitutes a Default or Event of Default, (ii) any litigation or governmental proceeding pending (A) against the Borrower or any of its Subsidiaries which could reasonably be expected to have a materially adverse effect upon the business, operations, property, assets, liabilities, or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole or (B) with respect to any Credit Document, (iii) any other event which could reasonably be expected to have a materially adverse effect upon the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (iv) any rating report received by the Borrower published by Moody's, S&P or, if either Moody's or S&P no longer rates the claims-paying ability of the Borrower, any other nationally recognized rating agency which, with the consent of the Borrower, rates the creditworthiness of obligations insured by the Borrower, (v) each Loss in excess of $100,000, including without limitation, identification of the Insured Obligation with respect to which such Loss occurred, (vi) each default by the issuer of any Insured Obligation in the Covered Portfolio or other obligor with respect thereto which could form the basis of a claim in excess of $100,000 under an Insurance Contract and (vii) each default by any party to a reinsurance agreement or similar arrangement with the Borrower which covers at least $100,000 of Insured Obligations in the Covered Portfolio. (f) Other Reports and Filings. Within 10 Business Days following the filing thereof with the Securities and Exchange Commission or any successor thereto, copies of all financial information, proxy materials and other information and reports, if any, which the Borrower or any Affiliate of the Borrower shall file with the Securities and Exchange Commission or any successor thereto. (g) Specific Information. No less frequently than quarterly, (i) information with respect to the Covered Portfolio received by the Borrower from the relevant primary insurer, (ii) service mix (i.e., health care, education, small issue industrial development bonds, utilities and pollution control, etc.) detail, on a par insured and debt service basis, with respect to the -26- Covered Portfolio and (iii) a watch list/weakening credit update with respect to the Covered Portfolio. (h) Other Information. From time to time, such other information or documents (financial or otherwise) as any Bank may reasonably request, including, without limitation, information with respect to, and copies of, any relevant reinsurance agreement. Section 8.02 Books, Records and Inspections. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with generally accepted accounting principles in the United States and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent or any Bank to visit and inspect, during regular business hours and under guidance of officers of the Borrower or such Subsidiary, any of the properties of the Borrower or such Subsidiary, and to examine the books of account of the Borrower or such Subsidiary and discuss the affairs, finances and accounts of the Borrower or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as the Agent or such Bank may request. Section 8.03 Corporate Franchises. The Borrower will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises, licenses and patents; provided, however, that nothing in this Section 8.03 shall prevent (i) transactions by the Borrower or any of its Subsidiaries which are permitted as exceptions to the restrictions of Section 9.02 or (ii) the withdrawal by the Borrower of its qualification as a foreign corporation in any jurisdiction where such withdrawal could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole. Section 8.04 Compliance with Statutes, etc. The Borrower will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole. Section 8.05 ERISA. Promptly after an Authorized Officer of the Borrower has received notice or otherwise has knowledge thereof, the Borrower shall deliver to the Agent a written notice describing in reasonable detail the occurrence of any of the following: that a Reportable Event has occurred; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum -27- funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that a Plan has an Unfunded Current Liability giving rise to a Lien under ERISA; or that the Borrower or any ERISA Affiliate will or may incur any material liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan or Multiemployer Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA. Upon written request of the Agent, the Borrower will deliver to each Bank a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. Section 8.06 Performance of Obligations. The Borrower will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement and other debt instrument by which it is bound, except such non-performances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole. Section 8.07 Use of Proceeds. The Borrower will use the proceeds of the Loans only to pay or reimburse itself for the payment of Losses (including establishing and/or maintaining Permitted Reserves in the Pledged Reserves Account) in respect of the Covered Portfolio. Section 8.08 Conduct of Business. The Borrower will continue to engage in business of the same general type as conducted by it on the Effective Date. Section 8.09 Underwriting Criteria. The Borrower shall maintain (i) its criteria for underwriting (including reinsuring) Insurance Contracts and (ii) with respect to the Covered Portfolio, its basic service/industry mix substantially as heretofore in effect. Section 8.10 Collection of Pledged Recoveries and Pledged Premiums. The Borrower shall at all times use its commercially reasonable efforts to collect and otherwise realize upon all Pledged Recoveries and Pledged Premiums in compliance with applicable law and in a commercially reasonable manner. Section 8.11 Pledged Reserve Release Notice. The Borrower hereby acknowledges and agrees that if, at any time, it shall cease to maintain (other than as a result of a transfer or application contemplated by Section 2.4(d) of the Security Agreement) all or any portion of Permitted Reserves in respect of which Pledged Reserves Account Funds have been deposited in the Pledged Reserves Account, the Borrower as promptly as possible (and in any event within three Business Days) after it shall cease to maintain such Permitted Reserves shall give written notice thereof (each such notice, a "Pledged Reserve Release Notice") to the Agent and the Collateral Agent which notice shall provide the amount of such Pledged Reserves Account Funds that have been released. -28- Section 8.12 Registry. The Borrower hereby covenants that it shall maintain a register on which it will record the Commitment and Contingent Commitment from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrower's obligations in respect of such Loans. Upon the request of the Borrower, the Agent hereby agrees to use its reasonable efforts to provide to the Borrower such information not otherwise available to the Borrower, as the Borrower shall reasonably request from time to time in order to enable it to fulfill its obligations pursuant to this Section 8.12. SECTION 9. NEGATIVE COVENANTS. The Borrower covenants and agrees that on and after the Effective Date and until the Commitments have terminated and the Loans and the Notes, together with interest, Fees and all other obligations incurred hereunder and thereunder, are paid in full: Section 9.01 Liens. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any Pledged Recoveries, Pledged Premiums, Pledged Reserves Account Funds or other Collateral, provided that the provisions of this Section 9.01 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as "Permitted Liens"): (i) the Lien in favor of the Banks under the Security Agreement or otherwise permitted thereunder; (ii) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles; (iii) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's and mechanics' liens and other similar Liens arising in the ordinary course of business, which relate to Indebtedness which has not been paid when due and payable in accordance with its terms and which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; and (iv) Liens incurred in connection with reinsurer trust agreements entered into pursuant to Section 114 of the New York Insurance Law. Section 9.02 Consolidation, Merger, Sale of Assets, etc. The Borrower will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) all or any substantial part of its property or assets, or purchase or otherwise acquire (in one or a series of related transactions) all or -29- substantially all of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person, or permit any of its Subsidiaries so to do any of the foregoing, except that: (i) each of the Borrower and its Subsidiaries may in the ordinary course of business sell or lease assets; (ii) any Subsidiary may wind up its affairs or liquidate or dissolve into, and may consolidate or merge with or into, the Borrower or any other Subsidiary of the Borrower; (iii) the assets or stock of any Subsidiary of the Borrower may be purchased or otherwise acquired by the Borrower or any other Subsidiary of the Borrower; and (iv) the Borrower or any of its Subsidiaries may purchase or otherwise acquire all or substantially all of the properties or assets of any Person (other than the Borrower) or acquire such Person by merger so long as (a) no Default or Event of Default has occurred and is continuing or would occur after giving effect thereto, (b) such purchase, acquisition or merger shall not result in any downgrading of the Borrower's Rating assigned by Moody's or S&P from that in effect immediately prior to such purchase, acquisition or merger and (c) the Borrower shall deliver to the Agent a certificate of the president, chief financial officer or the treasurer of the Borrower stating that such purchase, merger or acquisition complied with the conditions contained in this clause (iv). SECTION 10. EVENTS OF DEFAULT. Upon the occurrence of any of the following specified events (each an "Event of Default"): Section 10.01 Payments. The Borrower shall (i) default in the payment when due of any principal of any Loan or any Note or (ii) default, and such default shall continue unremedied for two or more Business Days, in the payment when due of any interest on any Loan or any Note or any Fees or any other amounts owing hereunder or under any Note; or Section 10.02 Representations, etc. Any representation, warranty or statement made by or on behalf of the Borrower herein or in any other Credit Document or in any certificate delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or Section 10.03 Covenants. The Borrower shall (i) default in the due performance or observance by it of any term, covenant or agreement contained in Section 8.01(e)(i), 8.07, 8.08, 8.09, 8.10, 8.11 or 9 or (ii) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Sections 10.01 and 10.02 and clause (i) of this Section 10.03) contained in this Agreement and such default shall continue unremedied for a period of 30 days after written notice to the Borrower by the Agent or, in the event there is no Agent, any Bank; or -30- Section 10.04 Default Under Other Agreements. The Borrower or any of its Subsidiaries shall (i) default in any payment of any Indebtedness (other than the Notes) with an outstanding principal balance in excess of $10,000,000 beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness beyond the grace period as provided therein (other than the Notes) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of any such default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause any such Indebtedness to become due prior to its stated maturity; or any Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or Section 10.05 Bankruptcy, etc. The Borrower or any of its Subsidiaries shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower or any of its Subsidiaries, and the petition is not controverted within 10 days, or is not stayed or dismissed and remains in effect after 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any of its Subsidiaries, or the Borrower or any of its Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Subsidiaries, or there is commenced against the Borrower or any of its Subsidiaries any such proceeding which remains undismissed or unstayed for a period of 60 days, or the Borrower or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any of its Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Subsidiaries for the purpose of effecting any of the foregoing; or Section 10.06 Security Agreement. (i) The Security Agreement or any provision thereof shall cease to be in full force and effect, or shall cease in any material respect to give the Collateral Agent for the benefit of the Banks, the Liens, rights, powers and privileges purported to be created thereby, or (ii) the Borrower shall otherwise default in any material respect in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Security Agreement and such default shall continue unremedied for a period of 30 days after written notice to the Borrower by the Agent or, in the event there is no Agent, any Bank; or Section 10.07 Judgments. One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate for the Borrower and its Subsidiaries a liability (not paid or fully covered by insurance) of $5,000,000 or more at any -31- one time, and all such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days after the entry thereof; or Section 10.08 Change of Control. A Change of Control shall occur; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent may or shall upon direction from the Majority Banks, by written notice to the Borrower, take the following actions to the extent permitted below (provided, that, if an Event of Default specified in Section 10.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice to the Borrower as specified below shall occur automatically without the giving of any such notice): if any Event of Default has occurred and is continuing, the Agent may declare the principal of and any accrued interest in respect of all Loans and the Notes and all obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 11. THE AGENT. Section 11.01 Appointment. The Banks hereby designate Deutsche Bank AG, New York Branch as Agent (for purposes of this Section 11, the term "Agent" shall also include Deutsche Bank AG, New York Branch in its capacity as Collateral Agent pursuant to the Security Documents) to act as specified herein and in the other Credit Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its officers, directors, agents or employees. Section 11.02 Nature of Duties. The Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement and the Security Agreement. Neither the Agent nor any of its officers, directors, agents or employees shall be liable for any action taken or omitted by it or them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Bank or the holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein. Section 11.03 Lack of Reliance on the Agent. Independently and without reliance upon the Agent, each Bank and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Borrower in connection with the making and the continuance of the Loans and -32- the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Borrower and, except as expressly provided in this Agreement, the Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. The Agent shall not be responsible to any Bank or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectability, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of the Borrower or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of the Borrower or the existence or possible existence of any Default or Event of Default. Section 11.04 Certain Rights of the Agent. If the Agent shall request instructions from the Banks with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, the Agent shall be entitled to refrain from such act or taking such action unless and until the Agent shall have received instructions from the Majority Banks or all the Banks to the extent required by Section 12.11; and the Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Bank or the holder of any Note shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Majority Banks or the Banks, as the case may be. Section 11.05 Reliance. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any Person that the Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by the Agent. Section 11.06 Indemnification. To the extent the Agent is not reimbursed and indemnified by the Borrower, each Bank will reimburse and indemnify the Agent for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits and reasonable costs, expenses and disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Agent in performing its duties hereunder or under any other Credit Document, in any way relating to or arising out of this Agreement or any other Credit Document; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Section 11.07 The Agent in Its Individual Capacity. With respect to its obligation to make Loans under this Agreement, the Agent shall have the rights and powers specified herein for a "Bank" and may exercise the same rights and powers as though it was not performing the duties specified herein; and the term "Banks," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity. The -33- Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Borrower or any Affiliate of the Borrower as if they were not performing the duties specified herein, and may accept fees and other consideration from the Borrower for services in connection with this Agreement and otherwise without having to account for the same to the Banks. Section 11.08 Resignation by the Agent. (a) The Agent may resign from the performance of all its functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days' prior written notice to the Borrower and the Banks. In the case of the resignation by the Agent, such resignation shall take effect upon the appointment of a successor Agent pursuant to Section 11.08(b) or 11.08(c) or as otherwise provided in Section 11.08(d). (b) Upon any such notice of resignation by the Agent, the Banks shall appoint a successor Agent hereunder or thereunder who shall be a commercial bank or trust company reasonably acceptable to the Borrower (it being understood and agreed that any Bank is deemed to be acceptable to the Borrower). (c) If a successor Agent shall not have been so appointed within such 15 Business Day period, the Agent, with the consent of the Borrower, shall then appoint a successor Agent who shall serve as Agent hereunder or thereunder until such time, if any, as the Banks appoint a successor Agent as provided above. (d) If no successor Agent has been appointed pursuant to Section 11.08(b) or 11.08(c) by the 20th Business Day after the date such notice of resignation was given by the Agent, the Agent may appoint any other Bank which agrees to such appointment to act as successor Agent. SECTION 12. MISCELLANEOUS. Section 12.01 Payment of Expenses, etc. The Borrower shall: (i) whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses (a) of the Agent (including, without limitation, the reasonable fees and disbursements of White & Case, LLP, counsel for the Agent) in connection with the preparation, execution and delivery of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein and any amendment, waiver or consent relating hereto or thereto and (b) of the Agent and the Banks in connection with the enforcement of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein (including, without limitation, the reasonable fees and disbursements of counsel for the Agent and the Banks); (ii) pay and hold each Bank harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save such Bank harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iii) except as otherwise provided in Section 4.05, indemnify each Bank, its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits and -34- reasonable costs, expenses and disbursements incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not such Bank is a party thereto) related to the entering into and/or performance of this Agreement or any other Credit Document or the use of the proceeds of any Loans hereunder or the consummation of any transactions contemplated herein or in any other Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such liabilities, obligations, losses, etc., to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). Section 12.02 Right of Setoff. Except as otherwise provided in Section 4.05, in addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights and to the extent permitted by applicable law, during the continuance of an Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special), and any other Indebtedness at any time held or owing by such Bank (including without limitation by branches and agencies of such Bank wherever located) to or for the credit or the account of the Borrower against and on account of the Obligations and liabilities of the Borrower to such Bank under this Agreement or under any of the other Credit Documents, and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not the Bank shall have made any demand hereunder and although such Obligations, liabilities or claims, or any of them, shall be contingent or unmatured, provided however that (i) except to the extent provided in the next succeeding clause (ii), no Bank is authorized hereunder to take any of the foregoing actions, nor shall any Bank exercise any other right of setoff or bankers' lien or any other right now or hereafter granted under applicable law with respect to the Pledged Reserves Account or any portion of the Pledged Reserves Account Funds or any Collateral contained in the Pledged Reserves Account (each of the Agent, the Collateral Agent and each Bank hereby waiving, to the extent permitted by applicable law, any such right) and (ii) from and after receipt by the Agent or the Collateral Agent of any Pledged Reserve Release Notice, the Agent, the Collateral Agent or any Bank is authorized to and may exercise, to the extent permitted by applicable law, any of such foregoing actions or such rights only with respect to the amount of Pledged Reserves Account Funds described in such Pledged Reserve Release Notice and the other Collateral contained in the Pledged Reserves Account in an amount equal to the interest and other earnings on such Pledged Reserves Account Funds. Section 12.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered: if to the Borrower or any Bank, at its address listed opposite its name on the signature page hereto; and if to the Agent at its Notice Office; or, as to any Bank or the Agent, at such other address as shall be designated by such party in a written notice to the other parties hereto and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent. All such notices and communications shall not be effective until received by the Agent or the Borrower. -35- Section 12.04 Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, that the Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Banks and, provided further, that, no Bank may transfer or assign its rights or obligations hereunder or under any of the other Credit Documents, except as provided in this Section 12.04, provided further, that no Bank shall transfer, grant or assign any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any of the other Credit Documents (i) except to the extent such amendment or waiver (A) extends the final maturity of any Loan or Note other than in accordance with Section 3.04, or reduces the rate or extends the time of payment of interest or Fees thereon, or reduces the principal amount thereof, or increases the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of any Commitment of any Bank), (B) releases any material portion of the Collateral under the Security Agreement except as shall be otherwise provided in any Credit Document, (C) consents to the assignment or transfer by the Borrower of any of its rights and obligations under any Credit Document, (D) amends the definition of Loss Threshold Incurrence Date other than to increase the dollar amount or the percentage specified therein, (E) reduces the percentage specified in the definition of Majority Participants or (F) amends, modifies or waives any provision of this Section 12.04 or (ii) except to the extent that a Bank may permit its Majority Participants to approve any material written amendment, modification, waiver or release of any other provision of this Agreement or any other Credit Document which would, if effected, materially adversely affect the interests of its participants. "Majority Participants" for purposes of this Section 12.04 shall mean, with respect to each Bank, at any time participants of such Bank participating in at least 51% of the aggregate principal amount of Loans made by such Bank and outstanding at such time, or if no such Loans are outstanding at such time, participants of such Bank participating in at least 51% of the Commitment of such Bank at such time. In the case of any such participation, the participant shall not constitute a "Bank" hereunder and shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against any Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation, except that the participant shall be entitled to the benefits of Section 2.07 or 4.04 of this Agreement to the extent that such Bank would be entitled to such benefits if the participation had not been transferred, granted or assigned. (b) Notwithstanding the foregoing, any Bank (or any Bank together with one or more other Banks) may (and, at the direction of the Borrower following a rating downgrade of such Bank, shall) assign all or a portion of its Commitment (plus, if such Bank shall be a Part C Bank, such Bank's Contingent Commitment) and related outstanding rights and obligations hereunder to one or more Eligible Transferees, each of which assignees shall become a party to this Agreement as a Bank and, if applicable, a Part C Bank by execution of an Assignment and Assumption Agreement and delivery of such Assignment and Assumption Agreement to the Borrower and the Agent, provided that (i) new Notes will be issued to such new Bank in the stated amount of its assumed Commitment (plus, if such Bank shall be a Part C Bank, such -36- Bank's Contingent Commitment), and to the assigning Bank in the stated amount of the Commitment (plus, if such Bank shall be a Part C Bank, the Contingent Commitment) if any, retained by it, upon the request of such new Bank or assigning Bank and the surrender of the Note previously issued to the assigning Bank (or the execution and delivery to the Borrower of an indemnity satisfactory to the Borrower), such new Notes to be in conformity with the requirements of Section 2.05 to the extent needed to reflect the revised Commitments and, if applicable, Contingent Commitments, (ii) unless such assignment is to an Affiliate of such assigning Bank with the same or higher unsecured senior debt rating, and so long as no Default or Event of Default exists at the time of such assignment, the Borrower shall have consented to such assignment, (iii) at the time of such assignment, the new Bank or (except to the extent the new Bank is an affiliate of the assigning Bank) its parent shall have an unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody's and S&P (A) acceptable to the Borrower (if such assignment is at the direction of the Borrower) or (B) no lower than the unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody's and S&P of the assigning Bank or its parent (if such assignment is not at the direction of the Borrower), (iv) in the case of any assignment of all or a portion of a Part C Bank's Contingent Commitment, the new Part C Bank or its parent shall have, at the time of such assignment, an unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody's and S&P of Aaa and AAA, respectively, (v) such assignment shall not result in a downgrading of the Borrower's Rating by Moody's or S&P from that in effect immediately prior to such assignment, (vi) the assigning Bank shall provide notice of any such assignment to the Agent and the Borrower and the Borrower shall provide notice of same to Moody's and S&P and (vii) the new Bank shall deliver a legal opinion addressed to each of the Borrower, Moody's and S&P dated the effective date of the applicable assignment to the effect that this Agreement constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditor's rights and by equitable principles (regardless of whether enforcement is sought in equity or at law) as the same may be applied in the event of bankruptcy or similar proceedings with respect to such new Bank. To the extent of any assignment pursuant to this Section 12.04(b), the assigning Bank shall be relieved of its obligations hereunder with respect to its assigned Commitment. To the extent that an assignment of all or any portion of a Bank's Commitment and related outstanding Obligations pursuant to this Section 12.04(b) would at the time of such assignment, result in increased costs under Section 2.07 or 4.04 from those being charged by the respective assigning Bank prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes in applicable law, or government rules, regulations, orders or requests after the date of the respective assignment). (c) Upon the execution and delivery of an Assignment and Assumption Agreement in accordance with, and subject to the restrictions of, Section 12.04(b), the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder and under the other Credit Documents have been assigned to it pursuant to such Assignment and Assumption Agreement, have the rights and obligations of a "Bank" hereunder and thereunder. -37- (d) Any Bank claiming any amounts payable pursuant to Section 4.04 shall use reasonable efforts (consistent with legal and regulatory restrictions and subject to overall policy considerations of such Bank) to designate another lending office for its Commitment or Loans or take such other action to minimize such amounts, as may be reasonably requested by the Borrower, provided that such designation is made or such other action is taken on such terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage. (e) Nothing in this Agreement shall prevent or prohibit any Bank from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. (f) Each Bank shall promptly notify the Borrower of any change in the location of its applicable lending office. Section 12.05 No Waiver; Remedies Cumulative. No failure or delay on the part of any Bank or the holder of any Note in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower and any Bank or the holder of any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. Except as otherwise expressly provided herein or in any other Credit Document, the rights, powers and remedies herein or in any other Credit Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which any Bank would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Bank or the holder of any Note to any other or further action in any circumstances without notice or demand. Section 12.06 Calculations; Computations. (a) The financial statements to be furnished to the Banks pursuant to Section 8.01(a) and (b) shall be made and prepared in accordance with generally accepted accounting principles in the United States consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks). (b) All computations of interest hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Section 12.07 Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial. (a) This Agreement and the other Credit Documents and the rights and obligations of the parties hereunder and thereunder shall be construed in accordance with and be governed by the law of the State of New York, without regard to the conflict of law provisions thereof. Any legal action or proceeding against the Borrower with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its property, generally and uncon- -38- ditionally, the jurisdiction of the aforesaid courts. The Borrower irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address set forth opposite its signature below (or to such other address as the Borrower may from time to time notify the Agent in writing), such service to become effective 30 days after such mailing. Except as otherwise provided in Section 4.05, nothing herein shall affect the right of the Agent or any Bank under this Agreement to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. (b) The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in Section 12.07(a) and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (c) Each of the Borrower, the Agent and each of the Banks hereby irrevocably waives its right to a jury trial in connection with any action, proceeding or counterclaim arising out of or relating to this Agreement or any other Credit Document or any transaction contemplated hereby or thereby. Section 12.08 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Agent. Section 12.09 Effectiveness. This Agreement shall become effective on the date (the "Effective Date") on which the Borrower and the Banks shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Agent at its Notice Office and the conditions set forth in Section 5 shall have been satisfied or waived by the Banks, as evidenced by a written notice by the Agent to the Borrower confirming that the Agreement has become effective and setting forth the Effective Date. Section 12.10 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 12.11 Amendment or Waiver. Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Borrower and the Majority Banks and the Agent; provided, however, that no such change, waiver, discharge or termination shall, without the consent of each Bank (other than any Bank that is, at the time of the proposed extension, release, amendment, reduction or consent, a Defaulting Bank; provided, however, that, with respect to any matter described in clause (i) or -39- (ii) of this Section 12.11, the consent of each Defaulting Bank which at such time has a Loan outstanding shall also be required) (i) extend the final maturity of any Loan or Note other than in accordance with Section 3.04 or reduce the rate or extend the time of payment of interest or Fees thereon, or reduce the principal amount thereof, or increase the Commitment or percentage of the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of any Commitment of any Bank), (ii) release any material portion of the Collateral under any Security Document except as shall be otherwise provided in any Credit Document, (iii) amend, modify or waive any provision of this Section 12.11, (iv) reduce the percentage specified in the definition of Majority Banks, (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under any Credit Document or (vi) amend the definition of Loss Threshold Incurrence Date other than to increase the dollar amount or the percentage specified therein. Section 12.12 Survival. All indemnities set forth herein including, without limitation, in Sections 2.07, 4.04 and 12.01 shall survive the execution and delivery of this Agreement and the Notes and the making and repayment of the Loans. Section 12.13 Exclusions from Covered Portfolio. In the event that any Bank (or any participant to whom such Bank has transferred, granted or assigned any participation in its rights and obligations hereunder and under the other Credit Documents) is, or upon the occurrence of any contingency would be, obligated under the terms of a line of credit, standby bond purchase agreement, letter of credit, liquidity agreement or similar agreement or arrangement to purchase any Insured Obligation listed in a certificate delivered by the Borrower to the Agent pursuant to Section 5.06 or 8.01(d), such Bank (or such participant) shall promptly notify the Agent, and the Agent shall promptly notify the Borrower, that such Bank (or such participant) is or would be so obligated to purchase such Insured Obligation. Upon delivery by the Agent to the Borrower of any such notice with respect to an Insured Obligation, such Insured Obligation shall, effective upon delivery of such notice by the Agent to the Borrower, be excluded from the Covered Portfolio. Section 12.14 Confidentiality. Each of the Agent and each Bank agrees to take and cause its respective Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentially of all financial information and all other information reasonably identified as "confidential" or "secret" by the Borrower and provided to it by the Borrower or by the Agent on the Borrower's behalf, and neither it nor any of its Affiliates shall use such information other than in connection with or in enforcement of this Agreement and the other Credit Documents, except to the extent such information (i) was or becomes generally available to the public other than as a result of a disclosure by the Agent or any Bank or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower, provided that such source is not bound by a confidentiality agreement with the Borrower known to the Agent or such Bank; provided, however, that the Agent or any Bank may disclose such information (a) at the request or pursuant to any requirement of any authority to which the Agent or such Bank is subject or in connection with an examination of the Agent or such Bank by any such authority; (b) pursuant to subpoena or other court process, provided that if not prohibited by law, the Agent or such Bank will make reasonable efforts to provide notice to the Borrower of the receipt of such subpoena prior to delivering confidential material in response thereto, and the -40- Agent and the Banks will cooperate with the Borrower in any attempt to obtain a protective order, at the Borrower's expense, as may be reasonably requested by the Borrower; (c) when required to do so in accordance with the provisions of any applicable law or regulation; (d) to the extent reasonably required in connection with any litigation or proceeding with respect to the transactions contemplated hereby to which the Agent or any Bank or their respective Affiliates may be party; (e) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Credit Document; (f) to the Agent's or such Bank's independent auditors and other professional advisors with a need to know and who agrees to keep such information confidential to the extent required of the Agent or such Bank hereunder; and (g) to any assignee or participant, actual or potential, provided that such Person agrees to keep such information confidential to the same extent required of the Agent or the Bank hereunder. In addition to the foregoing, each of the Agent and each Bank agrees that, with respect to any information provided to them by or on behalf of the Borrower pursuant to Section 8.01(d) or 8.01(g) or which is obtained from, or derived from information provided by, any primary insurer pursuant to any other provision of this Agreement, and in any event which the Borrower notifies the Agent is subject to any confidentiality undertaking made by the Borrower to any primary insurer, (1) such information shall be deemed "confidential" for purposes of this Section 12.14, (2) such information shall only be provided to any employee, agent, attorney or advisor on a need to know basis and (3) each of the Agent and each Bank shall be deemed to have made the same confidentiality undertakings as the Borrower with respect to such information. Section 12.15 Payments Pro Rata. (a) The Agent agrees that promptly after its receipt of each payment from or on behalf of the Borrower in respect of any Obligation (including, without limitation, any payment received pursuant to Section 2.4 or 6.4 of the Security Agreement) it shall distribute such payment to the Banks pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under any Credit Document or otherwise), which is applicable to the payment of the principal of, or interest on, any Loan or Commitment Fee, the sum of which when compared to the related sum or sums received by other Banks is in a greater proportion than the total amount of such Obligation then owed and due to such Bank vis a vis that owed and due to all Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the Obligations of the Borrower to such Banks in such amount as shall result in a proportional participation by all the Banks in such amount; provided, however, that if all or any portion of such excess amount is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. (c) Anything contained herein to the contrary notwithstanding, the provisions of Sections 12.15(a) and 12.15(b) shall be subject to the express provisions of this Agreement which require or permit differing payments to be made to Defaulting Banks as opposed to non-Defaulting Banks. -41- IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized officers to execute and deliver this Agreement as of the date first above written. Address: 335 Madison Avenue ENHANCE REINSURANCE COMPANY 25th Floor New York, New York 10017-4607 By_________________________________ Attention: President Title: -42- 1211 Avenue of the Americas WESTDEUTSCHE LANDESBANK 23rd Floor GIROZENTRALE, NEW YORK BRANCH New York, New York 10036 Attention: Ms. Lillian Tung Lum By_________________________________ Title: By_________________________________ Title: 245 Park Avenue COOPERATIEVE CENTRALE New York, New York 10167-0062 RAIFFEISEN-BOERENLEENBANK, Attention: Ms. Angela Reilly B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH By_________________________________ Title: By_________________________________ Title: 1114 Avenue of the Americas NORDDEUTSCHE LANDESBANK 37th Floor GIROZENTRALE, NEW YORK New York, New York 10036 BRANCH Attention: Mr. Hinrich Holm By_________________________________ Title: By_________________________________ Title: -43- DEUTSCHE BANK AG, 31 West 52nd Street NEW YORK BRANCH, New York, New York 10019 Individually and as Agent Attention: Mr. John S. McGill By_________________________________ Title: By_________________________________ Title: -44- SCHEDULE I PART A Commitments
Name Commitment ---- ---------- Deutsche Bank AG, $25,000,000 New York Branch Westdeutsche Landesbank 25,000,000 Girozentrale, New York Branch Cooperatieve Centrale 20,000,000 Raiffeisen-Boerenleenbank, B.A., "Rabobank Nederland", New York Branch Norddeutsche Landesbank 20,000,000 ----------- Girozentrale, New York Branch Total $90,000,000 ===========
PART B Part B Banks Deutsche Bank AG, New York Branch Westdeutsche Landesbank Girozentrale, New York Branch Norddeutsche Landesbank Girozentrale, New York Branch PART C Part C Banks/Contingent Commitments
Name Contingent Commitment ---- --------------------- Cooperatieve Centrale $21,000,000 ----------- Raiffeisen-Boerenleenbank, B.A., "Rabobank Nederland", New York Branch Total $21,000,000 ===========
EX-10.35 16 w56746ex10-35.txt SECOND AMENDED AND RESTATED CHANGE-IN-CONTROL AGR EXHIBIT 10.35 ENHANCE FINANCIAL SERVICES GROUP INC. SECOND AMENDED AND RESTATED CHANGE -IN-CONTROL PROTECTION AGREEMENT SECOND AMENDED AND RESTATED AGREEMENT dated November 15, 1999 by and between Enhance Financial Services Group Inc. (the "Company") and _______________ (the "Executive"), amended and restated as of December 8, 1999 and further amended and restated as of March 23, 2000. WHEREAS, the Executive is a key employee of the Company and an integral part of its management; and WHEREAS, the Company desires to recognize the Executive's commitment to the Company and to confirm the right of the Executive to certain severance benefits in the event of termination of the Executive's employment under certain circumstances following a Change in Control, WHEREAS, to that end the board of directors of the Company adopted a Management Severance Protection Plan in 1998, which it amended September 23, 1999 and March 23, 2000, and the terms of which as so amended, insofar as they apply in the event of a Change of Control, are reflected in this instrument; NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the Company and the Executive do hereby agree as follows (capitalized terms herein having the respective meanings ascribed to them upon their first use or as set forth in Section X hereof): I. SEVERANCE BENEFITS: If a Termination Event occurs during the 24 months following a Change in Control (the "Protection Period"), the Executive shall be entitled to receive the benefits set forth as follows: 1. Cash Compensation: The Executive shall receive, in a single lump-sum payment, an amount equal to the sum of (a) three times his or her Annual Cash Compensation; plus (b) the greater of (i) the Adjusted Bonus paid the Executive in respect of the calendar year immediately preceding the Date of Termination, (ii) the Adjusted Bonus paid the Executive in the year preceding the calendar year in which the Change in Control Date occurs (provided, that, for purposes of both subclauses (i) and (ii), if the Executive shall have been employed by the Company for less than the entire such relevant preceding calendar year, then the applicable Adjusted Bonus for such subclause (i) or (ii) shall, in lieu of that set forth above, be the target Adjusted Bonus which would have payable to the Executive in respect of such relevant preceding calendar year), pro-rated over the period beginning January 1 in the year in which the Notice of Termination is given and ending on the Date of Termination. Payment of the aforesaid total amount shall be made no later than 30 days after the Date of Termination. If payment in full is not made within the aforesaid 30 days, any amounts due and owing shall earn and be allocated daily interest beginning on the 31st day following the Date of Termination and ending on the date payment is actually made at a rate equal to 1/365 of the annual interest rate payable on one-year U. S. Treasury Bills in effect as of the business day coincident with or next following the Date of Termination. 2. Outplacement: The Executive shall be entitled to receive six months of outplacement services commensurate with the Executive's status level and at such outplacement organization as the Executive shall select. The Executive may not elect to take cash in lieu of outplacement services. Such outplacement services shall commence on such date as is designated by the Executive but in no instance later than six months after the Date of Termination. 3. Welfare Benefits: Commencing on the Date of Termination and continuing for a period of 36 months (the "Benefit Period"), the Company shall provide the Executive with life insurance (including group term and supplemental executive life insurance), health insurance (including, but not limited to, medical, dental and prescription drug benefits) and long-term disability insurance ("Welfare Benefits") substantially similar in all respects to those which the Executive was receiving immediately prior to the Notice of Termination. The receipt of the Welfare Benefits shall be conditioned upon the Executive continuing to pay the applicable premiums for such Welfare Benefits that the Executive paid immediately prior to the Notice of Termination. Benefits otherwise receivable by the Executive pursuant to this Section I.3. and the corresponding premium payments made by the Executive, shall be reduced to the extent substantially similar benefits are actually received by the Executive from any other employer during the Benefit Period at a cost to the Executive that is commensurate with the cost incurred by the Executive immediately prior to Notice of Termination; provided, however, that if the Executive becomes employed by a new employer that maintains Welfare Benefits that either (a) do not cover the Executive or a family member or dependent with respect to a pre-existing condition for which there was coverage under the applicable Welfare Plans of the Company, or (b) does not cover the Executive or a family member or dependent for a designated waiting period, or at all, the Executive's coverage under the applicable Welfare Benefits of the Company shall continue (but in the event of non-coverage due to a preexisting condition, limited to such preexisting condition) until (i) the end of the applicable period of non-coverage under the new employer's Welfare Benefits, or (ii) the end of the Benefit Period, whichever occurs first. The Executive shall promptly notify the Company of any Welfare Benefits actually received from another employer. During the Benefit Period, the Executive shall be entitled to elect to change the Executive's level of coverage and/or choice of coverage options (e.g. Executive only or Executive and family, or deductible options) under the Welfare Benefits of the Company to the same extent that actively employed senior executives of the Company are permitted to make such changes; provided, that in the event of any such changes, the premiums paid by the Executive for such Welfare Benefits shall reflect any cost increases or decreases that would actually be paid or received by an actively employed senior executive of the Company who made the same changes. For purposes of this Section I.3, any measurement of Welfare Benefits, premiums, 2 payments or costs that is based on the Welfare Benefits, premiums, payments or costs that the Executive was receiving, paying or incurring immediately prior to the Notice of Termination shall be determined without giving effect to any change thereto during the Protection Period if Notice of Termination was due to Good Reason. To the extent the Company is unable to provide the Executive with any of the Welfare Benefits required by this Section I.3, the Company shall either purchase such Welfare Benefits for the Executive or pay the Executive a cash payment equal to the value thereof. 4. Equity-Based Awards: (a) As to all his or her outstanding stock options, restricted stock and any other equity based awards and insofar as not inconsistent with the terms of the Company's plans under which such awards were granted (the "Incentive Plans"), at the option of the Company, either (i) the Executive shall receive a cash-out of such awards or (ii) to the extent that such awards are not cashed out they shall become (A) fully vested as of the Change in Control Date and (B) if susceptible of exercise, exercisable for a period 90 days after the Termination Date. (b) If (i) the Executive is terminated as provided for in Section VIII (Termination in Anticipation of Change in Control), (ii) such termination results in a forfeiture of any of the Executive's stock options, restricted stock or other equity-based awards under any of the Incentive Plans, and (iii) the Executive is entitled to receive payments under the aforesaid Section VIII, the Executive shall, subject to the provisions of Section VIII, be entitled to receive a cash payment equal to the amount the Executive would have received under such plans with respect to such stock options, restricted stock or other equity based awards as if the Executive had remained in the Company's employ until the Change in Control Date. Such cash payment shall be made at the same time and in the same manner as payment would have been made under the applicable Incentive Plans had the Executive remained employed by the Company until the Change in Control Date. 5. Tax Reimbursement Payment: (a) If any amount or benefit paid or distributed to the Executive by the Company, whether pursuant to this agreement or otherwise (collectively, the "Covered Payments"), is or becomes subject to tax imposed under Section 4999 of the Code (the "Excise Tax") or any similar tax that may hereafter be imposed, the Company shall either pay to the Executive or contribute for the benefit of the Executive to a "rabbi" trust established by the Company prior to the Change in Control Date, at the time specified in this Section I.5.(e) below, the Tax Reimbursement Payment. The "Tax Reimbursement Payment" means an amount which, when added to the Covered Payments and reduced by any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this agreement (but without reduction for any federal, state or local income or employment tax on the Covered Payments), shall be equal to the sum of (i) the Covered Payments, and (ii) the product of (A) any deductions disallowed for federal, state, or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is to be made. 3 (b) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and, if so, the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code and all "parachute payments" in excess of the "base amount," as defined under Section 280G(b)(3) of the Code, shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants, which, in the case of Covered Payments made after the Change in Control Date, shall be the Company's independent certified accountants appointed prior to the Change in Control Date, or tax counsel selected by such accounts, (collectively, the "Accounts"), such Covered Payments, in whole or in part, either do not constitute "parachute payments" or represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code, in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed: (i) to pay federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, (ii) to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in federal income taxes which would be obtained from the deduction of such state or local taxes if paid in such year, determined without regard to limitations on deductions based upon the amount of the Executive's adjusted gross income, and (iii) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income. (d) (i) If, subsequent to the making by the Company of the payment or the contribution provided for in the first sentence of Section I.5.(a), the Excise Tax is determined by the Accountants to be less than the amount otherwise taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that has been paid to the Executive or to federal, state or local tax authorities on the Executive's behalf and that would not have been paid if such Excise Tax had been applied in initially calculating such Tax 4 Reimbursement Payment, plus interest on the amount of such repayment at the rate provided for in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, if any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually agree upon the course of action to be pursued, and the method of allocating expenses thereof, if the Executive's good claim faith for refund or credit is denied. (ii) If, subsequent to the making by the Company of the payment or the contribution provided for in the first sentence of Section I.5.(a), the Excise Tax is determined by the Accountants to exceed the amount otherwise taken into account hereunder at the time the Tax Reimbursement Payment is made, including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment, the Company shall make an additional Tax Reimbursement Payment in respect of such excess, which Tax Reimbursement Payment shall include any interest or penalty payable with respect to such excess, at the time that the amount of such excess is finally determined. (e) The portion of the Tax Reimbursement Payment attributable to Covered Payments shall be paid to the Executive or contributed for the benefit of the Executive to a "rabbi" trust established by the Company prior to the Change in Control Date within ten business days following the payment of the Covered Payments. If the amount of such Tax Reimbursement Payment, or portion thereof, cannot be finally determined on or before the date on which payment is due, the Company shall either pay to the Executive or contribute to the aforesaid "rabbi" trust an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment, including applicable interest thereon determined under Section 1274(b)(2)(B) of the Code, as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payments. If the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall be repaid or refunded pursuant to the provisions of Section I.5.(d). 6. Supplemental Pension: If the Executive is not fully vested under the Enhance Reinsurance Company Pension Plan (the "Pension Plan") and he or she is a participant in the Enhance Reinsurance Company Supplemental Pension Plan (the "Supplemental Plan"), then the Executive shall receive, in a single lump-sum payment, an amount equal to the amount the Executive would have received under the Supplemental Plan had the Executive become fully vested under the Pension Plan on the day immediately preceding his or her Date of Termination. The aforesaid payment shall be reduced by any amount the Executive is entitled to receive under the Supplemental Plan. 5 II. FULL SETTLEMENT AND MITIGATION: The Company's obligation to make payments provided for in this agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, claim, counterclaim, recoupment, defense or other legal or equitable right which the Company may have against the Executive or others whether by reason of subsequent employment of the Executive or otherwise. In no event shall the Executive be obligated to seek other employment by way of mitigation. Likewise, the amount of any benefit or payment provided under this agreement shall not be reduced by any compensation earned by the Executive through either employment with another employer or self-employment, or by any retirement-type benefits or unemployment benefits to which the Executive may be entitled. III. RESTRICTIVE COVENANTS: 1. The Executive shall at all times, now and forever, hold in a fiduciary capacity for the benefit of the Company and shall not exploit, use, sell, publish, disclose, communicate or divulge in any manner whatsoever to any person or entity any trade secret or confidential information, knowledge or data regarding the Company, its subsidiaries or affiliates. This Section III. shall not apply to any truthful statement required to be made by the Executive pursuant to an order of a court or other body having lawful jurisdiction over such matter. 2. The Executive shall not, directly or indirectly, for a period of one year after the date of the Termination Event employ, or solicit for employment or advise or recommend to any other person or entity that such person or entity employ or solicit for employment any person employed at that time or within one year theretofore by the Company or its subsidiaries or other affiliates. 3. It is understood and agreed that, if the Executive violates and breaches either Section III.1 or III.2, the Company will suffer irreparable damage and that the Company shall be entitled to injunctive relief to prevent such a breach. Resort to such equitable relief, however, shall not constitute a waiver of any other rights or remedies the Company may have, and the Executive shall repay to the Company 95% of the payments made under this agreement and/or the Company shall be entitled to recover 95% of the amounts paid to the Executive without waiving the right to pursue any other available legal or equitable remedies. IV. SUCCESSORS and ASSIGNMENT: 1. This agreement shall inure to the benefit of and be binding upon the Company, and the Company shall require any successor to the Company, or any part thereof, including but not limited to subsidiaries or affiliate, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, to expressly assume and perform this agreement in the same manner and to the same extent as the Company would be required to perform. In the event of such succession, references to the Company herein shall thereafter be deemed to include such successor. Any failure by the Company to obtain assumption of this agreement by a successor prior to the effectiveness of any such succession shall be a breach of this agreement. Such breach shall entitle the Executive to terminate the Executive's employment at any time within twelve months after such succession and thereafter to receive compensation and benefits under this agreement from the Company in the same amount as the Executive would be entitled to 6 hereunder if the Executive were to terminate his or her employment for Good Reason during the Protection Period. Any failure by the Executive to exercise any right to terminate his or her employment under this Section IV shall not affect any other right of the Executive under this Agreement, and this agreement shall continue to remain binding on the Company in the same manner and to the same extent as the successor would be required to perform them if the successor had assumed this agreement in it entirety without any change thereto. 2. This agreement is personal to the Executive and shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. V. LEGAL FEES and EXPENSES: The Company shall pay all reasonable attorney fees and expenses incurred by the Executive in connection with, but not limited to, a bona fide dispute regarding the application of any and all the provisions under this Agreement, the Executive's seeking to obtain or enforce any right or benefit provided under this Agreement, or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment of benefit provided hereunder. Payment under this Section V shall be made within ten business days after delivery of the Executive's written request for payment accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. VI. TERMINATION PROCEDURES: 1. During the Protection Period any termination of the Executive's employment by reason of a Termination Event must be preceded by a written "Notice of Termination" from one party hereto to the other party hereto in accordance with Section VI. For purposes of this agreement, a "Notice of Termination" shall mean a written notice that shall (a) specify the Executive's date of Termination, which shall not be more than 60 days from the date the Notice of Termination is given (the "Date of Termination"), (b) indicate the notifying party's opinion regarding the specific provisions of this agreement that apply to such termination of employment and (c) set forth in reasonable detail the facts and circumstances claimed to provide a basis for the application of the provisions indicated. 