Document:

EX-4.20

 

Exhibit 4.20

EXECUTION COPY

OMNIBUS AMENDMENT CONSISTING OF

THIRD AMENDMENT

TO

CREDIT AGREEMENT

AND

FIRST AMENDMENT

TO

PLEDGE AGREEMENT

     This FIRST OMNIBUS AMENDMENT CONSISTING OF THIRD AMENDMENT TO CREDIT AGREEMENT AND FIRST
AMENDMENT TO PLEDGE AGREEMENT (this “Amendment”) is dated as of December 28, 2006 and is
entered into by and among Russ Berrie and Company, Inc., in its individual capacity (in such
capacity, the “Company”) and as “Loan Party Representative,” Russ Berrie U.S. Gift, Inc., a
Delaware corporation (“Russ Gift”), Russ Berrie & Co. (West), Inc. (“Russ West”),
Russ Berrie and Company Properties, Inc. (“Russ Properties”), Russplus, Inc.
(“Russplus”), and Russ Berrie and Company Investments, Inc. (“Russ Investments”)
(Russ Gift, Russ West, Russ Properties, Russplus and Russ Investments are sometimes referred to
herein collectively as the “Borrowers” and individually as a “Borrower” and
collectively with the Company, the “Credit Parties”), the financial institutions listed on
the signature pages hereto as “Lenders” (and each being a “Lender”), LaSalle Bank National
Association (in its individual capacity, “LaSalle”), as administrative agent (in such
capacity, the “Administrative Agent”) for the Lenders, and as Issuing Lender under the
Credit Agreement referred to below.

RECITALS:

     A. The Credit Parties, the Lenders and the Issuing Lender have entered into that certain
Credit Agreement dated as of March 14, 2006 (as the same has been and may hereafter be amended,
restated, supplemented or otherwise modified from time to time, the “Credit Agreement”),
pursuant to which, among other things, the Administrative Agent, the Lenders and the Issuing Lender
have made and may hereafter make certain loans, advances and other financial accommodations to the
Borrowers.

     B. As a condition precedent to entering into the Credit Agreement, the Administrative Agent,
the Lenders and the Issuing Lender required that the Company enter into that certain Pledge
Agreement dated as of March 14, 2006 in favor of the Administrative Agent (as the same has been and
may hereafter be amended, restated, supplemented or otherwise modified from time to time, the
“Pledge Agreement”), pursuant to which the Company, among other things, (x) pledged 100% of
the issued and outstanding Capital Securities (as defined in the Credit Agreement) of each of the
Borrowers of which it is the direct parent to the Administrative Agent as collateral for the
Obligations and (y) made certain undertakings with respect to the conduct of its business.

     C. The Credit Parties have requested that the Administrative Agent, the Lenders and the
Issuing Lender amend the Credit Agreement and the Pledge Agreement to modify certain terms thereof
as set forth herein.

 

 

     D. The Administrative Agent, the Lenders and the Issuing Lender are willing to enter into such
amendment subject to the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, and subject to the terms
and conditions set forth herein, the Parties hereto hereby agree as follows:

AGREEMENTS:

SECTION 1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used in this Amendment
shall have the meanings ascribed to such terms in the Credit Agreement.

SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the satisfaction of the conditions precedent
set forth herein, the Credit Agreement is hereby amended as follows:

2.1 Section 1.1 of the Credit Agreement is hereby amended to add the following
definitions thereto in their appropriate alphabetical order:

Average Excess Revolving Loan Availability means, at any time of
determination, the average daily Excess Revolving Loan Availability for the calendar
quarter most recently ended prior to such time.

2.2 Section 1.1 of the Credit Agreement is hereby further amended to amend and
restate the following definitions in their entirety to read as follows:

Applicable Margin means for any day, subject to the provisions of
Section 10.1.3, the rate per annum set forth below opposite the level (the
“Level”) then in effect; it being understood and agreed that the Applicable
Margin for (i) LIBOR Loans shall be the percentage set forth under the column “LIBOR
Margin,” (ii) Base Rate Loans shall be the percentage set forth under the column
“Base Rate Margin,” (iii) the Non-Use Fee Rate shall be the percentage set forth
under the column “Non-Use Fee Rate” and (iv) the L/C Fee shall be the percentage set
forth under the column “L/C Fee Rate”:

