Document:

exv10w1

 

Exhibit-10.1

March 6, 2007

Mr. Lawrence A. Gyenes

16 Benedict Crescent

Basking Ridge, NJ 07920

     Re:      Employment with Zila, Inc.

Dear Larry:

     I am pleased to extend an employment offer to you on behalf Zila, Inc. (the “Company”) on the
following terms:

     1. Title. Your title will be Chief Financial Officer (CFO).

     2. Start Date. Your target start date is March 12, 2007. (Your actual first day of
employment with the Company, whether March 12, 2007 or some other date, is referred to herein as
the “Start Date.”)

     3. Reporting Structure. You will report directly to me in my capacity as CEO of the Company.

     4. Responsibilities. Your responsibilities will be those consistent with the above-described
position and/or as they may be assigned to you by the Company.

     5. Base Salary. Your initial base salary will be paid at the rate of three hundred thousand
dollars ($300,000.00) per year, less applicable withholdings as may be required by law, in
accordance with the Company’s regular payroll practices (currently bi-weekly).

     6. Auto allowance. You will receive an auto allowance as may approximately be commensurate
with those provided other executive-level employees. Initially, this will be $800 per month,
subject to Internal Revenue Service regulations and paid in accordance with the Company’s regular
payroll practices.

     7. Special Bonus. No later than the first regular Company payroll date on or after sixty (60)
says from the Start Date, you will receive a one-time special bonus in the amount of twenty-five
thousand dollars ($25,000.00), less applicable withholdings as may be required by law. You must
still be employed by the Company on such payroll date to receive this bonus. If you voluntarily
terminate your employment with the Company within six (6) months of the Start Date, you will repay
the Company 100% of this bonus.

 

 

Mr. Lawrence A. Gyenes

March 6, 2007

Page 2

     8. Eligibility for Performance Bonuses. You will be eligible to participate in whatever
incentive bonus plan(s) the Company maintains, or successor plans as may be applicable. Currently,
the Company’s incentive bonus plan provides you with an opportunity to receive a cash performance
bonus of up to fifty percent (50%) of your base salary, less applicable withholdings as may be
required by law. You will be eligible to participate in such incentive bonus plan for fiscal year
2007 (ending July 31, 2007) on a pro rata basis based on time actually employed during this fiscal
year.

     9. Stock Options. Subject to approval of the Company’s Board of Directors or its Compensation
Committee, you will receive the following stock option grants to purchase the Company’s common
stock under the Zila, Inc. 1997 Stock Option Award Plan, as amended and restated December 5, 2002
(the “Stock Option Plan”), or such amended or restated stock option plan as may then be in effect:
A total of 200,000 options, effective on the Start Date and vesting in three equal installments on
the first, second and third anniversaries of the Start Date (66,667 on the first and second
anniversaries, respectively, and 66,666 on the third anniversary). You will also be eligible for
additional stock option grants based on individual performance and/or as may be commensurate with
grants to other executive-level employees. All stock option grants shall be governed in all
respects by the Stock Option Plan or such amended or restated stock option plan as may then be in
effect.

     10. Restricted Stock. Subject to approval of the Company’s Board of Directors or its
Compensation Committee, you will be granted 50,000 shares of restricted stock. The restrictions on
the shares will be removed in equal amounts on the first, second and third anniversaries of the
Start Date, respectively.

     11. Insurance. You will receive insurance benefits as provided to other executive-level
employees. Currently, these consist of medical, dental and vision coverage for you and your
dependents, life insurance and short-term disability coverage for you, and directors and officers’
liability insurance.

     12. Paid Time Off. You will receive paid time off (“PTO”) in accordance with the Company’s
regular PTO policy except your initial allotment of PTO will be 20 days rather than the 18 recited
in the policy. Otherwise, all aspects of the Company’s regular PTO policy will apply to you. You
will also receive paid holidays in accordance with the Company’s regular holiday policies.

     13. Other Benefits. You will receive other benefits as may be commensurate with those
provided to other executive-level employees. Currently, these include participation in a 401(k)
plan, an employee stock purchase plan, a flexible spending program/Section 125, and employee
recognition programs.

 

 

 Mr. Lawrence A. Gyenes

March 6, 2007

Page 3

     14. Term. The term of this Agreement shall be for three (3) years from the Start Date. The
term shall automatically be extended for successive one-year terms starting on the third
anniversary of the Start Date, and continuing each anniversary thereafter, unless the Company gives
you a minimum of 120 days advance written notice of nonextension before any such anniversary.

