CREDIT AGREEMENT

 

among

 

KMG AMERICA CORPORATION,

as Borrower

 

and

 

WACHOVIA BANK, NATIONAL ASSOCIATION,

as Lender

 

 

$15,000,000 Revolving Credit Facility

 

 

Dated as of December 21, 2006

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ARTICLE I

DEFINITIONS

 

Section 1.1

Defined Terms

1

Section 1.2

Accounting Terms; GAAP and SAP

16

Section 1.3

Other Terms; Construction

16

 

ARTICLE II

 

AMOUNT AND TERMS OF THE CREDIT

 

Section 2.1

Commitment

17

Section 2.2

Borrowings

17

Section 2.3

Domicile of Loans

18

Section 2.4

Evidence of Debt; Note

18

Section 2.5

Termination and Reduction of Commitment

18

Section 2.6

Mandatory Payments and Prepayments

18

Section 2.7

Voluntary Prepayments

19

Section 2.8

Interest

19

Section 2.9

Fees

20

Section 2.10

Conversions and Continuations

20

Section 2.11

Methods of Payments; Computations; Apportionment of Payments

21

Section 2.12

Recovery of Payments

22

Section 2.13

Use of Proceeds

22

Section 2.14

Increased Costs; Change in Circumstances; Illegality

22

Section 2.15

Taxes

24

Section 2.16

Compensation

25

Section 2.17

Replacement of Lenders; Mitigation Obligations

25

 

ARTICLE III

 

CONDITIONS PRECEDENT

 

Section 3.1

Conditions Precedent to the Closing Date

27

Section 3.2

Conditions Precedent to All Borrowings

29

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES

 

Section 4.1

Organization and Power

29

Section 4.2

Authorization; Enforceability

30

Section 4.3

No Violation

30

Section 4.4

Governmental and Third-Party Authorization; Permits

30

Section 4.5

Litigation

31

Section 4.6

Taxes

31

 

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Section 4.7

Subsidiaries

31

Section 4.8

Full Disclosure

32

Section 4.9

Margin Regulations

32

Section 4.10

No Material Adverse Effect

32

Section 4.11

Financial Matters

32

Section 4.12

ERISA

33

Section 4.13

Environmental Matters

34

Section 4.14

Compliance With Laws

34

Section 4.15

Investment Company Act

34

Section 4.16

Insurance

34

Section 4.17

OFAC; PATRIOT Act

34

 

ARTICLE V

 

AFFIRMATIVE COVENANTS

 

Section 5.1

GAAP Financial Statements

35

Section 5.2

Statutory Financial Statements

35

Section 5.3

Other Business and Financial Information

36

Section 5.4

Corporate Existence; Franchises; Maintenance of Properties

38

Section 5.5

Compliance With Laws

38

Section 5.6

Payment of Obligations

38

Section 5.7

Insurance

38

Section 5.8

Maintenance of Books and Records; Inspection

39

Section 5.9

Dividends

39

Section 5.10

OFAC; PATRIOT Act

39

 

ARTICLE VI

 

FINANCIAL COVENANTS

 

Section 6.1

Maximum Consolidated Indebtedness to Total Capitalization

39

Section 6.2

Minimum Available Dividend Amount

40

Section 6.3

Ratings

40

 

ARTICLE VII

 

NEGATIVE COVENANTS

 

Section 7.1

Fundamental Changes

40

Section 7.2

Indebtedness

40

Section 7.3

Liens

41

Section 7.4

Disposition of Assets

41

Section 7.5

Investments

41

 

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Section 7.6

Transactions with Affiliates

42

Section 7.7

Restricted Payments

42

Section 7.8

Lines of Business

42

Section 7.9

Fiscal Year

42

Section 7.10

Accounting Changes

43

Section 7.11

Limitations on Certain Restrictions

43

 

ARTICLE VIII

 

EVENTS OF DEFAULT

 

Section 8.1

Events of Default

43

Section 8.2

Remedies; Termination of Commitment, Acceleration, Etc.

45

Section 8.3

Remedies; Set Off

46

 

ARTICLE IX

 

MISCELLANEOUS

 

Section 9.1

Expenses; Indemnity; Damage Waiver

46

Section 9.2

Governing Law; Submission to Jurisdiction; Waiver of Venue; Service of Process

47

Section 9.3

Arbitration; Preservation and Limitation of Remedies

48

Section 9.4

Notices; Effectiveness; Electronic Communication

49

Section 9.5

Amendments, Waivers, etc.

49

Section 9.6

Successors and Assigns

49

Section 9.7

No Waiver

51

Section 9.8

Survival

51

Section 9.9

Severability

51

Section 9.10

Construction

51

Section 9.11

Confidentiality

51

Section 9.12

Counterparts; Integration; Effectiveness

52

Section 9.13

USA PATRIOT Act Notice

52

 

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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

Form of Compliance Certificate

Exhibit D

Form of Opinion of Hunton & Williams

 

 

SCHEDULES

Schedule 1.1(a)

Notice Addresses

Schedule 4.4

Licenses

Schedule 4.7

Subsidiaries

Schedule 7.2

Indebtedness

Schedule 7.3

Liens

 

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CREDIT AGREEMENT

THIS CREDIT AGREEMENT, dated as of December 21, 2006, is made among KMG AMERICA
CORPORATION, a company incorporated under the laws of the Commonwealth of
Virginia (“Borrower”), and WACHOVIA BANK, NATIONAL ASSOCIATION (“Lender”).

RECITALS

The Lender is willing to make available to the Borrower the revolving credit
facility provided for 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

Section 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” means a letter from the Borrower to the Lender,
duly completed and signed by an Authorized Officer of the Borrower and in form
and substance reasonably 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” means 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,
division thereof or line of 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 Base Rate” means, at any time with respect to any Base Rate Loan, a
rate per annum equal to the Base Rate as in effect at such time plus the
Applicable Percentage for Base Rate Loans as in effect at such time.

“Adjusted LIBOR Rate” means, at any time with respect to any LIBOR Loan, a rate
per annum equal to the LIBOR Rate as in effect at such time plus the Applicable
Percentage for LIBOR Loans as in effect at such time.

“Affiliate” means, with respect to a specified Person, another Person that
directly or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common

 

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Control with the Person specified. Notwithstanding the foregoing, the Lender
shall not be deemed an “Affiliate” of the Borrower.

“Agreement” means this Credit Agreement, as amended, restated, modified or
supplemented from time to time.

“A.M. Best” means A.M. Best Company, Inc. , and its successors and assigns.

“Annual Statement” means, 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 Percentage” means, for any day, with respect to the (i) applicable
margin to be added to the LIBOR Rate for purposes of determining the Adjusted
LIBOR Rate and (ii) applicable margin to be added to the Base Rate for purposes
of determining the Adjusted Base Rate, the applicable rate per annum set forth
below under the caption “Applicable Margin for LIBOR Rate Loans” and “Applicable
Margin for Base Rate Loans”, respectively, in each case based upon the A.M. Best
Financial Strength Rating of Kanawha Insurance Company:

 

Level

AM Best Financial Strength Rating

Applicable Margin for LIBOR Rate Loans

Applicable Margin for Base Rate Loans

 

 

 

 

I

A- or above

1.25%

0.25%

II

B++ or below

1.35%

0.35%

 

For purposes of the foregoing, each change in the Applicable Percentage shall be
effective as of the date A.M. Best first publicly announces any change in the
Financial Strength Rating; provided, however, that, notwithstanding the
foregoing or anything else herein to the contrary, if at any time an Event of
Default shall have occurred and be continuing or the Financial Strength Rating
is not available from A.M. Best, at all times from and including the date on
which such Event of Default occurred or such Financial Strength Rating is not
available to the date on which such Event of Default shall have been cured or
waived or A.M. Best shall make publicly available the Financial Strength Rating,
each Applicable Percentage shall be determined in accordance with Level II of
the above matrix (notwithstanding the actual level).

“Authorized Officer” means, with respect to any action specified herein to be
taken by or on behalf of the Borrower, any officer of the Borrower duly
authorized by resolution of the board of directors or other governing body 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.

“Availability Period” means the period from and including the Closing Date to
but excluding the Termination Date.

 

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“Available Dividend Amount” means, with respect to Kanawha Insurance Company for
any period of four consecutive fiscal quarters, the aggregate maximum amount of
dividends that is permitted or, if such period were a fiscal year, would be
permitted by the Insurance Regulatory Authority of its jurisdiction of domicile,
under applicable Requirements of Law (without the necessity of any consent,
approval or other action of such Insurance Regulatory Authority involving the
granting of permission or the exercise of discretion by such Insurance
Regulatory Authority), to be paid by Kanawha Insurance Company to the Borrower
in respect of such four-quarter period as if such period were a fiscal year
(whether or not any such dividends are actually paid).

“Bankruptcy Code” means 11 U.S.C. §§101 et seq., as amended from time to time,
and any successor statute.

“Bankruptcy Event” means the occurrence of an Event of Default pursuant to
Section 8.1(f) or Section 8.1(g).

“Base Rate” means the higher of (i) the per annum interest rate publicly
announced from time to time by Wachovia in Charlotte, North Carolina, to be its
prime rate (which may not necessarily be its lowest or 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% 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” means, at any time, any Loan that bears interest at such time
at the applicable Adjusted Base Rate.

“Borrower” has the meaning given to such term in the introductory paragraph of
this Agreement.

“Borrowing” means the incurrence by a Borrower on a single date of a Loan
pursuant to Section 2.2.

“Borrowing Date” means, with respect to any Borrowing, the date upon which such
Borrowing is made.

“Business Day” means (i) any day other than a Saturday or Sunday, a legal
holiday or a day on which commercial banks in Charlotte, North Carolina are
authorized or 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
trading in Dollar deposits is conducted by banks in the London inter-bank
Eurodollar market.

“Capital Stock” means, with respect to any Person, shares of capital stock of,
or any partnership, membership, limited liability company, trust or other
ownership or profit interests in, such Person, together with (i) warrants,
options or other rights for the purchase or other acquisition from such Person
of any of the foregoing, (ii) securities convertible into or exchangeable for
any of the foregoing or warrants, options or other rights for the purchase or
other acquisition from such Person of any such securities and (iii) any other
ownership or profit interests in such Person, in each case, whether voting or
nonvoting, and whether or not any of the

 

3

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foregoing are authorized or otherwise existing on any date of determination;
provided, that for purposes of Section 7.7, “Capital Stock” shall not include
any Hybrid Securities.

“Cash Equivalents” means (i) securities issued or unconditionally guaranteed or
insured 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 one year from the date of acquisition, (ii) commercial paper
issued by any Person organized under the laws of the United States of America,
maturing within 270 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 270 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 (y) that has combined
capital and surplus of at least $500,000,000 or (z) 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 thirty (30) 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 foregoing types.

“Change in Law” means the occurrence, after the date of this Agreement, of any
of the following: (i) the adoption or taking effect of any law, rule, regulation
or treaty, (ii) any change in any law, rule, regulation or treaty or in the
administration, interpretation or application thereof by any Governmental
Authority or (iii) the making or issuance of any request, guideline or directive
(whether or not having the force of law) by any Governmental Authority.

“Claims” has the meaning given to such term in the definition of “Environmental
Claims”.

“Closing Date” has the meaning given to such term in Section 3.1.

“Code” means 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.

“Commitment” means the commitment of the Lender to make Loans in an aggregate
principal amount at any time outstanding up to $15,000,000, as such amount may
be reduced or terminated pursuant to the terms hereof.

“Compliance Certificate” means a fully completed and duly executed certificate
in the form of Exhibit B, together with a Covenant Compliance Worksheet.

“Consolidated Indebtedness” means, at any time, the aggregate (without
duplication) of all Indebtedness (whether or not reflected on the balance sheet
of the Borrower or any of its Subsidiaries) of the Borrower and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP, and
for the avoidance of doubt shall not include the obligations of the Borrower or
any of its Subsidiaries under any Hybrid Equity Securities.

 

4

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“Consolidated Net Income” means, for any period, net income (or loss) for the
Borrower and its Subsidiaries for such period and as reflected on the
consolidated financial statements of the Borrower and its Subsidiaries,
determined on a consolidated basis in accordance with GAAP.

“Consolidated Net Worth” means, at any time, the consolidated shareholders’
equity of the Borrower and its Subsidiaries determined in accordance with GAAP
and as reflected on the consolidated financial statements of the Borrower and
its Subsidiaries (i) excluding the adjustment to accumulated other comprehensive
income (loss) for unrealized investment gains and losses pursuant to Statement
No. 115 of the Financial Accounting Standards Board of the United States of
America and (ii) including Hybrid Equity Securities.

“Control” means, with respect to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ability to exercise voting power,
by contract or otherwise; and the terms “Controlled” and “Controlling” have
correlative meanings.

“Covenant Compliance Worksheet” means a fully completed worksheet in the form of
Attachment A to Exhibit B.

“Credit Documents” means this Agreement, the Note and all other agreements,
instruments, documents and certificates now or hereafter executed and delivered
to the Lender by or on behalf of the Borrower with respect to this Agreement, in
each case as amended, modified, supplemented or restated from time to time.

“Default” means any event or condition that, with the passage of time or giving
of notice, or both, would constitute an Event of Default.

“Dollars” or “$” means dollars of the United States of America.

“Eligible Assignee” shall mean (i) a commercial bank organized under the laws of
the United States or any state thereof and having total assets in excess of
$1,000,000,000, (ii) a commercial bank organized under the laws of any other
country that is a member of the Organization for Economic Cooperation and
Development or any successor thereto (the “OECD”) or a political subdivision of
any such country and having total assets in excess of $1,000,000,000, provided
that such bank or other financial institution is acting through a branch or
agency located in the United States, in the country under the laws of which it
is organized or in another country that is also a member of the OECD, (iii) the
central bank of any country that is a member of the OECD, (iv) a finance
company, insurance company or other financial institution or fund that is
engaged in making, purchasing or otherwise investing in loans in the ordinary
course of its business and having total assets in excess of $500,000,000, or
(v) any Affiliate of an existing Lender.

“Environmental Claims” means any and all administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, allegations, notices of
noncompliance or violation, investigations by a Governmental Authority, or
proceedings (including, without limitation, administrative, regulatory and
judicial proceedings) relating in any way to any Hazardous Substance, any actual
or alleged violation of or liability under any Environmental Law or any permit
issued, or any approval given, under any Environmental Law (collectively,
“Claims”),

 

5

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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 any Hazardous
Substance or arising from alleged injury or threat of injury to human health or
the environment.

“Environmental Laws” means any and all federal, state and local laws, statutes,
ordinances, rules, regulations, permits, licenses, approvals, rules of common
law and orders of Governmental Authorities, relating to the protection of human
health, occupational safety with respect to exposure to Hazardous Substances, 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.

“ERISA” means 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” means any Person (including any trade or business, whether or
not incorporated) 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 Code or Section 4001 of
ERISA.

