AMENDMENT NUMBER 1
TO
10% CONVERTIBLE SUBORDINATED DEBENTURE No. 1
DUE DECEMBER 31, 2005
OF
HIGHLANDS INSURANCE GROUP, INC.
THIS AMENDMENT NUMBER 1, dated as of April 30, 1997 (this
"Amendment"), is entered into by and between Highlands Insurance Group, Inc., a
Delaware corporation (the "Company"), and the undersigned Holder of that certain
10% Convertible Subordinated ▇▇▇▇▇▇▇▇▇, ▇▇. ▇, due December 31, 2005, of the
Company, dated January 23, 1996 (the "Debenture"), pursuant to which the Company
has promised to pay to the Holder the principal sum of THIRTY-SIX MILLION EIGHT
HUNDRED FORTY-THREE THOUSAND NINE HUNDRED FIFTY-SIX DOLLARS ($36,843,956) on
December 31, 2005 and to pay interest thereon, all in accordance with the terms
of the Debenture. Unless otherwise defined herein, capitalized terms shall have
the meanings ascribed thereto in the Debenture.
RECITALS
A. The Company has entered into that certain Amended and
Restated Agreement and Plan of Merger, dated as of February 13, 1997 (as amended
by Amendment Number 1 thereto, the "Merger Agreement"), by and among the
Company, Highlands Acquisition Corp. and Vik Brothers Insurance, Inc.
B. Simultaneously with the closing of the transactions
contemplated by, and certain transactions entered into in connection with, the
Merger Agreement (collectively, the "Merger Transactions"), the Company will
enter into a Credit Agreement, dated as of April 30, 1997 (the "Credit
Agreement"), among the Company, various lending institutions listed from time to
time on Annex I to the Credit Agreement (each a "Bank" and collectively, the
"Banks") and The Chase Manhattan Bank, as administrative agent, in order to
provide financing for, among other things, certain of the Merger Transactions.
C. Section 6.9(a) of the Merger Agreement and Section 4.01(n)
of the Credit Agreement require certain amendments to be made to the terms of
the Debenture.
D. Pursuant to Section 9 of the Debenture, the Company and the
Holder wish to amend the terms of the Debenture as set forth below in order to
comply with Section 6.9(a) of the Merger Agreement and Section 4.01(n) of the
Credit Agreement.
Now therefore, in consideration of the foregoing and good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each of the Company and the Holder agrees as follows:
AGREEMENT
1. Amendment to Section 2(a) of the Debenture. Section 2(a) of
the Debenture is hereby deleted and replaced in its entirety with the following
new Subsection 2(a):
(a) Senior Indebtedness. "Senior Indebtedness" means
the principal of, premium, if any, and unpaid interest (including
without limitation any interest accruing from and after the date of any
filing made in respect of the Company or any of its Subsidiaries
pursuant to Chapter 11 of Title 11 of the U.S. Code, whether or not a
claim for such interest would be recognized or allowed in such
proceeding) on the following, whether outstanding at the date hereof or
thereafter incurred or created: (i) Indebtedness of the Company for
money borrowed (including purchase-money obligations), evidenced by
notes or other written obligations, (ii) Indebtedness of the Company
evidenced by notes, debentures, bonds or other securities issued under
the provisions of an indenture or similar instrument, (iii) obligations
of the Company as lessee under Capital Leases and under leases of
property made as part of any sale and leaseback transactions, (iv)
Interest Rate Agreements of the Company, (v) Indebtedness of others of
any of the kinds described in the preceding clauses (i) through (iv)
assumed or guaranteed by the Company and (vi) renewals, extensions and
refundings of, and Indebtedness and obligations of a successor person
issued in exchange for or in replacement of, Indebtedness or
obligations of the kinds described in the preceding clauses (i) through
(v); provided, however, that the following shall not constitute Senior
Indebtedness: (A) any Indebtedness or obligation as to which, in the
instrument creating or evidencing the same or pursuant to which the
same is outstanding; it is expressly provided that such Indebtedness or
obligation is subordinate in right of payment to all other Indebtedness
of the Company not expressly subordinated to such Indebtedness or
obligation; (B) any Indebtedness or obligation which by its terms
refers explicitly to the Debentures and states that such Indebtedness
or obligation shall not be senior in right of payment thereto; (C) any
Indebtedness or obligation of the Company in respect of the Debentures;
(D) Indebtedness or other obligations of the Company to a Subsidiary of
the Company; and (E) Indebtedness guaranteed by the Company on behalf
of any stockholder, director, officer or employee of the Company or any
of its Subsidiaries.