     15. Relocation Benefits. The Company will reimburse you for the following actual, documented
expenses in connection with your relocation to Arizona: (i) Reasonable out-of-pocket expenses
related to trips between New Jersey and Arizona for you and/or your fiancé to transition living
arrangements, not to exceed a total of $10,000; (ii) costs associated with the move to Arizona of
your possessions from your current principal residence and up to two vehicles at actual
professional van line costs based on the lowest bid from three separate companies; (iii) reasonable
out-of-pocket expenses related to transporting (by airplane or automobile) you and your fiancé for
your move from New Jersey to Arizona; (iv) temporary housing in the Phoenix area for up to six
months at a maximum of $3,000 per month; and (v) realtor fees and other traditional closing costs
that are your responsibility on any sale of your current principal residence within one year of the
Start Date, and on any purchase of a home in the Phoenix area within one year of the Start Date,
the total of which closing costs may not exceed the sum of $50,000 (collectively, “Relocation
Benefits”). Relocation Benefits will be paid in accordance with Internal Revenue Service
regulations.

     15.1 Repayment of Relocation Benefits. If you voluntarily terminate your employment with the
Company on or before 15 months from the Start Date, you will repay the Company 100% of all
Relocation Benefits you actually received pursuant to this Agreement. If you voluntarily terminate
your employment with the Company later than 15 months from the Start Date and on or before 18
months from the Start Date, you will repay the Company 75% of all such Relocation Benefits. If you
voluntarily terminate your employment with the Company later than 18 months from the Start Date and
on or before 21 months from the Start Date, you will repay the Company 50% of all such Relocation
Benefits. If you voluntarily terminate your employment with the Company later than 21 months from
the Start Date and on or before 24 months from the Start Date, you will repay the Company 25% of
all such Relocation Benefits. If you voluntarily terminate your employment later than 24 months
from the Start Date, you will have no repayment obligation. You agree that the Company may
withhold from any compensation that may be due you upon termination of your employment any sum you
may owe the Company pursuant to this provision, and that if you are not due sufficient funds to
cover what you owe the Company, the Company may withhold all compensation due you and you will pay
the balance owing the Company within thirty (30) calendar days of your last day of employment.

     16. At-Will Employment. Your employment with the Company is at will, meaning that it lawfully
can be terminated at any time by either you or the Company, with or without cause or notice.
Nothing contained in this Agreement changes the at-will nature of your employment.

 

 

 Mr. Lawrence A. Gyenes

March 6, 2007

Page 4

     17. Severance Benefits. If the Company terminates your employment, you shall be eligible to
receive severance benefits (“Severance Benefits”) in accordance with the following:

          17.1 Change in Control. If your employment is terminated because of a change in control of
the Company (“Change in Control”), you shall be entitled to receive severance pay in (i) an amount
equivalent to eighteen (18) months of your annual base salary in effect on the date your employment
is terminated; and (ii) an amount equivalent to the maximum cash bonus(es) (expressed as a
percentage of your annual base salary in effect on the date your employment is terminated) for
which you would have been eligible, during the eighteen (18) months following termination of your
employment had your employment not terminated and had you stayed in the position you occupied as of
termination of your employment, under any employee incentive bonus plan(s) in effect on the date
your employment is terminated. For purposes of this Agreement, “Change in Control” shall be
defined and governed by the definition of “change in control” contained in the Stock Option Plan,
or such amended or restated stock option plan as may then be in effect or, in the absence of such
plan, in the last such plan that was in effect. If the Company terminates your employment within
eighteen (18) months of a Change in Control, a presumption shall arise that the termination was
because of a Change in Control. This presumption, however, shall be rebutted if a preponderance of
the evidence shows that the reason for your termination was something other than a Change in
Control.

          17.2 Termination Without Cause. If the Company terminates your employment for any reason that
is unrelated to (i) a Change in Control, (ii) your conduct or job performance, and (iii) your
inability to perform your job (e.g., due to incapacity or death) (hereafter a termination “Without
Cause”), you shall be entitled to receive severance pay in an amount equivalent to eighteen (18)
months of your annual base salary in effect on the date your employment is terminated.

          17.3 Stock Options and Restricted Stock. If your employment is terminated because of a Change
in Control or Without Cause, and upon expiration of any revocation period contained in the release
required by subpart 17.4 below, (i) any stock options granted prior to termination of your
employment shall be deemed immediately vested and exercisable according to their terms; and (ii)
all restrictions applicable to any restricted stock awarded prior to termination shall be deemed
immediately lifted. (Together, the severance pay set forth above and these stock benefits are the
“Severance Benefits”).