“ERISA Event” means any of the following with respect to a Plan or Multiemployer
Plan, as applicable: (i) a Reportable Event, (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 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 Code by any fiduciary of any
Plan for which the Borrower or any of its ERISA Affiliates may be directly or
indirectly

 

6

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liable or (ix) the adoption of an amendment to any Plan that, pursuant to
Section 401(a)(29) of the 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.

“Event of Default” has the meaning given to such term in Section 8.1.

“Exchange Act” means 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.

“Excluded Taxes” means, with respect to the Lender, (i) any taxes imposed on or
measured by its overall net income (however denominated), and any franchise
taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any
political subdivision thereof) under the laws of which such recipient is
organized or in which its principal office is located or in which its applicable
Lending Office is located and (ii) any branch profits taxes imposed by the
United States or any similar taxes imposed by any other jurisdiction in which
the Lender is located; in each case under clauses (i) and (ii) above, Excluded
Taxes shall include any interest, additions to tax or penalties applicable
thereto.

“Federal Funds Rate” means, 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” means the Board of Governors of the Federal Reserve
System or any successor thereto.

“Financial Officer” means, with respect to the Borrower, the chief financial
officer, vice president – finance, principal accounting officer or treasurer of
the Borrower.

“Financial Strength Rating” means the financial strength rating issued with
respect to any Insurance Subsidiary by A.M. Best Company (or its successor).

“GAAP” means generally accepted accounting principles in the United States of
America, as set forth in the statements, opinions and pronouncements of the
Accounting Principles Board, the American 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” means the government of the United States of America or
any other nation, or of any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or

 

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pertaining to government (including any supra-national bodies such as the
European Union or the European Central Bank).

“Guaranty Obligation” means, with respect to any Person, at the time of
determination, 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, (i) to
purchase, repurchase or otherwise acquire such primary obligation or any
property constituting direct or indirect security therefor, (ii) to advance or
provide funds (x) for the payment or discharge of any such primary obligation or
(y) 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 (including, without
limitation, keep well agreements, maintenance agreements, comfort letters or
similar agreements or arrangements), (iii) 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 (iv) 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 Guaranty Obligation shall not
include endorsements for collection or deposit in the ordinary course of
business or trust arrangements, withheld balances or any other collateral or
security arrangements entered into in the ordinary course of business. The
amount of any Guaranty Obligation of any guaranteeing Person hereunder shall be
deemed to be the lower of (a) an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Guaranty Obligation is
made and (b) the maximum amount for which such guaranteeing Person may be liable
pursuant to the terms of the instrument embodying such Guaranty Obligation,
unless such primary obligation and the maximum amount for which such
guaranteeing Person may be liable are not stated or determinable, in which case
the amount of such Guaranty Obligation shall be such guaranteeing Person’s
maximum reasonably anticipated liability in respect thereof as determined by
such guaranteeing Person in good faith.

“Hazardous Substance” means any substance or material meeting any one or more of
the following criteria: (i) it is designated as a hazardous waste, hazardous
substance, hazardous material, pollutant, contaminant or toxic substance under
any Environmental Law, (ii) it is toxic, explosive, corrosive, ignitable,
infectious, radioactive, mutagenic or otherwise hazardous to human health or the
environment and is or becomes regulated under any Environmental Law, or (iii) it
is or contains, without limiting the foregoing, 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” means 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 agreement.

“Historical Statutory Statements” has the meaning given to such term in Section
4.11(b).

“Hybrid Equity Securities” shall mean that portion of hybrid securities
consisting of trust preferred securities, deferrable interest subordinated debt
securities, mandatory convertible debt

 

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or other hybrid securities that are shown on the consolidated financial
statements of the Borrower as liabilities and treated as equity by A.M. Best.

“Indebtedness” means, with respect to any Person, at the time of determination
(without duplication), (i) all obligations of such Person for borrowed money,
(ii) all obligations of such Person evidenced by notes, bonds, debentures or
similar instruments, or upon which interest payments are customarily made,
(iii) the maximum stated or face amount of all surety bonds, letters of credit
and bankers’ acceptances issued or created for the account of such Person and,
without duplication, all drafts drawn thereunder (to the extent unreimbursed),
(iv) all obligations of such Person to pay the deferred purchase price of
property or services (excluding trade payables incurred in the ordinary course
of business and not past due based on customary practices in the trade), (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
Capital Lease Obligations of such Person, (vii) the principal balance
outstanding and owing by such Person under any synthetic lease, tax retention
operating lease or similar off-balance sheet financing product, (viii) all
Guaranty Obligations of such Person with respect to Indebtedness of another
Person, (ix) 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 and (x) all indebtedness of the types referred to in
clauses (i) through (ix) above (A) of any partnership or unincorporated joint
venture in which such Person is a general partner or joint venturer to the
extent such Person is liable therefor or (B) secured by any Lien on any property
or asset owned or held by such Person regardless of whether or not the
indebtedness secured thereby shall have been incurred or assumed by such Person
or is non-recourse to the credit of such Person, the amount thereof being equal
to the value of the property or assets subject to such Lien; provided that
Indebtedness shall not include obligations with respect to Primary Policies and
Reinsurance Agreements which are entered into in the ordinary course of
business.

“Indemnified Taxes” means Taxes (including, for the avoidance of doubt, Other
Taxes) other than Excluded Taxes.

“Indemnitee” has the meaning given to such term in Section 9.1(b).

“Insurance Regulatory Authority” means, 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” means Kanawha Insurance Company and any other Subsidiary
of the Borrower the ability of which to pay dividends is regulated by an
Insurance Regulatory Authority.

“Interest Period” means, as to each LIBOR Loan, the period commencing on the
date of the Borrowing of such LIBOR Loan (or the date of any continuation of, or
conversion into, such LIBOR Loan), and ending one, two, three or six months
thereafter, as selected by the Borrower in its Notice of Borrowing or Notice of
Conversion/Continuation; provided, that:

 

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(i)           all LIBOR Loans comprising a single Borrowing shall at all times
have the same Interest Period;

(ii)          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 five (5)
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)

no Interest Period shall extend beyond 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)       no Borrower may select any Interest Period (and consequently, no
LIBOR Loans shall be made or continued) if a Default or Event of Default shall
have occurred and be continuing at the time of such Notice of Borrowing or
Notice of Conversion/Continuation with respect to any Borrowing.

“Invested Assets” means cash, Cash Equivalents, short term investments,
investments held for sale and any other assets which are treated as investments
under GAAP.

“Investment” means, as to any Person, any direct or indirect Acquisition or
investment by such Person, whether by means of (i) the purchase or other
acquisition of Capital Stock or other securities of another Person or (ii) a
loan, advance or capital contribution to, guarantee or assumption of debt of, or
purchase or other Acquisition of any other debt or equity participation or
interest in, another Person, including any partnership or joint venture interest
in such other Person and any arrangement pursuant to which the investor
guarantees Indebtedness of such other Person. For purposes of covenant
compliance, the amount of any Investment shall be the amount actually invested,
without adjustment for subsequent increases or decreases in the value of such
Investment, net of any returns of principal.

“Investment Policy” means the investment policy of the Borrower as in effect on
the Closing Date for the management of its investment portfolio with such
revisions thereto as are approved by the Board of Directors of the Borrower from
time to time.

“Lender” means Wachovia and each other Person that becomes a “Lender” hereunder
pursuant to Section 9.6(b).

 

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“Lending Office” means the office of the Lender designated as such in the
Register.

“LIBOR Loan” means, at any time, any Loan that bears interest at such time at
the applicable Adjusted LIBOR Rate.

“LIBOR Rate” means, 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 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.

“Licenses” has the meaning given to such term in Section 4.4(c).

“Lien” means any mortgage, pledge, hypothecation, assignment, security interest,
lien (statutory or otherwise), 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” has the meaning given to such term in Section 2.1.

“Losses” has the meaning given to such term in Section 9.1(b).

“Margin Stock” has the meaning given to such term in Regulation U.

“Material Adverse Effect” means a material adverse effect upon (i) the business,
assets, properties, liabilities (actual or contingent), operations, condition
(financial or otherwise) or prospects of the Borrower and its Subsidiaries,
taken as a whole, (ii) the ability of the Borrower to perform its obligations
under this Agreement or any of the other Credit Documents 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.

“Maturity Date” means December 31, 2007.

“Moody’s” means Moody’s Investors Service, Inc., and its successors and assigns.

“Multiemployer Plan” means 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.

 

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“NAIC” means the National Association of Insurance Commissioners and any
successor thereto.

“Net Income” means, with respect to any Person for any period, the net income
(or loss), after extraordinary items, taxes and all other items of expense and
income of such Person for such period, determined in accordance with GAAP.

“Notes” means the promissory note of the Borrower in favor of the Lender
evidencing the Loans made by the Lender to the Borrower pursuant to Section 2.1,
in substantially the form of Exhibit A, together with any amendments,
modifications and supplements thereto, substitutions therefor and restatements
thereof.

“Notice of Borrowing” has the meaning given to such term in Section 2.2(b).

“Notice of Conversion/Continuation” has the meaning given to such term in
Section 2.10(b).

“Obligations” means all principal of and interest (including interest accruing
after the filing of a petition or commencement of a case by or with respect to
the Borrower seeking relief under any applicable federal and state laws
pertaining to bankruptcy, reorganization, arrangement, moratorium, readjustment
of debts, dissolution, liquidation or other debtor relief, specifically
including, without limitation, the Bankruptcy Code and any fraudulent transfer
and fraudulent conveyance laws, whether or not the claim for such interest is
allowed in such proceeding) 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, in each case whether direct or indirect, joint or
several, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, and whether existing by contract, operation
of law or otherwise.

“OFAC” means the U.S. Department of the Treasury’s Office of Foreign Assets
Control, and any successor thereto.

“Other Taxes” means all present or future stamp or documentary taxes or duties
or any excise or property taxes, charges or similar levies or duties arising
from any payment made hereunder or under any other Credit Document or from the
execution, delivery or enforcement of, or otherwise with respect to, this
Agreement or any other Credit Document.

“Participant” has the meaning given to such term in Section 9.6(d).

“PATRIOT Act” means the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act
of 2001), as amended from time to time, and any successor statute, and all rules
and regulations from time to time promulgated thereunder.

“Payment Office” means the office of the Lender designated on Schedule 1.1(a)
under the heading “Instructions for wire transfers to the Lender,” or such other
office as the Lender may designate to the Borrower for such purpose from time to
time.

 

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“PBGC” means the Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA, and any successor thereto.

“Permitted Liens” means such of the following as to which no enforcement,
collection, execution, levy or foreclosure proceeding shall have been commenced:
(i) Liens for taxes, assessments and governmental charges or levies to the
extent not required to be paid under Section 5.6, (ii) Liens imposed by law,
such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens
and other similar Liens arising in the ordinary course of business securing
obligations that are not overdue for a period of more than 60 days or which are
being contested in good faith and by appropriate proceedings and with respect to
which adequate reserves have been established, and are being maintained, in
accordance with GAAP, (iii) pledges or deposits to secure obligations under
workers’ compensation, unemployment, old-age pensions, retirement benefits laws
or similar legislation or to secure public or statutory obligations, (iv) zoning
restrictions, easements, rights of way and other encumbrances on title to real
property that do not render title to the property encumbered thereby
unmarketable or materially adversely affect the use of such property for its
present purposes, (v) Liens arising by virtue of trust arrangements, withheld
balances, or any other collateral or security arrangements incurred in
connection with reinsurance obligations in the ordinary course of business or
capital support agreements or any other agreements by the Borrower in support of
the capital of any Insurance Subsidiary, or guarantees or any other agreements
by the Borrower guaranteeing the obligations of any Insurance Subsidiary under
reinsurance agreements entered into in the ordinary course of business, (vi)
lease deposits and (vii) Liens arising by virtue of any statutory or common law
provision relating to bankers’ liens, rights of set-off or other similar rights
or remedies existing solely with respect to cash and Cash Equivalents on deposit
pursuant to standard banking arrangements.

“Person” means any natural person, corporation, limited liability company,
trust, joint venture, association, company, partnership, Governmental Authority
or other entity.

“Plan” means 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.

“Primary Policies” means any insurance policies issued by an Insurance
Subsidiary.

“Prohibited Transaction” means 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 Code that is not exempt by reason of Section 4975 (c)(2)
or 4975(d) of the Code.

“Register” has the meaning given to such term in Section 9.6(c).

“Regulations D, T, U and X” means Regulations D, T, U and X, respectively, of
the Federal Reserve Board, and any successor regulations.

“Reinsurance Agreement” means any agreement, contract, treaty, policy,
certificate or other arrangement whereby any Insurance Subsidiary agrees to
assume from or reinsure an

 

13

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insurer or reinsurer all or part of the liability of such insurer or reinsurer
under a policy or policies of insurance issued by such insurer or reinsurer.

“Related Parties” means, with respect to any Person, such Person’s Affiliates
and the partners, directors, officers, employees, agents and advisors of such
Person and of such Person’s Affiliates.

“Reportable Event” means, with respect to any Plan, (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, without
limitation, any failure to meet the minimum funding standard of, or timely make
any required installment under, Section 412 of the Code or Section 302 of ERISA,
regardless of the issuance of any waivers in accordance with Section 412(d) of
the 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
Code and (iv) a cessation of operations described in Section 4062(e) of ERISA.

“Requirement of Law” means, 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.

“Reserve Requirement” means, with respect to any Interest Period, the reserve
percentage (expressed as a decimal and rounded upwards, if necessary, to the
next higher 1/100th of 1%) 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 Wachovia 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” means, with respect to the Borrower, the president, the
chief executive officer, the chief financial officer, vice president-finance,
principal accounting officer or treasurer 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 or any other Credit
Document.

“Sanctioned Country” means a country subject to a sanctions program identified
on the list maintained by OFAC and available at
http://www.treas.gov/offices/enforcement/ofac/

sanctions, or as otherwise published from time to time.

“Sanctioned Person” means (i) a Person named on the list of Specially Designated
Nationals or Blocked Persons maintained by OFAC available at
http://www.treas.gov/offices/

enforcement/ofac/sdn, or as otherwise published from time to time or (ii) (A) an
agency of the government of a Sanctioned Country, (B) an organization controlled
by a Sanctioned Country, or

 

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(C) a Person resident in a Sanctioned Country, to the extent subject to a
sanctions program administered by OFAC.

“SAP” means, with respect to any Insurance Subsidiary, the statutory accounting
practices prescribed or permitted by the relevant Insurance Regulatory Authority
of its jurisdiction of domicile, consistently applied and maintained, as in
effect from time to time, subject to the provisions of Section 1.2.

“Standard & Poor’s” means Standard & Poor’s Ratings Services, a division of The
McGraw Hill Companies, Inc. and its successors and assigns.

“Subordinated Promissory Note” means that Subordinated Promissory Note made by
the Borrower as of December 21, 2004 to pay The Springs Company the principal
sum of $15,000,000.

