-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LlvlzFJ6iG0SnuMr/bF3duHQ2mtKHZZd8Z3ripq96q+Pz/8DbLnfSu+53/1634MB eJwc2kZLfhgm3mItHCEF9g== 0001047469-97-005010.txt : 19971117 0001047469-97-005010.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-005010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INSURANCE HOLDINGS INC/DE/ CENTRAL INDEX KEY: 0000888919 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 760336636 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13790 FILM NUMBER: 97721544 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended SEPTEMBER 30, 1997 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from _______ to __________ Commission file number 0-20766 ------------------------------------------------------- HCC INSURANCE HOLDINGS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 76-0336636 - ------------------------------------------------------------------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13403 NORTHWEST FREEWAY, HOUSTON, TEXAS 77040-6094 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (713) 690-7300 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On November 7, 1997, there were 46,171,658 shares of Common Stock, $1 par value issued and outstanding. HCC INSURANCE HOLDINGS, INC. INDEX PAGE NO. Part I. FINANCIAL INFORMATION -------- Item 1. Condensed Consolidated Balance Sheets September 30, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Earnings Nine months Ended September 30, 1997 and Nine months Ended September 30, 1996 4 Condensed Consolidated Statements of Earnings Three Months Ended September 30, 1997 and Three Months Ended September 30, 1996 5 Condensed Consolidated Statements of Changes in Shareholders' Equity Nine months Ended September 30, 1997 and Year Ended December 31, 1996 6 Condensed Consolidated Statements of Cash Flows Nine months Ended September 30, 1997 and Nine months Ended September 30, 1996 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis 15 Part II. OTHER INFORMATION 18 2 HCC Insurance Holdings, Inc. and Subsidiaries --------- Condensed Consolidated Balance Sheets (Unaudited) --------- September 30, 1997 December 31, 1996 ------------------ ----------------- ASSETS Investments available for sale: Fixed income securities, at market (cost: 1997 $379,451,000, 1996 $371,844,000) $ 390,199,000 $377,555,000 Marketable equity securities, at market (cost: 1997 $10,388,000, 1996 $13,434,000) 10,093,000 13,250,000 -------------- ------------ Total investments 400,292,000 390,805,000 Cash and short-term investments: Cash 4,827,000 9,171,000 Short-term investments, at cost, which approximates market 132,629,000 78,693,000 -------------- ------------ Total cash and short-term investments 137,456,000 87,864,000 Restricted cash and cash investments 53,213,000 44,363,000 Reinsurance recoverables 185,249,000 132,684,000 Premium, claims and other receivables 229,331,000 168,717,000 Ceded unearned premium 91,102,000 71,758,000 Deferred policy acquisition costs 24,084,000 24,166,000 Property and equipment, net 18,274,000 17,021,000 Deferred income tax 7,234,000 10,871,000 Other assets, net 38,344,000 15,795,000 -------------- ------------ TOTAL ASSETS $1,184,579,000 $964,044,000 -------------- ------------ -------------- ------------ LIABILITIES Loss and loss adjustment expense payable $ 267,488,000 $229,049,000 Reinsurance balances payable 66,503,000 45,449,000 Unearned premium 158,057,000 151,959,000 Deferred ceding commissions 21,815,000 16,670,000 Premium and claims payable 214,037,000 123,118,000 Notes payable 82,334,000 73,167,000 Accounts payable and accrued liabilities 16,845,000 23,370,000 -------------- ------------ Total liabilities 827,079,000 662,782,000 SHAREHOLDERS' EQUITY Common Stock, $1.00 par value; 100,000,000 shares authorized, (issued and outstanding: 1997 46,007,058 shares; 1996 47,416,643 shares) 46,007,000 47,417,000 Additional paid-in capital 153,974,000 139,971,000 Retained earnings 150,881,000 167,012,000 Unrealized investment gain, net 6,834,000 3,623,000 Foreign currency translation adjustment (196,000) (91,000) Treasury stock (1996 3,301,741 shares) - (56,670,000) -------------- ------------ Total shareholders' equity 357,500,000 301,262,000 -------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' equity $1,184,579,000 $964,044,000 -------------- ------------ -------------- ------------
See Notes to Condensed Consolidated Financial Statements. 3 HCC Insurance Holdings, Inc. and Subsidiaries --------- Condensed Consolidated Statements of Earnings (Unaudited) --------- For the Nine Months Ended September 30, 1997 1996 ------------ ------------ REVENUE Net earned premium $124,431,000 $128,852,000 Fee and commission income 50,145,000 39,444,000 Net investment income 20,424,000 17,326,000 Computer products and services 5,374,000 6,756,000 Net realized investment gain (loss) (258,000) 6,654,000 Gain on sale of subsidiary - 3,307,000 ------------ ------------ Total revenue 200,116,000 202,339,000 EXPENSE Loss and loss adjustment expense 70,537,000 83,812,000 Operating expense: Policy acquisition costs 38,241,000 34,800,000 Compensation expense 30,488,000 28,157,000 Other operating expense 22,323,000 19,157,000 Merger expense 7,582,000 26,160,000 Ceding commissions (32,032,000) (25,296,000) ------------ ------------ Net operating expense 66,602,000 82,978,000 Interest expense 4,021,000 3,775,000 Total expense 141,160,000 170,565,000 ------------ ------------ Earnings before income tax provision 58,956,000 31,774,000 Income tax provision 19,825,000 5,232,000 ------------ ------------ NET EARNINGS $ 39,131,000 $ 26,542,000 ------------ ------------ ------------ ------------ EARNINGS PER SHARE DATA: Primary: Earnings per share $ 0.84 $ 0.60 ------------ ------------ ------------ ------------ Weighted average shares outstanding 46,471,000 44,350,000 ------------ ------------ ------------ ------------ Fully diluted: Earnings per share $ 0.84 $ 0.60 ------------ ------------ ------------ ------------ Weighted average shares outstanding 46,649,000 44,553,000 ------------ ------------ ------------ ------------ Cash dividends declared, per share $ 0.09 $ 0.04 ------------ ------------ ------------ ------------ See Notes to Condensed Consolidated Financial Statements. 