          17.4 Release Required. Severance Benefits will be provided and/or take effect only if you
provide the Company and its affiliated entities and persons with a written release, in a form
acceptable to the Company, from legal liability. In no event will any Severance Benefits be
provided or take effect until such release is executed and its revocation period (if any) under
applicable law has expired unexercised. If you fail to execute the release within thirty (30) days

 

 

Mr. Lawrence A. Gyenes

March 6, 2007

Page 5

of your receipt of same, your right to execute the release, and your corresponding right to
Severance Benefits, will be extinguished.

          17.5 No Other Right to Severance Benefits. Severance Benefits will not be provided and/or
take effect if you voluntarily resign from your employment, or your employment terminates for a
reason other than a Change in Control or Without Cause, or you do not qualify for Severance
Benefits pursuant to this Agreement for any other reason.

          17.6 Timing of Severance Pay. All sums payable to you pursuant to subparts 17.1 or 17.2 above
shall be paid in a lump sum within six (6) months plus five (5) business days after termination of
your employment (the “Payment Date”). However, if you are a “Specified Employee” of the Company
for purposes of Internal Revenue Code Section 409A (“Code Section 409A”) at the time of any event
that triggers a payment obligation on the part of the Company pursuant to subpart 17.1 or 17.2,
then the required payment shall be made to you by the Company on the first day such payment may be
made without incurring excise taxes under Code Section 409A (without regard to whether that
shortens or lengthens the time period set forth in the first sentence of this subpart 17.6) (the
“409A Payment Date”). Should this result in a delay of payments to you beyond the Payment Date,
then the Company shall also pay you interest accrued from the Payment Date to the 409A Payment Date
at the rate of interest announced by Bank of America, Arizona from time to time as its prime rate.
For purposes of this provision, the term Specified Employee shall have the meaning set forth in
Section 409A(2)(B)(i) of the Internal Revenue Code of 1986, as amended, or any successor provision
and the treasury regulations and rulings issued thereunder.

          17.7 Termination of Your Right to Severance Benefits. Your right to receive Severance
Benefits shall immediately terminate if (i) you breach any contractual obligation you owe the
Company or violate any other promise or commitment you have made to the Company or duty you owe the
Company; (ii) you commence employment or other engagement with any person or entity that competes
with the Company or its affiliated companies; or (iii) you solicit, induce, or attempt to influence
any employee of the Company or its affiliated companies to terminate his or her employment.

     18. Cooperation in Dispute Resolution. During your employment and thereafter (including
following termination of your employment for any reason), you will make yourself reasonably
available to consult with the Company or any of its affiliated companies with regard to any
potential or actual dispute the Company or any of its affiliated companies may have with any third
party concerning matters about which you have personal knowledge, and to testify about any such
matter should such testimony be required, so long as doing so does not unreasonably interfere with
your then-current professional activities.

     19. Applicable Law. You hereby consent to application of Arizona law to this Agreement
without regard to choice-of-law or conflict-of-law rules. However, in recognition of

 

 

Mr. Lawrence A. Gyenes

March 6, 2007

Page 6

the fact that the Severance Benefits set forth above are not items of ordinary compensation, and as
an inducement for the Company to agree to those provisions, we have specifically agreed that
Arizona Revised Statute § 23-355 (which provides for the possibility of treble damages for unpaid
wages) shall not apply to Paragraph 17 of this Agreement (or its subparts), or to any payment(s)
arguably due under Paragraph 17 of this Agreement (or its subparts), or to any dispute arising
under Paragraph 17 of this Agreement (or its subparts). This does not affect your right to
Severance Benefits, but means that if we have a dispute about whether Severance Benefits are owed,
you cannot seek three times the amount of such Severance Benefits in a legal action.

     20. Severability. In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part, the remaining
provisions of this Agreement shall remain in full force and effect to the fullest extent permitted
by law.

     21. Other agreements. As a condition of your employment with the Company, you must also
execute the enclosed Employee Confidentiality and Intellectual Property Agreement. Like all
Company employees, you may in the future be required, in the Company’s reasonable discretion, to
execute agreements relating to other Company policies or substantive matters.

     As with all our offers to prospective executive-level employees, this offer is contingent upon
satisfactory completion of those portions of our standard due diligence (including background and
reference checks) as may be applicable to your prospective employment.