“Subsidiary” means, with respect to any Person, any corporation or other Person
of which more than 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 or
controlled 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.

“Taxes” means all present or future taxes, levies, imposts, duties, deductions,
withholdings, assessments, fees or other charges imposed by any Governmental
Authority, including any interest, additions to tax or penalties applicable
thereto.

“Termination Date” means the Maturity Date or such earlier date of termination
of the Commitment pursuant to Section 2.5 or Section 8.2.

“Total Capitalization” means, as of any date of determination, the sum of (i)
Consolidated Net Worth as of such date and (ii) Consolidated Indebtedness as of
such date.

“Total Voting Power” means, with respect to any Person, the total number of
votes which may be cast in the election of directors of such Person at any
meeting of stockholders of such Person if all securities entitled to vote in the
election of directors of such Person (on a fully diluted basis, assuming the
exercise, conversion or exchange of all rights, warrants, options and securities
exercisable for, exchangeable for or convertible into, such voting securities)
were present and voted at such meeting (other than votes that may be cast only
upon the happening of a contingency).

“Type” has the meaning given to such term in Section 2.2(a).

“Unfunded Pension Liability” means, with respect to any 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.

 

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“Unutilized Commitment” means, at any time for the Lender, the Lender’s
Commitment less the sum of the outstanding principal amount of Loans.

“Wachovia” means Wachovia Bank, National Association, and its successors and
assigns.

“Wholly Owned” means, 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.

Section 1.2        Accounting Terms; GAAP and SAP. Except as otherwise expressly
provided herein, all terms of an accounting or financial nature shall be
construed in accordance with GAAP or SAP, as the context requires, each as in
effect from time to time; provided that, if the Borrower requests of the Lender
an amendment to any provision hereof to eliminate the effect of any change
occurring after the date hereof in GAAP or SAP, as the case may be, or in the
application thereof on the operation of such provision (or if the Lender request
an amendment to any provision hereof for such purpose), regardless of whether
any such notice is given before or after such change in GAAP or SAP, as the case
may be, or in the application thereof, then such provision shall be interpreted
on the basis of GAAP or SAP, as the case may be, as in effect and applied
immediately before such change shall have become effective until such notice
shall have been withdrawn or such provision amended in accordance herewith.

Section 1.3       Other Terms; Construction. The definitions of terms herein
shall apply equally to the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words “include,” “includes” and
“including” shall be deemed to be followed by the phrase “without limitation.”
The word “will” shall be construed to have the same meaning and effect as the
word “shall.” Unless the context requires otherwise, (i) any definition of or
reference to any agreement, instrument or other document shall be construed as
referring to such agreement, instrument or other document as from time to time
amended, supplemented, restated or otherwise modified (subject to any
restrictions on such amendments, supplements, restatements or modifications set
forth herein or in any other Credit Document), (ii) any reference herein to any
Person shall be construed to include such Person’s successors and assigns
permitted hereunder, (iii) the words “herein,” “hereof” and “hereunder,” and
words of similar import when used in any Credit Document, shall be construed to
refer to such Credit Document in its entirety and not to any particular
provision thereof, (iv) all references in a Credit Document to Articles,
Sections, Exhibits and Schedules shall be construed to refer to Articles and
Sections of, and Exhibits and Schedules to, the Credit Document in which such
references appear, (v) any reference to any law or regulation herein shall,
unless otherwise specified, refer to such law or regulation as amended, modified
or supplemented from time to time and (vi) the words “asset” and “property”
shall be construed to have the same meaning and effect and to refer to any and
all tangible and intangible assets and properties, including cash, securities,
accounts and contract rights.

 

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ARTICLE II

AMOUNT AND TERMS OF THE CREDIT

Section 2.1        Commitment. Upon and subject to the terms and conditions
hereof, the Lender hereby agrees from time to time on any Business Day during
the Availability Period to make loans (each, a “Loan,” and collectively, the
“Loans”) to the Borrower; provided that the Lender shall not be obligated to
make any Loan if, immediately after giving effect thereto, the aggregate
principal of all outstanding Loans would exceed the Commitment at such time.
Within the foregoing limits, and subject to and on the terms and conditions
hereof, the Borrower may borrow, repay and reborrow Loans.

 

Section 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 Base Rate Loans or LIBOR Loans
(each, a “Type” of Loan), provided that all Loans comprising the same Borrowing
shall, unless otherwise specifically provided herein, be of the same Type.

(b)          In order to make a Borrowing (other than Borrowings involving
continuations or conversions of outstanding Loans, which shall be made pursuant
to Section 2.10), 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
of LIBOR Loans and not later than 10:00 a.m., Charlotte time, on the same
Business Day prior to each Borrowing of Base Rate Loans. Each such notice (each,
a “Notice of Borrowing”) shall be irrevocable, shall be given in the form of
Exhibit A-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 Borrowing Date, which shall be a Business Day.
Notwithstanding anything to the contrary contained herein:

(i)           each Borrowing of Base Rate Loans shall be in a principal amount
not less than $1,000,000 or, if greater, an integral multiple of $500,000 in
excess thereof, and each Borrowing of LIBOR Loans shall be in a principal amount
not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in
excess thereof (or, in each case if less than the minimum amount, in the amount
of the aggregate Unutilized Commitment);

(ii)          if the Borrower shall have failed to designate the Type of Loans
in a Notice of Borrowing, then the Loans shall be made as Base Rate Loans; and

(iii)        if the Borrower shall have failed to specify an Interest Period to
be applicable to any Borrowing of LIBOR Loans, then such Borrower shall be
deemed to have selected an Interest Period of one month.

(c)          As promptly as practicable, upon satisfaction of the applicable
conditions set forth in Section 3.2 (and, if such Borrowing is on the Closing
Date, Section 3.1), the Lender shall make available to the Borrower the proceeds
of such Borrowing in accordance with the terms of the Account Designation
Letter.

 

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Section 2.3        Domicile of Loans. 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.

 

Section 2.4

Evidence of Debt; Note.

(a)          The Lender shall maintain the Register pursuant to Section 9.6(c)
in which Register shall be recorded (i) the amount and Type of each Loan, (ii)
the amount of any principal or interest due and payable or to become due and
payable from the Borrower to the Lender in respect of each such Loan and (iii) 
the amount of any sum received by the Lender from the Borrower.

(b)          The entries made in the Register shall, to the extent permitted by
applicable law, be prima facie evidence of the existence and amounts of the
obligations of the Borrower therein recorded; provided, however, that the
failure of the Lender to maintain such Register, or any error therein, shall not
in any manner affect the obligation of the Borrower to repay (with applicable
interest) the Obligations of the Borrower under this Agreement.

(c)          The Loans made by the Lender shall be evidenced by a Note
appropriately completed in substantially the form of Exhibit A, executed by the
Borrower and payable to the order of the Lender. The Note shall be entitled to
all of the benefits of this Agreement and the other Credit Documents and shall
be subject to the provisions hereof and thereof.

 

Section 2.5

Termination and Reduction of the 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 three (3) Business Days’ prior written notice to the Lender, the
Borrower may terminate in whole or reduce in part the aggregate Unutilized
Commitment; provided that any such partial reduction shall be in an aggregate
amount of not less than $1,000,000 or, if greater, an integral multiple of
$500,000 in excess thereof. The amount of any termination or reduction made
under this Section 2.5(b) may not thereafter be reinstated.

 

Section 2.6

Mandatory Payments and Prepayments.

(a)          Except to the extent due or paid sooner pursuant to the provisions
hereof, the Borrower shall repay to the Lender on the Maturity Date the
aggregate outstanding principal amount of Loans made to the Borrower.

(b)          In the event that, at any time, the aggregate principal amount of
Loans outstanding 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 Loans in the amount of
such excess. Such prepayments shall be applied first to prepay all Base Rate
Loans, and then to prepay LIBOR Loans in direct order of Interest Period
maturities. Each payment or prepayment of a LIBOR Loan made pursuant to the
provisions of

 

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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 2.16 to
be paid as a consequence thereof.

Section 2.7        Voluntary Prepayments. At any time and from time to time, the
Borrower may prepay its Loans, in whole or in part, together with accrued
interest to the date of prepayment, 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 a principal amount of $1,000,000 or an integral multiple
of $500,000 in excess thereof, (ii) no partial prepayment of LIBOR Loans made
pursuant to any single Borrowing shall reduce the aggregate outstanding
principal amount of the remaining LIBOR Loans 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 2.16 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 2.7 may be reborrowed, subject to the terms and conditions of this
Agreement.

 

Section 2.8

Interest.

(a)          Subject to the provisions of Section 2.8(b), each Loan shall bear
interest on the outstanding principal amount thereof, from the date of Borrowing
thereof until such principal amount shall be paid in full, (i) at the Adjusted
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
and/or 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 bear
interest at a rate per annum equal to the interest rate applicable from time to
time thereafter to such Loans (whether the Adjusted Base Rate or the Adjusted
LIBOR Rate) plus 2% (or, in the case of interest, fees and other amounts for
which no rate is provided hereunder, at the Adjusted 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 or
Section 2.7, except as provided hereinbelow), in arrears on the last Business
Day of each calendar month, beginning with the first such day to occur after the
Closing Date; provided, that in

 

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the event the Loans are repaid or prepaid in full and the Commitment has been
terminated, 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 or Section
2.7, 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 the definition of “Interest Period”) and (z) in addition, in the case of an
Interest Period of six months, on the date occurring three months after the
first day of such Interest Period; provided, that in the event all LIBOR Loans
made pursuant to a single Borrowing are repaid or prepaid in full, then accrued
interest in respect of such LIBOR Loans 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.

Section 2.9        Fees. The Borrower agrees to pay a commitment fee for each
calendar quarter (or portion thereof) at a per annum rate equal to 1/8 of 1% on
the average daily Unutilized Commitment, 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 up to the Termination Date, and (ii) on the
Termination Date.

 

Section 2.10

Conversions and Continuations.

(a)          The Borrower may elect (i) to convert all or a portion of the
outstanding principal amount of any of its Base Rate Loans into LIBOR Loans, or
to convert any of its 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 of its
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 be in a principal amount not less than $1,000,000 or, if
greater, an integral multiple of

 

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$500,000 in excess thereof; any such conversion of Base Rate Loans of the same
Borrowing into, or continuation of LIBOR Loans shall be in a principal amount
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 of the same 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 2.14(f), 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 respective Borrower will pay, upon such conversion, all
amounts required under Section 2.16 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 must give 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 A-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 of its
outstanding LIBOR Loans, such LIBOR Loans shall automatically be converted to
Base Rate Loans upon the expiration of the Interest Period applicable thereto
(unless repaid pursuant to the terms hereof). In the event that the Borrower
shall have failed to specify an Interest Period to be applicable to any
conversion into, or continuation of, its LIBOR Loans, then the Borrower shall be
deemed to have selected an Interest Period of one month.

Section 2.11    Method of Payments; Computations; Apportionment of Payments.

(a)          All payments by the Borrower hereunder (whether of principal,
interest, or fees, or under Sections 2.15, 2.16 or 2.17, or otherwise) shall be
made without setoff, counterclaim or other defense, in Dollars and in
immediately available funds to the Lender at the Payment Office, prior to 12:00
noon, Charlotte time, on the date payment is due. Any payment made as required
hereinabove, but after 12:00 noon, 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 such due date shall be extended to the next
succeeding Business Day (except that in the case of LIBOR Loans to which clause
(iv) of the definition of “Interest Period” is 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)          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, or (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.

 

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Section 2.12      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, federal or foreign law, common law or equitable cause (whether as a
result of any demand, settlement, litigation or otherwise), 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.

Section 2.13      Use of Proceeds. The proceeds of the Loans shall be used by
the Borrower (i) to pay the outstanding principal amount owing on the
Subordinated Promissory Note, and thereafter (ii) to provide for the Borrower’s
working capital, liquidity needs and general working requirements and those of
its Subsidiaries.

 

Section 2.14

Increased Costs; Change in Circumstances; Illegality.

 

(a)

If any Change in Law shall:

(i)           impose, modify or deem applicable any reserve, special deposit,
compulsory loan, insurance charge or similar requirement against assets of,
deposits with or for the account of, or credit extended or participated in by,
the Lender (except the Reserve Requirement reflected in the LIBOR Rate);

(ii)          subject the Lender to any tax of any kind whatsoever with respect
to this Agreement or any LIBOR Loan made by it, or change the basis of taxation
of payments to the Lender in respect thereof (except for Indemnified Taxes or
Other Taxes covered by Section 2.15 and the imposition of, or any change in the
rate of, any Excluded Tax payable by the Lender); or

(iii)        impose on the Lender or the London interbank market any other
condition, cost or expense affecting this Agreement or LIBOR Loans made by the
Lender;

and the result of any of the foregoing shall be to increase the cost to the
Lender of making or maintaining any LIBOR Loan (or of maintaining its obligation
to make any such Loan), or to reduce the amount of any sum received or
receivable by the Lender hereunder (whether of principal, interest or any other
amount), then, upon request of the Lender, the Borrower will pay to the Lender
such additional amount or amounts as will compensate the Lender for such
additional costs incurred or reduction suffered.

(b)          If the Lender determines that any Change in Law affecting the
Lender or any Lending Office of the Lender or the Lender’s holding company
regarding capital requirements has or would have the effect of reducing the rate
of return on the Lender’s capital or on the capital of the Lender’s holding
company as a consequence of this Agreement, the Commitment or the Loans made by
the Lender to a level below that which the Lender or the Lender’s holding
company could have achieved but for such Change in Law (taking into
consideration such the Lender’s policies and the policies of the Lender’s
holding company with respect to capital adequacy), then from time to time the
Borrower will pay to the Lender such additional amount or

 

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amounts as will compensate the Lender or the Lender’s holding company for any
such reduction suffered.

(c)          A certificate of the Lender setting forth the amount or amounts
necessary to compensate the Lender or its holding company, as the case may be,
as specified in Section 2.14(a) or Section 2.14(b) and delivered to the Borrower
shall be conclusive absent manifest error. The Borrower shall pay the Lender the
amount shown as due on any such certificate within ten (10) days after receipt
thereof.

(d)          Failure or delay on the part of the Lender to demand compensation
pursuant to the foregoing provisions of this Section shall not constitute a
waiver of the Lender’s right to demand such compensation, provided that the
Borrower shall not be required to compensate the Lender pursuant to the
foregoing provisions of this Section for any increased costs incurred or
reductions suffered more than nine months prior to the date that the Lender
notifies the Borrower of the Change in Law giving rise to such increased costs
or reductions and of the Lender’s intention to claim compensation therefor
(except that, if the Change in Law giving rise to such increased costs or
reductions is retroactive, then the nine-month period referred to above shall be
extended to include the period of retroactive effect thereof).

(e)          If, on or prior to the first day of any Interest Period, 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 determine 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 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 Borrower.

(f)           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 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) and to the extent not sooner prepaid, be converted into a Base Rate
Loan, (ii) the obligation of the Lender to make, to

 

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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), 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 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 Borrower.