4 HCC Insurance Holdings, Inc. and Subsidiaries --------- Condensed Consolidated Statements of Earnings (Unaudited) --------- For the three months ended September 30, 1997 1996 ------------ ----------- REVENUE Net earned premium $ 31,622,000 $42,047,000 Fee and commission income 17,946,000 13,313,000 Net investment income 7,695,000 5,892,000 Computer products and services 1,773,000 2,658,000 Net realized investment gain 36,000 1,447,000 Gain on sale of subsidiary - 3,307,000 ------------ ----------- Total revenue 59,072,000 68,664,000 EXPENSE Loss and loss adjustment expense 14,467,000 30,155,000 Operating expense: Policy acquisition costs 12,153,000 11,414,000 Compensation expense 10,335,000 8,906,000 Other operating expense 6,748,000 6,616,000 Merger expense 305,000 - Ceding commissions (11,671,000) (8,858,000) ------------ ----------- Net operating expense 17,870,000 18,078,000 Interest expense 1,211,000 1,111,000 ------------ ----------- Total expense 33,548,000 49,344,000 ------------ ----------- Earnings before income tax provision 25,524,000 19,320,000 Income tax provision 8,406,000 5,571,000 ------------ ----------- NET EARNINGS $ 17,118,000 $13,749,000 ------------ ----------- ------------ ----------- EARNINGS PER SHARE DATA: Primary: Earnings per share $ 0.36 $ 0.31 ------------ ----------- ------------ ----------- Weighted average shares outstanding 47,122,000 44,356,000 ------------ ----------- ------------ ----------- Fully diluted: Earnings per share $ 0.36 $ 0.31 ------------ ----------- ------------ ----------- Weighted average shares outstanding 47,201,000 44,419,000 ------------ ----------- ------------ ----------- Cash dividends declared, per share $ 0.03 $ 0.02 ------------ ----------- ------------ ----------- See Notes to Condensed Consolidated Financial Statements. 5 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the nine months ended September 30, 1997 and for the year ended December 31, 1996 (Unaudited) ---------- Additional Unrealized Common paid-in Retained investment Stock capital earnings gain (loss) ----------- ------------ ------------ ----------- BALANCE AS OF DECEMBER 31, 1995 $18,460,000 $138,084,000 $142,134,000 $9,296,000 27,688,869 shares of Common Stock issued for 150% stock dividend 27,689,000 (27,689,000) - - 132,108 Shares of Common Stock issued for exercise of options, including tax benefit of $366,000 132,000 837,000 - - Net earnings - - 41,586,000 - Cash dividends declared, $0.06 Per share - - (2,104,000) - Compensatory grant of pooled company stock prior to merger - 23,682,000 - - Dividends to shareholders of pooled companies prior to merger - - (7,705,000) - Capitalize undistributed earnings of pooled company upon conversion from S Corporation - 3,840,000 (3,840,000) - 1,136,400 shares of Common Stock issued for NASRA combination 1,136,000 - (1,452,000) - Repurchase of 520,000 shares of Common Stock by pooled company prior to merger - - - - Unrealized investment loss on fixed income securities, net of deferred tax benefit of $857,000 - - - (1,594,000) Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $2,144,000 - - - (4,079,000) Other - 1,217,000 (1,607,000) - ----------- ------------ ------------ ---------- BALANCE AS OF DECEMBER 31, 1996 $47,417,000 $139,971,000 $167,012,000 $3,623,000
Foreign currency Total translation Treasury shareholders' adjustment stock equity ----------- ------------ ------------ BALANCE AS OF DECEMBER 31, 1995 $(186,000) $(50,570,000) $257,218,000 27,688,869 shares of Common Stock issued for 150% stock dividend - - - 132,108 shares of Common Stock issued for exercise of options, including tax benefit of $366,000 - - 969,000 Net earnings - - 41,586,000 Cash dividends declared, $0.06 Per share - - (2,104,000) Compensatory grant of pooled company stock prior to merger - - 23,682,000 Dividends to shareholders of pooled companies prior to merger - - (7,705,000) Capitalize undistributed earnings of pooled company upon conversion from S Corporation - - - 1,136,400 shares of Common Stock issued for NASRA combination - - (316,000) Repurchase of 520,000 shares of Common Stock by pooled company prior to merger - (7,909,000) (7,909,000) Unrealized investment loss on fixed income securities, net of deferred tax benefit of $857,000 - - (1,594,000) Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $2,144,000 - - (4,079,000) Other 95,000 1,809,000 1,514,000 -------- ------------ ------------ BALANCE AS OF DECEMBER 31, 1996 $(91,000) $(56,670,000) $301,262,000
See Notes to Condensed Consolidated Financial Statements. 6 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the nine months ended September 30, 1997 and for the year ended December 31, 1996 (Unaudited) (Continued) ---------- Additional Unrealized Common paid-in Retained investment Stock capital earnings gain (loss) ----------- ------------ ------------ ----------- BALANCE AS OF DECEMBER 31, 1996 $47,417,000 $139,971,000 $167,012,000 $3,623,000 575,027 shares of Common Stock issued for exercise of options, including tax benefit of $1,474,000 575,000 7,628,000 - - 382,024 shares of Common Stock issued for purchased companies 382,000 9,805,000 - - 950,000 shares of Common Stock issued for combinations with pooled companies 950,000 - (1,507,000) - Net earnings - - 39,131,000 - Cash dividends declared, $0.09 Per share - - (3,833,000) - Repurchase of 14,895 shares of Common Stock by pooled company prior to combination - - - - Retirement of 3,316,636 shares of treasury Stock (3,317,000) (3,430,000) (50,247,000) - Unrealized investment gain on fixed income securities, net of deferred tax charge of $1,883,000 - - - 3,268,000 Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $54,000 - - - (57,000) Other - - 325,000 - ----------- ------------ ------------ ---------- BALANCE AS OF SEPTEMBER 30, 1997 $46,007,000 $153,974,000 $150,881,000 $6,834,000 ----------- ------------ ------------ ---------- ----------- ------------ ------------ ----------