     We believe you will be a valuable addition to the Company and we hope you will accept this
offer. If you wish to do so, please sign where indicated below and return this Agreement. Please
let us know if you have any questions.

	 	 	 
	 

	 	Sincerely,
	 
	 	 
	 
	 	 
	 

	 	/s/ Douglas D. Burkett
	 

	 	 
	 

	 	Douglas D. Burkett, Ph.D.
	 

	 	CEO and President

 

 

Mr. Lawrence A. Gyenes

March 6, 2007

Page 7

Statement of Acceptance:

     I have read the foregoing and agree to accept employment with the Company on the terms stated
in this Agreement.

	 	 	 	 	 
	 	 	 
	        Dated:  March 7, 2007 	/s/ Lawrence A. Gyenes
 	 
	 	Lawrence A. GyenesExhibit 4.6

    Exhibit
      4.6

     

    

     

     

    PMA
      CAPITAL CORPORATION 

     

    TO
      

     

    U.S.
      BANK NATIONAL ASSOCIATION, TRUSTEE 

     

    

     

     

    THIRD
      SUPPLEMENTAL INDENTURE 

     

    DATED
      AS OF NOVEMBER 15, 2004 

     

     

    

     

    $57,500,000
      

     

    

    

     

    8.50%
      MONTHLY INCOME SENIOR NOTES

     

    DUE
      JUNE 15, 2018

     

     

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    TABLE
      OF CONTENTS1 

    

    Page

     

    
      	
              ARTICLE
                I Definitions

            	
              1

            
	
              Section
                1.01

            	
              Definitions.

            	
              1

            
	
              Section
                1.02

            	
              Certain
                Terms Defined in the Indenture.

            	
              2

            
	
              Section
                1.03

            	
              Grant
                of Security Interest in Collateral and Additional
                Collateral.

            	
              3

            
	
              Section
                1.04

            	
              Release
                of Security Interest in Collateral and Additional
                Collateral.

            	
              5

            
	
              Section
                1.05

            	
              Authorization
                of Actions to be Taken by Collateral Agent Under the Collateral Agent
                Agreement.

            	
              6

            
	
              Section
                1.06

            	
              Authorization
                of Receipt of Funds by the Trustee Under the Collateral Agent
                Agreement.

            	
              7

            
	
              Section
                1.07

            	
              Authorization
                of Trustee to Enter into the Collateral Agent Agreement

            	
              7

            
	
              ARTICLE
                II MISCELLANEOUS PROVISIONS

            	
              7

            
	
              Section
                2.01

            	
              Recitals
                by Company.

            	
              7

            
	
              Section
                2.02

            	
              Ratification
                and Incorporation of Original Indenture.

            	
              7

            
	
              Section
                2.03

            	
              Executed
                in Counterparts.

            	
              7

            

    

     

    1 This
      Table of Contents does not constitute part of the Indenture or have any bearing
      upon the interpretation of any of its terms and provisions.

    

    
      
        
        

      

      
        i

        
          

        

      

      
        
        

      

    

    THIS
      THIRD SUPPLEMENTAL INDENTURE (the “Third Supplemental Indenture”) is made as of
      the 15th day of November, 2004, by and between PMA CAPITAL CORPORATION, a
      company duly organized and existing under the laws of the Commonwealth of
      Pennsylvania (hereinafter called the “Company”), having its principal executive
      office located at 380 Sentry Parkway, Blue Bell, Pennsylvania 19422, and U.S.
      BANK NATIONAL ASSOCIATION, a national banking association duly organized and
      existing under the laws of the United States (hereinafter called the “Trustee”),
      having its Corporate Trust Office located at 225 Asylum Street, Hartford,
      Connecticut 06103. 

     

    WITNESSETH:
      

     

    WHEREAS,
      the Company has heretofore entered into an Indenture, dated as of October 21,
      2002 (the “Original Indenture”), and the Second Supplemental Indenture, dated
      June 5, 2003 (the “Second Supplemental Indenture”) establishing the terms of the
      Company’s 8.50% Monthly Income Senior Notes due 2018 (the “Senior Notes”), with
      U.S. Bank National Association; 

     

    WHEREAS,
      the Original Indenture as amended and supplemented by the Second Supplemental
      Indenture and this Third Supplemental Indenture, is herein called the
“Indenture”; 

     

    WHEREAS,
      the Second Supplemental Indenture provides that the Company will not create
      any
      Indebtedness secured by a pledge, lien or other encumbrance on the capital
      stock
      of any of the Company’s Significant Subsidiaries without making effective
      provision for equal and ratable security for the Senior Notes;

     

    WHEREAS,
      the Company desires to provide equal and ratable security for the Senior Notes
      and the Indenture provides that the Company and the Trustee may enter into
      a
      supplemental indenture to provide security for the Senior Notes;

     

    WHEREAS,
      all conditions necessary to authorize the execution and delivery of this Third
      Supplemental Indenture and to make it a valid and binding obligation of the
      Company have been done or performed. 