 

Section 2.15

Taxes.

(a)          Any and all payments by or on account of any obligation of the
Borrower hereunder or under any other Credit Document shall be made free and
clear of and without deduction or withholding for any Indemnified Taxes,
provided that if the Borrower shall be required by applicable law to deduct or
withhold, or the Lender shall be required to remit, any Indemnified Taxes from
such payments, then (i) the sum payable shall be increased as necessary so that
after making all required deductions, withholdings or remittances (including
deductions, withholdings and remittances applicable to additional sums payable
under this Section 2.15) the Lender receives an amount equal to the sum it would
have received had no such deductions, withholdings or remittances been made,
(ii) the Borrower shall make such deductions or withholdings and (iii) the
Borrower shall timely pay the full amount deducted or withheld to the relevant
Governmental Authority in accordance with applicable law.

(b)          Without limiting the provisions of Section 2.15(a), the Borrower
shall timely pay, severally and not jointly, any Other Taxes to the relevant
Governmental Authority in accordance with applicable law.

(c)          The Borrower shall indemnify the Lender within 10 days after
written demand therefor for the full amount of any Indemnified Taxes with
respect to payments by the Borrower under this Agreement or any other Credit
Document (including Indemnified Taxes imposed or asserted on or attributable to
amounts payable under this Section) paid by the Lender and any reasonable
expenses arising therefrom or with respect thereto, whether or not such
Indemnified Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. A certificate as to the amount of such payment or
liability delivered to the Borrower by the Lender shall be conclusive absent
manifest error.

(d)          As soon as practicable after any payment of Indemnified Taxes by
the Borrower to a Governmental Authority, the Borrower shall deliver to the
Lender the original or a certified copy of a receipt issued by such Governmental
Authority evidencing such payment, a copy of the return reporting such payment
or other evidence of such payment reasonably satisfactory to the Lender.

(e)          The Lender agrees that if it is entitled to an exemption from or
reduction of withholding tax under the law of the jurisdiction in which the
Borrower is resident for tax purposes, or any treaty to which such jurisdiction
is a party, with respect to payments hereunder or under any other Credit
Document, it shall at the written request of the Borrower deliver to the
Borrower, at the time or times prescribed by applicable law or reasonably
requested by the Borrower, such properly completed and executed documentation
prescribed by applicable law as

 

24

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will permit such payments to be made without withholding or at a reduced rate of
withholding. In addition, the Lender, if requested by the Borrower, shall
deliver such other documentation prescribed by applicable law or reasonably
requested by the Borrower as will enable the Borrower to determine whether or
not the Lender is subject to backup withholding or information reporting
requirements.

(f)           If the Lender determines, in its sole discretion, that it has
received a refund of any Taxes as to which it has been indemnified by the
Borrower or with respect to which the Borrower has paid additional amounts
pursuant to this Section 2.15, it shall pay to the Borrower an amount equal to
such refund (but only to the extent of indemnity payments made, or additional
amounts paid, by the Borrower under this Section 2.15 with respect to the Taxes
giving rise to such refund or recovery), net of all out-of-pocket expenses of
the Lender and without interest (other than any interest paid by the relevant
Governmental Authority with respect to such refund), provided that the Borrower,
upon the request of the Lender, agrees to repay the amount paid over to the
Borrower (plus any penalties, interest or other charges imposed by the relevant
Governmental Authority) to the Lender in the event the Lender is required to
repay such refund to such Governmental Authority. This Section 2.15(f) shall not
be construed to require the Lender to make available its tax returns (or any
other information relating to its Taxes that it deems confidential) to the
Borrower or any other Person.

Section 2.16      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
(other than 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 any
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 a Lender under this Section
2.16 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
2.16. A certificate (which shall be in reasonable detail) showing the bases for
the determinations set forth in this Section 2.16 by the Lender as to any
additional amounts payable pursuant to this Section 2.16 shall be submitted by
the Lender to the Borrower. Determinations set forth in any such certificate
made in good faith for purposes of this Section 2.16 of any such losses,
expenses or liabilities shall be conclusive absent manifest error.

 

 

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Section 2.17

Replacement of Lenders; Mitigation Obligations.

(a)          The Borrower may, at any time at its sole expense and effort,
require any Lender (i) that has requested compensation from the Borrower under
Section 2.14(a) or Section 2.14(b) or payments from the Borrower under Section
2.15, (ii) the obligation of which to make or maintain LIBOR Loans has been
suspended under Section 2.14(f), or (iii) or if any Lender defaults in its
obligation to fund Loans hereunder, in any case upon notice to such Lender, to
assign and delegate, without recourse (in accordance with and subject to the
restrictions contained in, and consents required by, Section 9.6), all of its
interests, rights and obligations under this Agreement and the related Credit
Documents to an Eligible Assignee that shall assume such obligations (which
Eligible Assignee may be another Lender, if a Lender accepts such assignment);
provided that:

(i)           such Lender shall have received payment of an amount equal to the
outstanding principal of its Loans, accrued interest thereon, accrued fees and
all other amounts payable to it hereunder and under the other Credit Documents
(including any amounts under Section 2.16) from the assignee (to the extent of
such outstanding principal and accrued interest and fees) or the Borrower (in
the case of all other amounts);

(ii)          in the case of any such assignment resulting from a request for
compensation under Section 2.14(a) or Section 2.14(b) or payments required to be
made pursuant to Section 2.15, such assignment will result in a reduction in
such compensation or payments thereafter; and

 

(iii)

such assignment does not conflict with applicable Requirements of Law.

A Lender shall not be required to make any such assignment or delegation if,
prior thereto, as a result of a waiver by such Lender or otherwise, the
circumstances entitling the Borrower to require such assignment and delegation
cease to apply.

(b)          If any Lender requests compensation under Section 2.14(a) or
Section 2.14(b), or the Borrower is required to pay any additional amount to any
Lender or any Governmental Authority for the account of any Lender pursuant to
Section 2.15, or if any Lender gives a notice pursuant to Section 2.14(f), then
such Lender shall use reasonable efforts to avoid any such costs, reductions or
Indemnified Taxes in respect of which amounts are claimed, including the filing
of any certificate or document reasonably requested by the Borrower or the
designation of a different Lending Office for funding or booking its Loans
hereunder or the assignment of its rights and obligations hereunder to another
of its offices, branches or affiliates, if such filing, designation or
assignment (i) would eliminate or reduce amounts payable pursuant to Section
2.14(a), Section 2.14(b) or Section 2.15, as the case may be, in the future, or
eliminate the need for the notice pursuant to Section 2.14(f), as applicable,
and (ii) in each case, in the good faith judgment of such Lender, (A) would not
subject such Lender to any unreimbursed cost or expense, (B) would not be
inconsistent with any legal or regulatory restriction or preexisting internal
policy applicable to such Lender and (C) would not otherwise be disadvantageous
to such Lender. The Borrower hereby agrees to pay all reasonable costs and
expenses incurred by any Lender in connection with any such designation or
assignment.

 

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ARTICLE III

CONDITIONS PRECEDENT

Section 3.1        Conditions Precedent to the Closing Date. The obligations of
the Lender to make Loans shall not become effective until the date (the “Closing
Date”) on which each of the following conditions is satisfied (or waived in
accordance with Section 9.5):

(a)          The Lender shall have received the following, each of which shall
be originals or telecopies or in an electronic format acceptable to the Lender
(followed promptly by originals) unless otherwise specified, each properly
executed by a Responsible Officer of the Borrower, each dated as of the Closing
Date (or, in the case of certificates of governmental officials, a recent date
prior to the Closing Date) and each in a form and substance reasonably
satisfactory to the Lender:

(i)           executed counterparts of this Agreement in such number of copies
as the Lender shall require;

 

(ii)

an executed Note;

(iii)         a certificate, signed by a Responsible Officer of the Borrower, in
form and substance 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 in all material respects as of
the Closing Date (except representations and warranties which relate solely to a
specific earlier date, which shall have been true and correct in all material
respects as of such earlier date), (ii) there are no material insurance
regulatory proceedings pending or threatened in writing against the Borrower or
any Insurance Subsidiary in any jurisdiction, (iii) no Default or Event of
Default exists as of the Closing Date and (iv) there has not occurred since
December 31, 2005 any event or circumstance that has resulted or in the judgment
of such officer could reasonably be expected to result in a Material Adverse
Effect;

(iv)         a certificate of the secretary or an assistant secretary of the
Borrower, in form and substance reasonably satisfactory to the Lender,
certifying (i) that attached thereto is a true and complete copy of the articles
or certificate of incorporation, certificate of formation or other
organizational document 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 organization, and that the same has not been
amended since the date of such certification, (ii) that attached thereto is a
true and complete copy of the bylaws or similar governing document of the
Borrower, as then in effect and as in effect at all times from the date on which
the resolutions referred to in clause (iii) below were adopted to and including
the date of such certificate and (iii) that attached thereto is a true and
complete copy of resolutions adopted by the board of directors (or similar
governing body) of the Borrower authorizing the execution, delivery and
performance of this Agreement and the other Credit Documents, and

 

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as to the incumbency and genuineness of the signature of each officer of the
Borrower executing this Agreement or any of the other Credit Documents, and
attaching all such copies of the documents described above;

(v)          a Compliance Certificate calculated on a pro forma basis as of
September 30, 2006 after giving effect to the making of the initial Borrowing
(if any); and

(vi)         a certificate as of a recent date of the good standing of the
Borrower under the laws of its jurisdiction of organization, from the Secretary
of State (or comparable Governmental Authority) of such jurisdiction;

(b)          On the Closing Date, the Lender shall have received an opinion, in
form and substance reasonably satisfactory to the Lender, addressed to the
Lender and dated the Closing Date, from (i) Hunton & Williams, special North
Carolina counsel to the Borrower, and (ii) James E. Nelson, Senior Vice
President, General Counsel & Secretary to the Borrower, which opinions shall
cover the matters contained in Exhibit C;

(c)          All approvals, permits and consents of any Governmental Authorities
(including, without limitation, all relevant Insurance Regulatory Authorities)
or other Persons required in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby shall
have been obtained (without the imposition of conditions that are not reasonably
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 and such documents and papers where appropriate to be
certified by proper corporate or governmental authorities; 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 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
could reasonably be expected to have a Material Adverse Effect;

(d)          Since December 31, 2005, both immediately before and after giving
effect to the making of the initial Borrowing (if any), there shall not have
occurred any event having a Material Adverse Effect, or any event, condition or
state of facts that could reasonably be expected to result in a Material Adverse
Effect;

(e)          The Borrower shall have paid (i) to Wachovia a facility fee equal
to 0.15% of the Commitment on the Closing Date and (ii) all other fees and
reasonable expenses of the Lender required hereunder or under any other Credit
Document to be paid on or prior to the Closing Date (including, without
limitation, legal fees and expenses) in connection with this Agreement and the
transactions contemplated hereby;

(f)           The Lender shall have received satisfactory confirmation that the
current Financial Strength Rating of Kanawha Insurance Company is “A-” or
better;

 

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(g)          The Lender shall have received an Account Designation Letter from
an Authorized Officer of each Borrower;

(h)          Concurrently with the making of the initial Loans hereunder, (i)
all principal, interest and other amounts outstanding under the Subordinated
Promissory Note shall be repaid and satisfied in full and (ii) any Liens
securing the Subordinated Promissory Note shall be released and any related
filings terminated of record; and the Lender shall have received evidence of the
foregoing satisfactory to it, including a payoff letter executed by the holder
of the Subordinated Promissory Note; and

(i)           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.

Section 3.2        Conditions Precedent to All Borrowings. The obligation of the
Lender to make any Loan (including on the Closing Date) shall be subject to the
prior or concurrent satisfaction (in form and substance reasonably satisfactory
to the Lender) of each of the conditions precedent set forth below:

(a)          The Lender shall have received a Notice of Borrowing in accordance
with Section 2.2(b);

(b)          Each of the representations and warranties set forth in this
Agreement and in the other Credit Documents shall be true and correct in all
material respects on and as of the date of any Borrowing, with the same effect
as if made on and as of such date, both immediately before and after giving
effect to such Borrowing (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 in all material
respects as of such date);

(c)          No Default or Event of Default shall have occurred and be
continuing on such date, both immediately before and after giving effect to such
Borrowing.

Each giving of a Notice of Borrowing, and the consummation of each Borrowing,
shall be deemed to constitute a representation and warranty by the Borrower that
the statements contained in Section 3.2(b) through Section 3.2(c) above are
true, both as of the date of such notice or request and as of the date such
Borrowing is made.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

To induce the Lender to enter into this Agreement and to extend the credit
contemplated hereby, the Borrower represents and warrants to the Lender as
follows:

Section 4.1        Organization and Power. Each of the Borrower and its
Subsidiaries (i) is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (ii) has the full corporate
power and authority 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

 

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foreign corporation 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 could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.

Section 4.2        Authorization; Enforceability. The Borrower has the full
corporate power and authority to execute, deliver and perform its obligations
under the Credit Documents and has taken all necessary corporate action to
execute, deliver and perform its obligations under each of the Credit Documents,
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. This
Agreement constitutes, and each of the other Credit Documents upon execution and
delivery by the Borrower 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, fraudulent conveyance, fraudulent transfer, moratorium or other
similar laws affecting creditors’ rights generally or by general equitable
principles regardless of whether enforceability is considered in a proceeding in
equity or at law.

Section 4.3        No Violation. The execution, delivery and performance by the
Borrower of this Agreement and each of the other Credit Documents, and
compliance by it with the terms hereof and thereof, do not and will not (i)
violate any provision of its certificate of incorporation or bylaws, (ii)
contravene any other Requirement of Law applicable to it, (iii) 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, or (iv) result in or require the creation or imposition of any Lien
upon any of its properties or assets, other than, in the case of clauses (ii),
(iii) and (iv), such contraventions, conflicts, breaches, defaults and creation
or imposition of Liens that could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.

 

Section 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 or the legality, validity or enforceability hereof or
thereof, other than such consents, approvals, authorizations and other actions
that could not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.

(b)          The Borrower and its Subsidiaries has, and is 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 could not
reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect.

(c)          Schedule 4.4 lists with respect to each Insurance Subsidiary, as of
the Closing Date, all of the jurisdictions in which such Insurance Subsidiary
holds licenses (including, without limitation, licenses or certificates of
authority from relevant Insurance Regulatory

 

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Authorities), permits or authorizations to transact insurance and reinsurance
business (collectively, the “Licenses”), and indicates the type or types of
insurance in which each such Insurance Subsidiary is permitted to be engaged
with respect to each License therein listed. (i) No such License is the subject
of a proceeding for suspension, revocation or limitation or any similar
proceedings and (ii) no such suspension, revocation or limitation is threatened
in writing by any relevant Insurance Regulatory Authority, that, in each
instance under (i) and (ii) above, could individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. As of the Closing
Date, no Insurance Subsidiary transacts any insurance business, directly or
indirectly, in any jurisdiction other than those listed on Schedule 4.4, where
such business requires any license, permit or other authorization of an
Insurance Regulatory Authority of such jurisdiction except to the extent that
the failure to have any such license, permit or other authorization could not
reasonably be expected to have a Material Adverse Effect.