2. Termination of the Executive's employment shall occur on the specified Date of Termination even if there is a dispute between the parties relating to the provisions of this agreement. Except as provided for in Section VIII, if Notice of Termination is given by either party to this agreement by reason of a Termination Event, the Company shall pay all amounts due the Executive under Section I whether or not a dispute exits between the Executive and the Company relating to the provisions of this agreement. 3. If within 30 days of receiving Notice of Termination the party receiving such notice notifies the other party that a dispute exits as to the provisions of this agreement that apply to such termination, the dispute shall be resolved either (a) by mutual written agreement of the parties hereto or (b) by a final judgment, order or decree of a court having competent jurisdiction, which is not further appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected. The parties to this Agreement shall pursue the resolution of such dispute with reasonable diligence. Within ten business days after such resolution, any party owing any payments to the other party pursuant to such resolution and/or this Agreement shall make all payments together with annual compounded interest accrued thereon at a rate equal to 7 the interest rate payable on one-year U. S. Treasury Bills in effect as of the business day coincident with or next following the Date of Termination. 4. Except as otherwise provided in Section VIII, in any proceeding, regardless of who initiates such proceeding, in which payments of severance benefits or other benefits or payments under this Agreement is at issue, the burden of proof that any termination of the Executive's employment has been for Cause or without Good Reason shall be upon the Company or its successor, and the standard of proof to be met with respect thereto shall be clear and convincing evidence. VII. NOTICES: Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given or delivered:, if delivered in person with signed acceptance of such personal delivery, on the date of such delivery; or if sent by a recognized overnight courier service, or by certified U.S. Mail, return receipt requested, on the date of receipt. Notice to the Company shall be sent to: Enhance Financial Services Group Inc. 335 Madison Avenue New York, New York 10017 Attention: Elaine J. Eisenman Executive Vice President Notice to the Executive shall be sent to the address listed on the last page of this agreement. VIII. TERMINATION IN ANTICIPATION OF CHANGE IN CONTROL: 1. The Executive's employment shall be deemed to have been terminated by the Company without Cause during the Protection Period if the Executive's employment is terminated by the Company otherwise without Cause not during the Protection Period and such termination of employment (a) was at the request of a third party that has theretofore taken steps reasonably calculated to effect a Change in Control; or (b) otherwise arose in anticipation of a Change in Control. 2. The Executive's employment shall be deemed to have been terminated by the Executive for Good Reason during the Protection Period if the Executive otherwise terminates his or her employment for Good Reason not during the Protection Period and the circumstances or event that constitutes Good Reason (a) occurs at the request of a third party that has theretofore taken steps reasonably calculated to effect a Change in Control; or (b) otherwise arose in anticipation of a Change in Control. 3. In the event of a termination of employment described in this Section VIII, the Executive shall be entitled to all payments and benefits to which the Executive would have been entitled had such termination occurred during a Protection Period, except that the Executive shall not be entitled to receive any payments or benefits under this agreement, and the Company shall have no obligation to pay any payments or benefit hereunder, as a result of the termination of the Executive's employment, unless and until the Change in Control Date occurs within 90 days after termination of the Executive's employment and, in the reasonable judgment of the Company, the Executive is entitled to payment of benefits hereunder by reason of the applicability of either Section VIII.1 or VIII.2. Notwithstanding any provision of this agreement to the contrary, for 8 purposes of this Section VIII only, the burden of proving that the requirements of Section VIII.1 or VIII.2 have been met shall be on the Executive, and the standard of proof to be met by the Executive shall be clear and convincing evidence. IX. MISCELLANEOUS: 1. Amendment, Modification and Waiver: No provision of this agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is approved by the Board and is agreed to in writing and signed by the Executive and such officer of the Company as may be specifically designated by the Board subsequent to the Board's approval of such amendment, modification waiver or discharge. No waiver by either party hereto at any time of any breach of, or failure to comply with, any condition or provision of this agreement that is to be satisfied or performed by the other party hereto shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any subsequent time. 2. Entire Agreement: This agreement contains the entire agreement of the parties concerning the subject matter, and all promises, representations, understandings, arrangements and prior agreements concerning the subject matter are merged herein and superseded hereby. 3. Governing Law and Venue: The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York applicable to agreement made entirely to be performed within such jurisdiction. The party bringing any action under this Agreement shall only be entitled to choose the federal or state courts in the State of New York as the venue for such action, and each party consents to the jurisdiction of the court chosen in such manner for such action. 4. Taxes: The Company shall be entitled to withhold from any payments made hereunder, applicable federal, state or local income and payroll taxes as the Company determines it is required to withhold under law. 5. Validity: The invalidity or unenforceability of any provision of this agreement shall not affect the validity or enforceability of any other provision of this agreement, which shall remain in full force and effect. 6. No Right to Continued Employment: Nothing in this agreement shall be deemed to give the Executive the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge the Executive at any time, subject in all cases to the terms of this agreement. 7. Termination of Agreement: Notwithstanding anything in this agreement to the contrary, this agreement may be terminated by the Company at any time prior to the Change in Control Date if the Executive fails to carry out the material responsibilities assigned to the Executive, including without limitation those related to the effectuation of the transaction looking to the Change in Control. 8. Waiver under Severance Payment Plan: Should the Executive become entitled to receive payments and benefits under this Agreement, the Executive hereby automatically waives all rights to receive any payments under the Company's Severance Payment Plan. 9 X. DEFINITIONS: 1. "Accountants" shall have the meaning set forth in Section I.4. 2. "Adjusted Bonus" means the Executive's actually paid or actual target bonus (as applicable) for the relevant prior period as the same shall be recalculated using (a) the performance rating of the Executive for that prior period and applying thereto (b) the greater of (i) the percentage of salary that would have been applicable in determining the Executive's bonus for the year in which the Change of Control shall have occurred and (ii) the percentage of salary that would have been applicable in determining the Executive's bonus for the year in which the Date of Termination shall have occurred. 3. "Annual Cash Compensation" means the total of: (a) the Executive's stated annual base salary determined immediately prior to Notice of Termination, but in no event less than the Executive's stated annual base salary in the year in which the Change in Control Date occurs; plus (b) the Executive's bonus paid by the Company for the year immediately preceding the year in which Notice of Termination is given, but in no event shall it be less than the bonus paid in the year immediately preceding the year in which the Change in Control Date occurs (provided, that, for purposes of this clause (b), if the Executive shall have been employed by the Company for less than the entire such relevant preceding calendar year, then the applicable bonus for this clause (b) shall, in lieu of that set forth above, be the target bonus which would have payable to the Executive in respect of such relevant preceding calendar year); plus (c) the amount of any cash received or entitled to be received prior to Notice of Termination as a "flex perquisite," but in no event less than the amount of cash received or entitled to be received as a "flex perquisite" from the Company in the year in which the Change in Control Date occurs; plus (d) the amount of the premium paid by the Company, on behalf of the Executive for executive supplemental long-term disability insurance. 4. "Benefit Period" shall have the meaning set forth in Section I.3. 5. "Board" means the Board of Directors of the Company and, except for purposes of Section X.7 (d), the Compensation and Nominating Committee thereof. 6. "Cause" means: (a) the willful and continued failure of the Executive to substantially perform the Executive's duties with the Company, other than any 10 such failure resulting from incapacity due to physical or mental illness, after a written demand for substantial performance is delivered to the Executive by the Board or the chief executive officer of the Company which specifically identifies the manner in which the Board or chief executive officer of the Company believes that the Executive has not substantially performed his or her duties; or (b) the willful engaging by the Executive in illegal conduct or gross misconduct that is demonstrably injurious to the Company. For purposes of this Section X.6, no act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Any act, or failure to act, based upon the instructions or prior approval of the Board or chief executive officer of the Company or the Executive's superior or based upon the advice of counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive, as part of the Notice of Termination, a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire Board, at regularly scheduled Board meeting or at a Board meeting called and held for the purpose of considering such termination, finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in clause (a) or (b) of this Section X.6 and specifying the particulars thereof in detail. Such resolution shall be adopted only after reasonable notice of such Board meeting is provided to the Executive and the Executive is given an opportunity to be heard before the Board. 7. "Change in Control" shall occur when: (a) The "beneficial ownership" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934) of securities representing more than 35% of the combined voting power of the Company is acquired by a person or entity other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or an affiliate thereof, or any entity owned directly or indirectly by the shareholders of the Company in substantially the same proportion as their ownership of the Company; or (b) Consummation of a merger or consolidation of the Company with or into any other entity other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent, either by remaining outstanding or by being converted into voting securities of the surviving entity, more than 65% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (c) The shareholders of the Company approve a plan to sell or otherwise dispose of all or substantially all of the Company's assets or adopt a plan for the Company's liquidation; or (d) During a period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director, other than a director designated by a person who has entered into an agreement with the Company to effect a transition described in clause (a) or (b) of this Section 11 X.7 whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election was previously so approved, ceases for any reason to constitute a majority thereof; or (e) The ownership of the assets composing a business unit of the Company (whether comprising (i) non-securities assets of that business unit (where the business unit is a separate juridical entity), (ii) securities of other business entities owned by the Company and managed or overseen by the business unit, (iii) the assets of those business entities or (iv) a combination of the foregoing) representing at least 50% in current market value of the assets of such business unit is acquired by a person or entity other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or an affiliate thereof, or any entity owned directly or indirectly by the shareholders of the Company in substantially the same proportion as their ownership of the Company, provided that the foregoing shall apply as a "Change in Control" for purposes of this agreement as concerns only an executive officer of the Company holding a position at least of senior vice president of the Company and either (i) for whom at least 50% of his or her annual goals are attributable to the operations, results or performance of such subsidiary or (ii) who is designated as "corporate staff" of the Company. Where the foregoing pertains to the ownership of securities, it shall mean "beneficial ownership" thereof as defined in Rule 13d-3 of the Securities Exchange Act of 1934. However, in no event shall a Change in Control be deemed to have occurred with respect to any Executive who is part of a purchasing group which consummates the Change in Control transaction. The Executive shall be deemed to be part of the purchasing group for purposes of the proceeding sentence if the Executive is an equity participant in the purchasing entity or group of individuals, except for: (i) passive ownership of less than 3% of the stock of the purchasing entity; or (ii) ownership of equity participation in the purchasing entity which is otherwise not significant, as determined prior to the Change in Control by a majority of continuing directors who are not employees of the Company or any of its subsidiaries or other affiliates. 8. "Change in Control Date" means the date on which a Change in Control shall be deemed to have occurred. 9. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and shall also include the regulations and ruling promulgated thereunder. 10. "Covered Payments" shall have the meaning set forth in Section I.4. 11. "Excise Tax" shall have the meaning set forth in Section I.4. 12. "Good Reason" shall mean the occurrence, during the Protection Period, of any one or more of the following without the Executive's express written consent: (a) The assignment to the Executive of duties inconsistent in any substantial respect with the Executive's position, authority, duties, responsibilities and status (including offices, titles and reporting requirements), or any substantial changes in such position, authority, duties, responsibilities and status from those 12 previously held by the Executive prior to the Change in Control event, as applicable. The Executive's position, authority, duties, responsibilities and status shall not be regarded as substantially inconsistent with or substantially changed from previous position, authority, duties, responsibilities or status merely by virtue of the fact that there has been a Change in Control. (b) In the case of a Change in Control as described in Section VIII.6.(e), with respect to an executive officer of the Company holding a position at least of executive vice-president of the Company who is designated as "corporate staff" of the Company and who remains directly or indirectly employed by the Company, the Change in Control, directly or indirectly, results in the reduction of corporate revenues or staff by at least 50%, (c) A reduction in the Executive's stated annual base salary determined immediately prior to the Change in Control Date and which shall include any cash perquisite payment and any insurance premium payment, (d) A reduction of the Executive's annual target bonus opportunity (excluding any annual reduction that applies to all executives of the Company), (e) A reduction in the Executive's level of participation in or benefits provided under any short- or long-term incentive plan of the Company, including, but not limited to incentive compensation in the form of cash, stock or stock options, in effect as of the Change in Control Date, (f) A material reduction, in the aggregate, in the Executive's level of participation in and benefits provided to the Executive under the Company's employee welfare, retirement, fringe benefit, vacation and sick leave plans, policies and practices, including, but not limited to, retirement, 401(k), severance, medical, dental, life, health, short- and long-term disability and flexible benefits, (g) A change of more than 50 miles in the office or location at which the Executive is based, or (h) A failure of the Company to have a successor assume this Agreement pursuant to Section IV of this Agreement. For purposes of this definition of "Good Reason," any good faith determination of "Good Reason" made by the Executive shall be conclusive. 13. "Notice of Termination" shall have the meaning set forth in Section V.1. 14. "Protection Period" shall have the meaning set forth in Section I. 15. "Tax Reimbursement Payment" shall have the meaning set forth in Section I.4. 16. "Termination Date" shall have the meaning set forth in Section V.1. 13 17. "Termination Event" shall mean, upon a Change in Control, an action of the Company, or the successor to the Company under Section IV, or any of their respective subsidiaries or affiliates, resulting in either (a) the involuntary termination of employment of the Executive other than for Cause or (b) the resignation of the Executive for "Good Reason." ENHANCE FINANCIAL SERVICES GROUP INC. By:_______________________________________ Name: Daniel Gross Title: President EXECUTIVE: __________________________________________ Name: Address: 14 EX-13 17 w56746ex13.txt PORTIONS OF THE ANNUAL REPORT EXHIBIT 13 SELECTED FINANCIAL AND STATISTICAL DATA (1)
(in millions, except per-share amounts and ratios) 2001 2000 1999 1998 1997 --------- -------- -------- -------- -------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME Net premiums written $ 783.6 $ 544.3 $ 451.8 $ 406.5 $ 327.8 ========= ======== ======== ======== ======== Net premiums earned 715.9 520.9 472.6 405.3 330.0 Net investment income 147.5 82.9 67.3 59.9 52.4 Equity in net income of affiliates 41.3 -- -- -- -- Other income 42.5 7.4 11.3 15.3 5.6 Total revenues 947.2 611.3 551.2 480.4 388.0 Provision for losses 208.1 154.3 174.1 166.4 147.4 Policy acquisition costs and other operating expenses 216.8 108.6 121.4 118.2 83.4 Merger expenses -- -- 37.8 1.1 -- Net gains 1.0 4.2 1.6 3.2 2.0 Pretax income 505.5 352.5 219.5 197.9 159.2 Net income 360.4 248.9 148.1 142.2 115.7 Net income per share (2) (3) $ 3.88 $ 3.22 $ 1.91 $ 1.84 $ 1.50 Average shares outstanding (2) (3) 92.0 76.3 75.7 75.6 75.1 CONDENSED CONSOLIDATED BALANCE SHEETS Assets $ 4,438.6 $2,272.8 $1,776.7 $1,513.4 $1,222.7 Investments 3,369.5 1,750.5 1,388.7 1,175.5 974.7 Unearned premiums 513.9 77.2 54.9 75.5 72.7 Reserve for losses and loss adjustment expenses 588.6 390.0 335.6 245.1 179.9 Long-term debt 324.1 -- -- -- -- Redeemable preferred stock 40.0 40.0 40.0 40.0 40.0 Common stockholders' equity 2,306.3 1,362.2 1,057.3 932.2 780.1 Book value per share (3) 24.54 17.97 14.17 12.65 10.69 STATUTORY RATIOS - MORTGAGE INSURANCE Loss ratio 30.2% 30.5% 37.6% 42.0% 46.1% Expense ratio (4) 20.4 17.9 24.2 24.6 22.5 --------- -------- -------- -------- -------- Combined ratio 50.6% 48.4% 61.8% 66.6% 68.6% SELECTED RATIOS - FINANCIAL GUARANTY Loss ratio 27.2% -- -- -- -- Expense ratio 40.8 -- -- -- -- --------- -------- -------- -------- -------- Combined ratio 68.0% OTHER DATA - MORTGAGE INSURANCE New primary insurance written $ 44,754 $ 24,934 $ 33,256 $ 37,067 $ 21,481 Direct primary insurance in force 107,918 100,859 97,089 83,178 67,294 Direct primary risk in force 26,004 24,622 22,901 19,840 15,158 Direct pool risk in force 1,571 1,388 1,361 933 601 Other risk in force 348 211 -- -- -- OTHER DATA - FINANCIAL GUARANTY Net premiums written $ 143.2 -- -- -- -- Net premiums earned 106.5 -- -- -- -- Net debt service outstanding 97,939.7 -- -- -- --
(1) Effective June 9, 1999, Radian Group Inc. was formed by the merger of CMAC Investment Corporation and Amerin Corporation pursuant to an Agreement and Plan of Merger dated November 22, 1998. The transaction was accounted for on a pooling of interests basis and, therefore, all financial statements presented reflect the combined entity. On February 28, 2001, the Company acquired Enhance Financial Services Group Inc. The results for 2001 include the results of operations for Enhance Financial Services Group Inc. from the date of acquisition. See note 1 of Notes to Consolidated Financial Statements set forth on page 20 herein. (2) Diluted net income per share and average share information per Statement of Financial Accounting Standards No. 128, "Earnings Per Share." See note 1 of Notes to Consolidated Financial Statements set forth on page 20 herein. (3) All share and per-share data for prior periods have been restated to reflect a 2-for-1 stock split in 2001. (4) Expense ratio in 1999 calculated net of merger expenses of $21.8 million recognized by statutory companies. CONSOLIDATED BALANCE SHEETS
December 31 ------------------------------- (in thousands, except share and per-share amounts) 2001 2000 ----------- ----------- ASSETS Investments Fixed maturities held to maturity -- at amortized cost (fair value $461,962 and $490,792) $ 442,198 $ 469,591 Fixed maturities available for sale -- at fair value (amortized cost $2,552,930 and $1,087,191) 2,567,200 1,120,840 Trading securities -- at fair value (amortized cost $22,599) 21,659 -- Equity securities -- at fair value (cost $116,978 and $58,877) 120,320 64,202 Short-term investments 210,788 95,824 Other invested assets 7,310 -- Cash 60,159 2,424 Investment in affiliates 177,465 -- Deferred policy acquisition costs 151,037 70,049 Prepaid federal income taxes 326,514 270,250 Provisional losses recoverable 47,229 43,740 Other assets 306,747 135,891 ----------- ----------- $ 4,438,626 $ 2,272,811 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums $ 513,932 $ 77,241 Reserve for losses 588,643 390,021 Long-term debt 324,076 -- Deferred federal income taxes 432,098 291,294 Accounts payable and accrued expenses 233,549 112,058 ----------- ----------- 2,092,298 870,614 ----------- ----------- Redeemable preferred stock, par value $.001 per share; 800,000 shares issued and outstanding -- at redemption value 40,000 40,000 ----------- ----------- Common stockholders' equity Common stock, par value $.001 per share; 200,000,000 shares authorized; 94,170,300 and 37,945,483 shares issued in 2001 and 2000, respectively 94 38 Treasury stock; 188,092 and 37,706 shares in 2001 and 2000, respectively (7,874) (2,159) Additional paid-in capital 1,210,088 549,154 Retained earnings 1,093,580 789,831 Accumulated other comprehensive income 10,440 25,333 ----------- ----------- 2,306,328 1,362,197 ----------- ----------- $ 4,438,626 $ 2,272,811 =========== ===========
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 ----------------------------------------------- (in thousands, except per-share amounts) 2001 2000 1999 --------- --------- --------- REVENUES: Premiums written: Direct $ 753,392 $ 592,734 $ 496,646 Assumed 90,917 80 93 Ceded (60,665) (48,542) (44,922) --------- --------- --------- Net premiums written 783,644 544,272 451,817 (Increase) decrease in unearned premiums (67,764) (23,401) 20,818 --------- --------- --------- Net premiums earned 715,880 520,871 472,635 Net investment income 147,487 82,946 67,259 Equity in net income of affiliates 41,309 -- -- Other income 42,525 7,438 11,349 --------- --------- --------- 947,201 611,255 551,243 --------- --------- --------- EXPENSES: Provision for losses 208,136 154,326 174,143 Policy acquisition costs 84,262 51,471 58,777 Other operating expenses 132,516 57,167 62,659 Interest expense 17,803 -- -- Merger expenses -- -- 37,766 --------- --------- --------- 442,717 262,964 333,345 --------- --------- --------- GAINS AND LOSSES: Net gains on sales of investments 6,824 4,179 1,568 Change in fair value of derivative instruments (5,777) -- -- --------- --------- --------- 1,047 4,179 1,568 --------- --------- --------- Pretax income 505,531 352,470 219,466 Provision for income taxes 145,112 103,532 71,328 --------- --------- --------- Net income 360,419 248,938 148,138 Dividends to preferred stockholder 3,300 3,300 3,300 --------- --------- --------- Net income available to common stockholders $ 357,119 $ 245,638 $ 144,838 ========= ========= ========= Basic net income per share $ 3.95 $ 3.26 $ 1.96 ========= ========= ========= Diluted net income per share $ 3.88 $ 3.22 $ 1.91 ========= ========= ========= Average number of common shares outstanding - basic 90,474 75,268 73,950 ========= ========= ========= Average number of common and common equivalent shares 91,958 76,298 75,712 outstanding - diluted ========= ========= =========
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income (Loss) ------------------------- Foreign Unrealized Additional Currency Holding Common Treasury Paid-in Retained Translation Gains/ (in thousands) Stock Stock Capital Earnings Adjustment Losses Total --------- ------- ---------- ----------- ---------- -------- ----------- BALANCE, JANUARY 1, 1999 $ 37 $ -- $ 507,282 $ 407,406 $ -- $ 17,474 $ 932,199 Comprehensive income: Net income -- -- -- 148,138 -- -- 148,138 Unrealized holding losses arising during period, net of tax benefit of $17,398 -- -- -- -- -- (32,311) Less: Reclassification adjustment for net gains included in net income, net of tax of $558 -- -- -- -- -- (1,036) -------- Net unrealized loss on investments, net of tax benefit of $17,956 -- -- -- -- -- (33,347) (33,347) ----------- Total comprehensive income -- -- -- -- -- -- 114,791 Issuance of common stock under -- -- 17,126 -- -- -- 17,126 incentive plans Dividends -- -- -- (6,860) -- -- (6,860) --------- ------- ---------- ----------- ----- -------- ----------- BALANCE, DECEMBER 31, 1999 37 -- 524,408 548,684 -- (15,873) 1,057,256 Comprehensive income: Net income -- -- -- 248,938 -- -- 248,938 Unrealized holding gains arising during period, net of tax of $23,658 -- -- -- -- -- 43,937 Less: Reclassification adjustment for net gains included in net income, net of tax of $1,470 -- -- -- -- -- (2,731) -------- Net unrealized gain on investments, net of tax of $ 22,188 -- -- -- -- -- 41,206 41,206 ----------- Total comprehensive income 290,144 Issuance of common stock under 1 -- 24,746 -- -- -- 24,747 incentive plans Treasury stock purchased -- (2,159) -- (2,159) Dividends -- -- -- (7,791) -- -- (7,791) --------- ------- ---------- ----------- ----- -------- ----------- BALANCE, DECEMBER 31, 2000 38 (2,159) 549,154 789,831 -- 25,333 1,362,197 Comprehensive income: Net income -- -- -- 360,419 -- -- 360,419 Unrealized foreign currency translation adjustment, net of tax benefit of $306 -- -- -- -- (586) -- (586) Unrealized holding losses arising during period, net of tax benefit of $5,316 -- -- -- -- -- (9,871) Less: Reclassification adjustment for net gains included in net income, net of tax of $2,388 -- -- -- -- -- (4,436) -------- Net unrealized loss on investments, net of tax benefit of $7,704 -- -- -- -- -- (14,307) (14,307) ----------- Total comprehensive income 345,526 Issuance of common stock related 9 -- 574,676 -- -- -- 574,685 to acquisition Issuance of common stock under incentive plans 1 -- 39,686 -- -- -- 39,687 Treasury stock purchased (5,715) (5,715) Two-for-one stock split 46 -- 46,572 (46,618) -- -- 0 Dividends -- -- -- (10,052) -- -- (10,052) --------- ------- ---------- ----------- ----- -------- ----------- BALANCE, DECEMBER 31, 2001 $ 94 $(7,874) $1,210,088 $ 1,093,580 $(586) $ 11,026 $ 2,306,328 ========= ======= ========== =========== ===== ======== ===========
See notes to consolidated financial statements. -14- CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 --------------------------------------------- (in thousands) 2001 2000 1999 --------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 360,419 $ 248,938 $ 148,138 Adjustments to reconcile net income to net cash provided by operating activities: Net gains (1,047) (4,179) (1,568) Equity in net income of affiliates (41,309) -- -- Proceeds from sales of trading securities 14,204 -- -- Purchase of trading securities (24,978) -- -- Increase (decrease) in unearned premiums 65,685 22,316 (20,613) Net increase in deferred policy acquisition costs (24,336) (8,369) (12,697) Increase in reserve for losses 90,980 54,437 90,459 Increase in deferred federal income taxes 140,804 62,942 57,849 Increase in provisional losses recoverable (3,276) (3,675) (7,347) Depreciation and other amortization, net 2,486 3,158 2,289 Net change in prepaid federal income taxes, other assets, accounts payable and accrued expenses (98,483) (95,591) 5,163 ----------- --------- --------- Net cash provided by operating activities 481,149 279,977 261,673 ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of fixed maturity investments available for sale 1,039,762 552,439 131,170 Proceeds from sales of fixed maturity investments held to maturity -- 1,922 10 Proceeds from sales of equity securities available for sale 8,425 18,988 3,076 Proceeds from redemptions of fixed maturity investments available for sale 111,674 16,467 24,769 Proceeds from redemptions of fixed maturity investments held to maturity 21,509 2,897 19,981 Purchases of fixed maturity investments available for sale (1,595,179) (813,627) (380,683) Purchases of equity securities available for sale (66,098) (29,713) (25,595) Purchases of short-term investments, net (28,101) (38,859) (32,560) Purchases of property and equipment, net (8,538) (9,419) (12,509) Acquisitions, net of cash acquired 6,788 -- -- Investment in affiliates (15,020) -- -- Distributions from affiliates 12,761 -- -- Other (1,084) (952) (1,468) ----------- --------- --------- Net cash used in investing activities (513,101) (299,857) (273,809) ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (10,052) (7,791) (6,860) Proceeds from issuance of common stock under incentive plans 39,687 24,747 17,126 Purchase of treasury stock (5,715) (2,159) -- Repayment of short-term debt (173,724) -- -- Issuance of long-term debt 246,885 -- -- Acquisition costs (7,394) -- -- ----------- --------- --------- Net cash provided by financing activities 89,687 14,797 10,266 ----------- --------- --------- Increase (decrease) in cash 57,735 (5,083) (1,870) Cash, beginning of year 2,424 7,507 9,377 ----------- --------- --------- Cash, end of year $ 60,159 $ 2,424 $ 7,507 =========== ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Income taxes paid $ 98,960 $ 74,768 $ 61,450 =========== ========= ========= Interest paid $ 19,099 $ 817 $ 181 =========== ========= =========