     

    NOW,
      THEREFORE, in consideration of the agreements and obligations set forth herein
      and for other good and valuable consideration, the sufficiency of which is
      hereby acknowledged, the parties hereto hereby agree as follows: 

     

    ARTICLE
      I

     

    Definitions

    Section
      1.01  Definitions. 

     

    The
      following defined terms used herein shall, unless the context otherwise
      requires, have the meanings specified below. Capitalized terms used herein
      for
      which no definition is provided herein shall have the meanings set forth in
      the
      Original Indenture. 

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    “Collateral
      Agent” means, U.S. Bank National Association, in its capacity as collateral
      agent under the Collateral Agent Agreement and its permitted successors and
      assigns. 

     

    “Collateral
      Agent Agreement” means the Collateral Agent Agreement dated as of November 15,
      2004 by and among the Company, U.S. Bank National Association, as Collateral
      Agent, the Trustee for the Senior Notes, the trustee for the New Debentures,
      the
      trustee for the 144A Debentures and the trustee or other authorized
      representative for other secured Indebtedness in accordance with the terms
      of
      the Original Indenture, as such may be amended from time to time in accordance
      with the terms of the Original Indenture and the Collateral Agent
      Agreement.

     

    “Net
      Cash
      Proceeds” means with respect to any sale of Capital Stock, cash proceeds of such
      sale net of attorneys’ fees, accountants’ fees, underwriting or placement
      agents’ fees, discounts or commissions and brokerage, consultant and other fees
      actually incurred in connection with such sale and net of taxes paid or payable
      as a result thereof, as and where received.

     

    “Pooled
      Companies” means (Pennsylvania Manufacturers’ Association Insurance Company,
      Pennsylvania Manufacturers Indemnity Company and Manufacturers Alliance
      Insurance Company). 

     

    “Securities”
      means, for the purpose of this Third Supplemental Indenture only, the Senior
      Notes. 

     

    Section
      1.02  Certain
      Terms Defined in the Indenture. 

     

    (a)  Definitions
      of the following terms in this Third Supplemental Indenture may be found in
      the
      Sections of this Third Supplemental Indenture where indicated as follows:

     

    
      	
              Term

               

            	
              Defined
                in Section

               

            
	 	 
	
              “144A
                Debentures”

               

            	
              Section
                1.03(a) of this Third Supplemental Indenture

               

            
	 	 
	
              “Additional
                Collateral”

               

            	
              Section
                1.03(a) of this Third Supplemental Indenture

               

            
	
              “A.M.
                Best”

               

            	
              Section
                1.03(a) of this Third Supplemental Indenture

               

            
	
              “Collateral”

               

            	
              Section
                1.03(a) of this Third Supplemental Indenture

               

            

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    

    
      	
              “Collateral
                Companies”

               

            	
              Section
                1.03(a) of this Third Supplemental Indenture

               

            
	
              “Indenture”

               

            	
              Recitals
                of this Third Supplemental Indenture

               

            
	
              “Original
                Indenture”

               

            	
              Recitals
                of this Third Supplemental Indenture

               

            
	
              “New
                Debenture”

               

            	
              Section
                1.03(a) of this Third Supplemental Indenture

               

            
	 	 
	
              “Released
                Interest”

               

            	
              Section
                1.04 of the Third Supplemental Indenture

               

            
	 	 
	
              “Third
                Supplemental Indenture”

               

            	
              Recitals
                of this Third Supplemental Indenture

               

            
	 	 

    

    Section
      1.03   Grant
      of Security Interest in Collateral and Additional Collateral. 