Section 4.5        Litigation. Except as disclosed in the Borrower’s 2005 Form
10-K and as supplemented in written disclosure to the Lender delivered prior to
execution of this Agreement, there are no actions, investigations, suits or
proceedings pending or, to the knowledge of the Borrower, threatened, at law or
in equity before any Governmental Authority or in arbitration, against or
affecting the Borrower or any of its Subsidiaries or any of their respective
properties (i) that could reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect, or (ii) with respect to this
Agreement or any of the other Credit Documents.

Section 4.6       Taxes. Each of the Borrower and its Subsidiaries has timely
filed all federal, state, local and foreign tax returns and reports required to
be filed by it and has 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 (i) those taxes, assessments, fees and other charges that are being
contested in good faith and by proper proceedings and for which adequate
reserves have been established in accordance with GAAP, or (ii) where the
failure to file such returns and reports or the failure to pay such taxes,
assessments, fees and other charges could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Such returns are true,
correct and complete in all material respects. There is no ongoing audit or
examination or other investigation by any Governmental Authority of the tax
liability of the Borrower or any of its Subsidiaries the outcome of which could
reasonably be expected to have a Material Adverse Effect. 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 that could not reasonably be
expected to have a Material Adverse Effect.

 

Section 4.7

Subsidiaries.

(a)          Set forth on Schedule 4.7 is a complete and accurate list of all of
the Subsidiaries of the Borrower as of the Closing Date, together with, for each
such Subsidiary, and, as to each such Subsidiary, (i) the jurisdiction of
organization of such Subsidiary, (ii) each Person holding direct ownership
interests in such Subsidiary and (iii) the percentage of ownership of such
Subsidiary represented by such ownership interests. Except as disclosed in
Schedule 4.7, each of the Borrower and its Subsidiaries owns, free and clear of
Liens, and has the unencumbered

 

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right to vote, all outstanding ownership interests in each Person shown to be
held by it in Schedule 4.7.

(b)          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.

Section 4.8        Full Disclosure. No written statement, certificate, exhibit
or report (other than financial projections and forecasts) furnished to the
Lender by or on behalf of the Borrower for purposes of or in connection with
this Agreement, the other Credit Documents and the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state any
material fact necessary to make the statements therein not misleading in light
of the circumstances under which they were made. Written statements,
certificates, exhibits and reports furnished to the Lender by or on behalf of
the Borrower consisting of financial projections and forecasts were prepared
based on good faith estimates and reasonable assumptions of the management of
the Borrower, it being recognized by the Lender that such projections as to
future events are not to be viewed as facts and that actual results during the
period or periods covered by any such projections may differ from the projected
results.

Section 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 Section 7 of the Exchange Act.

Section 4.10      No Material Adverse Effect. There has been no Material Adverse
Effect since December 31, 2005, and to the knowledge of Borrower, there exists
no event, condition or state of facts that could reasonably be expected to
result in a Material Adverse Effect.

 

Section 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, 2005 and 2004 and the related statements of income,
stockholders’ equity and cash flows for the fiscal years or period then ended,
together with the opinion of Ernst & Young LLP thereon and (ii) the unaudited
consolidated balance sheet of the Borrower and its Subsidiaries as of September
30, 2006, and the related statements of income, stockholders’ equity and cash
flows for the nine-month period then ended. Such consolidated financial
statements have been prepared in accordance with GAAP (subject, with respect to
the unaudited financial statements, to the absence of notes required by such
accounting principles and to normal year end adjustments) and present fairly, in
all material respects, the financial position of the Borrower and its
Subsidiaries, and the results of their operations and their cash flows, as of
the dates and for the periods

 

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indicated. Except for liabilities and obligations disclosed or provided for in
the most recent financial statements referred to above and the notes thereto or
the most recent financial statements and the notes thereto delivered pursuant to
Section 5.1, as of the date of such financial statements, neither the Borrower
nor any of its Subsidiaries has any material liability or obligation that, in
accordance with GAAP, would have been required to have been disclosed or
provided for in such financial statements or the notes thereto.

(b)          The Borrower has heretofore furnished to the Lender copies of (i)
the Annual Statements of Kanawha Insurance Company as of December 31, 2005 and
2004 and for the fiscal years then ended, each as filed with the relevant
Insurance Regulatory Authority and (ii) the Quarterly Statement of Kanawha
Insurance Company as of September 30, 2006, and for the nine-month period then
ended, each as filed with the relevant Insurance Regulatory Authority
(collectively, 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 all material respects, in
accordance with SAP (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 all material
respects, in compliance with applicable Requirements of Law when filed and
present fairly in all material respects the financial condition of the
respective Material Insurance Subsidiaries covered thereby as of the respective
dates thereof and the results of operations, changes in capital and surplus and
cash flows of the respective Material 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 Material 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.

 

Section 4.12

ERISA.

(a)          Each of the Borrower and its ERISA Affiliates is in compliance in
all respects with the applicable provisions of ERISA, and each Plan is and has
been administered in compliance in all respects with all applicable Requirements
of Law, including, without limitation, the applicable provisions of ERISA and
the Code, except for any noncompliance that could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect. No ERISA
Event (i) has occurred within the five-year period prior to the Closing Date and
is continuing, or (ii) to the knowledge of the Borrower, is reasonably expected
to occur with respect to any Plan, in either case that could reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.
No Plan has any Unfunded Pension Liability as of the date of the most recent
actuarial report applicable thereto, and neither the Borrower nor any of its
ERISA Affiliates has engaged in a transaction that would be subject to Section
4069 or 4212(c) of ERISA, in either instance where the same could reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.

 

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(b)          Neither the Borrower nor any of its ERISA Affiliates has had a
complete or partial withdrawal from any Multiemployer Plan for which there
exists unsatisfied withdrawal liability that could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect, and neither
the Borrower nor any of its ERISA Affiliates would become subject to any
withdrawal liability under ERISA that could reasonably be expected, individually
or in the aggregate, to have a Material Adverse Effect if the Borrower or any
such ERISA Affiliate were to withdraw completely from all Multiemployer Plans as
of the most recent valuation date for the Multiemployer Plans. To the knowledge
of the Borrower, no Multiemployer Plan is in “reorganization” or is “insolvent”
within the meaning of such terms under ERISA.

Section 4.13    Environmental Matters. Except with respect to any matters that,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect, to the knowledge of Borrower, neither the Borrower
nor any of its Subsidiaries (i) has failed to comply with any Environmental Law
or to obtain, maintain or comply with any permit, license or other approval
required for its business under any Environmental Law, or (ii) is involved in
any suit, action or proceeding, or has received any written notice, complaint or
other request for information from any Governmental Authority or other Person,
with respect to any actual or alleged Environmental Claims.

Section 4.14     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, 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 any
failure to timely file, any failure to retain and any noncompliance that could
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

Section 4.15      Investment Company Act. The Borrower is not an “investment
company,” or a company “controlled” by an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.

Section 4.16      Insurance. The assets, properties and business of each 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.

 

Section 4.17

OFAC; PATRIOT Act.

(a)          Neither the Borrower nor any of its Subsidiaries, in each case that
is subject to OFAC, is a Sanctioned Person or does business in a Sanctioned
Country or with a Sanctioned Person in violation of the economic sanctions of
the United States administered by OFAC that are applicable to it.

(b)          Each of the Borrower and its Subsidiaries, in each case that is
subject to the PATRIOT Act, is in compliance in all material respects with the
provisions of the PATRIOT Act that are applicable to it. No part of the proceeds
of the Loans hereunder will be used, directly or

 

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indirectly, for any payments to any governmental official or employee, political
party, official of a political party, candidate for political office, or anyone
else acting in an official capacity, in order to obtain, retain or direct
business or obtain any improper advantage, in violation of the United States
Foreign Corrupt Practices Act of 1977, as amended.

ARTICLE V

AFFIRMATIVE COVENANTS

Until the termination of the Commitment and the payment in full in cash of all
principal and interest with respect to the Loans together with all fees,
expenses and other amounts then due and owing hereunder, the Borrower covenants
and agrees that:

 

Section 5.1

GAAP Financial Statements. The Borrower will deliver to the Lender:

(a)          As soon as available and in any event within 45 days after the end
of each of the first three fiscal quarters of each fiscal year, beginning with
the first fiscal quarter of fiscal year 2007, 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 changes in
shareholders’ 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 120 days after the end
of each fiscal year, beginning with fiscal year ending December 31, 2006, an
audited consolidated balance sheet of the Borrower and its Subsidiaries as of
the end of such fiscal year and the related audited consolidated statements of
income, cash flows and shareholders’ equity for the Borrower and its
Subsidiaries for the fiscal year then ended, including the notes thereto, in
each case setting forth comparative consolidated figures as of the end of and
for the preceding fiscal year, all in reasonable detail and (with respect to the
audited statements) 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 consolidated
financial statements present fairly, in all material respects, the financial
position of the Borrower and its Subsidiaries, and the results of their
operations and their cash flows, as of the dates and for the periods indicated,
in accordance with GAAP.

Section 5.2        Statutory Financial Statements. The Borrower will deliver to
the Lender as soon as available and in any event within 60 Business Days after
the required filing date, an Annual Statement of each Insurance Subsidiary as of
the end of each fiscal year beginning with the fiscal year ending December 31,
2006, and within 45 Business Days of the required filing

 

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date, a Quarterly Statement of each Insurance Subsidiary as of the end of each
fiscal quarter beginning with the fiscal quarter ending March 31, 2007, in each
case in the form filed with the Insurance Regulatory Authority in its
jurisdiction of domicile, prepared in accordance with SAP, in each case applied
on a basis consistent with that of the preceding reporting period 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.

Section 5.3        Other Business and Financial Information. The Borrower will
deliver to the Lender:

(a)          Concurrently with each delivery of the financial statements
described in Section 5.1, a Compliance Certificate in the form of Exhibit B with
respect to the period covered by the financial statements then being delivered,
executed by a Financial Officer of the Borrower, together with a Covenant
Compliance Worksheet reflecting the computation of the respective financial
covenants set forth in Article VI of this Agreement 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 150 days after the end of each fiscal year,
beginning with the fiscal year ending December 31, 2006, a copy of the
“Statement of Actuarial Opinion” of each Insurance Subsidiary as to the adequacy
of its loss reserves as of such fiscal year-end, together with a copy of its
management discussion and analysis in connection therewith (but only if and to
the extent required by the applicable Insurance Regulatory Authority with regard
to such Insurance Subsidiary), each in the format prescribed by the applicable
insurance laws of such Insurance Subsidiary’s jurisdiction of domicile;

(c)          Promptly after and in any event no later than the 30th Business Day
after 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 reports (other than earnings press releases) on Form 10-Q, Form 10-K or
Form 8-K (or their successor forms) or registration statements and prospectuses
(other than on Form S-8 or its successor form) 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, (iii) all reports on Form A (or any successor form) that
any Insurance Subsidiary shall file with any Insurance Regulatory Authority,
(iv) all material reports on examination or similar material reports, financial
examination reports or market conduct examination reports by the NAIC or any
Insurance Regulatory Authority or other Governmental Authority with respect to
any Insurance Subsidiary’s insurance business and (v) all material filings made
under applicable state insurance holding company acts by the Borrower or any of
its Subsidiaries, including, without limitation, filings seeking approval of
transactions with Affiliates;

(d)          Promptly after (and in any event within five Business Days after
(or within three Business Days after in the case of clause (i) below)) any
Responsible Officer of the Borrower obtaining knowledge thereof, written notice
of any of the following:

 

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(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 or suit
against or affecting the Borrower or any of its Subsidiaries, or any
investigation or proceeding by any Insurance Regulatory Authority or other
Governmental Authority (other than inquiries and routine periodic investigations
or reviews), that could reasonably be expected, individually or in the
aggregate, to result in 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
Insurance Regulatory Authority or other Governmental Authority of (i) any
written notice asserting any failure by the Borrower or any of its Subsidiaries
to be in compliance with applicable Requirements of Law or that threatens the
taking of any action against the Borrower or such Subsidiary or sets forth
circumstances that, if taken or adversely determined, could reasonably be
expected to have a Material Adverse Effect, (ii) any written 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 could reasonably be
expected to have a Material Adverse Effect or (iii) the appointment of any
inspector or any conservator for any Insurance Subsidiary;

(iv)         the occurrence of any ERISA Event that could reasonably be expected
to have a Material Adverse Effect, 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 to be filed with the PBGC and (z) a copy of any notice delivered by the
PBGC to the Borrower or such ERISA Affiliate with respect to such ERISA Event;

(v)          the occurrence of any decrease in the Financial Strength Rating
given to any Insurance Subsidiary by A.M. Best Company;

(vi)         the occurrence of any actual changes in any insurance statute or
regulation governing the investment or dividend practices of any Insurance
Subsidiary that could reasonably be expected to have a Material Adverse Effect;
and

(vii)       any other matter or event that has, or could reasonably be expected
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;

 

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(e)          Promptly, notice of 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, involving unreserved claims in excess of 10% of Consolidated
Net Worth; and

(f)           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 Material Subsidiaries (including any Plan and any
information required to be filed under ERISA) as the Lender may from time to
time reasonably request.

Section 5.4       Corporate Existence; Franchises; Maintenance of Properties.
The Borrower will, and will cause each of its Subsidiaries to, (i) except as
expressly permitted otherwise by Section 7.1, maintain and preserve in full
force and effect its legal existence, (ii) obtain, maintain and preserve in full
force and effect all other rights, franchises, licenses, permits,
certifications, approvals and authorizations required by Governmental
Authorities and necessary to the ownership, occupation or use of its properties
or the conduct of its business, except to the extent the failure to do so could
not reasonably be expected to have a Material Adverse Effect, (iii) continue to
conduct and operate its businesses substantially as conducted and operated
during the present and preceding fiscal years and (iv) 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.

Section 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 its business and the ownership and
operation of its properties, except to the extent the failure so to comply could
not have, or reasonably be expected to have, a Material Adverse Effect.

Section 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 could not reasonably be expected to have a Material Adverse
Effect and (ii) pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it, upon its income or profits or upon any of its
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.

Section 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.

 

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Section 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 its business and properties, and
prepare all financial statements required under this Agreement, in each case in
accordance with GAAP or SAP, as applicable, and in compliance with the
requirements of any Governmental Authority having jurisdiction over it and
(ii) permit employees or agents of the Lender to visit and inspect its
properties and examine or audit its books, records, working papers and accounts
and make copies and memoranda of them, and to discuss its affairs, finances and
accounts with its officers and employees and, upon notice to and in the presence
of (except during the continuance of an Event of Default) the Borrower, the
independent public 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), provided that such independent
public accountants agree to participate in such discussions, all at such times
and from time to time, upon reasonable notice and during business hours, as may
be reasonably requested, and in the event a Default or Event of Default has
occurred and is continuing, the Borrower agrees to pay the expense of such
independent public accountants, otherwise the cost of such independent public
accountants shall be paid by the Lender.