-2-

 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Average Excess	 	 	 	 	 	Base	 	 	Non-Use	 	 	 	 
	 	 	Revolving Loan	 	LIBOR	 	 	Rate	 	 	Fee	 	 	L/C Fee	 
	Level	 	Availability	 	Margin	 	 	Margin	 	 	Rate	 	 	Rate	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	I
	 	Less than $2,500,000	 	 	2.75	%	 	 	0.50	%	 	 	0.50	%	 	 	2.75	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	II
	 	Greater than or	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	equal to $2,500,000	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	but less than	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	$4,000,000	 	 	2.50	%	 	 	0.25	%	 	 	0.375	%	 	 	2.50	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	III
	 	Greater than or	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	equal to $4,000,000	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	but less than to	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	$6,500,000	 	 	2.25	%	 	 	0.25	%	 	 	0.375	%	 	 	2.25	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	IV
	 	Greater than or	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	equal to $6,500,000	 	 	2.00	%	 	 	0.00	%	 	 	0.375	%	 	 	2.00	%

The Applicable Margins shall be determined and adjusted, to the extent applicable,
one Business Day after the Loan Party Representative shall have delivered the
Administrative Agent a written certification on or after the first day of any
calendar quarter (commencing with the calendar quarter commencing on April 1, 2007)
containing the calculation of the Average Excess Revolving Loan Availability for the
preceding calendar quarter then ending. Prior to the delivery of any such
certification with respect to the calendar quarter ending March 31, 2007, the
Applicable Margins shall be set at Level II; provided that if the Loan Party
Representative shall fail to deliver any such certificate within five Business Days
after the end of any calendar quarter (from and after the calendar quarter ending
March 31, 2007), the Administrative Agent may, if it elects, adjust the Applicable
Margins to the next highest (i.e., more expensive) Level over the then current Level
until one Business Day following the delivery of any such certificate, following
which the Applicable Margin shall thereafter be determined in accordance with the
information set forth in such certificate. In the event the Administrative Agent
disputes the calculations or results of any such certificate, the Applicable Margin
shall not be adjusted until such dispute is resolved.

Excess Revolving Loan Availability means at any time the difference between
the Borrowing Base and Revolving Outstandings, in each case, at such time.

Revolving Loan Availability means the difference between (a) the lesser of
(x) the Maximum Revolving Commitment in effect at such time, minus $1,500,000 and
(y) the Borrowing Base at such time, minus (b) the sum of the aggregate
principal

-3-

 

amount of all “Loans,” all “Specified Hedging Obligations” and the “Stated Amount”
of all “Letters of Credit” outstanding or requested but not yet funded under (and,
in each case, as such terms are defined in) the Canadian Loan Agreement.

2.3 Section 11.3(vi) of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:

(vi) so long as (x) no Event of Default or Unmatured Event of Default then exists
or would result therefrom and (y) immediately after giving effect to such
distribution, the Borrowers would have the capacity to borrow not less than an
additional $1,500,000 of Revolving Loans in compliance with the terms hereof (as
certified in writing by the Loan Party Representative at the time of such intended
payment, including the calculations thereof in reasonably sufficient detail), then
the Borrowers may pay dividends or make other distributions to the Company in an
amount not to exceed (1) the aggregate amount of capital contributions received by
the Borrowers from the Company from and after December 28, 2006, the proceeds of
which have been applied to the repayment of Revolving Outstandings, minus (2) the aggregate amount of dividends or
distributions previously made to the Company pursuant to this clause (vi);

2.4 Section 11.13.1 of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:

11.13.1 Excess Revolving Loan Availability. Not permit Excess Revolving
Loan Availability at any time to be less than $3,500,000.

2.5 Sections 11.13.2 (Minimum EBITDA) and 11.13.4 (Fixed Charge Coverage
Ratio) of the Credit Agreement are each hereby deleted and replaced with “[Reserved],” and
all references to such covenants throughout the Credit Agreement shall be deemed of no
further force or effect.

SECTION 3. AMENDMENT TO PLEDGE AGREEMENT.