     

    (a)  The
      Company does hereby grant to the Trustee, as trustee for the benefit of the
      Holders of the Senior Notes, a first priority Lien and security interest, equal
      and ratable with a Lien and security interest in favor of the trustee for the
      holders of the Company’s $84,140,000 6.50% Senior Secured Convertible Debentures
      due 2022 (the “New Debentures”) and the trustee for the holders of the Company’s
      $15,000,000 6.50% Senior Secured Convertible Debentures due 2022 (the “144A
      Debentures”), in and to 20% of the outstanding Capital Stock of the Company’s
      Significant Subsidiaries (such companies, collectively, the “Collateral
      Companies”), and all rights and privileges of the Company with respect thereto,
      including all dividends, distributions and other payments with respect thereto
      and in and to all proceeds thereof (the “Collateral”) to have and to hold in
      trust to secure the payment of principal of and premiums, if any, and interest
      on, and any other amounts (including all fees, expenses, counsel fees and other
      amounts, including fees and expenses of the Collateral Agent, due and owing
      to
      the Trustee) owing in respect of the Senior Notes, equally and ratably with
      the
      New Debentures and the 144A Debentures, without prejudice, preference, priority
      or distinction, except as expressly provided in the Indenture (and the indenture
      for the New Debentures and the indenture for the 144A Debentures), and to secure
      performance by the Company of all the Company’s obligations under the Indenture
      (equally and ratably with the Company’s obligations with respect to the New
      Debentures and the 144A Debentures), all as provided for in this Indenture
      (and
      the indenture for the New Debentures and the indenture for the 144A Debentures).
      Additionally, if the financial strength ratings of the Pooled Companies from
      A.M. Best Company, Inc. (“A.M. Best”) are not at least “A-” on December 31,
      2005, or if the financial strength ratings of the Pooled Companies from A.M.
      Best are reduced to below “B++” prior to December 31, 2005, the Company does
      hereby grant to the Trustee, as trustee for the benefit of the Holders of the
      Senior Notes, a first priority Lien and security interest, equal and ratable
      with a Lien and security interest in favor of the trustee for the holders of
      the
      New Debentures and the trustee for the holders of the 144A Debentures, in and
      to
      the remaining outstanding Capital Stock of the 

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    Collateral
      Companies and all rights and privileges of the Company with respect thereto,
      including all dividends, distributions and other payments with respect thereto
      and all proceeds thereof, (“Additional Collateral”) to have and to hold in trust
      to secure the payment of principal of and premiums if any, and interest on,
      and
      any other amounts (including all fees, expenses, counsel fees and other amounts,
      including fees and expenses of the Collateral Agent, due and owing to the
      Trustee) owing in respect of the Senior Notes, equally and ratably with the
      New
      Debentures and the 144A Debentures, without prejudice, preference, priority
      or
      distinction, except as expressly provided in the Indenture (and the indenture
      for the New Debentures and the indenture for the 144A Debentures), and to secure
      performance by the Company of the Company’s obligations under this Indenture
      (equally and ratably with the Company’s obligations with respect to the New
      Debentures and the 144A Debentures) with respect to the Senior Notes, the New
      Debentures and the indenture for the 144A Debentures, all as provided for under
      the Indenture (and the indenture for the New Debentures and the indenture for
      the 144A Debentures). 

     

    The
      Trustee, as trustee on behalf of the Holders of the Senior Notes, acknowledges
      this grant, accepts the trusts hereunder in accordance with the provisions
      hereof and agrees to perform its duties herein required and agrees that, the
      Trustee holds the Collateral and the Additional Collateral in trust for the
      benefit of the Holders of the Senior Notes. 

     

    (b)  The
      Company will file and the Trustee and the Collateral Agent are hereby authorized
      to file such financing statements and continuation statements, and perform
      such
      acts necessary or desirable to perfect and maintain a first priority security
      interests in the Collateral and the Additional Collateral granted in Section
      1.03(a) of this Indenture. In the case of any Additional Collateral, the Company
      shall do all such things within 90 days of December 31, 2005 or such earlier
      date as the financial strength ratings of the Pooled Companies from A.M. Best
      are reduced to below B++. 

     

    (c)  If
      any
      provisions of the Collateral Agent Agreement limit, qualify or conflict with
      the
      duties imposed by the provisions of the Trust Indenture Act, the Trust Indenture
      Act will control.

     

    (d)  As
      more
      fully set forth in, and subject to the provisions of, the Collateral Agent
      Agreement, the Holders, and the Trustee and the Collateral Agent on behalf
      of
      such Holders, will have rights in and to the Collateral and the Additional
      Collateral that are subject to the rights that have been or may be created
      in
      favor of the holders of the New Debentures and the holders of the 144A
      Debentures. 

     

    (e)  As
      among
      the Holders, the Collateral and the Additional Collateral shall be held for
      the
      equal and ratable benefit of the Holders without preference, priority or
      distinction of any thereof over any other. 