Foreign currency Total translation Treasury shareholders' adjustment stock equity ----------- ------------ ------------ BALANCE AS OF DECEMBER 31, 1996 $ (91,000) $(56,670,000) $301,262,000 575,027 shares of Common Stock issued for exercise of options, including tax benefit of $1,474,000 - - 8,203,000 382,024 shares of Common Stock issued for purchased companies - - 10,187,000 950,000 shares of Common Stock issued for combinations with pooled companies - - (557,000) Net earnings - - 39,131,000 Cash dividends declared, $0.09 per share - - (3,833,000) Repurchase of 14,895 shares of Common Stock by pooled company prior to combination - (324,000) (324,000) Retirement of 3,316,636 shares of treasury stock - 56,994,000 - Unrealized investment gain on fixed income securities, net of deferred tax charge of $1,883,000 - - 3,268,000 Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $54,000 - - (57,000) Other (105,000) - 220,000 ----------- ------------ ------------ BALANCE AS OF SEPTEMBER 30, 1997 $ (196,000) - $357,500,000 ----------- ------------ ------------ ----------- ------------ ------------
See Notes to Condensed Consolidated Financial Statements. 7 HCC Insurance Holdings, Inc. and Subsidiaries --------- Condensed Consolidated Statements of Cash Flows (Unaudited) --------- For the Nine Months Ended September 30, 1997 1996 ------------ ------------ Cash flows from operating activities: Net earnings $ 39,131,000 $ 26,542,000 Adjustments to reconcile net earnings to net Cash provided by operating activities: Change in reinsurance recoverables (52,565,000) (20,061,000) Change in premium, claims and other receivables (60,614,000) (17,223,000) Change in ceded unearned premium (19,344,000) 3,403,000 Change in deferred income tax, net of tax effect of unrealized gain or loss 1,922,000 (9,081,000) Change in loss and loss adjustment expense payable 38,439,000 26,512,000 Change in reinsurance balances payable 21,054,000 (24,552,000) Change in unearned premium 6,098,000 6,532,000 Change in premium and claims payable, net of restricted cash 82,069,000 20,370,000 Net realized investment (gain) loss 258,000 (9,961,000) Non cash compensation expense - 23,975,000 Depreciation and amortization expense 3,586,000 3,004,000 Other, net (3,016,000) (8,938,000) ------------ ------------ Cash provided by operating activities 57,018,000 20,522,000 Cash flows from investing activities: Sales of fixed income securities 27,090,000 21,312,000 Maturity or call of fixed income securities 15,024,000 16,481,000 Sales of equity securities 17,631,000 31,357,000 Proceeds from sale of subsidiary - 13,957,000 Cash paid for companies acquired (12,948,000) - Cost of investments acquired (64,417,000) (72,096,000) Purchases of property and equipment (3,682,000) (1,750,000) ------------ ------------ Cash provided (used) by investing activities (21,302,000) 9,261,000 Cash flows from financing activities: Proceeds from notes payable 15,298,000 29,000,000 Sale of common stock 8,203,000 798,000 Payments on notes payable (6,131,000) (28,985,000) Dividends paid (3,170,000) (7,406,000) Repurchase common stock (324,000) (7,478,000) ------------ ------------ Cash provided (used) by financing activities 13,876,000 (14,071,000) ------------ ------------ Net change in cash and short-term investments 49,592,000 15,712,000 Cash and short-term investments at beginning of period 87,864,000 78,437,000 ------------ ------------ CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $137,456,000 $ 94,149,000 ------------ ------------ ------------ ------------ Supplemental cash flow information: Interest paid $ 5,076,000 $ 4,146,000 ------------ ------------ ------------ ------------ Income tax paid $ 16,635,000 $ 12,703,000 ------------ ------------ ------------ ------------
See Notes to Condensed Consolidated Financial Statements. HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (1) GENERAL INFORMATION HCC Insurance Holdings, Inc. ("the Company" or "HCCH") and its subsidiaries include domestic and foreign property and casualty insurance companies and managing general underwriters, surplus lines insurance brokers and wholesale insurance and reinsurance brokers. The Company, through its subsidiaries, provides specialized property, casualty, accident and health insurance, underwritten on both a direct and reinsurance basis, and insurance agency services. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include all adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim periods. All adjustments made to the interim periods are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements for periods reported should be read in conjunction with the annual consolidated financial statements and notes related thereto. The condensed consolidated balance sheet as of December 31, 1996, and the statement of shareholders' equity for the year then ended were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. The combination with AVEMCO Corporation ("AVEMCO") was accounted for as a pooling- of-interests. The Company's condensed consolidated financial statements have been restated to include the accounts and operations of AVEMCO for all periods presented (see note 3). INCOME TAX For the nine months ended September 30, 1997 and 1996, the income tax provision has been calculated based on an estimated effective tax rate for each of the fiscal years. The difference between the Company's effective tax rate and the Federal statutory rate is primarily the result of nontaxable municipal bond interest included in pretax income. In addition, during 1996, prior to its merger with the Company, LDG Management Company Incorporated ("LDG") was an S Corporation and thus exempt from Federal income tax until May 21, 1996. 9 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (1) GENERAL INFORMATION, CONTINUED EARNINGS PER SHARE Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the period divided into net earnings. Weighted average shares outstanding have been adjusted to include shares and options issued in connection with the combination of AVEMCO. Outstanding common stock options, when dilutive, are considered to be common stock equivalents for the purpose of this calculation. The treasury stock method is used to calculate common stock equivalents due to options. EFFECTS ON RECENT ACCOUNTING PRONOUNCEMENTS In February, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". SFAS No. 128 is effective for fiscal periods ending after December 15, 1997. Early application is not permitted. SFAS No. 128 modifies the denominator to be used in the earnings per share calculations, and requires additional disclosures of the calculations. The statement will have no effect on the Company's net earnings, shareholders' equity or cash flows and an insignificant effect on earnings per share. In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". Both statements are effective for fiscal years beginning after December 15, 1997. These SFAS's require that additional information be included in a complete set of financial statements, but will have no effect on the Company's net earnings, shareholders' equity or cash flows. RECLASSIFICATIONS Certain amounts in the 1996 condensed consolidated financial statements have been reclassified to conform to the 1997 presentation. Such reclassifications had no effect on the Company's net earnings, shareholders' equity, or cash flows. 