3.1 Subject to the satisfaction of the conditions precedent set forth herein, Section
10(a) of the Pledge Agreement is hereby amended by deleting the word “and” before
subclause (x) thereof, inserting a comma at the end of subclause (xi) thereof, and adding
the following as a new subclause (xii) thereto:

and (xii) the guaranty of lease obligations for real estate or personal property or
the incurrence of any purchase money indebtedness owing from any of its subsidiaries
to any landlord, lessor or creditor, as applicable, provided that the aggregate
obligations of the Company under any and all such guaranties shall not exceed
$2,500,000 at any time outstanding in Fiscal Year 2007, or $3,000,000 at any time
outstanding in any Fiscal Year thereafter.

-4-

 

SECTION 4. CONDITIONS; REPRESENTATIONS AND WARRANTIES. The effectiveness of this Amendment
is subject to the satisfaction of the following conditions precedent (unless specifically waived in
writing by the Administrative Agent):

4.1 The Administrative Agent shall have received fully executed copies of this Amendment
executed by each of the Credit Parties, the Lenders and the Issuing Lender.

4.2 No Event of Default or Unmatured Event of Default has occurred and is continuing.

4.3 As of the effective date of this Amendment, all representations and warranties of the
Credit Parties set forth herein shall be true and correct, and all representations and
warranties of the Credit Parties set forth in the Credit Agreement shall be true and correct
in all material respects (or, with respect to those representations and warranties expressly
limited by their terms by materiality or material adverse effect qualifications, all
respects) and shall be deemed remade on such date, except to the extent any such
representation and warranty expressly relates to an earlier date, in which case such
representation and warranty shall be true and correct in all material respects (or, with
respect to those representations and warranties expressly limited by their terms by
materiality or material adverse effect qualifications, all respects) as to the date to which
it relates.

4.4 All proceedings taken in connection with the transactions contemplated by this Amendment
and all documents, instruments and other legal matters incident thereto shall be reasonably
satisfactory to the Administrative Agent.

4.5 The Administrative Agent shall have received payment in immediately available funds of a
fee (the “Amendment Fee”) in an amount equal to $18,750.

SECTION 5. REAFFIRMATION.

     Each of the Credit Parties hereby expressly reaffirms and assumes all of their obligations and
liabilities to the Administrative Agent, the Lenders and the Issuing Lender as set forth in the
Credit Agreement, the Pledge Agreement and the other Loan Documents and agrees to be bound by and
abide by and operate and perform under and pursuant to and comply fully with all of the terms,
conditions, provisions, agreements, representations, undertakings, warranties, indemnities, grants
of security interests and covenants contained in the Credit Agreement, the Pledge Agreement and the
other Loan Documents, as such obligations and liabilities may be modified by this Amendment, as
though the Credit Agreement, the Pledge Agreement and the other Loan Documents were being
re-executed on the date hereof, except to the extent that such terms expressly relate to an earlier
date. The Credit Parties hereby ratify, confirm and affirm without condition, all liens and
security interests granted to the Administrative Agent pursuant to the Credit Agreement, the Pledge
Agreement and the other Loan Documents and such liens and security interests shall continue to
secure the Obligations under the Credit Agreement as amended by this Amendment, and all extensions,
renewals, refinancings, amendments or modifications of any of the foregoing.

-5-

 

SECTION 6. GENERAL PROVISIONS.

6.1 No Changes. Except as expressly provided in this Amendment, the terms and
provisions of the Credit Agreement and the Pledge Agreement shall remain in full force and
effect and are hereby affirmed, confirmed and ratified in all respects.

6.2 Fees and Costs. In addition to the Amendment Fee, the Credit Parties hereby
jointly and severally agree to reimburse the Administrative Agent for all of its reasonable
out-of-pocket legal fees and expenses incurred in the preparation and documentation of this
Amendment and related documents.

6.3 Governing Law. This Amendment shall be construed in accordance with and
governed by the internal laws (without regard to the conflicts of law provisions, other than
Section 5-1401 of the New York General Obligations Law) of the State of New York.

6.4 Counterparts. This Amendment may be executed in one or more counterparts, each
of which shall constitute an original, but all of which taken together shall be one and the
same instrument. This Amendment may also be executed by facsimile and each facsimile
signature hereto shall be deemed for all purposes to be an original signatory page.