     

    (f)  In
      the
      event the Trustee acts as Collateral Agent, the Trustee (i) shall not be deemed
      to have breached its fiduciary duty as Trustee to the Holders as a result of
      the
      performance of its duties as Collateral Agent to the extent it acts in
      compliance with the Collateral Agent Agreement and (ii) shall not be liable
      to
      the Holders for any such action or 

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    inaction.
      The rights and interests created under this Indenture shall be subject to the
      terms of the Collateral Agent Agreement. 

     

    (g)  The
      Company will do or cause to be done all such acts and things as may be required
      by the provisions of the Collateral Agent Agreement to which it is a party,
      to
      assure and confirm to the Trustee and the Collateral Agent, the Liens on the
      Collateral and the Additional Collateral contemplated by the Indenture and
      the
      Collateral Agent Agreement to which it is a party, as from time to time
      constituted, so as to render the same available for the security and benefit
      of
      this Indenture and of the Senior Notes secured thereby, as applicable, according
      to the intent and purposes herein and therein expressed. The Company will take
      all actions required pursuant to the Indenture and the Collateral Agent
      Agreement to cause the Liens created pursuant to the Indenture to be valid,
      enforceable and perfected (except as expressly provided therein) Liens in and
      on
      all the Collateral and the Additional Collateral in favor of the Collateral
      Agent for the benefit of the Trustee and for the equal and ratable benefit
      of
      the Holders of the Senior Notes, the holders of the Company’s New Debentures and
      the holders of the Company’s 144A Debentures. With respect to any proceeds that
      are cash or cash equivalents, the Company shall deposit such proceeds into
      an
      account under the control of the Collateral Agent in accordance with the
      provisions of the Collateral Agent Agreement. 

     

    Section
      1.04  Release
      of Security Interest in Collateral and Additional Collateral. 

     

    (a)  Additionally,
      in the event of a sale or other disposition of Collateral (or Additional
      Collateral) in compliance with the provisions of Section 3.04 of the indenture
      pursuant to which the New Debentures were issued and the provisions of Section
      3.04 of the indenture pursuant to which the 144A Debentures were issued, the
      Liens securing the Senior Notes, the New Debentures and the 144A Debentures
      will
      automatically terminate as to the assets sold on the date of their sale and
      as
      to the Net Cash Proceeds at the close of business on the Business Day
      immediately prior to any Asset Sale Purchase Date (as defined in the indenture
      under which the New Debentures and the indenture under which the 144A Debentures
      were issued). 

     

    The
      Company shall have the right to obtain automatic release of items of Collateral
      (and Additional Collateral) (the “Released Interest”) securing the Senior Notes,
      the New Debentures and the 144A Debentures upon compliance with the condition
      that the Company deliver to the Trustee and the Collateral Agent the following:
      

     

    (i)  a
      notice
      from the Company requesting the release of the Released Interest describing
      the
      proposed Released Interest and certifying that the conditions to an Asset Sale
      (as defined in the indenture under which the New Debentures and the indenture
      under which the 144A Debentures were issued) in the indenture for the New
      Debentures and the indenture for the 144A Debentures have been met;
      and

     

    (ii)  an
      Officers’ Certificate stating that: 

     

    (1)  (a)
      such
      Asset Sale of Collateral or Additional Collateral does not include the sale
      of
      assets other than the Released Interest and (b) 

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    such
      Asset Sale complies with the terms and conditions of Section 3.04 of the
      indenture for the New Debentures and Section 3.04 of the indenture for the
      144A
      Debentures with respect to Asset Sales; 

     

    (2)  all
      conditions precedent in the Indenture relating to the release in question have
      been complied with; and 

     

    (3)  no
      Default or Event of Default has occurred or would occur immediately prior to
      or
      immediately after such release; 

     

    (iii)  all
      documentation necessary to evidence the grant to the Trustee (or any collateral
      agent), on behalf of the Holders of the Senior Notes and perfection of a
      security interest in and Lien (of the same priority as the Lien on the assets
      subject to the Asset Sale) on all consideration other than Net Cash Proceeds
      received in such Asset Sale, if any, equal and ratable with a security interest
      in and Lien on such consideration in favor of the trustee for the holders of
      the
      New Debentures and the trustee for 144A Debentures; and 

     

    (iv)  all
      documentation required by the Trust Indenture Act prior to the release of
      Collateral and the Additional Collateral by the Trustee. 