10 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE In the normal course of business the Company's insurance company subsidiaries cede a substantial portion of their premium to unrelated domestic and foreign reinsurers through quota share, surplus, excess of loss and facultative reinsurance agreements. Although the ceding of reinsurance does not discharge the primary insurer from liability to its policyholder, the subsidiaries participate in such agreements for the purpose of limiting their loss exposure and diversifying their business. Substantially all of the reinsurance assumed by the Company's insurance company subsidiaries was underwritten directly by the Company but issued by other unrelated companies in order to satisfy licensing or other requirements. The following tables represent the effect of such reinsurance transactions on net premium and loss and loss adjustment expense: Loss and Loss Written Earned Adjustment Premium Premium Expense ------------- ------------- ------------- For the nine months ended September 30, 1997: Direct business $ 136,769,000 $ 131,323,000 $ 90,419,000 Reinsurance assumed 130,703,000 132,408,000 126,165,000 Reinsurance ceded (159,034,000) (139,300,000) (146,047,000) ------------- ------------- ------------- NET AMOUNTS $ 108,438,000 $ 124,431,000 $ 70,537,000 ------------- ------------- ------------- ------------- ------------- ------------- For the nine months ended September 30, 1996: Direct business $ 138,197,000 $ 143,001,000 $ 92,939,000 Reinsurance assumed 117,085,000 105,823,000 78,132,000 Reinsurance ceded (115,336,000) (119,972,000) (87,259,000) ------------- ------------- ------------- NET AMOUNTS $ 139,946,000 $ 128,852,000 $ 83,812,000 ------------- ------------- ------------- ------------- ------------- ------------- For the three months ended September 30, 1997: Direct business $ 44,149,000 $ 44,764,000 $ 40,857,000 Reinsurance assumed 38,123,000 44,283,000 35,441,000 Reinsurance ceded (70,583,000) (57,425,000) (61,831,000) ------------- ------------- ------------- NET AMOUNTS $ 11,689,000 $ 31,622,000 $ 14,467,000 ------------- ------------- ------------- ------------- ------------- ------------- 11 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE, CONTINUED Loss and Loss Written Earned Adjustment Premium Premium Expense ------------ ------------ ------------ For the three months ended September 30, 1996: Direct business $ 40,909,000 $ 47,978,000 $ 33,946,000 Reinsurance assumed 35,957,000 36,670,000 23,413,000 Reinsurance ceded (37,999,000) (42,601,000) (27,204,000) ------------ ------------ ------------ NET AMOUNTS $ 38,867,000 $ 42,047,000 $ 30,155,000 ------------ ------------ ------------ ------------ ------------ ------------ The table below represents the approximate composition of reinsurance recoverables in the accompanying condensed consolidated balance sheets: September 30, December 31, 1997 1996 ------------ ------------ Reinsurance recoverable on paid losses $ 28,872,000 $ 23,333,000 Reinsurance recoverable on outstanding losses 145,943,000 102,350,000 Reinsurance recoverable on IBNR 12,939,000 9,416,000 Reserve for uncollectible reinsurance (2,505,000) (2,415,000) ------------ ------------ TOTAL REINSURANCE RECOVERABLES $185,249,000 $132,684,000 ------------ ------------ ------------ ------------ The insurance company subsidiaries require reinsurers not authorized by their respective states of domicile to collateralize their reinsurance obligations to the Company with letters of credit or cash deposits. At September 30, 1997, the Company held letters of credit and cash deposits in the amounts of $85.7 million and $8.2 million, respectively, to collateralize certain reinsurance balances. The Company has established a reserve of $2.5 million as of September 30, 1997, to reduce the effects of any recoverable problems. In order to minimize its exposure to reinsurance credit risk, the Company evaluates the financial condition of its reinsurers and places its reinsurance with a diverse group of financially sound companies. (3) ACQUISITIONS TRM On January 24, 1997, the Company acquired all of the occupational accident business of the TRM International, Inc. group of companies in exchange for 266,667 shares of the Company's Common Stock and $6.55 million in cash. This acquisition has been accounted for as a purchase and results of operations of the business acquired has been included in the consolidated statements of earnings beginning in January 1997. Cost in excess of net assets acquired (goodwill) of approximately $13.5 million was recorded from this acquisition. Goodwill is being amortized over twenty years. The results of operations of TRM for the periods prior to the acquisition are immaterial to the Company's consolidated results of operations. 