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES Basis of Presentation and Nature of Operations Radian Group Inc. (the "Company"), provides through its subsidiaries and affiliates, insurance and mortgage services to financial institutions in the United States and globally. The principal business segments of the Company are mortgage insurance, financial guaranty and mortgage services. Private mortgage insurance and risk management services are provided to mortgage lending institutions located throughout the United States through the Company's wholly-owned principal operating subsidiaries, Radian Guaranty Inc. ("Radian Guaranty") and Amerin Guaranty Corporation ("Amerin Guaranty") (together referred to as "Mortgage Insurance"). Private mortgage insurance generally protects lenders from default-related losses on residential first mortgage loans made to home buyers who make down payments of less than 20% of the purchase price and facilitates the sale of these mortgages in the secondary market. Mortgage Insurance currently offers two principal types of private mortgage insurance coverage, primary and pool. At December 31, 2001, primary insurance comprised 94.3% of Mortgage Insurance's risk in force and pool insurance comprised 5.7% of Mortgage Insurance's risk in force. During the third quarter of 2000, the Company commenced operations in Radian Insurance Inc., a subsidiary that writes credit insurance on non-traditional mortgage related assets such as second mortgages and manufactured housing, and provides credit enhancement to mortgage related capital market transactions. Mortgage Insurance recently began offering an alternative to title insurance providing lien protection mortgage insurance on refinanced second mortgages and home equity loans. On February 28, 2001, the Company acquired the financial guaranty and other businesses of Enhance Financial Services Group Inc. ("Financial Guaranty"), a New York based insurance holding company that primarily insures and reinsures credit-based risks at a purchase price of approximately $581.5 million. The financial guaranty insurance business is conducted through two insurance subsidiaries, Radian Reinsurance Inc. ("Radian Re," formerly Enhance Reinsurance Company) and Radian Asset Assurance Inc. ("Radian Asset Assurance," formerly Asset Guaranty Company). In addition, Financial Guaranty has a partial interest in two active credit-based asset businesses. Several smaller businesses are either in run-off or have been terminated. The purchase price represented the value of the Company's common stock and stock options issued in connection with the acquisition and other consideration in accordance with an Agreement and Plan of Merger, dated November 13, 2000, by and among the Company, a wholly-owned subsidiary of the Company and Financial Guaranty. The acquisition, which was structured as a merger of a wholly-owned subsidiary of the Company with and into Financial Guaranty, entitled Financial Guaranty stockholders to receive 0.22 shares of the Company's common stock in a tax-free exchange for each share of Financial Guaranty's common stock that they owned at the time of the merger. The acquisition was treated as a purchase for accounting purposes, and accordingly, the assets and liabilities were recorded based on their fair values at the date of acquisition. The fair value of assets acquired was $1,357.9 million. The fair value of liabilities assumed at acquisition was $833.1 million. The excess of purchase price over fair value of net assets acquired of $56.7 million represents the future value of insurance profits, which is being amortized over a period that approximates the future life of the insurance book of business. The results of Financial Guaranty's operations have been included in the Company's financial statements for the period from the date of the acquisition through December 31, 2001. The purchase price of Financial Guaranty reflects the issuance of 8,462,861 shares (pre-stock split) of the Company's common stock at $65.813 per share (pre-stock split) which represented the average closing price of the Company's common stock for the three days preceding and following the announcement of the acquisition, and the issuance of 1,320,079 options (pre-stock split) to purchase shares of the Company's common stock to holders of options to purchase shares of Financial Guaranty's common stock. The value of the option grant was based on a Black-Scholes valuation model assuming an average life of 2.8 years, a risk-free interest rate of 4.75%, volatility of 43.4% and a dividend yield of 0.22%. The following unaudited pro forma information presents a summary of the consolidated operating results of the Company for the year-to-date periods indicated, as if the acquisition of Financial Guaranty had occurred on January 1, 1999 (in thousands, except per-share information):
December 31 ---------------------------------- 2001 2000 1999 -------- -------- -------- Total revenues $951,206 $801,665 $768,964 Net income 265,147 239,529 216,762 Net income per share-basic $ 2.89 $ 3.14 $ 2.89 Net income per share-diluted $ 2.85 $ 3.10 $ 2.82
The unaudited pro forma financial information is not necessarily indicative of the combined results that would have occurred had the acquisition occurred on that date, nor is it indicative of the results that may occur in the future. On November 9, 2000, the Company completed the acquisition of RadianExpress.com, Inc. ("RadianExpress," formerly Expressclose.com, Inc.), an Internet-based settlement company that provides real estate information products and services to the first and second mortgage industry, for approximately $8.0 million consisting of cash, the Company's common stock and stock options and other consideration. The acquisition was treated as a purchase for accounting purposes, and accordingly, the assets and liabilities were recorded based on their fair values at the date of acquisition. The excess of purchase price over fair value of net assets acquired of $7.4 million was allocated to goodwill. During 2000 and 2001, a portion of this amount was amortized into earnings. With the issuance of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," the Company will evaluate the realizability of the goodwill annually and revalue if necessary. The financial results for the year ended December 31, 2000 include the results of RadianExpress' operations for the period from November 10, 2000 through December 31, 2000. The cash component of the acquisition was financed using the Company's cash flow from operations. The pro forma results for 2000 including this acquisition would not be materially different from reported results. On November 22, 1998, the Company was formed by the merger of CMAC Investment Corporation ("CMAC") and Amerin Corporation ("Amerin"). The merger closed on June 9, 1999 after approval by the stockholders of both companies, at which time the name of the merged company was changed to Radian Group Inc. At the same time, the name of the Company's main operating subsidiary, Commonwealth Mortgage Assurance Company, was changed to Radian Guaranty, while the main operating subsidiary of Amerin, Amerin Guaranty, retained its name. As a result of the merger, Amerin stockholders received 0.5333 shares (14,168,635 shares were issued) of CMAC common stock in a tax-free exchange for each share of Amerin common stock that they owned. CMAC's stockholders continued to own their existing shares after the merger. The merger transaction was accounted for on a pooling of interests basis and, therefore, all financial statements presented reflect the combined entity. There were no intercompany transactions requiring elimination for any periods presented prior to the merger. The operating results of the separate companies through the merger in 1999 are as follows (in thousands):
Total Net Revenues Income -------- -------- For the year ended December 31, 1999: Radian Group Inc. $418,428 $110,785 CMAC Investment Corporation (through March 31, 1999) 89,415 22,878 Amerin Corporation (through March 31, 1999) 43,400 14,475 -------- -------- Combined $551,243 $148,138 ======== ========
Consolidation The accompanying financial statements include the accounts of all subsidiaries. Investments in which the Company, or one of its subsidiaries, owns from 20% to 50% of those companies, and where the Company has a majority voting interest, but where the minority shareholders have substantive participating rights or where the Company has the intent and ability to divest its investment in the short term, are accounted for in accordance with the equity method of accounting (See note 13). All significant intercompany accounts and transactions, and intercompany profits and losses, including those transactions with equity method investee companies, have been eliminated. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Use of Estimates The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Insurance Premiums SFAS No. 60, "Accounting and Reporting by Insurance Enterprises," specifically excludes mortgage guaranty insurance from its guidance relating to the earning of insurance premiums. Consistent with GAAP and industry accounting practices, mortgage insurance premiums written on an annual and multiyear basis are initially deferred as unearned premiums and earned over the policy term, and premiums written on a monthly basis are primarily earned as they are received. Annual premiums are amortized on a monthly, straight-line basis. Multiyear premiums are amortized over the terms of the contracts in accordance with the anticipated claim payment pattern based on historical industry experience. Ceded premiums written are initially set up as prepaid reinsurance and are amortized in accordance with direct premiums earned. In the financial guaranty business, insurance premiums are earned in proportion to the level amortization of insured principal over the contract period. Premiums written on a monthly basis are primarily earned as they are received, which approximates a level amount of premium income recognition in proportion to the insured principal over the contract period. Unearned premium revenue represents that portion of premiums which will be earned over the remainder of the contract period, based upon information reported by ceding companies and management's estimates of amortization of insured principal on policies written on a direct basis. When insured issues are refunded or called, the remaining unearned premium revenue is generally earned at that time, since the risk to the Company is eliminated. Reserve for Losses and Loss Adjustment Expenses ("LAE") The mortgage insurance reserve for losses consists of the estimated cost of settling claims on defaults reported and defaults that have occurred but have not been reported. SFAS No. 60 specifically excludes mortgage guaranty insurance from its guidance relating to the reserve for losses. Consistent with GAAP and industry accounting practices, the Company does not establish loss reserves for future claims on insured loans that are not currently in default. In determining the liability for unpaid losses related to reported outstanding defaults, the Company establishes loss reserves on a case-by-case basis. The amount reserved for any particular loan is dependent upon the characteristics of the loan, the status of the loan as reported by the servicer of the insured loan as well as the economic condition and estimated foreclosure period in the area in which the default exists. As the default progresses closer to foreclosure, the amount of loss reserve for that particular loan is increased, in stages, to approximately 100% of the Company's exposure and that adjustment is included in current operations. The Company also reserves for defaults that have occurred but have not been reported using historical information on defaults not reported on a timely basis by lending institutions. The estimates are continually reviewed and, as adjustments to these liabilities become necessary, such adjustments are reflected in current operations. Reserves for losses and LAE in the financial guaranty business are established based on the Company's best estimate of specific and non-specific losses, including expenses associated with settlement of such losses on its insured and reinsured obligations. The Company's estimation of total reserves considers known defaults, reports and individual loss estimates reported by ceding companies and annual increases in the total net par amount outstanding of the Company's insured obligations. The Company records a specific provision for losses and related LAE when reported by primary insurers or when, in the Company's opinion, an insured risk is in default or default is probable and the amount of the loss is reasonably estimable. In the case of obligations with fixed periodic payments, the provision for losses and LAE represents the present value of the Company's ultimate expected losses, adjusted for estimated recoveries under salvage or subrogation rights. The non-specific reserves represent the Company's best estimate of total reserves, less provisions for specific reserves. Generally, when a case basis reserve is established or adjusted, an offsetting adjustment is made to the non-specific reserve. The Company discounts certain financial guaranty liabilities at annual rates, which correspond to the financial guaranty insurance subsidiaries' investment yields ranging from 4.95% to 5.51%. These discounted liabilities at December 31, 2001 were $16.6 million, net of discounts of $9.9 million. Reserves for losses and LAE for Financial Guaranty's other lines of business, primarily trade credit reinsurance, are based on reports and individual loss estimates received from ceding companies, net of anticipated estimated recoveries under salvage and subrogation rights. In addition, a reserve is included for losses and LAE incurred but not reported on trade credit reinsurance. The Company periodically evaluates its estimates for losses and LAE and may adjust such reserves based on its actual loss experience, mix of business and economic conditions. Changes in total estimates for losses and LAE are reflected in current earnings. The Company believes that its total reserves for financial guaranty losses and LAE are adequate to cover the ultimate cost of all claims net of reinsurance recoveries. However, the reserves are based on estimates of losses and LAE, and there can be no assurance that the ultimate liability will not exceed such estimates. Deferred Policy Acquisition Costs Costs associated with the acquisition of mortgage insurance business, consisting of compensation and other policy issuance and underwriting expenses, are initially deferred. Because SFAS 60 specifically excludes mortgage guaranty insurance from its guidance relating to the amortization of deferred policy acquisition costs, amortization of these costs for each underwriting year book of business are charged against revenue in proportion to estimated gross profits over the life of the policies using the guidance provided by SFAS No. 97, "Accounting and Reporting by Insurance Enterprises For Certain Long Duration Contracts and for Realized Gains and Losses From the Sale of Investments." This includes accruing interest on the unamortized balance of capitalized acquisition costs. The estimate for each underwriting year is updated annually to reflect actual experience and any changes to key assumptions such as persistency or loss development. Deferred policy acquisition costs in the financial guaranty business comprise those expenses that vary with and are primarily related to the production of insurance premiums, including: commissions paid on reinsurance assumed, salaries and related costs of underwriting and marketing personnel, rating agency fees, premium taxes and certain other underwriting expenses, offset by ceding commission income on premiums ceded to reinsurers. Acquisition costs are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed or are less than recoverable amounts, after considering investment income. Income Taxes Deferred income taxes are provided for the temporary difference between the financial reporting basis and the tax basis of the Company's assets and liabilities using enacted tax rates applicable to future years. Investments The Company is required to group its investment portfolio into one of three categories: held to maturity, available for sale, and trading securities. Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Debt and equity securities purchased and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. All other investments are classified as available for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders' equity as accumulated other comprehensive income (loss). Realized gains and losses are determined on a specific identification method and are included in income. Other invested assets consist of residential mortgage-backed securities and are carried at fair value. Fair Values of Financial Instruments The following methodology was used by the Company in estimating the fair value disclosures for its financial instruments: fair values for fixed maturity securities (including redeemable preferred stock) and equity securities are based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Short-term investments are carried at amortized cost, which approximates fair values. See note 14. Derivative Instruments and Hedging Activities The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, on January 1, 2001. The statement establishes accounting and reporting standards for derivative instruments and hedging activity and requires that all derivatives be measured at fair value and recognized as either assets or liabilities in the financial statements. Changes in the fair value of derivative instruments are recorded each period in current earnings. This represents a change from the Company's prior accounting practices whereby these changes were recorded as a component of stockholders' equity. Transactions that the Company has entered into that are accounted for under SFAS No. 133, as amended, include convertible debt securities, credit default swaps and certain financial guaranty contracts that are considered credit default swaps. Credit default swaps and certain financial guaranty contracts that are accounted for under SFAS No. 133, are part of the Company's overall business strategy of offering financial guaranty protection to its customers. Currently, none of the Company's derivatives qualify as hedges. Upon adoption of SFAS No. 133, the balance of the Company's convertible debt portfolio was approximately $104.6 million. SFAS No. 133 requires that the Company split its convertible debt securities into the derivative and debt host components. Over the term of the securities, changes in the fair value of the debt instrument are recorded in the Company's consolidated statement of changes in common stockholders' equity, through accumulated other comprehensive income or loss. Concurrently, a deferred tax liability or benefit is recognized as the recorded value of the debt host increases or decreases. A change in the fair value of the derivative is recorded as a gain or loss in the Company's consolidated statements of income. In connection with the adoption of SFAS No. 133, the Company reclassified $13.8 million from fixed maturities available for sale to trading securities on its consolidated balance sheet as of January 1, 2001. At December 31, 2001 the fair value of the Company's derivative instruments, classified as trading securities, was $21.7 million, as compared to an amortized value of $22.6 million, and the Company recognized $0.6 million, net of tax, of loss on changes in the fair value of derivative instruments in the consolidated statements of income for 2001. The notional value of the Company's credit default swaps and certain other financial guaranty contracts accounted for under SFAS No. 133 was $2.9 billion at December 31, 2001. The application of SFAS 133, as amended, could result in volatility from period to period in gains and losses as reported on the Company's consolidated statements of income. The Company is unable to predict the effect this volatility may have on its financial position or results of operations. Company-owned Life Insurance The Company is the beneficiary of insurance policies on the lives of certain officers and employees of the Company. The Company has recognized the amount that could be realized under the insurance policies as an asset in its consolidated balance sheet. At December 31, 2001 and 2000, the amount of Company-owned life insurance totaled $53,190,000 and $50,374,000, respectively, and is included as a component of other assets. Stock Split On May 1, 2001, the Company's board of directors authorized a stock split, paid June 20, 2001, in the form of a dividend of one additional share of the Company's common stock for each share owned by stockholders of record on June 14, 2001. To effect the stock split, the Company's stockholders approved an increase in the number of authorized shares of common stock, from 80 million to 200 million, on June 14, 2001. The dividend was accounted for as a two-for-one stock split and the par value of the Company's common stock remained at $.001 per share. Accordingly, all references to common shares and per share data, except where noted otherwise, have been adjusted to give effect to the stock split. In conjunction with the stock split, the Company's board of directors voted to increase the quarterly dividend from $.015 per share to $.02 per share of common stock outstanding after the split was effected. Accounting for Stock-Based Compensation The Company accounts for stock-based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages, but does not require, the recognition of compensation expense for the fair value of stock options and other equity instruments granted as compensation to employees. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"), and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. In March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"). FIN 44 clarifies the application of APB 25 for certain issues. The Company adopted the provisions of FIN 44 in 2000. The adoption of this interpretation did not have a material effect on the Company's financial statements. Net Income Per Share The Company is required to disclose both "basic" net income per share and "diluted" net income per share. Basic net income per share is based on the weighted average number of common shares outstanding, while diluted net income per share is based on the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of stock options. The calculation of the basic and diluted net income per share was as follows (in thousands, except per-share amounts):
2001 2000 1999 --------- --------- --------- Net income $ 360,419 $ 248,938 $ 148,138 Preferred stock dividend adjustment (3,300) (3,300) (3,300) --------- --------- --------- Net income available to common stockholders $ 357,119 $ 245,638 $ 144,838 ========= ========= ========= Average diluted stock options outstanding 5,924.1 3,852.6 4,176.2 Average exercise price per share $ 25.05 $ 15.59 $ 13.42 Average market price per share - diluted basis $ 36.63 $ 27.66 $ 23.17 Weighted average common shares outstanding 90,474 75,268 73,950 Increase in shares due to exercise of options - diluted basis 1,484 1,030 1,762 --------- --------- --------- Average shares outstanding - diluted 91,958 76,298 75,712 ========= ========= ========= Net income per share - basic $ 3.95 $ 3.26 $ 1.96 ========= ========= ========= Net income per share - diluted $ 3.88 $ 3.22 $ 1.91 ========= ========= =========
Comprehensive Income The Company is required to present, as a component of comprehensive income, the amounts from transactions and other events that are currently excluded from the statements of income and are recorded directly to stockholders' equity. Segment Reporting The Company has three reportable segments: mortgage insurance, mortgage services, and financial guaranty. The mortgage insurance segment provides private mortgage insurance and risk management services to mortgage lending institutions located throughout the United States. Private mortgage insurance primarily protects lenders from default-related losses on residential first mortgage loans made to home buyers who make downpayments of less than 20% of the purchase price and facilitates the sale of these mortgages in the secondary market. The mortgage services segment deals primarily with credit-based servicing and securitization of assets in underserved markets, in particular, the purchase and servicing of and securitization of special assets, including sub-performing/non-performing and seller financed residential mortgages and delinquent consumer assets. In addition, mortgage services includes the results of RadianExpress, an Internet-based settlement company that provides real estate information products and services to the first and second mortgage industry. The financial guaranty segment provides credit-related insurance coverage to meet the needs of customers in a wide variety of domestic and international markets. The Company's insurance businesses within this segment include the assumption of reinsurance from the monoline financial guaranty insurers for both municipal bonds and structured finance obligations. The Company also provides direct financial guaranty insurance for municipal bonds, structured finance, trade credit reinsurance and excess-SIPC insurance. The Company's reportable segments are strategic business units, which are managed separately, as each business requires different marketing and sales expertise. Certain corporate expenses have been allocated to the segments. In the mortgage insurance segment, the highest state concentration of risk is California. At December 31, 2001, California accounted for 16.6% of Mortgage Insurance's total direct primary insurance in force and 11.3% of Mortgage Insurance's total direct pool insurance in force. California accounted for 16.0% of Mortgage Insurance's direct primary new insurance written in 2001. The largest single customer of Mortgage Insurance (including branches and affiliates of such customer) measured by new insurance written, accounted for 12.6% of new insurance written during 2001 compared to 11.2% in 2000 and 12.2% in 1999. In the financial guaranty segment, the Company derives a substantial portion of its premiums written from a small number of primary insurers. In 2001, 34.0% of gross written premiums were derived from two primary insurers. Four primary insurers were responsible for 42.0% of gross written premiums. This customer concentration results from the small number of primary insurance companies licensed to write financial guaranty insurance. The Company evaluates performance based on net income. Summarized financial information concerning the Company's operating segments as of and for the year-to-date periods indicated, is presented in the following tables:
December 31, 2001 ------------------------------------------------------ (in thousands) Mortgage Mortgage Financial Insurance Services Guaranty Consolidated ---------- --------- ------------ ------------ Net premiums written $ 640,414 $ 143,230 $ 783,644 ========== ========= =========== ========== Net premiums earned $ 609,425 $ 106,455 $ 715,880 Net investment income 97,110 $ 127 50,250 147,487 Equity in net income of affiliates -- 42,517 (1,208) 41,309 Other income 20,412 19,122 2,991 42,525 ---------- --------- ----------- ---------- Total revenues 726,947 61,766 158,488 947,201 ---------- --------- ----------- ---------- Provision for losses 179,146 28,990 208,136 Policy acquisition costs 62,439 21,823 84,262 Other operating expenses 91,967 18,942 21,607 132,516 Interest expense 10,454 1,330 6,019 17,803 ---------- --------- ----------- ---------- Total expenses 344,006 20,272 78,439 442,717 ---------- --------- ----------- ---------- Net gains (losses) 4,451 (1,034) (2,370) 1,047 ---------- --------- ----------- ---------- Pretax income 387,392 40,460 77,679 505,531 Income tax provision 107,394 16,184 21,534 145,112 ---------- --------- ----------- ---------- Net income $ 279,998 $ 24,276 $ 56,145 $ 360,419 ========== ========= =========== ========== Total assets $2,783,705 $ 202,505 $ 1,452,416 $4,438,626 Deferred policy acquisition costs 76,035 -- 75,002 151,037 Reserve for losses 465,444 -- 123,199 588,643 Unearned premiums 106,151 -- 407,781 513,932
December 31, 2000 ----------------------------------------------------- (in thousands) Mortgage Mortgage Financial Insurance Services Guaranty Consolidated --------- -------- -------- ------------ Net premiums written $ 544,272 $ 544,272 ========== ========== Net premiums earned $ 520,871 $ 520,871 Net investment income 82,946 82,946 Other income 7,438 7,438 ---------- ---------- Total revenues 611,255 611,255 ---------- ---------- Provision for losses 154,326 154,326 Policy acquisition costs 51,471 51,471 Other operating expenses 57,167 57,167 ---------- ---------- Total expenses 262,964 262,964 ---------- ---------- Net gains 4,179 4,179 ---------- ---------- Pretax income 352,470 352,470 Income tax provision 103,532 103,532 ---------- ---------- Net income $ 248,938 $ 248,938 ========== ========== Total assets $2,272,811 $2,272,811 Deferred policy acquisition costs 70,049 70,049 Reserve for losses 390,021 390,021 Unearned premiums 77,241 77,241