     

    (b)  Any
      automatic release of items of Collateral (and Additional Collateral) securing
      the Senior Notes and the New Debentures and the 144A Debentures made in
      compliance with the provisions of this Section 1.04 shall not be deemed to
      impair the security under this Third Supplemental Indenture in contravention
      of
      the provisions hereof.

     

    Section
      1.05  Authorization
      of Actions to be Taken by Collateral Agent Under the Collateral Agent
      Agreement. 

     

    The
      Collateral Agent may (but shall not be obligated to), in its sole discretion
      and
      without the consent of the Holders, on behalf of the Trustee and the Holders,
      take all actions it deems necessary or appropriate in order to (a) enforce
      any
      of the terms of the Collateral Agent Agreement and (b) collect and receive
      any and all amounts payable in respect of the obligations of the Company
      hereunder. The Trustee, directly or through the Collateral Agent, shall have
      the
      power to institute and to maintain such suits and proceedings as it may deem
      expedient to prevent any impairment of the Collateral and the Additional
      Collateral by any acts that may be unlawful or in violation of the Collateral
      Agent Agreement or this Indenture, and such suits and proceedings as the Trustee
      may deem expedient to preserve or protect its interests and the interests of
      the
      Holders in the Collateral and the Additional Collateral (including power to
      institute and maintain suits or proceedings to restrain the enforcement of
      or
      compliance with any legislative or other government enactment, rule or order
      that may be unconstitutional or otherwise invalid if the enforcement of, or
      compliance with, such enactment, rule or order would impair the security
      interest hereunder or be prejudicial to the interests of the Holders or of
      the
      Trustee). 

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    Section
      1.06  Authorization
      of Receipt of Funds by the Trustee Under the Collateral Agent
      Agreement. 

     

    The
      Trustee, directly or through Collateral Agent, is authorized to receive any
      funds for the benefit of the Holders distributed under the Collateral Agent
      Agreement, and to make further distributions of such funds to the Holders
      according to the provisions of this Indenture and the Collateral Agent
      Agreement. 

     

    Section
      1.07  Authorization
      of Trustee to Enter into the Collateral Agent Agreement.

     

    The
      Trustee, hereby agrees that it shall, upon the written request of the Company,
      enter into the Collateral Agent Agreement appointing a Collateral Agent to
      hold
      and enforce rights against the Collateral and Additional Collateral on behalf
      of
      the Trustee, the trustee for the Company’s New Debentures and the trustee for
      the Company’s 144A Debentures. The Trustee and the Company may enter into
      amendments to the Collateral Agent Agreement without the consent of the Holders;
      provided, however, that the consent of the Holders shall be required for any
      amendment that would adversely affect the Holders’ rights in the Collateral or
      Additional Collateral.

     

    ARTICLE
      II

     

    MISCELLANEOUS
      PROVISIONS

     

    Section
      2.01  Recitals
      by Company. 

     

    The
      recitals in this Third Supplemental Indenture are made by the Company only
      and
      not by the Trustee, and all of the provisions contained in the Original
      Indenture in respect of the rights, privileges, immunities, powers and duties
      of
      the Trustee shall be applicable in respect of the Senior Notes and of this
      Third
      Supplemental Indenture as fully and with like effect as if set forth herein
      in
      full. 

     

    Section
      2.02  Ratification
      and Incorporation of Original Indenture. 

     

    As
      supplemented hereby, the Original Indenture is in all respects ratified and
      confirmed, and the Original Indenture, the Second Supplemental Indenture and
      this Third Supplemental Indenture shall be read, taken and construed as one
      and
      the same instrument. 

     

    Section
      2.03  Executed
      in Counterparts. 

     

    This
      Third Supplemental Indenture may be simultaneously executed in several
      counterparts, each of which shall be deemed to be an original, and such
      counterparts shall together constitute but one and the same instrument.

     

    

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the parties hereto have caused this Third Supplemental
      Indenture to be duly executed as of the day and year first above written.

     

    

     

    
      	
              PMA
                CAPITAL CORPORATION

            
	 	 
	 	 
	 	 
	
              By:

            	
              /s/William
                E. Hitselberger

            
	 	
              William
                E. Hitselberger

            
	 	
              Senior
                Vice President, Chief Financial Officer and Treasurer

            
	 	 
	 	 
	 	 
	
              U.S.
                BANK NATIONAL ASSOCIATION, as Trustee

            
	 	 
	 	 
	 	 
	
              By:

            	
              /s/
                Michael M. Hopkins

            
	 	
              Michael
                M. Hopkins

            
	 	
              Vice
                President

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