Section 5.9       Dividends. The Borrower will take all action necessary to
cause its Subsidiaries to make such dividends, distributions or other payments
to it as shall be necessary for the Borrower to make payments of the principal
of and interest on its 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 commercially
reasonable efforts to obtain such approval.

Section 5.10     OFAC; PATRIOT Act Compliance. The Borrower will, and will cause
each of its Subsidiaries to, (i) refrain from doing business in a Sanctioned
Country or with a Sanctioned Person in violation of the economic sanctions of
the United States administered by OFAC and (ii) provide such information and
take such actions as is reasonably requested by the Lender in order to assist
the Lender in maintaining compliance with the PATRIOT Act.

ARTICLE VI

FINANCIAL COVENANTS

Until the termination of the Commitment and the payment in full in cash of all
principal and interest with respect to the Loans together with all fees,
expenses and other amounts then due and owing hereunder, the Borrower covenants
and agrees that:

Section 6.1        Maximum Consolidated Indebtedness to Total Capitalization.
The ratio of Consolidated Indebtedness to Total Capitalization at all times
shall not be greater than 0.30 to 1.0.

 

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Section 6.2        Minimum Available Dividend Amount. Available Dividend Amount
shall be at all times an amount not less than $5,000,000.

Section 6.3       Ratings. The Borrower (i) will cause Kanawha Insurance Company
to maintain a Financial Strength Rating at all times and (ii) will not permit or
cause the Financial Strength Rating of Kanawha Insurance Company to be lower
than “B++” at any time.

ARTICLE VII

NEGATIVE COVENANTS

Until the termination of the Commitment and the payment in full in cash of all
principal and interest with respect to the Loans together with all fees,
expenses and other amounts then due and owing hereunder, the Borrower covenants
and agrees that:

Section 7.1       Fundamental Changes. Except as permitted under Section 7.4,
the Borrower will not, and will not permit or cause any of its 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 the
Borrower or any Subsidiary may merge into or consolidate with any other Person
so long as (y) the surviving corporation is the Borrower or a Wholly Owned
Subsidiary of the Borrower (and in any event, if the Borrower is a party to such
merger or consolidation, the surviving corporation shall be the Borrower) and
(z) immediately after giving effect thereto, no Default or Event of Default
would occur or exist.

 

Section 7.2

Indebtedness.

(a)          The Borrower will not, create, incur, assume or permit to exist any
Indebtedness, or agree, become or remain liable (contingent or otherwise) to do
any of the foregoing, except for (i) the Obligations and (ii) other Indebtedness
which is either incurred in connection with any Lien permitted under Section 7.3
or pari passu in right of payment with, or subordinated in right of payment to,
the Obligations, so long as upon the incurrence thereof no Default or Event of
Default would occur or exist.

(b)          No Subsidiary of the Borrower will create, incur, assume or permit
to exist any Indebtedness, or agree, become or remain liable (contingent or
otherwise) to do any of the foregoing, except for:

(i)           Indebtedness existing on the date hereof and described in Schedule
7.2 and extensions, renewals and replacements of any such Indebtedness that do
not increase the outstanding principal amount thereof;

 

(ii)

Indebtedness of Subsidiaries of the Borrower owing to the Borrower;

(iii)        Indebtedness consisting of current liabilities not for borrowed
money incurred in the ordinary course of business; and

(iv)         Indebtedness which is incurred in connection with any Lien
permitted under Section 7.3.

 

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Section 7.3       Liens. The Borrower will not, and will not permit or cause any
of its 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 agree to do any of the
foregoing, other than the following:

 

(i)

Permitted Liens;

(ii)          Liens in existence on the Closing Date and set forth on Schedule
7.3 and extensions, renewals and replacements thereof so long as the outstanding
principal amount of the Indebtedness secured by any such Lien is not increased;
and

 

(iii)

Liens securing any Indebtedness permitted under Section 7.2(b)(ii).

Section 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 assets in the ordinary course of business for fair market
value;

(ii)          the sale, lease or other disposition of assets by a Subsidiary of
the Borrower to the Borrower or to another Wholly Owned Subsidiary, to the
extent permitted by applicable Requirements of Law and each relevant Insurance
Regulatory Authority; provided that (y) immediately after giving effect thereto,
no Default or Event of Default would occur or exist and (z) such sale or
disposition would not adversely affect the ability of any Insurance Subsidiary
party thereto to pay dividends or otherwise make distributions in respect of its
Capital Stock; and

(iii)        the sale of a block or blocks of insurance policies on the books of
the Borrower, which sale(s) shall not exceed in the aggregate policies with
combined direct annualized premium of $25,000,000.

Section 7.5        Investments. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, make any Investments, except:

(i)           Investments held by the Borrower or such Subsidiary in accordance
with the Investment Policy;

(ii)          advances to officers, directors and employees of the Borrower and
its Subsidiaries, for travel, entertainment, relocation and analogous ordinary
business purposes;

(iii)        Investments in the Borrower or any Wholly-Owned Subsidiary of the
Borrower;

 

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(iv)         Investments consisting of securities received in settlement of
claims, the extension of trade credit, the creation of prepaid expenses, and the
purchase of inventory, supplies, equipment and other assets, in each case by the
Borrower and its Subsidiaries in the ordinary course of business;

(v)          Investments in reverse repurchase agreements and securities lending
transactions in the ordinary course of business; and

(vi)         Investments in connection with Reinsurance Agreements or other
insurance products in the ordinary course of business.

Section 7.6        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 Party or such Subsidiary other
than:

(i)           transactions between or among any of the Borrower and its
Wholly-Owned Subsidiaries, or between or among any of such Wholly-Owned
Subsidiaries; and

(ii)          transactions with Affiliates in good faith in the ordinary course
of the Borrower’s business consistent with past practice and on terms no less
favorable to the Borrower or any Subsidiary than those that could have been
obtained in a comparable transaction on an arm’s length basis from a Person that
is not an Affiliate.

Section 7.7        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 purchase, redeem, retire or otherwise
acquire for value any shares of its Capital Stock or any warrants, rights or
options to acquire its Capital Stock (other than the grant of stock or stock
options to any director, officer or employee of the Borrower pursuant to a
written plan or agreement), or set aside funds for any of the foregoing, except
that (i) any Subsidiary may declare and pay dividends on or make distributions
to the Borrower and (ii) the Borrower may repurchase its Capital Stock, provided
no Default or Event of Default shall have occurred and be continuing, both
immediately before and after giving effect to any such repurchase.

Section 7.8        Lines of Business. The Borrower will not, and will not permit
or cause any of its Subsidiaries to, engage to any material extent in any
business other than the life reinsurance or insurance business and other
businesses engaged in by the Borrower and their respective Subsidiaries on the
date hereof or a business reasonably related thereto.

Section 7.9         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 unless (i) the Borrower shall have given the Lender
written notice of its intention to change such ending date at least sixty (60)
days prior to the effective date thereof and (ii) prior to such effective date
this Agreement shall have been amended to make any changes in the financial
covenants and other terms and conditions to the extent necessary, in the
reasonable determination of the Lender, to reflect the new fiscal year ending
date.

 

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Section 7.10      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 or
permitted by GAAP or SAP, as applicable.

Section 7.11     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 to perform and comply with its
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 (a) the Credit Documents and (b) applicable Requirements
of Law.

ARTICLE VIII

EVENTS OF DEFAULT

Section 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 when
due or (ii) any interest on any Loan, any fee or any other Obligation under this
Agreement or under the other Credit Documents within three (3) Business Days
after such interest, fee or other amount becomes due in accordance with the
terms hereof or thereof; or

(b)          The Borrower shall (i) fail to, or fail to cause its Subsidiaries
that are subject thereto to, observe, perform or comply with any condition,
covenant or agreement applicable to it contained in any of Section 2.13, Section
5.3(d)(i) or Section 5.4(i), Article VI and Article VII or (ii) fail to observe,
perform or comply with any condition, covenant or agreement contained in Section
5.1 and (in the case of this clause (ii) only) such failure shall continue
unremedied for a period of 10 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; or

(c)          The Borrower 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 Section 8.1(a) and (b), and such
failure shall continue unremedied 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; or

(d)          Any representation or warranty made or deemed made by or on behalf
of the Borrower in this Agreement, any of the other Credit Documents or in any
certificate, instrument, report or other document furnished at any time in
connection herewith or therewith shall prove to have been incorrect, false or
misleading in any material respect as of the time made or deemed made; or

 

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(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 or notice provision) (y) any principal of
or interest on any Indebtedness (other than the Indebtedness incurred pursuant
to this Agreement or a Hedge Agreement) having an aggregate principal amount of
at least $1,000,000 or (z) any termination or other payment under any Hedge
Agreement having a net termination obligation of at least $1,000,000 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 Hedge Agreement, 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 Hedge
Agreement (or a trustee or agent on its or their behalf) to cause (with or
without the giving of notice, lapse of time, or both), without regard to any
subordination terms with respect thereto, such Indebtedness or Hedge Agreement
to become due, or to be prepaid, redeemed, purchased or defeased, prior to its
stated maturity; or

(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 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 Section 8.1(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; or

(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 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; or

(h)          Any one or more money judgments, writs or warrants of attachment,
executions or similar processes involving an aggregate amount (to the extent not
paid or fully bonded or covered by insurance as to which the surety or insurer,
as the case may be, has the financial ability to perform and has acknowledged
liability in writing) in excess of $1,000,000 shall be entered or filed against
the Borrower, any of its Subsidiaries, or any of their respective properties and
the same shall not be paid, dismissed, bonded, vacated, stayed or discharged
within a period of thirty (30) days or in any event later than five (5) days
prior to the date of any proposed sale of such property thereunder; or

(i)           Any ERISA Event shall occur or exist with respect to any Plan or
Multiemployer Plan and, as a result thereof, together with all other ERISA
Events then existing, there shall exist a reasonable likelihood that the
Borrower or any ERISA Affiliate would incur liability to any one

 

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or more Plans or Multiemployer Plans or to the PBGC (or to any combination
thereof) in excess of $1,000,000; or

(j)           Any Insurance Regulatory Authority or other Governmental Authority
having jurisdiction shall issue any order of conservation, supervision,
rehabilitation or liquidation or any other order of similar effect in respect of
any Insurance Subsidiary; or

(k)          At any time, Kanawha Insurance Company shall cease to be a Wholly
Owned Subsidiary of the Borrower other than as otherwise permitted in this
Agreement; 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 40% or more of the Total 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).

Section 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 a Bankruptcy Event, the
Commitment shall automatically be terminated;

(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 a Bankruptcy Event
or an Event of Default pursuant to Section 8.1(j), 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.

 

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Section 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 and each of its Affiliates may, and each is hereby
authorized 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 or any such Affiliate to or for
the credit or the account of the Borrower against any or all of the Obligations
of the Borrower now or hereafter existing under this Agreement or any other
Credit Documents to the Lender, whether or not such Obligations may be
contingent or unmatured. 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

 

Section 9.1

Expenses; Indemnity; Damage Waiver.

(a)          The Borrower shall pay (i) all reasonable out-of-pocket expenses
incurred by the Lender (including the reasonable fees, charges and disbursements
of counsel for the Lender), in connection with the preparation, negotiation,
execution, delivery and administration of this Agreement and the other Credit
Documents or any amendments, modifications, consents or waivers of the
provisions hereof or thereof (whether or not the transactions contemplated
hereby or thereby shall be consummated) and (ii) all reasonable out-of-pocket
expenses incurred by the Lender (including the reasonable fees, charges and
disbursements of any counsel for the Lender), in connection with the enforcement
or protection of its rights (A) in connection with this Agreement and the other
Credit Documents, including its rights under this Section, or (B) in connection
with the Loans made hereunder, including all such reasonable out-of-pocket
expenses incurred during any workout, restructuring or negotiations in respect
of such Loans.

(b)          The Borrower shall indemnify the Lender and each Related Party of
the Lender (each such person being called an “Indemnitee”) against, and hold
each Indemnitee harmless from, any and all losses, claims, damages, liabilities
and related expenses (including the reasonable fees, charges and disbursements
of any counsel for any Indemnitee)(collectively, “Losses”), incurred by any
Indemnitee or asserted against any Indemnitee arising out of, in connection
with, or as a result of (i) the execution or delivery of this Agreement, any
other Credit Document or any agreement or instrument contemplated hereby or
thereby, the performance by the parties hereto of their respective obligations
hereunder or thereunder or the consummation of the transactions contemplated
hereby or thereby, (ii) any Loan or the use or proposed use of the proceeds
therefrom, (iii) any actual or alleged presence or release of Hazardous
Substances on or from any property owned or operated by the Borrower or any of
its Subsidiaries, or any Environmental Claim related in any way to the Borrower
or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation,
investigation or proceeding relating to any of the foregoing, whether based on
contract, tort or any other theory, and regardless of whether any

 

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Indemnitee is a party thereto; provided that such indemnity shall not, as to any
Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Indemnitee.

(c)          To the fullest extent permitted by applicable law, the Borrower
shall not assert, and hereby waives, any claim against any Indemnitee, on any
theory of liability, for special, indirect, consequential or punitive damages
(as opposed to direct or actual damages) arising out of, in connection with, or
as a result of, this Agreement, any other Credit Document or any agreement or
instrument contemplated hereby, the transactions contemplated hereby or thereby,
any Loan or the use of the proceeds thereof.

(d)          All amounts due under this Section shall be payable by the Borrower
upon demand therefor.

Section 9.2        Governing Law; Submission to Jurisdiction; Waiver of Venue;
Service of Process.

(a)          THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS SHALL (EXCEPT AS MAY
BE EXPRESSLY OTHERWISE PROVIDED IN ANY CREDIT DOCUMENT) BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NORTH CAROLINA (WITHOUT
REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF).

(b)          THE BORROWER IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF
AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND OF THE UNITED STATES DISTRICT
COURT OF THE WESTERN DISTRICT OF NORTH CAROLINA, AND ANY APPELLATE COURT FROM
ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY OTHER CREDIT DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY
JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES
THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN SUCH STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL
JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER
PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER CREDIT DOCUMENT SHALL
AFFECT ANY RIGHT THAT THE LENDER MAY OTHERWISE HAVE TO BRING ANY ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT AGAINST THE
BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.

(c)          THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION

 

47

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THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT
DOCUMENT IN ANY COURT REFERRED TO IN Section 9.2(b). EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT.

(d)          EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE
MANNER PROVIDED FOR NOTICES IN Section 9.4. NOTHING IN THIS AGREEMENT WILL
AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY APPLICABLE LAW.

 

Section 9.3

Arbitration; Preservation and Limitation of Remedies.