December 31, 1999 ----------------------------------------------------- (in thousands) Mortgage Mortgage Financial Insurance Services Guaranty Consolidated ---------- -------- -------- ------------ Net premiums written $ 451,817 $ 451,817 ========== ========== Net premiums earned $ 472,635 $ 472,635 Net investment income 67,259 67,259 Other income 11,349 11,349 ---------- ---------- Total revenues 551,243 551,243 ---------- ---------- Provision for losses 174,143 174,143 Policy acquisition costs 58,777 58,777 Other operating expenses 62,659 62,659 Merger expenses 37,766 37,766 ---------- ---------- Total expenses 333,345 333,345 ---------- ---------- Net gains 1,568 1,568 Pretax income 219,466 219,466 Income tax provision 71,328 71,328 ---------- ---------- Net income $ 148,138 $ 148,138 ========== ========== Total assets $1,776,712 $1,776,712 Deferred policy acquisition costs 61,680 61,680 Reserve for losses 335,584 335,584 Unearned premiums 54,925 54,925
Subsequent Events In January 2002, the Company sold $220 million of Senior Convertible Debentures. Approximately $125 million of the proceeds from the offering was used to increase capital at Radian Asset Assurance. The remainder will be used for general corporate purposes. The debentures bear interest at the rate of 2.25% per year and interest is payable semi-annually on January 1 and July 1, beginning July 1, 2002. The Company will also pay contingent interest on specified semi-annual periods, if the sale price of its common stock for a specified period of time is less than 60% of the conversion price. The debentures are convertible, at the purchaser's option, into shares of common stock at prices and on dates specified in the offering. At that time, the shares become common shares for the purposes of calculating earnings per share. The Company may redeem all or some of the debentures on or after January 1, 2005. In February 2002, the Company closed on a $50 million Senior Revolving Credit Facility. The facility is unsecured and expires in one year. The facility will be used for working capital and general corporate purposes. The facility bears interest on any amounts drawn at either the Borrower's Base rate as defined in the agreement, or at a rate above LIBOR based on certain debt to capital ratios. In March 2002, the Company made a $20 million investment in Primus Guaranty, Ltd, a Bermuda holding company and parent company to Primus Financial Products, Inc. ("Primus"), a Triple A rated company that provides credit risk protection to derivatives dealers and credit portfolio managers on individual investment-grade entities. In connection with the capitalization and Triple A rating of Primus, Radian Re has provided Primus with an excess of loss insurance policy. The Company intends to account for the Primus investment under the equity method of accounting. Assignment Operations The Company is actively-seeking to sell or otherwise dispose of the remaining assets and operations of Singer Asset Finance Company, L.L.C. ("Singer"), an entity acquired in connection with the purchase of Financial Guaranty. During this process, any net servicing expenses will be charged against an existing servicing liability and any gains or losses on assets will be charged against an existing asset reserve. If and when these reserves become depleted, future results will be charged to current operations. Singer and another subsidiary, Enhance Consumer Services LLC ("ECS") which had been engaged in the purchase, servicing and securitization of assets including state lottery awards, structured settlement payments and viatical settlements, are currently operating on a run-off basis. Their operations consist of servicing the prior originations of non-consolidated special purpose vehicles containing approximately $600.0 million and $568.0 million of off-balance sheet assets and liabilities, respectively. The Company's investment in the non-consolidated special purpose vehicles at December 31, 2001 is $32.0 million and the results of these subsidiaries are not material to the financial results of the Company. Recent Accounting Pronouncements In June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company has adopted the provisions of SFAS 141 and SFAS 142 as of January 1, 2002. The adoption of SFAS 141 and SFAS 142 did not have a material impact on the Company's financial position or results of operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which replaces, in its entirety, SFAS No. 125. Although SFAS No. 140 has changed many of the rules regarding securitizations, it continues to require an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and derecognize financial assets when control has been surrendered in accordance with the criteria provided in the statement. The Company previously adopted the provisions of SFAS No. 140 that related to applicable disclosures of securitization transactions, and adopted the remaining provisions of the new statement in the second quarter of 2001. The adoption of SFAS No. 140 did not have a material impact on the financial position or results of operations of the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the financial position or results of operations of the Company. Reclassifications Certain prior period amounts have been reclassified to conform with the current year's presentation. 2. INVESTMENTS Fixed maturity and equity investments at December 31, 2001 and 2000 consisted of (in thousands):
December 31, 2001 -------------------------------------------------- Gross Gross Amortized Fair Unrealized Unrealized Cost Value Gains Losses ---------- ---------- ------- ---------- Fixed maturities held to maturity at amortized cost: Bonds and notes: United States government $ 9,730 $ 9,592 $ -- $ 137 State and municipal obligations 432,468 452,370 20,415 514 ---------- ---------- ------- ---------- $ 442,198 $ 461,962 $20,415 $ 651 ========== ========== ======= ========== Fixed maturities available for sale: Bonds and notes: United States government $ 102,781 $ 102,174 $ 995 $ 1,602 State and municipal obligations 1,952,650 1,956,321 25,103 21,432 Corporate 231,893 247,648 23,299 7,544 Asset-backed securities 149,670 149,700 637 607 Private placements 89,090 84,544 -- 4,546 Redeemable preferred stock 25,382 25,360 1,352 1,374 Other 1,464 1,453 -- 11 ---------- ---------- ------- ---------- $2,552,930 $2,567,200 $51,386 $ 37,116 ========== ========== ======= ========== Equity securities available for sale $ 116,978 $ 120,320 $14,394 $ 11,052 ========== ========== ======= ==========
December 31, 2000 -------------------------------------------------- Gross Gross Amortized Fair Unrealized Unrealized Cost Value Gains Losses ---------- ---------- ------- ---------- Fixed maturities held to maturity at amortized cost: Bonds and notes: United States government $ 8,765 $ 9,393 $ 628 $ -- State and municipal obligations 460,826 481,399 21,070 497 ---------- ---------- ------- ---------- $ 469,591 $ 490,792 $21,698 $ 497 ========== ========== ======= ========== Fixed maturities available for sale: Bonds and notes: United States government $ 33,126 $ 33,527 $ 756 $ 355 State and municipal obligations 822,501 848,048 28,541 2,994 Corporate 152,052 157,115 8,807 3,744 Asset-backed securities 59,200 60,031 1,146 315 Redeemable preferred stock 20,312 22,119 2,437 630 ---------- ---------- ------- ---------- $1,087,191 $1,120,840 $41,687 $ 8,038 ========== ========== ======= ========== Equity securities available for sale $ 58,877 $ 64,202 $12,684 $ 7,359 ========== ========== ======= ==========
The contractual maturities of fixed maturity investments are as follows (in thousands):
December 31, 2001 ------------------------ Amortized Cost Fair Value ------------------------ Fixed maturities held to maturity: 2002 $ 23,723 $ 23,754 2003-2006 125,760 132,106 2007-2011 186,266 196,525 2012 and thereafter 106,449 109,577 ---------- ---------- $ 442,198 $ 461,962 ========== ========== Fixed maturities available for sale: 2002 $ 19,104 $ 18,524 2003-2006 301,250 309,324 2007-2011 339,413 342,513 2012 and thereafter 1,718,111 1,721,779 Asset-backed securities 149,670 149,700 Redeemable preferred stock 25,382 25,360 ---------- ---------- $2,552,930 $2,567,200 ========== ==========
Net investment income consisted of (in thousands):
Year Ended December 31 ---------------------------------- 2001 2000 1999 -------- ------- ------- Investment income: Fixed maturities $139,508 $79,891 $66,090 Equity securities 1,772 1,461 636 Short-term investments 7,597 3,941 1,789 Other 3,749 1,272 667 -------- ------- ------- 152,626 86,565 69,182 Investment expenses (5,139) (3,619) (1,923) -------- ------- ------- $147,487 $82,946 $67,259 ======== ======= =======
Net gain on sales of investments consisted of (in thousands):
Year Ended December 31 ---------------------------------- 2001 2000 1999 -------- -------- ------- Gains on sales and redemptions of fixed maturity investments $ 22,336 $ 12,732 $ 3,213 available for sale Losses on sales and redemptions of fixed maturity investments available for sale (13,782) (9,115) (1,752) Gains on sales and redemptions of fixed maturity investments held to maturity 59 4 27 Losses on sales and redemptions of fixed maturity investments held to maturity (84) (35) (10) Gains on sales of equity securities available for sale 39 2,206 273 Losses on sales of equity securities available for sale (943) (1,767) (183) Losses on sales of other invested assets (1,058) -- -- Gains on sales of trading securities 521 -- -- Losses on sales of trading securities (669) -- -- Gains on sales of short-term investments 5 184 -- Losses on sales of short-term investments -- (30) -- -------- -------- ------- $ 6,824 $ 4,179 $ 1,568 ======== ======== =======
For the year ended December 31, 2001, the Company did not sell any fixed maturity investments held to maturity. For the year ended December 31, 2000, the Company sold fixed maturity investments held to maturity with an amortized cost of $1,949,000 resulting in losses of $27,000, and for the year ended December 31, 1999, the Company sold a fixed maturity investment held to maturity with an amortized cost of $10,000 that resulted in no gain or loss. All investments were sold in response to a significant deterioration in the issuer's creditworthiness. Net change in unrealized appreciation (depreciation) on investments consisted of (in thousands):
Year Ended December 31 ---------------------------------- 2001 2000 1999 -------- -------- -------- Fixed maturities held to maturity $ (1,437) $ 14,493 $(28,142) ======== ======== ======== Fixed maturities available for sale $(19,379) $ 68,718 $(59,636) Deferred tax benefit (provision) 6,725 (24,051) 20,873 -------- -------- -------- $(12,654) $ 44,667 $(38,763) ======== ======== ======== Equity securities available for sale $ (1,983) $ (5,334) $ 8,343 Deferred tax benefit (provision) 695 1,867 (2,920) -------- -------- -------- $ (1,288) $ (3,467) $ 5,423 -------- -------- -------- Other $ (365) -- -- ======== ======== ========
Securities on deposit with various state insurance commissioners amounted to $17,512,000 at December 31, 2001 and $13,086,000 at December 31, 2000. The Company also had $596,965,000 on deposit at December 31, 2001 for the benefit of reinsurers. 3. REINSURANCE The Company utilizes reinsurance as a risk management tool, to reduce net risk in force to meet regulatory risk to capital requirements and to comply with the regulatory maximum per loan coverage percentage limitation of 25%. Although the use of reinsurance does not discharge an insurer from its primary liability to the insured, the reinsuring company assumes the related liability. Included in other assets are unearned premiums (prepaid reinsurance) of $12,182,000 and $9,415,000 at December 31, 2001 and 2000, respectively. The effect of reinsurance on premiums written and earned is as follows:
Year Ended December 31 ------------------------------------------- (in thousands) 2001 2000 1999 --------- --------- --------- Premiums written: Direct $ 753,392 $ 592,734 $ 496,646 --------- --------- --------- Assumed 90,917 80 93 Ceded (60,665) (48,542) (44,922) --------- --------- --------- Net premiums written $ 783,644 $ 544,272 $ 451,817 ========= ========= ========= Premiums earned: Direct $ 699,085 $ 570,425 $ 517,364 Assumed 77,569 80 87 Ceded (60,774) (49,634) (44,816) --------- --------- --------- Net premiums earned $ 715,880 $ 520,871 $ 472,635 ========= ========= =========
The 2001, 2000 and 1999 figures included $4,062,000, $9,561,000 and $14,423,000, respectively, for premiums written and $4,299,000, $9,772,000 and $14,781,000, respectively, for premiums earned, for reinsurance ceded under variable quota share treaties entered into in 1997, 1996, 1995 and 1994 covering the books of business originated by Radian Guaranty in those years. Included in provisional losses recoverable was $47,016,000 and $43,740,000 for 2001 and 2000, respectively, which represented amounts due under variable quota share treaties entered into in 1997, 1996, 1995 and 1994, covering the books of business originated by Radian Guaranty in those years. The term of each treaty is ten years and is non-cancelable by either party except under certain conditions. The treaties also include underwriting year excess coverage in years four, seven, and ten of the treaty. Under the terms of these treaties, Radian Guaranty cedes premium to the reinsurer based on 15% of the premiums received by Radian Guaranty on the covered business. Radian Guaranty is entitled to receive a ceding commission ranging from 30% to 32% of the premium paid under the treaty provided that certain loss ratios are not exceeded. In return for the payment of premium, Radian Guaranty receives variable quota share loss relief at levels ranging from 7.5% to 15.0% based upon the loss ratio on the covered business. In addition, Radian Guaranty is entitled to receive, under the underwriting year excess coverage, 8% of the ceded premium written under each treaty to the extent that this amount is greater than the total amount received under the variable quota share coverage business. Premiums are payable to the reinsurer on a quarterly basis net of ceding commissions due and any losses calculated under the variable quota share coverage. At the end of the fourth, seventh, and tenth years of each treaty, depending on the extent of losses recovered to date under the variable quota share provisions of the treaty, Radian Guaranty may recover amounts due under the underwriting year excess coverage provisions of the treaty. The Company accounts for this reinsurance coverage under guidance provided in EITF 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises." Under EITF 93-6, the Company recognizes an asset for amounts due from the reinsurer based on experience to date under the contract. For the years ended December 31, 2001, 2000, and 1999, Radian Guaranty paid $4,062,000, $9,561,000 and $14,423,000 respectively, less ceding commissions of $2,216,000, $4,833,000 and $6,098,000 and recovered variable quota share losses under the treaties of $611,000, $2,262,000 and $6,066,000, respectively. Radian Guaranty has also entered into captive reinsurance arrangements with certain customers. The arrangements are typically structured on an excess layer basis with insured loans grouped by loan origination year. Radian Guaranty retains the first layer of risk on a particular book of business, the captive reinsurer assumes the next layer, and Radian Guaranty assumes all losses above that point. The captive reinsurers are required to maintain minimum capitalization equal to 10% of the risk assumed. At December 31, 2001, approximately $681,595,000 of risk was ceded under captive reinsurance arrangements. For the years ended December 31, 2001, 2000, and 1999, Radian Guaranty had ceded premiums written of $55,653,000, $39,686,000, and $26,931,000, respectively and ceded premiums earned of $52,472,000, $39,501,000, and $27,502,000, respectively, under these various captive reinsurance arrangements. In addition, Radian Guaranty reinsures all of its direct insurance in force under an excess of loss reinsurance program. Under this program, the reinsurer is responsible for 100% of Radian Guaranty's covered losses (subject to an annual and aggregate limit) in excess of an annual retention limit. Premiums are paid to the reinsurer on a quarterly basis, net of any losses due to Radian Guaranty. For the year ended December 31, 1999, Radian Guaranty had ceded premiums written of $3,183,000 and ceded premiums earned of $1,992,000, under this excess of loss reinsurance program. Beginning in 2000, this treaty was accounted for under Statements of Position 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk" ("SOP 98-7") and therefore, $5,269,000 and $5,370,000 were included in incurred losses during 2001 and 2000, respectively, relating to the excess of loss reinsurance program. Amerin Guaranty also reinsured all of its direct insurance in force under a $100 million excess loss protection treaty that covered Amerin Guaranty in the event the combined ratio exceeded 100% and the risk to capital ratio exceeded 24.9 to 1. This excess loss protection program was cancelled as of December 31, 2000. The amount ceded under the treaty was based on the calculated leverage ratio at the end of each calendar quarter. The total expense recognized under the treaty included in other operating expenses was $2,650,000 in 1999. Beginning in 2000, this treaty was accounted for under SOP 98-7 and therefore, $1,600,000 was included in incurred losses during 2000, relating to the excess loss protection treaty. 4. LOSSES AND LOSS ADJUSTMENT EXPENSES As described in note 1, the Company establishes reserves to provide for the estimated costs of settling claims in respect of loans reported to be in default and loans that are in default that have not yet been reported to the Company. The default and claim cycle on mortgage loans that the Company covers begins with a receipt from the lender of notification of a default on an insured loan. The master policy with each lender requires the lender to inform the Company of an uncured default on a mortgage loan within 75 days of the default. The incidence of default is influenced by a number of factors, including change in borrower income, unemployment, divorce and illness, the level of interest rates, and general borrower creditworthiness. Defaults that are not cured result in claims to the Company. Borrowers may cure defaults by making all delinquent loan payments or by selling the property and satisfying all amounts due under the mortgage. Different regions of the country experience different default rates due to varying economic conditions and each state has different rules regarding the foreclosure process. These rules can impact the amount of time it takes for a default to reach foreclosure, so the Company has developed a reserving methodology that takes these different time periods into account in calculating the reserve. When a specific loan initially defaults, it is uncertain the default will result in a claim. It is the Company's experience that a significant percentage of mortgage loans in default end up being cured. Increasing the reserve in stages as the foreclosure progresses approximates the estimated total loss for that particular claim. At any time during the foreclosure process, until the lender takes title to the property, the borrower may cure the default. Therefore, it is appropriate to increase the reserve in stages as new insight and information is obtained. At the time of title transfer, the Company has approximately 100% of the estimated total loss reserved. In the financial guaranty business, policies are monitored by the Company or the primary insurers over the life of the policy. When the policy's performance deteriorates below underwriting expectations, it is placed on the Watch List. Once a transaction is placed on the Watch List, the surveillance of the transaction is actively monitored, which may include communication with the borrower, site inspection or the engagement of a third party consultant. If the transaction continues to deteriorate until a default is probable, the Company will establish a loss reserve. Specific loss and loss expense reserves are recommended by the risk management function to a committee for approval. The following tables present information relating to the liability for unpaid claims and related expenses (in thousands):
MORTGAGE INSURANCE 2001 2000 1999 --------- --------- --------- Balance at January 1 $ 390,021 $ 335,584 $ 245,125 --------- --------- --------- Add losses and LAE incurred in respect of default notices received in: Current year 320,159 247,759 218,139 Prior years (141,013) (93,433) (43,996) --------- --------- --------- Total incurred 179,146 154,326 174,143 --------- --------- --------- Deduct losses and LAE paid in respect of default notices received in: Current year 21,237 8,891 7,353 Prior years 82,486 90,998 76,331 --------- --------- --------- Total paid 103,723 99,889 83,684 --------- --------- --------- Balance at December 31 $ 465,444 $ 390,021 $ 335,584 ========= ========= =========
FINANCIAL GUARANTY 2001 --------- Balance at February 28 (date of acquisition) $ 110,433 Less Reinsurance recoverables 185 Balance at February 28, net 110,248 Add losses and LAE incurred related to: Current year 17,560 Prior years 11,430 --------- Total incurred 28,990 --------- Deduct losses and LAE paid related to: Current year 3,815 Prior years 12,437 --------- Total paid 16,252 --------- Balance at December 31, net 122,986 Add Reinsurance recoverables 213 --------- Balance at December 31 $ 123,199 =========
As a result of changes in estimates of insured events in prior years, the provision for losses and loss adjustment expenses (net of reinsurance losses of $1,577,000 in 2001 and recoveries of $1,042,000, and $28,231,000 in 2000 and 1999, respectively) in the mortgage insurance business decreased by $141,013,000, $93,433,000 and $43,996,000 in 2001, 2000 and 1999, respectively, due primarily to lower than anticipated claim payments as compared to the amounts reserved as a result of strong housing prices. During 2001, the Company incurred losses and LAE of $11,430,000 in the financial guaranty insurance business related to prior years. This adverse development is primarily related to trade credit business and is the result of obtaining additional information on the assumed reinsurance as well as higher than expected development on specific claims. 5. LONG-TERM DEBT In May 2001, the Company issued, in a private placement, $250 million of 7.75% debentures due June 1, 2011. Interest on the debentures is payable semi-annually on June 1 and December 1. The Company has the option to redeem some or all of the debentures any time with not less than 30 days notice. In November 2001, the Company offered to exchange all of the old debentures for new debentures with terms of the new debentures substantially identical to the terms of the old debentures, except that the new debentures are registered and have no transfer restrictions, rights to additional interest or registration rights, except in limited circumstances. Substantially all of the initial debt converted to new public debt. The Company also has outstanding $75 million of 6.75% debentures, due 2003. Interest on the debentures is payable semi-annually in March and September. The composition of long-term debt at December 31, 2001 was as follows: 7.75% debentures due 2011 $249,076 6.75% debentures due 2003 75,000 -------- $324,076 ========
6. REDEEMABLE PREFERRED STOCK The Company's preferred stock is entitled to cumulative annual dividends of $4.125 per share, payable quarterly in arrears. The preferred stock is redeemable at the option of the Company at $54.125 per share on or after August 15, 2002, and declining to $50.00 per share on or after August 15, 2005 (plus, in each case, accumulated and unpaid dividends), or is subject to mandatory redemption at a redemption price of $50.00 per share plus accumulated and unpaid dividends based upon specified annual sinking fund requirements from 2002 to 2011. 7. INCOME TAXES Deferred income taxes at the end of each period are determined by applying enacted statutory tax rates applicable to the years in which the taxes are expected to be paid or recovered. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The effect on deferred taxes of a change in the tax rate is recognized in earnings in the period that includes the enactment date. The components of the Company's consolidated provision for income taxes are as follows (in thousands):
Year Ended December 31 ---------------------------------- 2001 2000 1999 -------- --------- --------- Current income taxes $ 22,992 $ 40,594 $ 13,245 Deferred income taxes 122,120 62,938 58,083 -------- --------- --------- $145,112 $ 103,532 $ 71,328 ======== ========= =========
The reconciliation of taxes computed at the statutory tax rate of 35% for 2001, 2000 and 1999 to the provision for income taxes is as follows (in thousands):
2001 2000 1999 -------- --------- --------- Provision for income taxes computed at the statutory tax rate $176,936 $ 123,365 $ 76,813 Change in tax provision resulting from: Tax-exempt municipal bond interest and dividends received deduction (net of proration) (32,315) (20,482) (15,535) Capitalized merger costs -- 123 8,124 Other, net 491 526 1,926 -------- --------- --------- Provision for income taxes $145,112 $ 103,532 $ 71,328 ======== ========= =========
The significant components of the Company's net deferred tax assets and liabilities are summarized as follows (in thousands):
December 31 ---------------------- 2001 2000 --------- --------- Deferred tax assets: AMT credit carryforward $ 35,118 $ 21,227 Loss reserves 30,643 8,896 Accrued expenses 12,076 1,225 Unearned premiums -- 4,746 Other 19,444 1,538 --------- --------- 97,281 37,632 --------- --------- Deferred tax liabilities: Deduction related to purchase of tax and loss bonds (390,315) (289,511) Deferred policy acquisition costs (52,866) (24,520) Partnership investments (35,001) -- Assignment sale income (9,795) -- Unearned premiums (8,148) -- Net unrealized gain on investments (FAS 115) (5,937) (13,641) Depreciation (1,842) (1,254) Other (25,475) -- --------- --------- (529,379) (328,926) --------- --------- Net deferred tax liability $(432,098) $(291,294) ========= =========