12 HCC Insurance Holdings, Inc. and Subsidiaries ----------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (3) ACQUISITIONS, CONTINUED INTERWORLD On April 30, 1997, the Company acquired all of the outstanding shares of Interworld Corporation in exchange for 725,000 shares of the Company's Common Stock. This business combination has been accounted for as a pooling-of-interests. However, the Company's consolidated financial statements have not been restated due to immateriality. AVEMCO On June 17, 1997, the Company issued 8,511,625 shares of its Common Stock and 604,575 options to purchase its Common Stock to acquire all of the outstanding common stock and options of AVEMCO. This business combination has been accounted for as a pooling-of-interests and, accordingly, the Company's condensed consolidated financial statements have been restated to include the accounts and operations of AVEMCO for all periods presented. Separate total revenue and net earnings amounts of the merged entities are presented for the periods prior to the merger in the following table: For the six For the nine months ended months ended June 30, 1997 September 30, 1996 ------------- ------------------ Total revenue: HCCH $ 81,598,000 $110,822,000 AVEMCO 59,446,000 91,517,000 ------------- ------------------ TOTAL REVENUE $141,044,000 $202,339,000 ------------- ------------------ ------------- ------------------ Net earnings: HCCH $ 21,295,000 $ 16,734,000 AVEMCO 718,000 9,808,000 ------------- ------------------ NET EARNINGS $ 22,013,000 $ 26,542,000 ------------- ------------------ ------------- ------------------ AVEMCO's net earnings for the six months ended June 30, 1997, include merger expenses of approximately $3.5 million. 13 HCC Insurance Holdings, Inc. and Subsidiaries ----------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (3) ACQUISITIONS, CONTINUED MGU On June 26, 1997, the Company acquired all of the outstanding shares of Managed Group Underwriting, Inc. in exchange for 98,003 shares of the Company's Common Stock and a cash payment of $3.6 million. This acquisition has been accounted for as a purchase and the results of operations has been included in the consolidated statements of earnings beginning in July, 1997. Cost in excess of net assets acquired (goodwill) of approximately $6.2 million was recorded from this acquisition. Goodwill is being amortized over twenty years. The results of operations of MGU for the periods prior to the acquisition are immaterial to the Company's consolidated results of operations. CONTINENTAL On July 31, 1997, the Company acquired all of the outstanding shares of Continental Aviation Underwriters, Inc. in exchange for 17,354 shares of the Company's Common Stock and a cash payment of $2.8 million. This acquisition has been accounted for as a purchase and the results of operations have been included in the consolidated statements of earnings beginning in August, 1997. Cost in excess of net assets acquired (goodwill) of approximately $3.4 million was recorded from this acquisition. Goodwill is being amortized over twenty years. The results of operations of Continental for the periods prior to the acquisition are immaterial to the Company's consolidated results of operations. SOUTHERN On August 8, 1997, the Company acquired all of the outstanding shares of Southern Aviation Insurance Underwriters, Inc. and Aviation Claims Administrators, Inc. in exchange for 225,000 shares of the Company's Common Stock. These business combinations have been accounted for as poolings-of-interests. However, the Company's consolidated financial statements have not been restated due to immateriality. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS The Company completed the acquisition of Interworld Corporation on April 30, 1997 (pooling-of-interests), of AVEMCO Corporation on June 17, 1997 (pooling-of-interests), of Managed Group Underwriting, Inc. on June 26, 1997 (purchase), of Continental Aviation Underwriters, Inc. on July 31, 1997 (purchase) and of Southern Aviation Insurance Underwriters, Inc. and Aviation Claims Administrators, Inc. on August 8, 1997 (poolings-of-interests). THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1996. Gross written premium increased 7% to $82.3 million for the third quarter of 1997 from $76.9 million for the same period in 1996. Aviation and accident and health premium increased during the quarter offset by a reduction in property and marine business as competition increases. Net written premium for the third quarter of 1997 decreased to $11.7 million from $38.9 million for the same period in 1996. The implementation of a significant reinsurance program covering AVEMCO's business since the acquisition caused a decline of $36 million in net written premium, of which $17 million was due to a portfolio transfer of inforce policies. However, accident and health net written premium increased during the third quarter. Net earned premium decreased to $31.6 million for the third quarter of 1997 compared to $42.0 million for the same period in 1996 reflecting increased reinsurance, particularly the effects of the new reinsurance program at AVEMCO. Fee and commission income increased 35% to $17.9 million for the third quarter of 1997, compared to $13.3 million for the same period in 1996 due to the increased agency activity in light of recent acquisitions. The Company expects fee and commission income to continue to increase due to the effects of recent acquisitions and internal growth. Net investment income increased 31% to $7.7 million for the third quarter of 1997 compared to $5.9 million for the same period in 1996 reflecting increased cash flow and, therefore, a higher level of investments. Net realized investment losses from sales of equity securities were $104,000 during the third quarter of 1997, compared to gains of $1.6 million for the same period in 1996. During 1996, the Company systematically liquidated the majority of its equity portfolio. Net realized investment gains from disposition of fixed income securities were $140,000 during the third quarter of 1997, compared to losses of $112,000 for the same period in 1996. During the third quarter of 1996, AVEMCO consummated the sale of National Assurance Underwriters, Inc., which was a subsidiary of AVEMCO prior to the pooling-of-interests combination. This sale generated an after tax gain of $2.2 million or $0.05 per share. Loss and LAE decreased during the third quarter of 1997, to $14.5 million, reflecting unusually good underwriting results and the effects of increased ceded reinsurance, particularly the new reinsurance program covering AVEMCO's business. Other operating expense increased 2% to $6.7 million for the third quarter of 1997. These expenses reflect increased expenditures required to meet the overall growth in business. Currency conversion losses amounted to $107,000 for the third quarter of 