(a)          Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to this Agreement or any other Credit
Document (“Disputes”) between or among the Borrower and the Lender, shall be
resolved by binding arbitration as provided herein. Institution of a judicial
proceeding by a party does not waive the right of that party to demand
arbitration hereunder. Disputes may include, without limitation, tort claims,
counterclaims, claims brought as class actions, claims arising from documents
executed in the future, disputes as to whether a matter is subject to
arbitration, or claims arising out of or connected with the transactions
contemplated by this Agreement and the other Credit Documents. Arbitration shall
be conducted under and governed by the Commercial Financial Disputes Arbitration
Rules (the “Arbitration Rules”) of the American Arbitration Association (the
“AAA”), as in effect from time to time, and the Federal Arbitration Act, Title 9
of the U.S. Code, as amended. All arbitration hearings shall be conducted in the
city in which the principal office of the Lender is located. A hearing shall
begin within 90 days of demand for arbitration and all hearings shall be
concluded within 120 days of demand for arbitration. These time limitations may
not be extended unless a party shows cause for extension and then for no more
than a total of 60 days. The expedited procedures set forth in Rule 51 et seq.
of the Arbitration Rules shall be applicable to claims of less than $1,000,000.
All applicable statutes of limitation shall apply to any Dispute. A judgment
upon the award may be entered in any court having jurisdiction. The panel from
which all arbitrators are selected shall be comprised of licensed attorneys
selected from the Commercial Financial Dispute Arbitration Panel of the AAA. The
single arbitrator selected for expedited procedure shall be a retired judge from
the highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted. The parties do not waive applicable federal or
state substantive law except as provided herein.

Notwithstanding the preceding binding arbitration provisions, the parties hereto
agree to preserve, without diminution, certain remedies that any party hereto
may employ or exercise freely, either alone, in conjunction with or during a
Dispute. Any party hereto shall have the right to proceed in any court of proper
jurisdiction or by self-help to exercise or prosecute the following remedies, as
applicable: (i) all rights to foreclose against any collateral by exercising a
power of sale granted pursuant to any of the Credit Documents or under
applicable law or by judicial foreclosure and sale, including a proceeding to
confirm the sale; (ii) all rights of self-

 

48

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help, including peaceful occupation of real property and collection of rents,
set-off, and peaceful possession of personal property; (iii) obtaining
provisional or ancillary remedies, including injunctive relief, sequestration,
garnishment, attachment, appointment of a receiver and filing an involuntary
bankruptcy proceeding; and (iv) when applicable, a judgment by confession of
judgment. Any claim or controversy with regard to any party’s entitlement to
such remedies is a Dispute. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute. The parties hereto agree that no party shall have a remedy
of punitive or exemplary damages against any other party in any Dispute, and
each party hereby waives any right or claim to punitive or exemplary damages
that it has now or that may arise in the future in connection with any Dispute,
whether such Dispute is resolved by arbitration or judicially. The parties
acknowledge that by agreeing to binding arbitration they have irrevocably waived
any right they may have to a jury trial with regard to a Dispute. The Borrower
agrees to pay the reasonable fees and expenses of counsel to the Lender in
connection with any Dispute subject to arbitration as provided herein; provided,
however, that the Borrower will not pay such fees and expenses if such Dispute
is concluded in favor of the Borrower.

 

Section 9.4

Notices; Effectiveness; Electronic Communication.

(a)          All notices and other communications provided for herein shall be
in writing and shall be delivered by hand or overnight courier service, mailed
by certified or registered mail or sent by telecopier to the Borrower or the
Lender at the address (or telecopier number) specified for such person on
Schedule 1.1(a). Notices sent by hand or overnight courier service, or mailed by
certified or registered mail, shall be deemed to have been given when received;
notices sent by telecopier shall be deemed to have been given when sent (except
that, if not given during normal business hours for the recipient, shall be
deemed to have been given at the opening of business on the next business day
for the recipient). Notices delivered through electronic communications to the
extent provided in Section 9.4(b) shall be effective as provided in Section
9.4(b).

(b)          Any party hereto may change its address or telecopier number for
notices and other communications hereunder by notice to the other party hereto.

Section 9.5       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.

 

Section 9.6

Successors and Assigns.

(a)          The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
permitted hereby, except that the Borrower may not assign or otherwise transfer
any of its rights or obligations hereunder without the prior written consent of
the Lender. Nothing in this Agreement, expressed or implied, shall be construed
to confer upon any Person (other than the parties hereto, their respective
successors and assigns permitted hereby, Participants to the extent provided in
Section 9.6(d) and, to the

 

49

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extent expressly contemplated hereby, the Related Parties of the Lender) any
legal or equitable right, remedy or claim under or by reason of this Agreement.

(b)          The Lender may at any time assign to one or more financial
institutions all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans at the time owing to
it); provided that any such assignment must be approved (so long as no Default
or Event of Default has occurred and is continuing) by the Borrower, each such
consent not to be unreasonably withheld or delayed, unless the Person that is
the proposed assignee is an Eligible Assignee. If requested by or on behalf of
the Eligible Assignee, the Borrower, at its own expense, will execute and
deliver to such Eligible Assignee a new Note to the order of such Eligible
Assignee (and, if the Lender has retained any portion of its rights and
obligations hereunder, to the order of the Lender), as necessary to reflect,
after giving effect to the assignment, the Commitments and/or outstanding Loans,
as the case may be, of the Eligible Assignee and (to the extent of any retained
interests) the Lender.

(c)          The Lender shall maintain at its address for notices referred to in
Schedule 1.1(a) a register for the recordation of the names and addresses of the
Lenders, and the Commitment of, and principal amounts of the Loans owing to,
each Lender pursuant to the terms hereof from time to time (the “Register”). The
entries in the Register shall be conclusive absent manifest error, and the
Borrower and the Lender may treat each Person whose name is recorded in the
Register pursuant to the terms hereof as a Lender hereunder for all purposes of
this Agreement, notwithstanding notice to the contrary.

(d)          The Lender may at any time, without the consent of, or notice to,
the Borrower, sell participations to any Person (other than a natural person or
the Borrower or any Affiliates or Subsidiaries of the Borrower) (each, a
“Participant”) in all or a portion of the Lender’s rights and/or obligations
under this Agreement (including all or a portion of its Commitment and/or the
Loans); provided that (i) the Lender’s obligations under this Agreement shall
remain unchanged, (ii) the Lender shall remain solely responsible to the
Borrower for the performance of such obligations and (iii) the Borrower shall
continue to deal solely and directly with the Lender in connection with the
Lender’s rights and obligations under this Agreement.

(e)          A Participant shall not be entitled to receive any greater payment
under Section 2.14(a), Section 2.14(b) or Section 2.15 than the Lender would
have been entitled to receive with respect to the participation sold to such
Participant, unless the sale of the participation to such Participant is made
with the Borrower’s prior written consent. A Participant shall not be entitled
to the benefits of Section 2.15 unless the Borrower is notified of the
participation sold to such Participant and such Participant agrees, for the
benefit of the Borrower, to comply with Section 2.15(e) as though it were a
Lender, and Section 2.15(e) shall be read accordingly.

(f)           The Lender may at any time pledge or assign a security interest in
all or any portion of its rights under this Agreement (including under its Note)
to secure obligations of the Lender, including any pledge or assignment to
secure obligations to a Federal Reserve Bank; provided that no such pledge or
assignment shall release the Lender from any of its obligations hereunder or
substitute any such pledgee or assignee for the Lender as a party hereto.

 

50

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(g)          Any Lender or Participant may, in connection with any assignment,
participation, or pledge pursuant to this Section 9.6, disclose to any proposed
assignee, Participant or pledgee, any information relating to the Borrower and
its Subsidiaries furnished to it by or on behalf of any other party hereto,
provided that such proposed assignee, Participant or pledgee agrees in writing
to keep such information confidential to the same extent required of the Lender
under Section 9.11.

Section 9.7        No Waiver. The rights and remedies of the Lender 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 the Lender 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.

Section 9.8        Survival. All representations, warranties and agreements made
by or on behalf of the Borrower in this Agreement and in the other Credit
Documents shall survive the execution and delivery hereof or thereof, the making
and repayment of the Loans. In addition, notwithstanding anything herein to the
contrary, the provisions of this Agreement and the other Credit Documents
relating to indemnification or payment of costs and expenses, including, without
limitation, the provisions of Section 2.14(a), Section 2.14(b), Section 2.15,
and Section 9.1, shall survive the payment in full of all Loans, the termination
of the Commitment, and any termination of this Agreement or any of the other
Credit Documents.

Section 9.9        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.

Section 9.10    Construction. The headings of the various articles, sections and
subsections of this Agreement and the table of contents 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.

Section 9.11      Confidentiality. The Lender agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective
partners, directors, officers, employees, agents, advisors and other
representatives (it being understood that the Persons to whom such disclosure is
made will

 

51

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be informed of the confidential nature of such Information and instructed to
keep such Information confidential), (b) to the extent requested by any
regulatory authority purporting to have jurisdiction over it (including any
self-regulatory authority, such as the NAIC), (c) to the extent required by
applicable Requirements of Law or by any subpoena or similar legal process,
(d) to any other party hereto, (e) in connection with the exercise of any
remedies hereunder or under any other Credit Document or any action or
proceeding relating to this Agreement or any other Credit Document or the
enforcement of rights hereunder or thereunder, (f) subject to an agreement
containing provisions substantially the same as those of this Section, to
(i) any assignee of or Participant in, or any prospective assignee of or
Participant in, any of its rights or obligations under this Agreement, or
(ii) any actual or prospective counterparty (or its advisors) to any swap or
derivative transaction relating to the Borrower and its obligations (g) with the
consent of the Borrower or (h) to the extent such Information (x) becomes
publicly available other than as a result of a breach of this Section or
(y) becomes available to the Lender or any of its Affiliates on a
nonconfidential basis from a source other than the Borrower or any of its
Subsidiaries or Affiliates or any other party hereto.

For purposes of this Section, “Information” means all information received from
the Borrower relating to the Borrower or its business, other than any such
information that is available to the Lender on a nonconfidential basis prior to
disclosure by the Borrower, provided that, in the case of information received
from the Borrower after the date hereof, such information is clearly identified
at the time of delivery as confidential. Any Person required to maintain the
confidentiality of Information as provided in this Section shall be considered
to have complied with its obligation to do so if such Person has exercised the
same degree of care to maintain the confidentiality of such Information as such
Person would accord to its own confidential information.

Section 9.12     Counterparts; Integration; Effectiveness. This Agreement may be
executed in counterparts (and by different parties hereto in different
counterparts), each of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This Agreement and the other
Credit Documents constitute the entire contract among the parties relating to
the subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof. Except
as provided in Section 3.1, this Agreement shall become effective when it shall
have been executed by each of the parties hereto. Delivery of an executed
counterpart of a signature page of this Agreement by telecopy shall be effective
as delivery of a manually executed counterpart of this Agreement.

Section 9.13      USA PATRIOT Act Notice. The Lender hereby notifies the
Borrower that pursuant to the requirements of the PATRIOT Act, it is required to
obtain, verify and record information that identifies the Borrower, which
information includes the names and addresses of the Borrower and other
information that will allow the Lender to identify the Credit Parties in
accordance with the PATRIOT Act.

 

52

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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.

 

KMG AMERICA CORPORATION

 

 

By:

__________________________________________

 

Title:

__________________________________________

 

 

--------------------------------------------------------------------------------

WACHOVIA BANK, NATIONAL ASSOCIATION

 

 

By:

__________________________________________

 

Title:

__________________________________________

 

 

--------------------------------------------------------------------------------

 

EXHIBIT A

 

Borrower’s Taxpayer Identification No. _____________

 

NOTE

 

$15,000,000

December __, 2006

Charlotte, North Carolina

 

FOR VALUE RECEIVED, KMG AMERICA CORPORATION, a company incorporated under the
laws of the Commonwealth of Virginia (the “Borrower”), hereby promises to pay to
the order of WACHOVIA BANK, NATIONAL ASSOCIATION (the “Lender”), at its offices
located at One Wachovia Center, 301 South College Street, Charlotte, North
Carolina (or at such other place or places as the Lender may designate), at the
times and in the manner provided in the Credit Agreement, dated as of December
21, 2006 (as amended, modified, restated or supplemented from time to time, the
“Credit Agreement”), among the Borrower and the Lender, the principal sum of
FIFTEEN MILLION DOLLARS ($15,000,000), under the terms and conditions of this
promissory note (this “Note”) and the Credit Agreement. The defined terms in the
Credit Agreement are used herein with the same meaning. The Borrower also
promises to pay interest on the aggregate unpaid principal amount of this Note
at the rates applicable thereto from time to time as provided in the Credit
Agreement.

This Note is issued to evidence the Loans made by the Lender pursuant to the
Credit Agreement. All of the terms, conditions and covenants of the Credit
Agreement are expressly made a part of this Note by reference in the same manner
and with the same effect as if set forth herein at length, and any holder of
this Note is entitled to the benefits of and remedies provided in the Credit
Agreement and the other Credit Documents. Reference is made to the Credit
Agreement for provisions relating to the interest rate, maturity, payment,
prepayment and acceleration of this Note.

In the event of an acceleration of the maturity of this Note, this Note shall
become immediately due and payable, without presentation, demand, protest or
notice of any kind, all of which are hereby waived by the Borrower.

In the event this Note is not paid when due at any stated or accelerated
maturity, the Borrower agrees to pay, in addition to the principal and interest,
all costs of collection, including reasonable attorneys’ fees.

This Note shall be governed by and construed in accordance with the internal
laws and judicial decisions of the State of North Carolina (without regard to
the conflicts of law provisions thereof). The Borrower hereby submits to the
nonexclusive jurisdiction and venue of the federal and state courts located in
Mecklenburg County, North Carolina, although the Lender shall not be limited to
bringing an action in such courts.

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its duly
authorized corporate officer as of the day and year first above written.

 

KMG AMERICA CORPORATION

 

 

By:

________________________________

 

Name:

________________________________

 

Title:

________________________________

 

 

--------------------------------------------------------------------------------

 

EXHIBIT B-1

 

NOTICE OF BORROWING

 

 

Wachovia Bank, National Association

[Need Address]

Charlotte, North Carolina 28288

Attention: [Name]

 

Ladies and Gentlemen:

 

The undersigned, KMG America Corporation (the “Borrower”), refers to the Credit
Agreement, dated as of December 21, 2006, among the Borrower and you, as the
Lender named therein (as amended, modified, restated or supplemented from time
to time, the “Credit Agreement,” the terms defined therein being used herein as
therein defined), and, pursuant to Section 2.2(b) of the Credit Agreement,
hereby gives you, as Lender, irrevocable notice that the Borrower requests a
Borrowing of Loans under the Credit Agreement, and to that end sets forth below
the information relating to such Borrowing (the “Proposed Borrowing”) as
required by Section 2.2(b) of the Credit Agreement:

(i)               The aggregate principal amount of the Proposed Borrowing is
$_______.1

(ii)  The Loans comprising the Proposed Borrowing shall be initially made as
[Base Rate Loans] [LIBOR Loans].2

(iii) [The initial Interest Period for the LIBOR Loans comprising the Proposed
Borrowing shall be [one/two/three/six months].]3

(iv) The Proposed Borrowing is requested to be made on _______ __, 200_ (the
“Borrowing Date”).4

The Borrower hereby certifies that the following statements are true on and as
of the date hereof and will be true on and as of the Borrowing Date:

_________________________

1 Amount of Proposed Borrowing must comply with Section 2.2(b) of the Credit
Agreement.

2 Select the applicable Type of Loans.

3 Include this clause in the case of a Proposed Borrowing comprised of LIBOR
Loans, and select the applicable Interest Period.