Prepaid federal income taxes includes Tax and Loss Bonds of $326.5 million and $270.3 million as of December 31, 2001 and 2000, respectively. In connection with the Financial Guaranty acquisition, the Company acquired net operating loss carryforwards of $12.0 million. At December 31, 2001, the net operating loss carryforward of $12.0 million remains unused, and will expire in the year 2019. 8. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS The Company is a holding company whose principal source of income is dividends from its subsidiaries. The ability of Radian Guaranty to pay dividends on its common stock is restricted by certain provisions of the insurance laws of the Commonwealth of Pennsylvania, its state of domicile. The insurance laws of Pennsylvania establish a test limiting the maximum amount of dividends that may be paid by an insurer without prior approval by the Pennsylvania Insurance Commissioner. Under such test, Radian Guaranty may pay dividends during any 12-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. In accordance with such restrictions, $252,843,000 would be available for dividends in 2002. However, an amendment to the Pennsylvania statute requires that dividends and other distributions be paid out of an insurer's unassigned surplus. Because of the unique nature of the method of accounting for contingency reserves, Radian Guaranty has negative unassigned surplus. Thus, prior approval by the Pennsylvania Insurance Commissioner is required for Radian Guaranty to pay dividends or make other distributions so long as Radian Guaranty has negative unassigned surplus. The Pennsylvania Insurance Commissioner has approved all distributions by Radian Guaranty since the passage of this amendment, and management has an expectation that the Commissioner of Insurance will continue to approve such distributions in the future, provided that the financial condition of Radian Guaranty does not materially decline. The ability of Amerin Guaranty to pay dividends on its common stock is restricted by certain provisions of the insurance laws of the State of Illinois, its state of domicile. The insurance laws of Illinois establish a test limiting the maximum amount of dividends that may be paid from positive unassigned surplus by an insurer without prior approval by the Illinois Insurance Commissioner. Under such test, Amerin Guaranty may pay dividends during any 12-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. In accordance with such restrictions, $53,215,000 is available for dividends in 2002 without prior regulatory approval, which represents the positive unassigned surplus of Amerin Guaranty at December 31, 2001. Under the New York Insurance Law, the Financial Guaranty insurance subsidiaries may declare or distribute dividends only out of earned surplus. The maximum amount of dividends, which may be paid by the insurance subsidiaries without prior approval of the New York Superintendent of Insurance, is subject to restrictions relating to statutory surplus and net investment income as defined by statute. Under such requirements, Radian Re would not be able to pay any dividends in 2002 and Radian Asset Assurance had $13,300,000 available for dividends in 2002, without prior approval. In connection with the approval of the acquisition of Financial Guaranty, the Company, Radian Re and Radian Asset Assurance agreed that Radian Re and Radian Asset Assurance will refrain from paying any dividends to the Company for a period of two years from the date of acquisition of control without the prior written consent of the New York Insurance Department. The Company and Radian Guaranty have entered into an agreement, pursuant to which the Company has agreed to establish and, for as long as any shares of $4.125 Preferred Stock remain outstanding, maintain a reserve account in an amount equal to three years of dividend payments on the outstanding shares of $4.125 Preferred Stock (currently $9,900,000), and not to pay dividends on the common stock at any time when the amount in the reserve account is less than three years of dividend payments on the shares of $4.125 Preferred Stock then outstanding. This agreement between the Company and Radian Guaranty provides that the holder of the $4.125 Preferred Stock is entitled to enforce the agreement's provisions as if such holder was signatory to the agreement. The Company may not pay any dividends on its shares of common stock unless the Company has paid all accrued dividends on, and has complied with all sinking fund and redemption obligations relating to, its outstanding shares of $4.125 Preferred Stock. Radian Guaranty's current excess of loss reinsurance arrangement prohibits the payment of any dividend that would have the effect of reducing the total of its statutory policyholders' surplus plus its contingency reserve below $85,000,000. As of December 31, 2001, Radian Guaranty had statutory policyholders' surplus of $185,268,000 and a contingency reserve of $1,348,541,000, for a total of $1,533,809,000. During 2001, Radian Guaranty and Amerin Guaranty entered into an assumption agreement whereby Radian Guaranty assumed 100% of the rights, duties and obligations related to first lien mortgage guaranty insurance written by Amerin Guaranty. Amerin Guaranty's contingency reserve of $310,873,000 was transferred to Radian Guaranty in accordance with the terms of the assumption agreement. The Company prepares its statutory financial statements in accordance with the accounting practices prescribed or permitted by the Insurance Department of the respective state of domicile. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC") as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Radian Guaranty's statutory policyholders' surplus at December 31, 2001 and 2000 was $185,268,000 and $171,644,000, respectively. Radian Guaranty's statutory net income for 2001, 2000 and 1999 was $252,843,000, $197,979,000, and $137,094,000, respectively. Under Illinois insurance regulations, Amerin Guaranty is required to maintain statutory basis capital and surplus of $1,500,000. The statutory policyholders' surplus at December 31, 2001 and 2000 was $298,802,000 and $284,813,000, respectively. Amerin Guaranty's statutory net income for 2001, 2000 and 1999 was $53,215,000, $101,448,000, and $70,901,000, respectively. The New York Insurance Law requires financial guaranty insurers to maintain minimum policyholders' surplus of $65,000,000. When added to the minimum policyholders' surplus of $3,400,000 separately required for the other lines of insurance which it is licensed to write, each of the insurance subsidiaries is required to have an aggregate minimum policyholders' surplus of $68,400,000. Radian Re had statutory policyholders' surplus of $188,635,000 and a contingency reserve of $308,865,000 at December 31, 2001 and statutory net income for 2001 of $39,970,000. Radian Asset Assurance had statutory policyholders' surplus of $133,131,000 and a contingency reserve of $36,665,000 at December 31, 2001 and statutory net income of $10,603,000 for 2001. The differences between the statutory net income and surplus and the consolidated net income and equity presented on a GAAP basis represent differences between GAAP and statutory accounting practices for the following reasons: Under statutory accounting practices, mortgage guaranty insurance companies are required to establish each year a contingency reserve equal to 50% of premiums earned in such year. Such amount must be maintained in the contingency reserve for 10 years after which time it is released to unassigned surplus. Prior to 10 years, the contingency reserve may be reduced with regulatory approval to the extent that losses in any calendar year exceed 35% of earned premiums for such year. Financial guaranty insurance companies are also required to establish contingency reserves under statutory accounting practices. Under GAAP, the contingency reserve is not required. In accordance with New York Insurance Law, financial guaranty insurance companies are required to establish a contingency reserve in the amount prescribed by legislation. Such legislation requires that for financial guaranty policies written after June 30, 1989, each primary insurer must establish a contingency reserve, equal to the greater of 50% of premiums written or a stated percentage of the principal guaranteed, ratably over 15-20 years dependent upon the category of obligation insured. Reinsurers are required to establish a contingency reserve equal to their proportionate share of the reserve established by the primary insurer. Under statutory accounting practices, insurance policy acquisition costs are charged against operations in the year incurred. Under GAAP, these costs are deferred and amortized. Statutory financial statements only include a provision for current income taxes due and limitations on deferred tax provisions, as revised effective January 1, 2001, and purchases of tax and loss bonds are accounted for as investments. GAAP financial statements provide for deferred income taxes, and purchases of tax and loss bonds are recorded as prepayments of income taxes. Under statutory accounting practices, fixed maturity investments are valued at amortized cost. Under GAAP, those investments that the statutory insurance entities do not have the ability or intent to hold to maturity are considered to be either available for sale or trading securities, and are recorded at fair value, with the unrealized gain or loss recognized, net of tax, as an increase or decrease to stockholders' equity or current operations, as applicable. Under statutory accounting practices, certain assets, designated as non-admitted assets, are charged directly against statutory surplus. Such assets are reflected on the GAAP financial statements. The New York Insurance Law establishes single-risk limits applicable to all obligations issued by a single entity and backed by a single revenue source. Under the limit applicable to municipal bonds, the insured average annual debt service for a single risk, net of reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders' surplus and contingency reserves. In addition, insured principal of municipal bonds attributable to any single risk, net of reinsurance and collateral, is limited to 75% of the insurer's policyholders' surplus and contingency reserves. Additional single risk limits, which generally are more restrictive than the municipal bond single risk limit, are also specified for several other categories of insured obligations. In March 1998, the NAIC adopted the Codification of Statutory Accounting Principles ("Codification"). The Codification, which is intended to standardize regulatory accounting and reporting for the insurance industry, was effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The Commonwealth of Pennsylvania required adoption of the Codification for the preparation of statutory financial statements effective January 1, 2001. The Company's adoption of the Codification by Pennsylvania increased statutory capital and surplus as of January 1, 2001 by $4,562,000 in Radian Guaranty. The State of Illinois required adoption of the Codification for the preparation of statutory financial statements effective January 1, 2001. The Company's adoption of the Codification by Illinois increased statutory capital and surplus as of January 1, 2001 by $767,000 in Amerin Guaranty. The State of New York required adoption of the Codification for the preparation of statutory financial statements effective January 1, 2001. The Company's adoption of the Codification by New York decreased statutory capital and surplus as of January 1, 2001 by $265,000 in Radian Re. There was no impact upon adoption for Radian Asset Assurance. 9. STOCK-BASED COMPENSATION The Company has two stock option plans, the Radian Group Inc. 1992 Stock Option Plan and the Radian Group Inc. 1995 Equity Compensation Plan, which together provide for the granting of non-qualified stock options, either alone or together with stock appreciation rights, as well as other forms of equity-based compensation. These options may be granted to directors, officers, and key employees of the Company at prices that are not less than 90% of the fair market value of the Company's stock at the date of grant. Each stock option is exercisable for a period of 10 years from the date of grant and is subject to a vesting schedule as approved by the Company's Stock Option and Compensation Committee. At the time of the Amerin merger in 1999, the number as approved by the Company's Stock Option and Compensation of options outstanding from the prior Amerin plan was added to the total number of shares subject to stock options and other forms of equity compensation. In February 2001, as a result of the Financial Guaranty acquisition, 1,320,079 options (pre-split) to purchase shares of the Company's common stock were issued to holders of options to purchase shares of Financial Guaranty common stock. The Company intends to issue any additional options to purchase shares of the Company's common stock only from under the Radian Group Inc. 1995 Equity Compensation Plan. Effective with the stock split in June 2001, all share totals within the plans were doubled. Information with regard to the Company's stock option plans is as follows:
Weighted Average Exercise Number of Price Per Shares Share --------- ---------- Outstanding, January 1, 1999 4,613,720 $13.33 Granted 459,842 20.32 Exercised (891,116) 13.20 Cancelled (269,558) 19.26 --------- Outstanding, December 31, 1999 3,912,888 13.77 Granted 920,214 22.67 Exercised (1,177,356) 12.43 Cancelled (143,980) 22.00 --------- Outstanding, December 31, 2000 3,511,766 16.22 Granted 1,822,006 31.91 Options granted re: Financial Guaranty acquisition 2,640,158 38.61 Exercised (1,351,468) 19.23 Cancelled (754,871) 49.88 --------- Outstanding, December 31, 2001 5,867,591 26.19 ========= Exercisable, December 31, 1999 2,782,292 11.09 ========= Exercisable, December 31, 2000 1,974,334 11.98 ========= Exercisable, December 31, 2001 3,175,377 25.06 ========= Available for grant, December 31, 2001 2,587,674 =========
The Company applies APB 25 in accounting for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS 123, the Company's net income and earnings per share would have been reduced by approximately $6,783,000 ($.07 per share), $4,189,000 ($.05 per share), and $2,932,000 ($.04 per share) in 2001, 2000, and 1999, respectively. The pro forma effect on net income for 2001, 2000 and 1999 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The weighted average fair values of the stock options granted during 2001, 2000 and 1999 were $15.74, $11.98, and $10.32, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:
2001 2000 1999 ----- ----- ----- Expected life (years) 7.53 7.07 7.89 Risk-free interest rate 4.40% 6.69% 4.91% Volatility 39.09% 39.29% 38.73% Dividend yield 0.22% 0.16% 0.30%
The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2001:
Options Outstanding Options Exercisable ----------------------------------------------------------------------------------- Weighted Average Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price - --------------- ----------- ------------ -------------- ----------- -------------- $ 4.50-$ 4.97 175,588 .89 $ 4.50 175,588 $ 4.50 $ 6.28-$ 7.34 413,300 2.36 7.26 413,300 7.26 $11.06-$16.25 396,406 4.39 13.39 345,531 12.97 $16.64-$24.00 1,747,592 5.69 20.81 846,359 20.76 $26.47-$37.36 2,516,666 8.28 30.85 807,560 30.19 $38.00-$56.68 482,127 7.55 44.82 451,127 45.21 $64.77-$68.18 135,912 6.08 65.80 135,912 65.80 --------- --------- 5,867,591 3,175,377 ========= =========
The Company's option plans include a "reload" feature. The award of a "reload" option allows the optionee to receive the grant of an additional stock option, at the then current market price, in the event that such optionee exercises all or part of an option (an "original option") by surrendering already owned shares of common stock in full or partial payment of the option price under such original option. The exercise of an additional option issued in accordance with the "reload" feature will reduce the total number of shares eligible for award under the stock option plan. The Company has an Employee Stock Purchase Plan (the "ESPP"). A total of 200,000 shares of the Company's authorized but unissued common stock has been made available under the ESPP. The ESPP allows eligible employees to purchase shares of the Company's stock at a discount of 15% of the beginning-of-period or end-of-period (each period being the first and second six calendar months) fair market value of the stock, whichever is lower. Eligibility under the ESPP is determined based on standard weekly work hours and tenure with the Company, and eligible employees are limited to a maximum contribution of $400 per payroll period toward the purchase of the Company's stock. Under the ESPP, the Company sold 7,528, 5,200 and 5,800 shares to employees in 2001, 2000 and 1999, respectively. The Company applies APB 25 in accounting for the ESPP. The pro forma effect on the Company's net income and earnings per share had compensation cost been determined under SFAS 123 was deemed immaterial in 2001, 2000 and 1999. 10. BENEFIT PLANS The Company currently maintains a noncontributory defined benefit pension plan covering substantially all full-time employees of Radian Group, Radian Guaranty and RadianExpress. Retirement benefits are a function of the years of service and the level of compensation. Assets of the plan are allocated in a balanced fashion with approximately 40% in fixed income securities and 60% in equity securities. The Company also provides a nonqualified executive retirement plan covering certain key executives designated by the board of directors. Under this plan, participants are eligible to receive benefits in addition to those paid under the defined benefit pension plan if their base compensation is in excess of the current IRS compensation limitation for the defined benefit pension plan. Retirement benefits under the nonqualified plan are a function of the years of service and the level of compensation and are reduced by any benefits paid under the defined benefit plan. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits to retired employees of Radian Guaranty. The Company accrues the estimated cost of retiree medical and life benefits over the period during which employees render the service that qualifies them for benefits. All of these plans together are referred to in the tables below as the "Radian Plans." Financial Guaranty maintains a noncontributory defined benefit pension plan including a non-qualified restoration pension plan, for the benefit of all eligible employees. Employers' contributions are based upon a fixed percentage of employee salaries at the discretion of Financial Guaranty. Currently this is a separate plan, although it is expected that in the near future, the plans will be merged. The funded status of the defined benefit plans and the postretirement benefit plan were as follows (in thousands):
RADIAN PLANS Postretirement Defined Benefit Plan Benefit Plan ------------------------ ------------------- 2001 2000 2001 2000 -------- ------- ----- ----- Change in Benefit Obligation Benefit obligation at beginning of year $ 9,302 $ 5,844 $ 363 $ 314 Service cost 1,376 1,014 14 16 Interest cost 744 548 28 24 Increase due to Plan amendments 564 406 41 -- Plan participants' contributions -- -- 10 6 Actuarial loss 953 1,530 7 16 Benefits paid (159) (40) (19) (13) -------- ------- ----- ----- Benefit obligation at end of year $ 12,780 $ 9,302 $ 444 $ 363 -------- ------- ----- ----- Change in Plan Assets Fair value of plan assets at beginning of year $ 5,103 $ 4,757 $ -- $ -- Actual return on plan assets (437) (69) -- -- Employer contributions 1,526 455 9 7 Plan participants' contributions -- -- 10 6 Benefits paid (159) (40) (19) (13) -------- ------- ----- ----- Fair value of plan assets at end of year $ 6,033 $ 5,103 $ -- $ -- -------- ------- ----- ----- Underfunded status of the plan $ (6,747) $(4,199) $(444) $(363) Unrecognized prior service cost 1,197 764 (153) (168) Unrecognized net actuarial loss (gain) 2,609 755 (81) (128) -------- ------- ----- ----- Accrued benefit cost $ (2,941) $(2,680) $(678) $(659) ======== ======= ===== =====
FINANCIAL GUARANTY PLAN Defined Benefit Plan 2001 ------------------- Change in Benefit Obligation Benefit obligation at beginning of period $ 14,431 Service cost 2,531 Interest cost 1,060 Curtailments/settlements (771) Actuarial gain 1,563 Benefits paid (1,052) -------- Benefit obligation at end of year $ 17,762 -------- Change in Plan Assets Fair value of plan assets at beginning of period $ 3,551 Actual return on plan assets (1,250) Employer contributions 1,311 Plan participants' contributions -- Benefits paid (392) -------- Fair value of plan assets at end of year $ 3,220 -------- Underfunded status of the plan $(14,542) Unrecognized transition obligation 8 Unrecognized prior service cost 2,218 Unrecognized net actuarial loss (gain) 386 -------- Accrued benefit cost $(11,930) ========
The components of net defined benefit and net periodic postretirement benefit costs are as follows (in thousands):
RADIAN PLANS Defined Benefit Plan Postretirement Benefit Plan ----------------------------- ---------------------------- 2001 2000 1999 2001 2000 1999 ------- ------- ----- ---- ---- ---- Service cost $ 1,376 $ 1,014 $ 797 $ 14 $ 16 $ 19 Interest cost 744 548 383 28 24 21 Expected return on plan assets (461) (422) (320) -- -- -- Amortization of prior service cost 132 98 69 (6) (11) (11) Recognized net actuarial loss (gain) 34 17 10 (8) (10) (8) ------- ------- ----- ---- ---- ---- Net periodic benefit cost $ 1,825 $ 1,255 $ 939 $ 28 $ 19 $ 21 ======= ======= ===== ==== ==== ====
Defined Benefit Plan FINANCIAL GUARANTY PLAN 2001 -------------------- Service cost $ 2,531 Interest cost 1,060 Expected return on plan assets (355) Amortization of prior service cost 438 Amortization of transition obligation 2 Recognized net actuarial (gain) loss (119) ------- Net periodic benefit cost $ 3,557 Curtailment/settlement charge 2,954 ------- Total financial statement impact $ 6,511 =======
Assumptions used to determine net pension and net periodic postretirement benefit costs are as follows:
RADIAN PLANS Defined Benefit Plan Postretirement Benefit Plan ------------------------------- ------------------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- Weighted average assumptions as of December 31: Discount rate 7.00% 7.50% 7.50% 7.00% 7.25% 7.50% Expected return on plan assets 8.50% 8.50% 8.50% -- -- -- Rate of compensation increase 6.00% 6.00% 4.00% -- -- --
Defined Benefit Plan FINANCIAL GUARANTY PLAN 2001 -------------------- Weighted average assumptions as of December 31: Discount rate 7.00% Expected return on plan assets 8.50% Rate of compensation increase 6.00%
Due to the nature of the postretirement benefit plan, no increase is assumed in the Company's obligation due to any increases in the per capita cost of covered health care benefits. In addition to pension benefits, Financial Guaranty provides certain healthcare benefits for retired employees. Certain employees may be eligible for these benefits if they reach retirement age while working for Financial Guaranty. The postretirement benefit cost for 2001, was $287,000 and includes service cost, interest cost and amortization of the transition obligation and prior service cost. At December 31, 2001, the accumulated postretirement benefit obligation under the Financial Guaranty Plan was $1,296,000 and was not funded. At December 31, 2001, the discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and the health care trend was 9.5%, graded to 5.5% after 8 years. The one-percentage point change in assumed healthcare cost trend rates would have the following effects on the Financial Guaranty postretirement plan:
1-Percentage 1-Percentage (in thousands) Point Increase Point Decrease -------------- -------------- Effect on total of service and interest components $ 52 $ (41) Effect on postretirement benefit costs 230 (184)
In addition to the defined benefit plan, the nonqualified executive retirement plan, and the postretirement benefit plan, the Company also maintains a Savings Incentive Plan, which covers substantially all full-time and all part-time employees of Radian Group, Radian Guaranty and RadianExpress employed for a minimum of 90 consecutive days. Participants can contribute up to 15% of their base earnings as pretax contributions. The Company will match at least 25% of the first 5% of base earnings contributed in any given year. These matching funds are subject to certain vesting requirements. The expense to the Company for matching funds for the years ended December 31, 2001, 2000 and 1999 was $1,511,000, $1,094,000 and 1,220,000, respectively. Financial Guaranty also has a Savings Incentive Plan. Under the Plan, employees of Financial Guaranty can contribute up to 15% of their base earnings as pretax contributions. Financial Guaranty will match 50% of the first 6% of base salary made to the plan by eligible employees. The expense to Financial Guaranty in 2001, since acquisition, was $219,000. 11. COMMITMENTS AND CONTINGENCIES In December 2000, a complaint seeking class action status on behalf of a nationwide class of home mortgage borrowers was filed against the Company in the United States District Court for the Middle District of North Carolina (Greensboro Division). The complaint alleges that the Company violated Section 8 of the Real Estate Settlement Procedures Act ("RESPA") which generally prohibits the giving of any fee, kickback or thing of value pursuant to any agreement or understanding that real estate settlement services will be referred. The complaint asserts that the pricing of pool insurance, captive reinsurance, contract underwriting, performance notes and other, unidentified "structured transactions," should be interpreted as imputed kickbacks made in exchange for the referral of primary mortgage insurance business, which, according to the complaint, is a settlement service under RESPA. The complaint seeks injunctive relief and damages of three times the amount of any mortgage insurance premiums paid by persons who were referred to the Company pursuant to the alleged agreement or understanding. The plaintiffs in the lawsuit are represented by the same group of plaintiffs' lawyers who last year filed similar lawsuits against other providers of primary mortgage insurance in federal court in Georgia. The Georgia court dismissed those lawsuits for failure to state a claim. Three of those lawsuits were settled prior to appeal; two are currently on appeal. The Company has responded to the complaint by filing a motion to dismiss. Because this case is at a very early stage, it is not possible to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential loss. A similar action focusing on pool insurance was filed in February 2001 in the United States District Court for the Eastern District of Texas. In addition to the above, the Company is involved in certain litigation arising in the normal course of its business. The Company is contesting the allegations in each such other action and believes, based on current knowledge and consultation with counsel, that the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. In conjunction with the acquisition of Financial Guaranty, the Company has guaranteed payments of up to $25.0 million of a revolving credit facility issued to Sherman Financial Group LLC ("Sherman"), a 45.5%-owned affiliate of Financial Guaranty. As of December 31, 2001, there were no outstanding amounts under this facility. Mortgage Insurance utilizes its underwriting skills to provide an outsource contract underwriting service to its customers. Mortgage Insurance often gives recourse to its customers on loans it underwrites for compliance. If the loan does not meet agreed-upon guidelines and is not salable in the secondary market for that reason, Mortgage Insurance agrees to remedy the situation either by placing mortgage insurance coverage on the loan, by purchasing the loan, or indemnifying the loan against future loss. Purchasing the loan would subject the Company to interest rate risk. During 2001, less than 1% of all loans were subject to these remedies and the costs associated with these remedies were immaterial. The Company is a party to reinsurance agreements with all the four largest primary financial guaranty insurance companies. The Company's facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria which are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with the New York Insurance Law and to maintain a specified claims-paying ability or financial strength rating for the particular insurance subsidiary or (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements. Upon the occurrence of the conditions set forth in (ii) above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement. The Company leases office space for use in its operations. Net rental expense in connection with these leases total $6,155,000, $2,970,000 and $3,145,000 in 2001, 2000 and 1999, respectively. The commitment for noncancelable operating leases in future years is as follows (in thousands): 2002 $10,092 2003 8,993 2004 7,669 2005 7,157 2006 6,198 Thereafter 55,622 ------- $95,732 =======
The commitment for noncancelable operating leases in future years has not been reduced by future minimum sublease rental payments aggregating approximately $52,798,000. 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, 2001 Quarter except per-share information) ------------------------------------------------------------ First Second Third Fourth Year -------- -------- --------- --------- -------- Net premiums written $160,249 $199,203 $ 183,938 $ 240,254 $783,644 Net premiums earned 155,763 179,241 180,490 200,386 715,880 Net investment income 28,020 39,455 39,956 40,056 147,487 Equity in net income of affiliates 12,044 12,760 7,389 9,116 41,309 Provision for losses 49,272 52,310 50,968 55,586 208,136 Policy acquisition and other operating expenses 40,998 54,938 54,476 66,366 216,778 Net gains (losses) 1,823 748 (1,299) (225) 1,047 Net income 80,157 92,677 91,532 96,053 360,419 Net income per share (1) (2) (3) $ 0.96 $ 0.97 $ 0.96 $ 1.00 $ 3.88 Average shares outstanding (1) (3) 83,038 94,854 94,784 95,157 91,958
2000 Quarter ------------------------------------------------------------ First Second Third Fourth Year -------- -------- --------- --------- -------- Net premiums written $135,606 $128,936 $136,147 $ 143,583 $544,272 Net premiums earned 127,297 129,539 130,236 133,799 520,871 Net gains 851 246 2,313 769 4,179 Net income 58,600 61,858 64,069 64,411 248,938 Net income per share (1) (2) (3) $ 0.77 $ 0.80 $ 0.83 $ 0.83 $ 3.22 Average shares outstanding (1) (3) 75,278 76,276 76,383 76,760 76,298
(1) Diluted net income per share and average shares outstanding per SFAS No. 128, "Earnings Per Share." See note 1. (2) Net income per share is computed independently for each period presented. Consequently, the sum of the quarters may not equal the total net income per share for the year. (3) All share and per share amounts have been restated to reflect a 2-for-1 stock split in 2001. See note 1. 13. INVESTMENT IN AFFILIATES As a result of the acquisition of Financial Guaranty, the Company owns a 46.0% interest in Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and a 45.5% interest in Sherman Financial Group LLC ("Sherman"). C-BASS is engaged in the purchasing, servicing and/or securitization of special assets, including sub-performing/non-performing and seller-financed residential mortgages, real estate and subordinated residential mortgage-based securities. Sherman conducts a business that focuses on purchasing and servicing delinquent unsecured consumer assets. At December 31, 2001, C-BASS had total assets of $1,290,425,000 and total liabilities of $1,005,907,000. C-BASS had net income for 2001 of $86,481,000. At December 31, 2001, Sherman had total assets of $287,826,297 and total liabilities of $203,051,815. Sherman had net income for 2001 of $10,624,267. The Company owns a 36.5% interest in EIC Corporation Ltd. ("Exporters"), an insurance holding company which, through its wholly-owned insurance subsidiary licensed in Bermuda, insures foreign trade receivables. At December 31, 2001, Exporters had total assets of $168,924,333 and total liabilities of $114,239,333. Exporters had a loss for 2001 of $2,240,000. The Company accounts for its investment in these affiliates in accordance with the equity method of accounting as the control of these affiliates does not rest with the Company and since the other shareholders have substantial participating rights. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between two willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices available. In those cases, fair values are based on estimates using present value or other valuation methodologies. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Fixed Maturity Securities - The fair values of fixed maturity securities and equity securities, are based on quoted market prices or dealer quotes. For investments that are not publicly traded, management has made estimates of fair value that consider investees' financial results, conditions and prospects, and the values of comparable public companies. Trading Securities - The fair values of trading securities are based on quoted market prices, dealer quotes or estimates using quoted market prices for similar securities. Short-Term Investments - Fair values of short-term investments are assumed to equal cost. Other Invested Assets - The fair value of other invested assets, residential mortgage-backed securities, is based on the present value of the estimated net future cash flows, including annual distributions and net cash proceeds from the exercise of call rights, using relevant market information. Unearned Premiums - In the mortgage insurance business, as the majority of the premiums received are cash basis, the fair value is assumed to equal the book value. The fair value of unearned premiums in the financial guaranty insurance business, net of prepaid reinsurance premiums, is based on the estimated cost of entering into a cession of the entire portfolio with third-party reinsurers under current market conditions, adjusted for ceding commissions based on current market rates. Reserve for Losses - The carrying amount is a reasonable estimate of the fair value. Long-Term Debt - The fair value is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the Company for debt of the same remaining maturities. Redeemable Preferred Stock - The redeemable preferred stock is valued at the redemption value at the mandatory redemption date.