1997, compared to losses of $30,000 during the same period in 1996. Net earnings increased 25% to $17.1 million for the third quarter of 1997 from $13.7 for the same period in 1996. This increase was principally a result of higher underwriting profits and increased fee and commission income. Earnings per share increased 16% to $0.36 for the third quarter of 1997 from $0.31 for the third quarter of 1996. This reflects the increase in net earnings, offset by a 6% increase in weighted average shares outstanding due to shares issued for acquisitions and the exercise of options. The Company's insurance company subsidiaries' GAAP combined ratio was 62.7% for the third quarter of 1997, as compared to 92.1% for the same period in 1996, principally due to reduced loss and LAE. The Company's book value per share was $7.77 as of September 30, 1997, up from $7.37 as of June 30, 1997. Earnings added $0.37 per share to book value during the third quarter of 1997. 15 NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996. Gross written premium increased 5% to $267.5 million for the first nine months of 1997 from $255.3 million for the same period in 1996, due primarily to increased aviation and accident and health premiums partially offset by decreased property and marine premium. Net written premium for the first nine months of 1997 decreased to $108.4 million from $139.9 million for the same period in 1996, due to the implementation of a significant reinsurance program covering AVEMCO's business. Net earned premium decreased to $124.4 million for the first nine months of 1997 compared to $128.9 million for the same period in 1996 reflecting increased reinsurance, particularly the new reinsurance program at AVEMCO. Fee and commission income increased 27% to $50.1 million for the first nine months of 1997, compared to $39.4 million for the same period in 1996 due to the increased agency activity. The Company expects fee and commission income to continue to increase due to the effects of recent acquisitions and internal growth. Net investment income increased 18% to $20.4 million for the first nine months of 1997 compared to $17.3 million for the same period in 1996 reflecting increased cash flow and, therefore, a higher level of investments. Net realized investment losses from sales of equity securities were $154,000 during the first nine months of 1997, compared to gains of $6.8 million for the same period in 1996. During 1996, the Company systematically liquidated the majority of its equity portfolio. Net realized investment losses from disposition of fixed income securities were $104,000 during the first nine months of 1997, compared to losses of $176,000 for the same period in 1996. During the third quarter of 1996, AVEMCO consummated the sale of National Assurance Underwriters, Inc., which was a subsidiary of AVEMCO prior to the pooling-of-interests combination. This sale generated an after tax gain of $2.2 million or $0.05 per share. Loss and LAE decreased during the first nine months of 1997, to $70.5 million, as the Company's GAAP loss ratio decreased to 56.7% from 65.0%, due to the decrease experienced during the third quarter of 1997. Other operating expense increased 17% to $22.3 million for the first nine months of 1997. These expenses reflect increased expenditures required to meet the overall growth in business. Currency conversion losses amounted to $649,000 for the first nine months of 1997, compared to losses of $203,000 for the same period in 1996. Merger expense represents non-recurring items incurred to consummate the acquisitions and mergers which are accounted for as poolings-of-interests. The amounts incurred during the first nine months of 1996 were due to the combination with LDG and included a compensatory stock grant of $24.0 million to certain key LDG employees immediately prior to the merger. The amounts incurred during 1997 were due to the combinations with AVEMCO Corporation, Interworld Corporation and Southern Aviation Insurance Underwriters, Inc. Income tax expense was $19.8 million for the first nine months of 1997, compared to $5.2 million during the first nine months of 1996. The 1996 amount included a deferred tax benefit of $9.6 million which was recorded in connection with the compensatory stock grant to certain key LDG employees. Most of the other merger expenses are not deductible for income tax purposes. Also, as an S Corporation, LDG was exempt from Federal income taxes through May 21, 1996. Had LDG been subject to Federal income tax during the period January 1, 1996 to May 21, 1996, additional income tax expense of $2.3 million would have been recorded for the nine months ended September 30, 1996. Net earnings increased 47% to $39.1 million for the first nine months of 1997 from $26.5 million for the same period in 1996. This increase was principally a result of higher underwriting profits and increased fee and commission income during 1997, and higher merger related expenses during 1996, which included the non-recurring compensation charge. Earnings per share increased 40% to $0.84 for the first nine months of 1997 from $0.60 for the first nine months of 1996. This reflects a 47% increase in net earnings, partially offset by a 5% increase in weighted average shares outstanding due to shares issued for acquisitions and the exercise of options. 