6.5 References. On or after the effective date hereof, each reference in the Credit
Agreement or the Pledge Agreement to this “Agreement,” “hereof,” “herein” or words of like
import and all references to the Credit Agreement or the Pledge Agreement in any other
agreement, shall in either case unless the context otherwise requires, be deemed to refer to
the Credit Agreement or the Pledge Agreement, respectively, as amended hereby.

6.6 Successors. This Amendment shall be binding on and inure to the benefit of each
of the Parties hereto and their respective successors and assigns.

6.7 Section Headings. Section headings used in this Amendment are for convenience
of reference only and shall not affect the construction of this Amendment.

[Remainder of Page Intentionally Left Blank]

-6-

 

          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their
respective officers thereunto duly authorized and delivered as of the date first written above.

	 	 	 	 	 
	 	 	BORROWERS:
	 
	 	 	 	 
	 	 	RUSS BERRIE U.S. GIFT, INC., a Delaware corporation
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Name:
	 	Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Title:
	 	Senior Vice President and General Counsel
	 

	 	 	 	 
	 
	 	 	 	 
	 	 	RUSS BERRIE & CO. (WEST), INC., a California corporation
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Name:
	 	Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Title:
	 	Senior Vice President and General Counsel
	 

	 	 	 	 
	 
	 	 	 	 
	 	 	RUSS BERRIE AND COMPANY PROPERTIES, INC., a New Jersey corporation
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Name:
	 	Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Title:
	 	Senior Vice President and General Counsel
	 

	 	 	 	 
	 
	 	 	 	 
	 	 	RUSSPLUS, INC., a New Jersey corporation
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Name:
	 	Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Title:
	 	Senior Vice President and General Counsel
	 

	 	 	 	 
	 
	 	 	 	 
	 	 	RUSS BERRIE AND COMPANY INVESTMENTS, INC., a New Jersey corporation
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Name:
	 	Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Title:
	 	Senior Vice President and General Counsel
	 

	 	 	 	 

-7-

 

	 	 	 	 	 
	 	 	THE COMPANY:
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	RUSS BERRIE AND COMPANY, INC., a New Jersey corporation, individually and as
Loan Party Representative
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Name:
	 	Marc S. Goldfarb
	 

	 	 	 	 
	 

	 	Title:
	 	Senior Vice President and General Counsel
	 

	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	ADMINISTRATIVE AGENT:
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:	 	/s/ Peter Walther
	 

	 	 	 	 
	 

	 	Name:	 	Peter Walther
	 

	 	 	 	 
	 

	 	Title:	 	Vice President
	 

	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	LENDERS/ISSUING LENDER:
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	LASALLE BANK NATIONAL ASSOCIATION, as a Lender and as Issuing Lender
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:	 	/s/ Peter Walther
	 

	 	 	 	 
	 

	 	Name:	 	Peter Walther
	 

	 	 	 	 
	 

	 	Title:	 	Vice President
	 

	 	 	 	 

-8-<PAGE>

                                                                    Exhibit 10.2

                       FLOATING RATE SENIOR DEBT SECURITY

                                    DUE 2033

     THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER
APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST
OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY
BE, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR
PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (I) TWO YEARS (OR
SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(K) OF THE SECURITIES ACT)
AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST
DATE ON WHICH THE COMPANY OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE
SECURITIES ACT) OF THE COMPANY WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST
OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (II) SUCH LATER DATE, IF ANY,
AS MAY BE REQUIRED BY ANY SUBSEQUENT CHANGE IN APPLICABLE LAW, ONLY (A) TO THE
COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER", AS
DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN "ACCREDITED INVESTOR"
WITHIN THE MEANING OF SUBPARAGRAPH (A) (1), (2), (3), (7) OR (8) OF RULE 501
UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY OR SUCH INTEREST OR
PARTICIPATION FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED
INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE
IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D)
PURSUANT TO OFFERS AND SALES TO NON-US PERSONS THAT OCCUR OUTSIDE THE UNITED
STATES PURSUANT TO REGULATION S UNDER THE SECURITIES ACT OR (E) PURSUANT TO
ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
PURSUANT TO CLAUSE (C), (D) OR (E) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION
OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN
ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY.
THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION

<PAGE>

HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES THAT IT
WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

     THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS
ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND
WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR
OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY
WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT
IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR
HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH
PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S.
DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38,
90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF
THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406
OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING.
ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN
WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR
THEREOF, AS THE CASE MAY BE, THAT EITHER (I) IT IS NOT AN EMPLOYEE BENEFIT PLAN
WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF
THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN
EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF
ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (II) SUCH
PURCHASE AND HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION
406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE
STATUTORY OR ADMINISTRATIVE EXEMPTION.

     IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER
TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS
MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE
FOREGOING RESTRICTIONS.

     THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM
DENOMINATIONS OF $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY
ATTEMPTED TRANSFER OF THIS SECURITY IN DENOMINATIONS OF LESS THAN $100,000 SHALL
BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED
TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST
OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT

<PAGE>

NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR SUCH INTEREST
OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO
INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

<PAGE>

                   Floating Rate Senior Debt Security due 2033

                                       of

                      Embarcadero Insurance Holdings, Inc.

     Embarcadero Insurance Holdings, Inc., an insurance holding company
incorporated in California (the "Company", which term includes any successor
permitted under the Indenture (as defined herein)), for value received, promises
to pay to JPMorgan Chase Bank, as Trustee for the benefit of the Noteholders of
InCapS Funding I, Ltd. or registered assigns, the principal amount of Eight
Million Dollars ($8,000,000) on May 23, 2033 (the "Maturity Date") (or any
Optional Redemption Date, as defined herein, or any earlier date of acceleration
of the maturity of this Debt Security), and to pay interest on the outstanding
principal amount of this Debt Security from May 22, 2003, or from the most
recent Interest Payment Date (as defined below) to which interest has been paid
or duly provided for, quarterly in arrears on February 23rd May 23rd, August
23rd and November 23rd of each year, commencing on August 23, 2003 (each, an
"Interest Payment Date"), at a floating rate per annum, which, with respect to
any Interest Period (as defined in the Indenture), will be equal to LIBOR (as
defined in the Indenture), as determined on the LIBOR Determination Date as
defined in the Indenture) for such Interest Period, plus 4.20% (the "Interest
Rate") (provided that the Interest Rate for any Interest Period prior to the
Interest Period commencing on the Interest Payment Date in May, 2008 may not
exceed 12.5% per annum; and provided, further, that the Interest Rate for any
Interest Period may not exceed the highest rate permitted by New York law, as
the same may be modified by United States law of general application) until the
principal hereof shall have been paid or duly provided for, and on any overdue
principal and (without duplication and to the extent that payment of such
interest is enforceable under applicable law) on any overdue installment of
interest at an annual rate equal to the then applicable Interest Rate,
compounded quarterly. The amount of interest payable for any Interest Period
shall be computed on the basis of a 360-day year and the actual number of days
elapsed in such Interest Period.

     The interest installment so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture, be paid to
the Person in whose name this Debt Security (or one or more Predecessor
Securities, as defined in the Indenture) is registered at the close of business
on the "regular record date" for such interest installment, which shall be the
fifteenth day prior to such Interest Payment Date, whether or not such day is a
Business Day (as defined herein). Any such interest installment not punctually
paid or duly provided for shall forthwith cease to be payable to the holders on
such regular record date and may be paid to the Person in whose name this Debt
Security (or one or more Predecessor Securities) is registered at the close of
business on a special record date to be fixed by the Trustee for the payment of
such defaulted interest, notice whereof shall be given to the holders of the
Debt Securities not less than 10 days prior to such special record date, all as
more fully provided in the Indenture.

<PAGE>

     Payment of the principal of and premium, if any, and interest on this Debt
Security due on the Maturity Date or any Optional Redemption Date, as the case
may be, shall be made in immediately available funds against presentation and
surrender of this Debt Security at the office or agency of the Trustee
maintained for that purpose in Wilmington, Delaware or at the office or agency
of any other Paying Agent appointed by the Company maintained for that purpose
in Wilmington, Delaware or San Francisco, California. Payment of interest on
this Debt Security due on any Interest Payment Date other than the Maturity Date
or any Optional Redemption Date, as the case may be, shall be made at the option
of the Company by check mailed to the holder thereof at such address as shall
appear in the Debt Security Register or by wire transfer of immediately
available funds to an account appropriately designated by the holder hereof.
Notwithstanding the foregoing, so long as the holder of this Debt Security is
InCapS Funding I, Ltd. or a trustee thereof, payment of the principal of and
premium, if any, and interest on this Debt Security shall be made in immediately
available funds when due at such place and to such account as may be designated
by InCapS Funding I, Ltd. or a trustee thereof. All payments in respect of this
Debt Security shall be payable in any coin or currency of the United States of
America that at the time of payment is legal tender for payment of public and
private debts.