December 31 ---------------------------------------------------- 2001 2000 ------------------------ ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- Assets: Fixed maturity securities $3,129,718 $3,149,482 $1,654,633 $1,675,834 Trading Securities 21,659 21,659 -- -- Short-term investments 210,788 210,788 95,824 95,824 Other invested assets 7,310 7,310 -- -- Liabilities: Unearned premiums 513,932 456,018 77,241 77,241 Reserve for losses 588,643 588,643 390,021 390,021 Long-term debt 324,076 346,333 -- -- Redeemable preferred stock 40,000 40,000 40,000 40,000
REPORT ON MANAGEMENT'S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimations and judgments as required. The Company's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that the Company and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner that is above reproach. Deloitte & Touche LLP, independent accountants, is retained to audit the company's financial statements. Their accompanying report is based on audits conducted in accordance with auditing standards generally accepted in the United States of America, which include the consideration of the company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The board of directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. /s/ Frank P. Filipps Chairman and Chief Executive Officer /s/ C. Robert Quint Executive Vice President and Chief Financial Officer /s/ John J. Calamari Vice President and Corporate Controller INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Radian Group Inc. Philadelphia, Pennsylvania We have audited the consolidated balance sheets of Radian Group Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Radian Group Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 15, 2002 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is a "Safe harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained herein that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve certain risks and uncertainties including, but not limited to: the possibility that interest rates may increase rather than remain stable or decrease; the possibility that housing demand may decrease for any number of reasons, some of which may be out of the control of the Company, including changes in interest rates, adverse economic conditions, or other reasons; the Company's market share may decrease as a result of changes in underwriting criteria by the Company or its competitors, or other reasons; performance of the financial markets generally, changes in the demand for and market acceptance of the Company's products, increased competition from government programs and the use of substitutes for mortgage insurance, changes in government regulation or tax laws that may effect one or more of the Company's businesses, changes in investor perceptions regarding the strength of financial guaranty providers and the guaranty offer by such providers, changes in investor concern regarding the credit quality of municipalities and corporations, including the need or desirability for financial guaranty insurance at all or as an alternative for other credit enhancement; and changes in general financial conditions. Investors are also directed to other risks discussed in documents filed by the Company with the Securities and Exchange Commission. 2001 COMPARED TO 2000 Results of Consolidated Operations Net income for 2001 was $360.4 million, a 44.8% increase compared to $248.9 million for 2000. The improvement in net income was a result of an increase in earned premiums and investment income and the inclusion of equity in net income of affiliates, as a result of the Enhance Financial Services Group Inc. ("Financial Guaranty") acquisition, partially offset by increases in the provision for losses, policy acquisition costs and other operating expenses. As a result of the acquisition of Financial Guaranty on February 28, 2001, net income for 2001 included the results of operations from March 2001 through December 2001 for Financial Guaranty, which contributed $81.3 million to net income and which is included as a component of mortgage services and financial guaranty net income. Consolidated earned premiums of $715.9 million increased $195.0 million or 37.4% from $520.9 million for 2000. Financial Guaranty contributed $106.5 million of this increase. Net investment income increased from $82.9 million in 2000 to $147.5 million in 2001. This increase of $64.5 million or 77.8% included $50.4 million from Financial Guaranty. Equity in net income of affiliates was $41.3 million for 2001. The provision for losses of $208.1 million increased $53.8 million or 34.9% from the $154.3 million in 2000, with Financial Guaranty contributing $29.0 million of the increase. Policy acquisition and other operating expenses increased by $108.2 million or 99.5% to $216.8 million in 2001 from $108.6 million in 2000. Financial Guaranty contributed $44.9 million of this increase. Interest expense for 2001 was $17.8 million primarily related to the issuance of long-term debt during 2001 as described in note 5 of Notes to Consolidated Financial Statements. The Company's effective tax rate was 28.7% for 2001 compared to 29.4% for 2000. Mortgage Insurance - Results of Operations Net income for 2001 was $280.0 million, a $31.1 million or 12.5% increase from $248.9 in 2000. This increase resulted from improvements in net premiums earned, net investment income and other income, offset by a higher provision for losses and an increase in policy acquisition costs and other operating expenses. Mortgage Insurance is dependent on a small number of lenders for providing a substantial portion of its business. Mortgage Insurance's top ten lenders were responsible for 46.1% of the direct primary risk in force at December 31, 2001. The top ten lenders were also responsible for 45.0% of primary new insurance written in 2001. Consistent with the rest of the private mortgage insurance industry, the Company's highest state concentration of risk is in California. As of December 31, 2001, California accounted for 16.6% of Mortgage Insurance's total direct primary insurance in force and 11.3% of Mortgage Insurance's total direct pool insurance in force. In addition, California accounted for 16.0% of Mortgage Insurance's direct primary new insurance written for the year ended December 31, 2001. The largest single customer of Mortgage Insurance (including branches and affiliates of such customer), measured by new insurance written, accounted for 12.6% of new insurance written during 2001, compared to 11.2% in 2000 and 12.2% in 1999. The concentration of business with lenders may increase or decrease as a result of many factors. These lenders may reduce the amount of business currently given to Mortgage Insurance or cease doing business with it altogether. Mortgage Insurance's master policies and related lender agreements do not, and by law cannot, require its lenders to do business with it. The loss of business from a major lender could materially adversely affect Mortgage Insurance's and the Company's business and financial results. New primary insurance written for 2001 was $44.8 billion, a 79.5% increase from the $24.9 billion written in 2000. This increase in primary new insurance written volume was primarily due to a substantial increase in new insurance written volume in the private mortgage insurance industry compared to 2000. Mortgage Insurance's market share increased to 15.6% compared to 15.2% in 2000. The Company believes that this market share increase was due, in part, to an increase in its share of new insurance written under structured transactions, which are included in industry new insurance written figures. During 2001 Mortgage Insurance wrote $8.7 billion of such transactions compared to $1.2 billion in 2000. The Company's participation in the structured transactions market is likely to vary from year to year due to the competitive bidding process associated with this business, as well as the fluctuating supply of such transactions from period to period. During 2001, the Company wrote $255.4 million of pool insurance risk compared to $187.9 million in 2000. The majority of the pool insurance outstanding relates to a group of structured transactions composed primarily of Fannie Mae and Freddie Mac eligible conforming mortgage loans (known as "GSE Pool" loans). This business contains loans with loan-to-value ratios above 80%, which have primary insurance that places the pool insurance in a secondary loss position and loans with loan-to-value ratios of 80% and below for which the pool coverage is in a first loss position. The performance of this business written in prior years has been better than anticipated although the historical performance might not be an indication of future performance. The Company's mortgage insurance volume was positively impacted by low interest rates in 2001, which affected the entire mortgage industry. The trend toward lower interest rates, which began in the fourth quarter of 2000, caused refinancing activity during 2001 to increase significantly and contributed to the increase in the mortgage insurance industry new insurance written volume in 2001. The~Company's refinancing activity as a percentage of primary new insurance written was 40.3% compared to 14.0% in 2000. The persistency rate, which is defined as the percentage of insurance in force that is renewed in any given year, was 63.3% for 2001 compared to 78.2% for 2000. This decrease was consistent with the increased level of refinancing activity, which started in the fourth quarter of 2000 and continued throughout 2001, and has caused cancellation rates to increase. The expectation for 2002 is lower industry volume and higher persistency rates, influenced by relatively higher interest rates. The Office of Federal Housing Enterprise Oversight issued new risk based capital regulations for Fannie Mae and Freddie Mac, which take effect September 13, 2002. The most relevant provision to the Company is a distinction between AAA rated insurers and AA rated insurers. The new regulations would impose a credit haircut that the Government Sponsored Entities ("GSEs") are given for exposure ceded to AAA insurers by 3.5% and to AA insurers by 8.75%. This would be phased in over a ten-year period commencing on the effective date of the regulation. The Company believes that this distinction will not have a material effect on its business. The Company insures non-traditional loans, specifically Alternative A and A minus loans (collectively, referred to as "non-prime" business). Alternative A borrowers have an equal or better credit profile than the Company's typical insured borrowers, but these loans are underwritten with reduced documentation and verification of information. The Company typically charges a higher premium rate for this business due to the reduced documentation, but the Company does not consider this business to be significantly more risky than the Company's normal primary business. The A minus loan programs typically have non-traditional credit standards that are less stringent than standard credit guidelines. To compensate for this additional risk, the Company receives a higher premium for insuring this product that the Company believes is commensurate with the additional default risk. During 2001, non-prime business accounted for $14.3 billion or 31.8% of Mortgage Insurance's new primary insurance written as compared to $5.4 billion or 21.8% for the same period in 2000. At December 31, 2001, non-prime insurance in force was $18.2 billion or 16.8% of total insurance in force as compared to $8.4 billion or 8.3% of insurance in force a year ago. In the third quarter of 2000, the Company began to insure mortgage-related assets in a Pennsylvania domiciled insurer, Radian Insurance Inc. ("Radian Insurance"). Radian Insurance is rated AA by S&P and Fitch and Aa3 by Moody's and was formed to write credit insurance and financial guaranty insurance on assets that are not permitted to be insured by monoline mortgage guaranty insurers. Such assets include manufactured housing loans, second mortgages, home equity loans and mortgages with loan-to-value ratios above 100%. During 2001, Radian Insurance wrote $3.4 billion of insurance compared to $1.6 billion in 2000. Risk in force at December 31, 2001 was $348.3 million compared to $211.0 million of risk at December 31, 2000. Such business is similar to mortgage guaranty insurance, however, the structures of the deals vary and thus premium rates and commensurate risk levels will vary from deal to deal. The performance of this business is too young to determine whether the premium rates charged will compensate the Company for the anticipated level of risk. Beginning in October 2001, Radian Insurance entered into a reinsurance agreement with one of its affiliates, Radian Asset Assurance, whereby Radian Insurance ceded substantially all of the insurance business and premium associated with certain obligations secured by mortgage-backed securities and manufactured housing loans. Because most Financial Guaranty business on mortgage related assets will be written in Radian Asset Assurance and Amerin Guaranty will be the primary writer of second mortgage insurance in the future, the business written by Radian Insurance will likely be substantially reduced in 2002. Net premiums earned in 2001 were $609.4 million, an $88.5 million or 17.0% increase from $520.9 million for 2000. This increase, which was greater than the increase in insurance in force, reflected the premiums earned in Radian Insurance of $38.8 million in 2001, and the change in the mix of new insurance written volume originated by the Company throughout 2001 combined with the increase in insurance in force. This change in mix included a higher percentage of non-prime business. This type of business has higher premium rates, which are commensurate with the increased level of risk associated with the insurance. The insurance in force growth resulting from strong new insurance volume during 2001 was offset by the decrease in persistency levels. Direct primary insurance in force increased 7.0% from $100.9 billion at December 31, 2000 to $107.9 billion at December 31, 2001. GSE pool risk in force also grew to $1.2 billion at December 31, 2001 from $1.1 billion at the end of 2000. Total pool risk in force grew to $1.6 billion from $1.5 billion at the end of 2000. Mortgage Insurance and other companies in the industry have entered into risk-sharing arrangements with various customers that are designed to allow the customer to participate in the risks and rewards of the mortgage insurance business. One such product is captive reinsurance, in which a mortgage lender establishes a mortgage reinsurance company that assumes part of the risk associated with that lender's insured book of business. In most cases, the risk assumed by the reinsurance company is an excess layer of aggregate losses that would be penetrated only in a situation of adverse loss development. For 2001, premiums ceded under captive reinsurance arrangements were $55.7 million, or 9.1% of total premiums earned during 2001, as compared to $39.6 million, or 7.6% of total premiums earned for the same period of 2000. Net primary insurance written under captive reinsurance arrangements was $14.7 billion, or 32.9% of total new primary insurance written in 2001 as compared to $8.1 billion, or 32.6% of total new primary insurance written in 2000. Net investment income was $97.1 million, a 17.1% increase over the $82.9 million reported for 2000. This increase was a result of continued growth in invested assets primarily due to positive operating cash flows and the allocation of interest income from net financing activities. The Company has continued to invest some of its new operating cash flow in tax-advantaged securities, primarily municipal bonds, although its investment policy allows the purchase of various other asset classes, including common stock and convertible securities. The Company's intent is to target the common equity exposure at a maximum of 5% of the investment portfolio's market value while the investment-grade convertible securities and investment-grade asset-backed securities exposures are each targeted not to exceed 10%. Net realized gains on sales of investments were $5.8 million for the year ended December 31, 2001 compared to $4.2 million for the comparable period of 2000. Net realized losses from the change in the fair value of Mortgage Insurance's derivative instruments were $1.3 million for 2001. The provision for losses was $179.1 million for 2001, an increase of $24.8 million or 16.1% from 2000. In addition to increases in business volumes, this increase reflects an increase in the number of delinquent loans as a result of the maturation of the books of business combined with an overall increase in delinquencies on both the prime and non-prime books of business as a result of the slowing economy. Claim activity is not spread evenly throughout the coverage period of a book of business. Relatively few claims are received during the first two years following issuance of the policy. Historically, claim activity has reached its highest level in the third through fifth years after the year of loan origination. Approximately 66.9% of the primary risk in force and 59.3% of the pool risk in force at December 31, 2001 had not yet reached its anticipated highest claim frequency years. The overall delinquency rate at December 31, 2001 was 3.5% compared to 2.4% at December 31, 2000. The increase in the overall delinquency rate was primarily a result of the slowing economy which produced higher levels of unemployment. A continued weakening of the economy could negatively impact the overall delinquency rates, which could result in an increase in the provision for losses. The number of delinquencies rose from 26,520 at December 31, 2000 to 41,147 at December 31, 2001 and the average loss reserve per delinquency declined from $14,707 at the end of 2000 to $11,291 at December 31, 2001, although the reserve as a percentage of risk in force rose to 169 basis points at December 31, 2001 from 148 basis points at the end of 2000. The delinquency rate in California was 1.9% (including pool) at December 31, 2001 as compared to 1.5% at year end 2000 and claims paid in California during 2001 were $7.1 million, representing approximately 7.7% of the total claims as compared to 16.1% for the same period of 2000. California represented approximately 16.4% of primary risk in force at December 31, 2001 as compared to 16.8% at December 31, 2000. The delinquency rate in Florida was 3.3% (including pool) at December 31, 2001 as compared to 2.7% at December 31, 2000 and claims paid in Florida during 2001 were $6.5 million, representing approximately 7.0% of total claims as compared to 13.6% for 2000. Florida represented approximately 7.4% of primary risk in force at December 31, 2001 the same as at year-end 2000. No other state represented more than 6.4% of Mortgage Insurance's primary risk in force at December 31, 2001. Mortgage Insurance has reported an increased number of delinquencies on non-prime business insured beginning in 1997. Although the delinquency rate on this business is higher than on the prime book of business, the higher premium rates charged are expected to compensate for the increased level of risk. The number of delinquent non-prime loans at December 31, 2001 was 7,704, which represented 24.8% of the total number of delinquent primary loans, as compared to 2,690 or 13.1% of delinquent primary loans at December 31, 2000. The delinquency rate on this business rose from 4.1% at December 31, 2000 to 5.5% at December 31, 2001. The delinquency rate on prime business was 3.1% and 2.3% at December 31, 2001 and 2000, respectively. At December 31, 2001, the delinquency rate on the Alternative A business was 4.5% as compared to 2.9% at December 31, 2000 and Alternative A delinquencies represented 34.6% of the total number of non-prime delinquent loans. The delinquency rate on A-minus business was 6.3% at December 31, 2001 as compared to 6.0% at December 31, 2000. Direct losses paid during 2001 increased to $97.7 million as compared to $93.3 million during 2000. Underwriting and other operating expenses were $154.4 million for 2001, an increase of $45.8 million or 42.1% from the $108.6 million reported in 2000. These expenses consisted of policy acquisition expenses, which relate directly to the acquisition of new business, and other operating expenses, which primarily represent contract underwriting expenses, overhead and administrative costs. Policy acquisition costs were $62.4 million in 2001, an increase of $10.9 million from 2000. This reflects an increase in expenses to support the higher new insurance written volume during 2001 and the continued development of marketing and e-commerce efforts undertaken by the Company. Other operating expenses of $92.0 million for 2001 increased by $34.8 million, representing a 60.9% increase from 2000. This amount reflects an increase in expenses related to contract underwriting. Contract underwriting expenses for 2001 were $44.6 million, a 120.2% increase from the $20.3 million reported in 2000. This increase in contract underwriting expenses reflected the increasing demand for this service as mortgage origination volume increased. Consistent with the increase in contract underwriting expenses, other income including income related to contract underwriting services, also increased to $20.4 million in 2001, up from $7.4 million in 2000. During 2001, loans underwritten via contract underwriting accounted for 34.5% of applications, 32.0% of commitments, and 25.8% of certificates issued by Mortgage Insurance as compared to 30.1%, 26.2% and 19.4%, respectively, in 2000. Interest expense for 2001 was $10.5 million, which primarily represented allocation of interest on the $250 million of long-term debt issued during 2001. The effective tax rate for 2001 was 27.9% compared to 29.4% in 2000. Mortgage Services - Results of Operations The mortgage services results include the operations of RadianExpress.com Inc. ("RadianExpress") and the asset-based businesses, conducted through Financial Guaranty's minority owned subsidiaries, Sherman Financial Services Group LLC ("Sherman") and Credit-Based Asset Servicing and Securitization LLC ("C-BASS"). The Company owns a 46% interest in C-BASS and a 45.5% interest in Sherman. C-BASS is engaged in the purchasing, servicing and/or securitizing of special assets, including sub-performing/non-performing and seller-financed residential mortgages, real estate and subordinated residential mortgage-based securities. Sherman conducts a business that focuses on purchasing and servicing delinquent unsecured consumer assets. Net income for 2001 was $24.3 million. Equity in net income of affiliates (pre-tax) was $42.5 million. C-BASS accounted for $38.1 million (pre-tax) of the total income from affiliates in 2001. These results could vary from period to period due to a significant portion of C-BASS's income being generated from sales of mortgage-backed securities in the capital markets. RadianExpress contributed $16.0 million of other income and $17.4 million of operating expenses for 2001. RadianExpress processed approximately 402,000 applications during 2001 with approximately 37,000 of the transactions processed related to net funding services, whereby RadianExpress receives and disburses mortgages funded on behalf of its customers. Financial Guaranty Insurance - Results of Operations The financial guaranty insurance operations are conducted through Financial Guaranty and primarily involve the direct insurance and reinsurance of municipal bonds and structured finance obligations. Reinsurance is assumed primarily from four primary monoline financial guaranty insurers: MBIA Insurance Corporation, Ambac Assurance Corporation, Financial Guaranty Insurance Company and Financial Security Assurance Inc. ("Monolines"). The Company's consolidated results of operations include ten months of operating results from Financial Guaranty, since its acquisition occurred at the end of February 2001. As such, comparative information is not included in the discussion. Radian Reinsurance Inc., a subsidiary of Financial Guaranty ("Radian Re"), currently derives substantially all of its reinsurance premium revenues from the four monolines. Approximately 42.0% of the total financial guaranty gross premiums were derived from these four monolines in 2001. A substantial reduction in the amount of insurance ceded by one or more of these four principal clients could have a material adverse effect on Radian Re's gross written premiums and, consequently, its results from operations. Net income for 2001 was $56.1 million. Net premiums written and earned during 2001 were $143.2 million and $106.5 million, respectively. Net premiums written consisted of $73.2 million of reinsurance premiums, $47.7 million of premiums from the direct financial guaranty of municipal and non-municipal obligations, and $22.4 million of trade credit insurance and reinsurance. Net premiums earned for 2001 include $58.5 million of reinsurance, $25.9 million in direct financial guaranty, and $22.0 million of trade credit. Included in net premiums earned for the year were refundings of $6.7 million. Net investment income was $50.3 million for the year. The provision for losses was $29.0 million for 2001, which represented 27.2% of earned premium. Policy acquisition costs were $21.8 million for 2001 and other operating expenses were $21.6 million for the same period. Acquisition and other operating expenses together resulted in an expense ratio of 40.8%. Interest expense of $6.0 million for 2001 represented interest allocated on the Company's debt financings as well as on the $75.0 million of long-term debt and on $173.7 million of short-term debt that was retired in May 2001. Net realized gains on sales of investments were $2.0 million for 2001. Net realized losses from the change in the fair value of derivative instruments, primarily credit default swaps were $4.4 million for 2001. The effective tax rate for 2001 was 27.7%. Other Two wholly-owned subsidiaries of Financial Guaranty, Singer Asset Finance Company, L.L.C. ("Singer") and Enhance Consumer Services LLC ("ECS"), which had been engaged in the purchase, servicing, and securitization of assets including state lottery awards, structured settlement payments and viatical settlements, are currently operating on a run-off basis. Their operations consist of servicing the prior originations of non-consolidated special purpose vehicles and the results of these subsidiaries are not expected to be material to the financial results of the Company. Another insurance subsidiary, Van-American Insurance Company, Inc., is engaged on a run-off basis, in reclamation bonds for the coal mining industry and surety bonds covering closure and post-closure obligations of landfill operators. Such business is not expected to be material to the financial results of the Company. At December 31, 2001, the Company, through its ownership of Financial Guaranty owned an indirect 36.5% equity interest in Exporters Insurance Company Ltd., an insurer of primarily foreign trade receivables for multinational companies. Financial Guaranty provides significant reinsurance capacity to this joint venture on a quota-share, surplus share and excess-of-loss basis. 