16 The Company's insurance company subsidiaries' GAAP combined ratio was 76.9% for the first nine months of 1997, as compared to 86.4% for the same period in 1996. The Company's book value per share was $7.77 as of September 30, 1997, up from $6.83 as of December 31, 1996. Earnings added $0.85 per share to book value during the first nine months of 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated cash and investment portfolio increased $59.1 million or 12% since December 31, 1996, and totaled $537.7 million as of September 30, 1997, of which $137.5 million was cash and short-term investments. Total assets increased to $1.2 billion as of September 30, 1997, from $964.0 million as of December 31, 1996. The increase in premium and claims receivables and payables is due to the growth in agency operations during the year. The increase in reinsurance balances is primarily due to the new reinsurance program at AVEMCO. AVEMCO's line of credit has been extended through December 31, 1997. As the year 2000 approaches, the Company recognizes the need to ensure its operations will not be adversely impacted by year 2000 computer software failures. The Company is presently addressing this issue to ensure the availability and integrity of its financial systems and the reliability of its operational systems. The Company has established processes for evaluating and managing the risks and costs associated with this problem. The Company has and will continue to make certain investments in its software systems and applications to ensure the Company's systems are year 2000 compliant. FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTY, INCLUDING WITHOUT LIMITATION, THE RISK OF A SIGNIFICANT NATURAL DISASTER, THE INABILITY OF THE COMPANY TO REINSURE CERTAIN RISKS, THE ADEQUACY OF ITS LOSS RESERVES, EXPANSION OR CONTRACTION OF ITS VARIOUS LINES OF BUSINESS, THE IMPACT OF INFLATION, CHANGING REGULATIONS IN FOREIGN COUNTRIES, THE EFFECT OF RECENT AND PENDING ACQUISITIONS, AS WELL AS GENERAL MARKET CONDITIONS, COMPETITION AND PRICING. PLEASE REFER TO THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS, COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY WITHOUT CHARGE, FOR FURTHER INFORMATION. 17 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS: There are no material pending legal proceedings to which the Company is a party or of which any of the property of the Company is the subject, except for claims arising in the ordinary course of business, none of which are considered material. Item 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: The exhibits listed on the accompanying Index to Exhibits on the following page are filed as part of this report. (b) Reports on Form 8-K: On September 26, 1997, the Company filed a report on Form 8-K reporting that the Company would employ John N. Molbeck as the Company's President. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCC Insurance Holdings, Inc. ------------------------------------------------ (Registrant) November 14, 1997 /s/ Frank J. Bramanti - ----------------------- ------------------------------------------------ (Date) Frank J. Bramanti, Executive Vice President November 14, 1997 /s/ Edward H. Ellis, Jr. - ----------------------- ------------------------------------------------ (Date) Edward H. Ellis, Jr., Senior Vice President and Chief Financial Officer 18 INDEX TO EXHIBITS 10.336 - Stock Purchase Agreement dated July 31, 1997 between Continental Aviation Underwriters, Inc., the shareholders thereof, and HCC Insurance Holdings, Inc. related to the purchase of 100% of the common stock of Continental Aviation Underwriters, Inc. 10.337 - Acquisition Agreement dated August 8, 1997, between Southern Aviation Insurance Underwriters, Inc., Aviation Claims Administrators, Inc., the shareholders thereof, and HCC Insurance Holdings, Inc. related to the acquisition of 100% of the common stock of Southern Aviation Insurance Underwriters, Inc. and Aviation Claims Administrators, Inc. 10.338 - Line of Credit Agreements payable to Wells Fargo Bank (Texas), National Association executed by HCC Insurance Holdings, Inc., Houston Casualty Company and IMG Insurance Company, Ltd. together with the Credit Agreements and Security Agreements related thereto. 11 - Statements Regarding Computation of Earnings Per Share. 27 - EDGAR Financial Data Schedule - September 30, 1997. 27.1 - EDGAR Financial Data Schedule - Restated September 30, 1996. 19 EX-10.336 2 EX 10.336 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT DATED AS OF July 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC., AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC. AND CONTINENTAL AVIATION UNDERWRITERS, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE I SALE AND TRANSFER OF THE CONTINENTAL COMMON STOCK . . . . . 1 Section 1.1 Sale of Continental Common Stock.. . . . . . . . . . . 1 Section 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . 1 Section 1.3 Closing Deliveries . . . . . . . . . . . . . . . . . . 2 ARTICLE II REPRESENTATIONS AND WARRANTIES OF CONTINENTAL AND SHAREHOLDERS. . . . . . . . . . . . . . . . 3 Section 2.1 Corporate Existence and Power. . . . . . . . . . . . . 3 Section 2.2 Authorization. . . . . . . . . . . . . . . . . . . . . 4 Section 2.3 Governmental Authorization . . . . . . . . . . . . . . 4 Section 2.4 Non-Contravention. . . . . . . . . . . . . . . . . . . 4 Section 2.5 Capitalization . . . . . . . . . . . . . . . . . . . . 5 Section 2.6 Subsidiaries and Joint Ventures. . . . . . . . . . . . 5 Section 2.7 Continental Financial Statements . . . . . . . . . . . 6 Section 2.8 Absence of Certain Changes . . . . . . . . . . . . . . 6 Section 2.9 No Undisclosed Liabilities . . . . . . . . . . . . . . 7 Section 2.10 Litigation . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.12 Employee Benefit Plans, ERISA. . . . . . . . . . . . . 9 Section 2.13 Material Agreements. . . . . . . . . . . . . . . . . . 10 Section 2.14 Properties . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.15 Environmental Matters. . . . . . . . . . . . . . . . . 11 Section 2.16 Labor Matters. . . . . . . . . . . . . . . . . . . . . 12 Section 2.17 Compliance with Laws . . . . . . . . . . . . . . . . . 12 Section 2.18 Trademarks, Tradenames, Etc. . . . . . . . . . . . . . 12 Section 2.19 Sale of Continental. . . . . . . . . . . . . . . . . . 12 Section 2.20 Broker's Fees. . . . . . . . . . . . . . . . . . . . . 13 Section 2.21 Investment Representation. . . . . . . . . . . . . . . 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH . . . . . . . . 13 Section 3.1 Corporate Existence and Power. . . . . . . . . . . . . 14 Section 3.2 Corporate Authorization. . . . . . . . . . . . . . . . 14 Section 3.3 Governmental Authorization . . . . . . . . . . . . . . 14 Section 3.4 Non-Contravention. . . . . . . . . . . . . . . . . . . 15 Section 3.5 Capitalization of HCCH . . . . . . . . . . . . . . . . 15 Section 3.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . 16 Section 3.7 SEC Filings. . . . . . . . . . . . . . . . . . . . . . 16 Section 3.8 Financial Statements . . . . . . . . . . . . . . . . . 