2. Amendment to Section 2(c)(i). Section 2(c)(i) of the
Debenture is hereby deleted and replaced in its entirety with the following new
Section 2(c)(i):
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(i) Upon the failure to pay (beyond any applicable
grace periods) any installment of principal, premium, interest, fees or
any other amounts owing on any Senior Indebtedness, the outstanding
principal amount of which equals or exceeds $5 million in the
aggregate, when the same becomes due and payable, including without
limitation a declaration that such principal amount of Senior
Indebtedness has been declared to be due and payable prior to its
maturity (a "Payment Default"), no payment of principal, premium (if
any), interest or other amounts owing shall be made on the Debentures
or on account of the purchase or other acquisition of Debentures unless
and until (i) such default shall have been cured or expressly waived or
shall have ceased to exist or (ii) adequate provision has been made for
the payment of such Senior Indebtedness in a manner satisfactory to the
holders of such Senior Indebtedness.
3. Amendment to Section 3(a)(vi). Section 3(a)(vi) of the
Debenture is hereby deleted and replaced in its entirety with the following new
Section 3(a)(vi):
(vi) There shall be a default or an event of default
under any bond, debenture, note or other evidence of Indebtedness of
the Company or any Significant Subsidiary (other than the Debentures)
or under any mortgage, indenture or other instrument under which there
may be issued or by which there may be secured or evidenced any
indebtedness of the Company or any Significant Subsidiary, whether such
Indebtedness now exists or shall hereafter be created, if such default
(A) results from the failure to pay principal of any such Indebtedness
at final scheduled maturity (unless extended), or (B) results in an
acceleration of an obligation to pay the principal of any such
Indebtedness, and in the case of either clause (A) or (b), the
principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness, aggregates $5 million or more at
any one time; or
4. Amendment to Section 5(g)(ii) of the Debenture. Section
5(g)(ii) of the Debenture is hereby amended by (i) deleting the word "and" at
the end of clause (G), (ii) replacing the period at the end of clause (H) with a
semi-colon and (iii) inserting the following new clauses (I) and (J) after
clause (H) thereof:
(I) Indebtedness incurred in connection with the
Senior Credit Facility; and
(J) (i) Other Indebtedness of the Company not to
exceed $5,000,000 in the aggregate and (ii) other Indebtedness incurred
in the ordinary course of business of the Subsidiaries of the Company
that are insurance companies not to exceed $1,000,000 in the aggregate.
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5. Amendment to Section 5(g)(ii)(D) of the Debenture. Section
5(g)(ii) of the Debenture is hereby amended by replacing the first clause
thereof up to the first proviso thereof with the following new clause:
(D) Indebtedness of the Company or any Subsidiary of
the Company issued in exchange for, or all of the net proceeds of which
are used to substantially concurrently repay, redeem, refund,
refinance, discharge or otherwise retire for value, outstanding
Indebtedness which when Incurred was permitted under subsection 5(g)(i)
or under clauses (A), (B), (E) or (I) of this subsection 5(g)(ii)
("Refinancing Indebtedness") in a principal amount not to exceed the
outstanding principal amount of the Indebtedness so refinanced, plus
any prepayment penalties and premiums, plus customary fees, expenses
and costs related to the incurrence of such Refinancing Indebtedness;
6. Amendment to Section 5(h) of the Debenture. Section 5(h) of
the Debenture is hereby amended by (i) deleting the word "and" at the end of
clause (4), (ii) replacing the period at the end of clause (5) with a comma
followed by the word "and" and (iii) inserting the following new clause (6)
immediately after clause (5) thereof:
(6) Senior Credit Facility. Any encumbrances
or restrictions contained in the Senior Credit Facility to the
extent not otherwise permitted pursuant to Section 5(f) or (g)
herein.
7. Amendment to Section 5(i) of the Debenture. Section 5(i) of
the Debenture is hereby amended by deleting the period, and by adding the
following proviso, at the end of such Section:
; provided, further, that any exercise by the Banks of any of their
rights in respect of any property or assets of the Company or any of
its Subsidiaries under or pursuant to any Lien provided for, or arising
under or in connection with, the Senior Credit Facility shall not
constitute an Asset Sale as defined in this Debenture and shall not be
subject to the restrictions placed on Asset Sales by this subsection
5(i) or any other provision of this Debenture.