2000 COMPARED TO 1999 Mortgage Insurance - Results of Operations Net income for 2000 was $248.9 million, a 68.0% increase compared to $148.1 million for 1999. However, net income for 1999 included merger expenses (net of tax) of $32.7 million and without these merger expenses, net income for 1999 was $180.8 million as compared to $248.9 million for 2000, an increase of 37.7% or $68.1 million. This improvement in net income, excluding merger expenses, was a result of growth in net premiums earned and net investment income combined with a lower provision for losses and a reduction in policy acquisition costs and other operating expenses. New primary insurance written during 2000 was $24.9 billion, a 25.0% decrease compared to $33.3 billion for 1999. This decrease in the Company's primary new insurance written volume in 2000 was partially due to a 14.0% decrease in new insurance written volume in the private mortgage insurance industry compared to 1999. In addition, the Company's market share of the industry decreased to 15.2% for the year ended December 31, 2000 as compared to 17.5% for the same period of 1999. The Company believes the market share decline was due in part to the reduction in business provided by a few of the largest national accounts, which rebalanced their mortgage insurance allocation after the merger. In addition, the Company believes that certain large structured transactions written primarily by other companies within the industry are included in industry new insurance written figures. For the year ended December 31, 2000, Mortgage Insurance wrote $1.2 billion of such structured transactions. In 2000, the Company reduced the volume of pool insurance it wrote to $187.9 million of risk written as compared to $421.2 million in 1999. Most of this pool insurance volume related to the GSE Pool business. Mortgage insurance industry volume in 2000 was negatively impacted by relatively higher interest rates, which affected the entire mortgage industry for most of the year. The trend toward higher interest rates, which began in the third quarter of 1999, caused refinancing activity during 2000 to decline to normal levels and contributed to the decrease in the mortgage insurance industry new insurance written volume for 2000. The Company's refinancing activity as a percentage of primary new insurance written was 14.0% for 2000 as compared to 27.0% for 1999. However, a decrease in interest rates during the fourth quarter of 2000 resulted in an increase in refinancing activity for the Company during the quarter to 17.0% of primary new insurance written as compared to 12.0% for the third quarter of 2000. The persistency rate, which is defined as the percentage of insurance in force that is renewed in any given year, was 78.2% for 2000 as compared to 75.0% for 1999. This increase was consistent with the declining level of refinancing activity during most of 2000, which caused the cancellation rate to decrease. During 2000, the Company's non-prime business accounted for $5.4 billion or 21.8% of Company's new primary insurance written as compared to $3.5 billion or 10.6% for the same period in 1999. During 2000, Radian Insurance wrote $1.6 billion of insurance, which represented $211.0 million of risk. Net premiums earned in 2000 were $520.9 million, a 10.2% increase compared to $472.6 million for 1999. This increase, which was greater than the increase in insurance in force, reflected the change in the mix of new insurance written volume originated by the Company during the second half of 1999 and throughout 2000. This change in mix included a higher percentage of loans with loan-to-value ratios of 95% or higher and non-prime business. The Company's higher loan-to-value activity was 45.0% for 2000 as compared to 41.0% for 1999 and the non-prime business accounted for 21.8% of the Company's new primary insurance written in 2000 as compared to 10.6% for 1999. The reduced level of refinancing activity and the resulting increase in persistency led to an increase in direct primary insurance in force during 2000 of 3.9%, from $97.1 billion at December 31, 1999 to $100.9 billion at December 31, 2000. GSE pool risk in force also grew to $1.1 billion at December 31, 2000, an increase of 4.2% for the year. For 2000, premiums ceded under captive reinsurance arrangements were $39.6 million, or 7.0% of total premiums earned during 2000, as compared to $27.5 million, or 5.8% of total premiums earned for the same period of 1999. New primary insurance written under captive reinsurance arrangements was $8.1 billion, or 32.6% of total new primary insurance written in 2000 as compared to $13.7 billion, or 41.3% of total new primary insurance written in 1999. Net investment income for 2000 was $82.9 million, a 23.3% increase compared to $67.3 million in 1999. This increase was a result of continued growth in invested assets primarily due to positive operating cash flows of $280.0 million during 2000. The Company has continued to invest some of its new operating cash flows in tax-advantaged securities, primarily municipal bonds, common stock and convertible securities. The provision for losses was $154.3 million in 2000, a decrease of 11.4% compared to $174.1 million in 1999. This decrease was due to a reduction from 1999 to 2000 in the percentage of delinquencies on higher loan-to-value loans, which have higher loss reserves per default, and a decrease in loss severity due to strong property value appreciation. Approximately 76.0% of Mortgage Insurance's primary risk in force and almost all of Mortgage Insurance's pool risk in force at December 31, 2000 had not yet reached its anticipated highest claim frequency years. Due to the high cancellation rates and strong new insurance volume in 1998 and the first half of 1999, this percentage of newer risk in force is significantly higher than normal levels. The Company's overall default rate (including pool) at December 31, 2000 was 1.6% as compared to 1.5% at December 31, 1999, while the default rate on the primary business was 2.3% at December 31, 2000 as compared to 2.2% at December 31, 1999. The increase in the Company's overall default rate could have been a result of the slowing economy. The number of defaults rose from 22,151 at December 31, 1999 to 26,520 at December 31, 2000 and the average loss reserve per default declined from $15,071 at the end of 1999 to $14,707 at December 31, 2000. The decrease in average loss reserve per default was primarily the result of a decline in the Company's percentage of higher loan-to-value loans in default which results in a lower overall reserve per default as lower loan-to-value loans are perceived as having a lower risk of claim incidence. The percentage of loans in default with loan-to-value ratios of 90.01% or higher decreased to 45.2% at December 31, 2000 as compared to 47.9% at December 31, 1999. The default rate in California was 1.5% (including pool) at December 31, 2000 as compared to 1.8% at December 31, 1999 and claims paid in California during 2000 were $15.8 million, representing approximately 16.1% of total claims as compared to 26.8% in 1999. California represented approximately 16.8% of primary risk in force at December 31, 2000 as compared to 17.2% at December 1999. The default rate in Florida was 2.7% (including pool) at December 31, 2000 as compared to 3.1% at December 31, 1999 and claims paid in Florida during 2000 were $13.3 million, representing approximately 13.6% of total claims as compared to 13.4% in 1999. Florida represented 7.4% of primary risk in force at December 31, 2000 and 1999. The number of non-prime loans in default at December 31, 2000 was 2,690, which represented 13.1% of the total number of primary loans in default and the default rate on this business was 4.10% as of December 31, 2000 as compared to the primary default rate on Mortgage Insurance's prime business of 2.25% at the end of 2000. Direct losses paid in 2000 were $93.3 million as compared to direct losses paid during 1999 of $88.2 million, an increase of 5.8%. Underwriting and other operating expenses were $108.6 million for 2000, a decrease of 10.5% compared to $121.4 million for 1999. Policy acquisition costs were $51.5 million in 2000, a decrease of 12.4% compared to $58.8 million in 1999. This decrease reflects the synergies achieved as a result of the merger between CMAC and Amerin and the decrease in the level of new insurance written for 2000 as compared to 1999. Other operating expenses for 2000 were $57.2 million, a decrease of 8.8% compared to $62.7 million for 1999. This reflects a decrease in expenses associated with contract underwriting services offset by an increase in expenses associated with the Company's administrative and support functions. Contract underwriting expenses for 2000, included in other operating expenses, were $20.3 million as compared to $32.4 million for 1999, a decrease of 37.5%. However, contract underwriting expenses were $6.8 million for the fourth quarter of 2000 as compared to $6.9 million for the same period in 1999. This $12.1 million decrease in contract underwriting expenses during 2000 reflected the decreased demand for contract underwriting services throughout the first nine months of 2000 as mortgage origination volume declined; however, the increase in expenses for the fourth quarter of 2000 reflected the increasing demand for contract underwriting services as more lenders took advantage of the integration of the contract underwriting process with Freddie Mac's Loan Prospector and Fannie Mae's Desktop Underwriter origination systems to eliminate back offices origination functions, combined with the decrease in interest rates toward the end of 2000 which resulted in an increase in the level of refinanced mortgage origination volume. Consistent with the decline in contract underwriting expenses, other income decreased 24.5% to $7.4 million in 2000 as compared to $11.3 million in 1999. During 2000, loans underwritten via contract underwriting accounted for 30.1% of applications, 26.2% of insurance commitments, and 19.4% of certificates issued by the Company as compared to 22.2% of applications, 18.8% of commitments, and 15.6% of certificates in 1999. During 1999, the Company incurred merger-related expenses of $37.8 million. The Company incurred no additional merger-related expenses in 2000 related to the CMAC/Amerin merger. The effective tax rate for 2000 was 29.4% and, excluding merger costs net of tax of $32.7 million, the effective tax rate for the same period in 1999 was 30.5%. Eliminating the merger expenses of $37.8 million in 1999, operating income accounted for 73.3% of net income in 1999 as compared to 75.3% for the same period in 2000, thus resulting in an increase in effective tax rates for 2000 compared to 1999. Liquidity and Capital Resources The Company's sources of funds consist primarily of premiums and investment income. Funds are applied primarily to the payment of the Company's claims and operating expenses. Cash flows from operating activities for 2001 were $481.1 million as compared to $280.0 million for 2000. The increase resulted from an increase in net premiums written and investment income partially offset by an increase in operating expenses. The 2001 operating cash flows included $61.8 million as the result of the Financial Guaranty acquisition. Positive cash flows are invested pending future payments of claims and other expenses; cash flow shortfalls, if any, are funded through sales of short-term investments and other investment portfolio securities. Stockholder's equity plus redeemable preferred stock of $40.0 million increased from $1.4 billion at December 31, 2000 to $2.3 billion at December 31, 2001. This increase resulted from the issuance of stock and, reduced by expenses, associated with the acquisition of Financial Guaranty of $574.7 million, net income of $360.4 million and proceeds from the issuance of common stock associated with incentive plans of $39.7 million. Offsetting this was $10.1 million of dividends paid, a decrease in the market value of securities available for sale of $14.3 million, net of tax, and the purchase of treasury shares of $5.7 million. As of December 31, 2001, the Company and its subsidiaries had plans to invest in significant information technology and infrastructure upgrades at an estimated cost of approximately $25 million to $30 million over the next two years. Cash flow from operations will be used to fund these expenditures. The Company owns a 46% interest in C-BASS. The Company has not made any capital contributions to C-BASS since the Company acquired its interest in C-BASS in connection with the acquisition of Financial Guaranty. C-BASS has paid $12.8 million of dividends to the Company for the year-to-date period ended December 31, 2001. The Company owns a 45.5% interest in Sherman. The Company has made $15.0 million of capital contributions to Sherman since the Company acquired its interest in Sherman in connection with the acquisition of Financial Guaranty. In conjunction with the acquisition, the Company has guaranteed payment of up to $25.0 million of a revolving credit facility issued to Sherman. At December 31, 2001, there were no outstanding amounts on this facility. Singer and ECS, which were acquired as a result of the Financial Guaranty acquisition, had been engaged in the purchase, servicing and securitization of assets, including state lottery awards, structured settlement payments and viatical settlements. Both Singer and ECS are currently operating on a run-off basis. Their operations consist of servicing the prior originations of non-consolidated special purpose vehicles containing approximately $600.0 million and $568.0 million of off-balance sheet assets and liabilities, respectively. The Company's investment in the non-consolidated special purpose vehicles at December 31, 2001 is $32.0 million and the results of these subsidiaries are not material to the financial results of the Company. The Company obtained long-term financing through privately placed ten-year Senior Unsecured Notes with a face value of $250 million. The notes were issued on May 29, 2001 at an offering price of 99.615% of par value with registration rights and mature on June 1, 2011. The notes bear interest at 7.75% which is payable semi-annually in June and December. Financial Guaranty was party to a credit agreement (as amended, the "Credit Agreement") with major commercial banks providing Financial Guaranty with a borrowing facility aggregating up to $175.0 million, the proceeds of which were used for general corporate purposes. The outstanding principal balance under the Credit Agreement of $173.7 million was retired on May 29, 2001 with proceeds from the Senior Unsecured Notes. On October 12, 2001, pursuant to the terms of the offering for the privately placed Senior Unsecured Notes, the Company commenced an offer to exchange the privately placed notes for notes (on substantially identical terms and conditions) registered under the Securities Act of 1933, as amended. This exchange of notes was completed in December 2001. As stated in note 1 of the Notes to Consolidated Financial Statements under the caption "Subsequent Events," in January 2002, the Company sold $220 million of Senior Convertible Debentures. The Company also closed on a $50 million Senior Revolving Credit Facility in February 2002. The Company believes that Radian Guaranty will have sufficient funds to satisfy its claims payments and operating expenses and to pay dividends to the Company for at least the next 12 months. The Company also believes that it will be able to satisfy its long-term (more than 12 months) liquidity needs with cash flow from Mortgage Insurance and Financial Guaranty. As a holding company, the Company conducts its principal operations through Mortgage Insurance and Financial Guaranty. The Company's ability to pay dividends on the $4.125 Preferred Stock is dependent upon dividends or other distributions from Mortgage Insurance or Financial Guaranty. In connection with obtaining approval from the New York Insurance Department for the change of control of Financial Guaranty when the Company acquired Financial Guaranty, Financial Guaranty agreed not to declare or pay dividends for a period of two years following consummation of the acquisition. Consequently, the Company cannot rely upon or expect any dividends or other distributions from Financial Guaranty in 2002. Based on the Company's current intention to pay quarterly common stock dividends of approximately $0.02 per share, the Company will require distributions from Mortgage Insurance of $10.8 million annually to pay the dividends on the outstanding shares of $4.125 Preferred Stock and common stock. In addition, the Company will require distributions from Mortgage Insurance of $29.4 million annually to pay the debt service on its long-term debt financing. The Company does not believe that any of these restrictions will prevent the payment by Mortgage Insurance or the Company of these anticipated dividends or distributions in the foreseeable future. Quantitative and Qualitative Disclosures about Market Risk The Company manages its investment portfolio to achieve safety and liquidity, while seeking to maximize total return. The Company believes it can achieve these objectives by active portfolio management and intensive monitoring of investments. Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. The market risk related to financial instruments primarily relates to the investment portfolio, which exposes the Company to risks related to interest rates, default, prepayments, and declines in equity prices. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. The Company views these potential changes in price within the overall context of asset and liability management. The Company's analysts estimate the payout pattern of the mortgage insurance loss reserves to determine their duration, which is the weighted average payments expressed in years. The Company sets duration targets for fixed income investment portfolios that it believes mitigates the overall effect of interest rate risk. As of December 31, 2001, the average duration of the fixed income portfolio was 5.8 years. Based upon assumptions the Company uses in its duration calculations, increases in interest rates of 100 and 150 basis points would cause decreases in the market value of the fixed maturity portfolio (excluding short-term investments) of approximately 7.3% and 10.7%, respectively. Similarly, a decrease in interest rates of 100 and 150 basis points would cause increases in the market value of the fixed maturity portfolio of approximately 6.1% and 9.7%, respectively. At December 31, 2001, the Company had no material foreign investments and its investment in non-investment grade fixed income securities was $6,137,000. At December 31, 2001, the market value and cost of the Company's equity securities were $120.3 million and $117.0 million, respectively. In addition, the market value and book value of the Company's long-term debt at December 31, 2001 were $346.3 million and $324.1 million, respectively. Critical Accounting Policies Critical accounting policies comprise those policies that require the Company's most difficult, subjective, and complex judgments. These policies require estimates of which the effect of matters are inherently uncertain. The accounting policies that the Company believes meet the criteria of critical accounting policies are described below. Reserve for Losses As described in notes 1 and 4 of the Notes to Consolidated Financial Statements, the Company establishes reserves to provide for the estimated costs of settling claims in both the mortgage insurance and financial guaranty businesses. Setting loss reserves in both the businesses involves the significant use of estimates with regard to the likelihood, magnitude and timing of a loss. In the mortgage insurance business, the incurred loss process is initiated by a borrower's missed payment. The Company uses historical models based on a variety of loan characteristics, including the status of the loan as reported by the servicer of the insured loan, the economic conditions, and the estimated foreclosure period in the area in which the default exists, to help determine the appropriate loss reserve at any point in time. As the delinquency proceeds toward foreclosure, there is more certainty around these estimates and adjustments are made to loss reserves to reflect this updated information. The financial guaranty loss reserve is similar, however, the remote probability of losses and the dearth of historical losses in this business makes it more difficult to estimate the appropriate loss reserve. Financial Guaranty has a regular case reserve committee meeting where experts in the risk management and surveillance area provide input to the finance area before any case reserves are determined, and the surveillance team actively monitors any problem deals and notifies the committee if a change in the reserve is necessary. Financial Guaranty establishes a reserve based on the estimated loss, including expenses associated with the settlement of the loss. Derivative Instruments and Hedging Activity As reported in note 1 of the Notes to Consolidated Financial Statements, the Company adopted SFAS No. 133 on January 1, 2001. The two areas where gains and losses on derivative contracts are recognized are in the convertible debt securities contained in the Company's investment portfolio and in certain financial guaranty contracts. The value of the derivative position of convertible debt securities is calculated by our outside convertible debt portfolio manager by determining the value of the readily ascertainable comparable debt securities and assigning a value to the equity (derivative) portion by subtracting the value of the comparable debt security from the total value of the convertible instrument. Changes in such values from period to period represent the gains and losses recorded. The gains and losses on derivative financial guaranty contracts are derived from internally generated models. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have an effect on the estimated fair value amounts. DIRECTORS AND OFFICERS RADIAN GROUP INC. Directors Frank P. Filipps Chairman and Chief Executive Officer Roy J. Kasmar President and Chief Operating Officer Herbert Wender Former Vice Chairman LandAmerica Financial Group, Inc. David C. Carney Chairman ImageMax, Inc. Howard B. Culang President Laurel Corporation Claire M. Fagin, Ph.D., R.N. Independent Consultant Rosemarie B. Greco Principal GRECOventures Stephen T. Hopkins President Hopkins and Company LLC James W. Jennings Senior Partner Morgan, Lewis & Bockius LLP Ronald W. Moore Adjunct Professor of Business Administration Graduate School of Business Administration Harvard University Robert W. Richards Former Chairman of the Board Source One Mortgage Services Corporation Anthony W. Schweiger President The Tomorrow Group LLC Officers Frank P. Filipps Chairman and Chief Executive Officer Roy J. Kasmar President and Chief Operating Officer C. Robert Quint Executive Vice President and Chief Financial Officer Howard S. Yaruss Executive Vice President Secretary and General Counsel Mark A. Casale Senior Vice President Strategic Investments Scott C. Stevens Senior Vice President Human Resources and Administration Elizabeth A. Shuttleworth Senior Vice President Chief Information Officer John J. Calamari Vice President Corporate Controller RADIAN GUARANTY INC. Roy J. Kasmar President and Chief Operating Officer RADIAN REINSURANCE Inc. RADIAN ASSET ASSURANCE Inc. Martin A. Kamarck President RADIANEXPRESS.COM INC. Albert V. Will President STOCKHOLDERS' INFORMATION ANNUAL MEETING The annual meeting of stockholders of Radian Group Inc. will be held on Tuesday, May 7, 2002, at 9:00 a.m. at 1601 Market Street, 11th floor, Philadelphia, Pennsylvania. 10-K REPORT Copies of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission will be available without charge after March 31, 2002, to stockholders upon written request to: Secretary, Radian Group Inc., 1601 Market Street, Philadelphia, PA 19103 TRANSFER AGENT AND REGISTRAR Bank of New York, P.O. Box 11002, Church Street Station, New York, NY 10286, 212 815.2286 CORPORATE HEADQUARTERS 1601 Market Street, Philadelphia, PA 19103, 215 564.6600 www.radiangroupinc.com COMMON STOCK Radian Group Inc. common stock is listed on The New York Stock Exchange under the symbol RDN. At December 31, 2001, there were 93,982,208 shares outstanding and approximately 10,500 holders of record. The following table sets forth the high and low sales prices of the Company's common stock on The New York Stock Exchange Composite Tape:
2000 2001 ---------------- ---------------- High Low High Low ----- ----- ----- ----- 1st Quarter 24.25 17.28 37.53 26.91 2nd Quarter 29.56 22.66 43.87 32.48 3rd Quarter 35.78 25.88 42.62 30.10 4th Quarter 38.31 30.22 43.38 32.25
Cash dividends for each share of the Company's common stock were $0.015 for each quarter of 2000 and the First Quarter of 2001 (as adjusted for the 2-for-1 stock split effected in June 2001). The quarterly cash dividend was increased to $0.02 per share beginning with the Second Quarter of 2001. EX-21 18 w56746ex21.txt REVISED SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF RADIAN GROUP INC. AS OF 12/31/01 RADIAN GROUP INC. (Delaware domiciled corporation) Amerin Guaranty Corporation (Illinois domiciled wholly owned subsidiary) Amerin Re Corporation (Illinois domiciled wholly owned subsidiary) Amerin Investor Services Corporation (Illinois domiciled wholly owned subsidiary) CMAC Investment Management Corporation (Delaware domiciled wholly owned subsidiary) RadianExpress.com (Iowa domiciled wholly owned subsidiary) Radian Mortgage Reinsurance Company (Vermont domiciled wholly owned subsidiary) ENHANCE FINANCIAL SERVICES GROUP INC. (New York domiciled wholly owned subsidiary) Radian Reinsurance Inc. (New York domiciled wholly owned subsidiary of Enhance Financial Services Group) Radian Asset Assurance Inc. (New York domiciled wholly owned subsidiary of Enhance Financial Services Group Inc.) Van-American Companies, Inc. (Delaware domiciled wholly owned subsidiary of Radian Asset Assurance Inc.) Van-American Insurance Company, Inc. (Kentucky domiciled wholly owned subsidiary Van-American Companies, Inc.) Singer Asset Finance Company, LLC (Delaware domiciled wholly owned subsidiary of Enhance Financial Services Group Inc.) RADIAN GUARANTY INC. (Pennsylvania domiciled wholly owned subsidiary) Commonwealth Mortgage Assurance Company of Texas (Texas domiciled wholly owned subsidiary Radian Guaranty Inc.) Commonwealth Mortgage Assurance Company of Arizona (Arizona domiciled wholly owned subsidiary Radian Guaranty Inc.) Radian Insurance Inc. (Pennsylvania domiciled wholly owned subsidiary of Radian Guaranty Inc.) Radian Services LLC (Delaware domiciled wholly owned subsidiary of Radian Guaranty Inc.) EX-23 19 w56746ex23.txt CONSENT OF DELOITTE & TOUCHE EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-57872, 33-67366, 33-98106, 333-40623, 333-77957, 333-81549 and 333-52762 of Radian Group Inc. on Form S-8 of our report dated March 15, 2002, appearing in this Annual Report on Form 10-K of Radian Group Inc. for the year ended December 31, 2001. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----