     Notwithstanding anything to the contrary contained herein, if any Interest
Payment Date, other than the Maturity Date or any Optional Redemption Date,
falls on a day that is not a Business Day, then any interest payable will be
paid on, and such Interest Payment Date will be moved to, the next succeeding
Business Day, and additional interest will accrue for each day that such payment
is delayed as a result thereof. If the Maturity Date or any Optional Redemption
Date falls on a day that is not a Business Day, then the principal, premium, if
any, and/or interest payable on such date will be paid on the next succeeding
Business Day, and no additional interest will accrue in respect of such payment
made on such next succeeding Business Day.

     The Company waives diligence, presentment, demand for payment, notice of
nonpayment, notice of protest, and all other demands and notices.

     This Debt Security shall not be entitled to any benefit under the Indenture
and shall not be valid or become obligatory for any purpose until the
certificate of authentication hereon shall have been signed by or on behalf of
the Trustee.

     The provisions of this Debt Security are continued on the reverse side
hereof and such continued provisions shall for all purposes have the same effect
as though fully set forth at this place.

<PAGE>

     IN WITNESS WHEREOF, the Company has duly executed this certificate.

                                        EMBARCADERO INSURANCE HOLDINGS, INC.

                                        By: /s/ John Sullivan
                                            ------------------------------------
                                            John Sullivan
                                            Chief Executive Officer

Dated: May 22, 2003

                          CERTIFICATE OF AUTHENTICATION

     This is one of the Debt Securities referred to in the within-mentioned
Indenture.

                                        WILMINGTON TRUST COMPANY,
                                        not in its individual capacity but
                                        solely as the Trustee

                                        By: /s/ Janel R. Havrilla
                                            ------------------------------------
                                            Authorized Officer

Dated: May 22, 2003

<PAGE>

     This Debt Security is one of a duly authorized series of debt securities of
the Company (collectively, the "Debt Securities"), all issued or to be issued
pursuant to an Indenture (the "Indenture"), dated as of May 22, 2003, duly
executed and delivered between the Company and Wilmington Trust Company, as
Trustee (the "Trustee"), to which Indenture and all indentures supplemental
thereto reference is hereby made for a description of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee, the
Company and the holders of the Debt Securities of which this Debt Security is a
part.

     The Company shall have the right to redeem this Debt Security at its
option, in whole or (provided that all accrued and unpaid interest has been paid
on all Debt Securities for all Interest Periods terminating on or prior to such
date) from time to time in part, on any Interest Payment Date on or after May
23, 2008 (each, an "Optional Redemption Date"), at the Optional Redemption Price
(as defined herein).

     Any redemption pursuant to the preceding paragraph will be made upon not
less than 30 days' nor more than 60 days' prior written notice. If the Debt
Securities are only partially redeemed by the Company, the Debt Securities will
be redeemed pro rata or by any other method utilized by the Trustee. In the
event of redemption of this Debt Security in part only, a new Debt Security or
Debt Securities for the unredeemed portion hereof will be issued in the name of
the holder hereof upon the cancellation hereof.

     "Optional Redemption Price" means an amount in cash equal to 100% of the
principal amount of this Debt Security being redeemed plus unpaid interest
accrued thereon to the Optional Redemption Date.

     In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of all of the Debt Securities may be
declared, and, in certain cases, shall ipso facto become, due and payable, and
upon any such declaration of acceleration shall become due and payable, in each
case, in the manner, with the effect and subject to the conditions provided in
the Indenture.