8. Amendment to Section 5(m)(i) of the Debenture. Section
5(m)(i) of the Debenture is hereby deleted and replaced in its entirety with the
following new Subsection 5(m)(i):
(i) The Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, Incur or suffer to exist
any Lien upon or with respect to any of the Property of the Company or
any such Subsidiary whether now owned or
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hereafter acquired, or on any income or profits therefrom, or assign or
otherwise convey any right to receive income to secure any Indebtedness
unless, contemporaneously therewith or prior thereto, effective
provision shall be made whereby the Debentures are secured equally and
ratably with such other Indebtedness; provided, however, that (A) the
Company may Incur and suffer to exist any Liens created pursuant to or
in connection with the Senior Credit Facility and the transactions
contemplated thereby and any related swaps and permitted refinancings
thereof and (B) in addition to Liens permitted pursuant to clause (A)
above, the Company and any Subsidiary, without securing the Debentures,
may Incur and suffer to exist any Lien securing Senior Indebtedness or
create or assume any Indebtedness so secured, provided, that after
giving effect thereto, the aggregate Senior Indebtedness secured by
such Liens does not exceed $30 million; and, provided further that the
provisions of this subsection 5(m) shall not prohibit the creation,
incurrence, existence or assumption of any Permitted Liens or any Lien
securing other Indebtedness required to be equally and ratably secured
as a result of the incurrence of such Lien.
9. Amendment to Section 11 of the Debenture. Section 11 of the
Debenture is hereby amended by adding the following new paragraph after the last
paragraph in Section 11 and immediately prior to Section 12:
Notwithstanding any provision of this Section 11 to
the contrary, prior to mailing a Change of Control notice (as described
in this Section 11(a)-(g), the "Change of Control Notice"), the Company
will either (i) repay in full the Senior Credit Facility (or any
permitted refinancing thereof) or offer to make such repayment and
repay the Indebtedness of each Bank which accepts such offer or (ii)
obtain a consent under the Senior Credit Facility (or under the
documentation with respect to any permitted refinancing thereof)
permitting the Company to repurchase the Debentures. The Company shall
first comply with the foregoing undertaking before it shall be required
to repurchase any Debentures provided that the failure to so comply may
become an Event of Default to the extent the provisions of Section
3(a)(iii) are satisfied.
10. Section 12 of the Debenture is hereby amended by inserting
the following terms and definitions in alphabetical order into Section 12:
"Affiliate" shall mean, with respect to a
specified Person, any other Person which controls, is
controlled by or is under common control with such specified
Person.
"Interest Rate Agreement" shall mean any
interest rate swap agreement, any interest rate cap agreement,
any interest rate collar agreement or other similar agreement
or arrangement to protect against fluctuations in interest
rates.
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"Senior Credit Facility" shall mean that
certain Credit Agreement, dated as of April 30, 1997, among
the Company, various lending institutions and The Chase
Manhattan Bank, as administrative agent, as amended,
supplemented, extended or otherwise modified from time to
time.
11. Notwithstanding any provision of the Debenture to the
contrary, the issuance of Common Stock pursuant to the Merger Agreement and the
Merger Transactions shall not (i) constitute a Change of Control pursuant to the
Debenture, (ii) result in an adjustment to the number of shares of Common Stock
issuable upon conversion of the Debenture and (iii) result in an adjustment of
the exercise or conversion price of the Debenture.
12. This Amendment may be executed in two or more counterparts
and each counterpart shall be deemed to be an original and which counterparts
together shall constitute one and the same agreement of the parties hereto.
13. All other provisions of the Debenture shall not be
affected by this Amendment and shall remain in full force and effect.
[SIGNATURES CONTAINED ON NEXT PAGE]
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IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Amendment as of the date first written above.
HIGHLANDS INSURANCE GROUP, INC.
By: _______________________________________
Name:______________________________________
Title:_____________________________________
HOLDER: INSURANCE PARTNERS, L.P.
By: Insurance GenPar MGP, L.P.,
its general partner
By: Insurance GenPar MGP, Inc.,
its general partner
By: _____________________________
Name:____________________________
Title:___________________________
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