4 Shall be a Business Day at least three Business Days after the date hereof in
the case of LIBOR Loans.

 

--------------------------------------------------------------------------------

A.           Each of the representations and warranties contained in Article IV
of the Credit Agreement and in the other Credit Documents is and will be true
and correct on and as of each such date, with the same effect as if made on and
as of each such date, both immediately before and after giving effect to the
Proposed Borrowing and to the application of the proceeds therefrom (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);

B.           No Default or Event of Default has occurred and is continuing or
would result from the Proposed Borrowing or from the application of the proceeds
therefrom; and

C.           After giving effect to the Proposed Borrowing, the aggregate
principal amount of Loans outstanding will not exceed the Commitment.

 

Very truly yours,

 

KMG AMERICA CORPORATION

 

 

By:

_________________________________

 

 

Title:

_________________________________

 

 

 

2

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EXHIBIT B-2

 

NOTICE OF CONVERSION/CONTINUATION

 

 

Wachovia Bank, National Association

[Need Address]

Charlotte, North Carolina 28288

Attention: [Name]

 

Ladies and Gentlemen:

 

The undersigned, KMG America Corporation (the “Borrower”), refers to the Credit
Agreement, dated as of December 21, 2006, among the Borrower and you, as the
Lender named therein (as amended, modified, restated or supplemented from time
to time, the “Credit Agreement,” the terms defined therein being used herein as
therein defined), and, pursuant to Section 2.9(b) of the Credit Agreement,
hereby gives you, as Lender, irrevocable notice that the Borrower requests a
[conversion] [continuation]1 of Loans under the Credit Agreement, and to that
end sets forth below the information relating to such [conversion]
[continuation] (the “Proposed [Conversion] [Continuation]”) as required by
Section 2.9(b) of the Credit Agreement:

(i)    The Proposed [Conversion] [Continuation] is requested to be made on
_______________.2

(ii)  The Proposed [Conversion] [Continuation] involves $____________3 in
aggregate principal amount of Loans made pursuant to a Borrowing on
________________,4 which Loans are presently maintained as [Base Rate] [LIBOR]
Loans and are proposed hereby to be [converted into Base Rate Loans] [converted
into LIBOR Loans] [continued as LIBOR Loans].5

 

_________________________

1 Insert “conversion” or “continuation” throughout the notice, as applicable.

2 Shall be a Business Day at least one Business Day after the date hereof (in
the case of any conversion of LIBOR Loans into Base Rate Loans) or at least
three Business Days after the date hereof (in the case of any conversion of Base
Rate Loans into, or continuation of, LIBOR Loans), and additionally, in the case
of any conversion of LIBOR Loans into Base Rate Loans, or continuation of LIBOR
Loans, shall be the last day of the Interest Period applicable to such LIBOR
Loans.

3 Amount of Proposed Conversion or Continuation must comply with Section 2.9(b)
of the Credit Agreement.

4 Insert the applicable Borrowing Date for the Loans being converted or
continued.

5 Complete with the applicable bracketed language.

 

--------------------------------------------------------------------------------

(iii) [The initial Interest Period for the Loans being [converted into]
[continued as] LIBOR Loans pursuant to the Proposed [Conversion] [Continuation]
shall be [one/two/three/six months].]6

The Borrower hereby certifies that the following statement is true both on and
as of the date hereof and on and as of the effective date of the Proposed
[Conversion] [Continuation]: no Default or Event of Default has or will have
occurred and is continuing or would result from the Proposed [Conversion]
[Continuation].

 

Very truly yours,

 

KMG AMERICA CORPORATION

 

 

By:

_________________________________

 

 

Title:

_________________________________

 

 

 

_________________________

6 Include this clause in the case of a Proposed Conversion or Continuation
involving a conversion of Base Rate Loans into, or continuation of, LIBOR Loans,
and select the applicable Interest Period.

 

2

 

--------------------------------------------------------------------------------

 

EXHIBIT C

 

FORM OF COMPLIANCE CERTIFICATE

THIS CERTIFICATE is delivered pursuant to the Credit Agreement, dated as of
December 21, 2006 (the “Credit Agreement”), between KMG AMERICA CORPORATION, a
Virginia corporation (the “Borrower”), and WACHOVIA BANK, NATIONAL ASSOCIATION
(the “Lender”). Capitalized terms used herein without definition shall have the
meanings given to such terms in the Credit Agreement.

The undersigned hereby certifies that:

 

1.

He is a duly elected Financial Officer of KMG AMERICA CORPORATION.

2.            Enclosed with this Certificate are copies of the financial
statements of the Borrower and its Subsidiaries as of _____________, and for the
[________-month period] [year] then ended, required to be delivered under
Section [5.1(a)][5.1(b)] and 5.2of the Credit Agreement. Such financial
statements have been prepared in accordance with GAAP [(subject to the absence
of notes required by GAAP and SAP, as applicable, and subject to normal year-end
adjustments)]1 and fairly present the financial condition of the Borrower and
its Subsidiaries on a consolidated basis as of the date indicated and the
results of operation of the Borrower and its Subsidiaries on a consolidated
basis for the period covered thereby.

3.            The undersigned has reviewed the terms of the Credit Agreement and
has made, or caused to be made under the supervision of the undersigned, a
review in reasonable detail of the transactions and condition of the Borrower
and its Subsidiaries during the accounting period covered by such financial
statements.

4.            The examination described in paragraph 3 above did not disclose,
and the undersigned has no knowledge of the existence of, any Default or Event
of Default during or at the end of the accounting period covered by such
financial statements or as of the date of this Certificate, except as set forth
below.

Describe here or in a separate attachment any exceptions to paragraph 4 above by
listing, in reasonable detail, the nature of the Default or Event of Default,
the period during which it existed and the action that the Borrower has taken or
proposes to take with respect thereto.]

5.            Attached to this Certificate as Attachment A is a covenant
compliance worksheet reflecting the computation of the financial covenants set
forth in Article VI of the Credit Agreement as of the last day of and for the
period covered by the financial statements enclosed herewith.

_________________________

1 Insert in the case of quarterly financial statements.

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate
as of the _______ day of _____________, ____.

 

KMG AMERICA CORPORATION

 

 

By:

___________________________________

 

 

Name:

___________________________________

 

 

Title:

___________________________________

 

 

 

2

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ATTACHMENT A

 

COVENANT COMPLIANCE WORKSHEET

 

A.           Maximum Consolidated Indebtedness to Total Capitalization (Section
6.1 of the Credit Agreement)

 

(1) Consolidated Indebtedness as of the date of determination (excluding, to the
extent otherwise included, amounts due to Hybrid Securities)

 

 

 

$               

(2) Total Capitalization of the Borrower as of such date

 

 

 

(a)             Consolidated Indebtedness as of such date (from Line 1 above)

 

$________

 

 

(b)             Consolidated Net Worth as of such date (excluding (1)
Disqualified Capital Stock, (2) accumulated other comprehensive income (loss)
(including any such income (loss) arising from adjustments pursuant to Statement
No. 115 of the Financial Accounting Standards Board of the United States of
America and (3) amounts due to Hybrid Securities)

 

 

$________

 

 

(c)             Aggregate redemption value of all Hybrid Securities as of such
date

 

$________

 

 

(d)             Sum of Line 2(a), Line 2(b) and Line 2(c)

$________

 

 

(3) Hybrid Securities exclusion:

Multiply Line 2(d) by 15%

 

$________

 

 

(4) Adjustment for Hybrid Securities:

Subtract line (3) from Line 2(c) (if not a positive number, enter 0)

 

 

 

$               

(5) Consolidated Indebtedness plus Adjustment for Hybrid Securities:

Add Line 1 and Line 4

 

 

 

 

$               

(6) Consolidated Indebtedness (as adjusted) to Total Capitalization as of the
date of determination:

Divide Line 5 by Line 2(d)

 

 

 

               

(7) Maximum Consolidated Indebtedness to Total Capitalization Ratio as of the
date of determination

 

 

 

0.30 : 1.0

 

--------------------------------------------------------------------------------

B.           Minimum Available Dividend Amount (Section 6.2 of the Credit
Agreement)

 

(1)

The aggregate Available Dividend Amount for all Insurance Subsidiaries as of
such date

$____________

(2)

Required Available Dividend Amount for such period

$5,000,000

 

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C.           Ratings (Section 6.3 of the Credit Agreement)

 

 

 

Insurance Subsidiaries

Financial Strength Rating

Kanawha Insurance Company

_____

[list other Insurance Subsidiaries]

 

 

 

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EXHIBIT D

FORM OF OPINION

Matters for Legal Opinion of Counsel

Terms not otherwise defined herein shall have the meanings ascribed to them in
the Credit Agreement. The opinion should be addressed to the Lender under the
Credit Agreement and should permit reliance thereon by the assignees and
participants of such parties.

 

1.        The Borrower is duly organized, validly existing [and in good
standing]1 under the laws of the jurisdiction of its incorporation.

2.            The Borrower has the full corporate power and authority to
execute, deliver and perform its obligations under the Credit Documents.

3.            The Borrower has taken all necessary corporate action to execute,
deliver and perform its obligations under, and has validly executed and
delivered, each Credit Document. Each Credit Document constitutes the legal,
valid and binding obligation of the Borrower, enforceable against it in
accordance with its terms.

4.            The execution, delivery and performance by the Borrower of the
Credit Documents, and compliance by it with the terms thereof, do not and will
not (i) violate any provision of its certificate of incorporation or bylaws,
(ii) contravene any provision of any applicable law, rule or regulation of the
State of North Carolina or federal law or, to the best of our knowledge, any
judgment, order, writ, injunction, decree or determination of any arbitrator or
Governmental Authority to which it is subject, (iii) conflict with, result in a
breach of or constitute (with notice, lapse of time or both) a default under any
material contract to which it is a party, by which it or any of its properties
is bound or to which it is subject, or (iv) result in or require the creation or
imposition of any Lien upon any of its property or assets.

5.            No authorization, approval or other action by, or notice to or
filing or registration with, any Governmental Authority or arbitrator is
required for the Borrower’s execution and delivery of the Credit Documents or
performance of its obligations thereunder.

6.            There are no actions, investigations, suits or proceedings pending
or, to the best of our knowledge, threatened, at law, in equity or in
arbitration, before any court, other Governmental Authority or other Person
against the Borrower or the properties of the Borrower (i)  that would have a
Material Adverse Effect or (ii) with respect to any of the Credit Documents.

_________________________

1 Insert this phrase only if such concept is recognized in the jurisdiction
whose law is governing the opinion.

 

--------------------------------------------------------------------------------

7.            The Borrower is not an “investment company” or a company
“controlled” by an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.

8.            The execution and delivery of the Credit Documents by the Borrower
and the making of the Loans under the Credit Agreement will not violate
Regulation T, U or X of the Board of Governors of the Federal Reserve System.

 

--------------------------------------------------------------------------------

 

Schedule 1.1(a)

 

Notice Addresses

 

 

--------------------------------------------------------------------------------

 

Schedule 4.4

 

Kanawha Insurance Company

State Licenses

 

State

Type of License

Alabama

Life, Health and Accident

Arizona

Life and Disability

Arkansas

Life and Disability

California

Life and Disability

Colorado

Life, Health & Accident

Connecticut

Accident and Health, Reinsurance & Life

Delaware

Life, including Annuities and Health

District of Columbia

Life, Health and Accident (Group and Individual)

Florida

Life and Health

Georgia

Life, Accident and Sickness

Hawaii

Accident and Health or Sickness

Idaho

Life and Disability

Illinois

Life, Health and Accident

Indiana

Life, Health and Accident

Iowa

Life, Health and Accident (Group and Individual)

Kansas

Life, Accident and Health

Kentucky

Life and Health

Louisiana

Life, Health, Accident and Annuities

Maryland

Life, including Annuities and Health

Massachusetts

Life, Accident and Health

Michigan

Life and Health

Minnesota

Life, Health and Accident

Mississippi

Life, Health and Accident

Missouri

Life, Health, Annuities, Endowments and Accident

Montana

Life and Disability

Nebraska

Life, Health and Accident

Nevada

Life and Health

New Jersey

Life, Health and Annuities

New Mexico

Life and Health

New York

Reinsurance Only

North Carolina

Life, Annuities, Accident and Health

North Dakota

Life, Annuity, Accident and Health

Ohio

Life, Health and Annuities

Oklahoma

Life, Health and Accident

Oregon

Life and Health

Pennsylvania

Accident, Health, Life and Annuities

Rhode Island

Life, Accident, Health and Annuities

South Carolina

Life, Accident and Health

South Dakota

Life and Health

Tennessee

Life, Disability, Accident and Health

Texas

Life, Accident and Health

Utah

Life, Health, Accident and Annuity

Vermont

Life and Health

Virginia

Life, Accident, Sickness and Annuities

State of Washington

Life and Disability

West Virginia

Life, Accident and Sickness

Wisconsin

Life, Annuities and Disability

Wyoming

Life and Disability

 

 

--------------------------------------------------------------------------------

 

Schedule 4.7

 

KMG America Corporation

 

Kanawha Insurance Company (100% owned by KMG America Corporation)

 

Kanawha HealthCare Solutions, Inc. (100% owned by Kanawha Insurance Company)

 

Kanawha Marketing Group, Inc.* (100% owned by Kanawha HealthCare Solutions,
Inc.)

 

* Effective December 31, 2006, Kanawha Marketing Group, Inc. will merge into
Kanawha HealthCare Solutions, Inc.

 

 

--------------------------------------------------------------------------------

 

Schedule 7.2

 

Indebtedness

 

$15,000,000 Subordinated Promissory Note, dated December 21, 2004, held by The
Springs Company.

 

--------------------------------------------------------------------------------

 

Schedule 7.3

 

Liens

 

1.        Office equipment leases as described in Note 15 to KMG America
Corporation and Predecessor Notes to Consolidated Financial Statements in the
Form 10-K filed by KMG America Corporation for the year ended December 31, 2005.

 

2.        IT and document management lease as described in Note 15 to KMG
America Corporation and Predecessor Notes to Consolidated Financial Statements
in the Form 10-K filed by KMG America Corporation for the year ended December
31, 2005.