     The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of a majority in aggregate principal amount of
the Debt Securities at the time outstanding affected thereby, as specified in
the Indenture, to execute supplemental indentures for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of any supplemental indenture or of modifying in any manner the
rights of the holders of the Debt Securities; provided, however, that no such
supplemental indenture shall, among other things, without the consent of the
holders of each Debt Security then outstanding and affected thereby (i) change
the Maturity Date of any Debt Security, or reduce the principal amount thereof
or any premium thereon, or reduce the rate (or manner of calculation of the
rate) or extend the time of payment of interest thereon, or reduce (other than
as a result of the maturity or earlier redemption of any such Debt Security in
accordance with the terms of the Indenture and such Debt Security) or increase
the aggregate principal amount of Debt Securities then outstanding, or change
any of the redemption provisions, or make the principal thereof or any interest
or premium thereon payable in any coin or currency other than United States
Dollars, or impair or affect the right of any holder to

<PAGE>

institute suit for payment thereof, or (ii) reduce the aforesaid percentage of
Debt Securities the holders of which are required to consent to any such
supplemental indenture. The Indenture also contains provisions permitting the
holders of a majority in aggregate principal amount of the Debt Securities at
the time outstanding, on behalf of the holders of all the Debt Securities, to
waive any past default in the performance of any of the covenants contained in
the Indenture, or established pursuant to the Indenture, and its consequences,
except (a) a default in payments due in respect of any of the Debt Securities or
(b) in respect of covenants or provisions of the Indenture which cannot be
modified or amended without the consent of the holder of each Debt Security
affected. Any such consent or waiver by the holder of this Debt Security (unless
revoked as provided in the Indenture) shall be conclusive and binding upon such
holder and upon all future holders and owners of this Debt Security and of any
Debt Security issued in exchange herefor or in place hereof (whether by
registration of transfer or otherwise), irrespective of whether or not any
notation of such consent or waiver is made upon this Debt Security.

     No reference herein to the Indenture and no provision of this Debt Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to make all payments due in respect of this Debt
Security at the time and place and at the rate and in the money herein
prescribed.

     As provided in the Indenture and subject to certain limitations herein and
therein set forth, this Debt Security is transferable by the holder hereof on
the Debt Security Register (as defined in the Indenture) of the Company, upon
surrender of this Debt Security for registration of transfer at the office or
agency of the Trustee in Wilmington, Delaware, or at any other office or agency
of the Company in Wilmington, Delaware or San Francisco, California, accompanied
by a written instrument or instruments of transfer in form satisfactory to the
Company or the Trustee duly executed by the holder hereof or such holder's
attorney duly authorized in writing, and thereupon one or more new Debt
Securities of authorized denominations and for the same aggregate principal
amount will be issued to the designated transferee or transferees. No service
charge will be made for any such registration of transfer, but the Company or
the Trustee may require payment of a sum sufficient to cover any tax, fee or
other governmental charge payable in relation thereto as specified in the
Indenture.

     Prior to due presentment for registration of transfer of this Debt
Security, the Company, the Trustee, any Authenticating Agent, any Paying Agent,
any transfer agent and the Debt Security registrar may deem and treat the holder
hereof as the absolute owner hereof (whether or not this Debt Security shall be
overdue and notwithstanding any notice of ownership or writing hereon) for the
purpose of receiving payment of the principal of and premium, if any, and
interest on this Debt Security and for all other purposes, and none of the
Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer
agent or any Debt Security registrar shall be affected by any notice to the
contrary.

     As provided in the Indenture and subject to certain limitations herein and
therein set forth, Debt Securities are exchangeable for a like aggregate
principal amount of Debt Securities of different authorized denominations, as
requested by the holder surrendering the same.

<PAGE>

     The Debt Securities are issuable only in registered certificated form
without coupons.

     No recourse shall be had for the payment of the principal of or premium, if
any, or interest on this Debt Security, or for any claim based hereon, or
otherwise in respect hereof, or based on or in respect of the Indenture, against
any incorporator, stockholder, officer, director, employee or agent, past,
present or future, as such, of the Company or of any predecessor or successor
corporation of the Company, whether by virtue of any constitution, statute or
rule of law, or by the enforcement of any assessment or penalty or otherwise,
all such liability being, by the acceptance hereof and as part of the
consideration for the issuance hereof, expressly waived and released.

     All terms used but not defined in this Debt Security shall have the
meanings assigned to them in the Indenture.

     THIS DEBT SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES
OF SAID STATE OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

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