17 Section 3.9 Absence of Certain Changes . . . . . . . . . . . . . . 17 Section 3.10 No Undisclosed Liabilities . . . . . . . . . . . . . . 18 i TABLE OF CONTENTS (CONT.) PAGE Section 3.11 Litigation . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.12 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.13 Employee Benefit Plans; ERISA. . . . . . . . . . . . . 19 Section 3.14 Material Agreements. . . . . . . . . . . . . . . . . . 20 Section 3.15 Properties . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.16 Environmental Matters. . . . . . . . . . . . . . . . . 21 Section 3.17 Labor Matters. . . . . . . . . . . . . . . . . . . . . 21 Section 3.18 Compliance with Laws . . . . . . . . . . . . . . . . . 21 Section 3.19 Trademarks, Tradenames, Etc. . . . . . . . . . . . . . 21 Section 3.20 Broker's Fees. . . . . . . . . . . . . . . . . . . . . 21 ARTICLE IV COVENANTS OF CONTINENTAL AND SHAREHOLDERS . . . . . . . . . 22 Section 4.1 Conduct of Continental . . . . . . . . . . . . . . . . 22 Section 4.2 Access to Financial and Operational Information. . . . 23 Section 4.3 Other Offers . . . . . . . . . . . . . . . . . . . . . 24 Section 4.4 Maintenance of Business. . . . . . . . . . . . . . . . 24 Section 4.5 Compliance with Obligations. . . . . . . . . . . . . . 24 Section 4.6 Notices of Certain Events. . . . . . . . . . . . . . . 24 Section 4.7 Representation Agreement . . . . . . . . . . . . . . . 25 Section 4.8 Necessary Consents . . . . . . . . . . . . . . . . . . 25 Section 4.9 Regulatory Approval. . . . . . . . . . . . . . . . . . 25 Section 4.10 Satisfaction of Conditions Precedent . . . . . . . . . 25 ARTICLE V COVENANTS OF HCCH . . . . . . . . . . . . . . . . . . . . . 25 Section 5.1 Conduct of HCCH. . . . . . . . . . . . . . . . . . . . 25 Section 5.2 Listing of HCCH Common Stock . . . . . . . . . . . . . 26 Section 5.3 Access to Information. . . . . . . . . . . . . . . . . 26 Section 5.4 Maintenance of Business. . . . . . . . . . . . . . . . 26 Section 5.5 Compliance with Obligations. . . . . . . . . . . . . . 26 Section 5.6 Notices of Certain Events. . . . . . . . . . . . . . . 27 Section 5.7 Employee Matters . . . . . . . . . . . . . . . . . . . 27 ARTICLE VI COVENANTS OF HCCH, SHAREHOLDERS AND CONTINENTAL . . . . . . 27 Section 6.1 Advice of Changes. . . . . . . . . . . . . . . . . . . 27 Section 6.2 Regulatory Approvals. . . . . . . . . . . . . . . . . 27 Section 6.3 Certain Filings. . . . . . . . . . . . . . . . . . . . 27 Section 6.4 Communications . . . . . . . . . . . . . . . . . . . . 28 Section 6.5 Satisfaction of Conditions Precedent . . . . . . . . . 28 Section 6.6 Tax Cooperation. . . . . . . . . . . . . . . . . . . . 28 ii TABLE OF CONTENTS (CONT.) PAGE Section 6.7 Confidentiality. . . . . . . . . . . . . . . . . . . . 28 ARTICLE VII CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . 29 Section 7.1 Conditions to Obligations of HCCH. . . . . . . . . . . 29 Section 7.2 Conditions to Obligations of Shareholders. . . . . . . 31 Section 7.3 Conditions to Obligations of Each Party. . . . . . . . 32 ARTICLE VIII TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . 32 Section 8.1 Termination. . . . . . . . . . . . . . . . . . . . . . 32 Section 8.2 Effect of Termination. . . . . . . . . . . . . . . . . 33 ARTICLE IX CLOSING MATTERS . . . . . . . . . . . . . . . . . . . . . . 33 Section 9.1 The Closing. . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS. . . . . 33 Section 10.1 Agreement to Indemnify . . . . . . . . . . . . . . . . 33 Section 10.2 HCCH Agreement to Indemnify. . . . . . . . . . . . . . 34 Section 10.3 Survival of Representations. . . . . . . . . . . . . . 34 Section 10.4 Procedure for Indemnification; Third Party Claims. . . 35 Section 10.5 Appointment of Representative. . . . . . . . . . . . . 35 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 37 Section 11.1 Further Assurances.. . . . . . . . . . . . . . . . . . 37 Section 11.2 Fees and Expenses. . . . . . . . . . . . . . . . . . . 37 Section 11.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . 37 Section 11.4 Governing Law. . . . . . . . . . . . . . . . . . . . . 38 Section 11.5 Binding upon Successors and Assigns, Assignment. . . . 38 Section 11.6 Severability . . . . . . . . . . . . . . . . . . . . . 38 Section 11.7 Entire Agreement . . . . . . . . . . . . . . . . . . . 38 Section 11.8 Amendment and Waivers. . . . . . . . . . . . . . . . . 38 Section 11.9 No Waiver. . . . . . . . . . . . . . . . . . . . . . . 39 Section 11.10 Construction of Agreement. . . . . . . . . . . . . . . 39 Section 11.11 Counterparts . . . . . . . . . . . . . . . . . . . . . 39 iii STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of the 31st day of July, 1997 by and among HCC Insurance Holdings, Inc., a Delaware corporation ("HCCH"), the Shareholders whose names, and share holdings are set forth on Exhibit "A" hereto and incorporated herein by this reference (collectively, the "Shareholders" or singularly, a "Shareholder") of Continental Aviation Underwriters, Inc. ("Continental") a Tennessee corporation, and Continental. RECITALS: A. Shareholders own all of the outstanding stock of Continental, a Company engaged in the insurance business. B. HCCH desires to purchase all of the outstanding stock of Continental and Shareholders desire to sell to HCCH their shares in Continental (being all of the outstanding stock of Continental) for the consideration and on the terms set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, the parties hereto do hereby agree as follows: ARTICLE I SALE AND TRANSFER OF THE CONTINENTAL COMMON STOCK SECTION 1.1 SALE OF CONTINENTAL COMMON STOCK. (a) Subject to the terms and conditions of this Agreement, at the Closing hereinafter defined, Shareholders shall sell, transfer and deliver to HCCH, and HCCH shall purchase from Shareholders, all of the outstanding stock of Continental (the "Continental Common Stock"). SECTION 1.2 PURCHASE PRICE. (a) At the closing, HCCH shall deliver to Shareholders the purchase price ("Purchase Price") which shall be equal to $3,318,254 to be paid, as follows: (i) $1,820,813 in cash (the "Crawley Cash Payment") to be transferred, by wire transfer, to the account designated by Crawley Warren (USA) Inc. ("Crawley") in subsection (iv) below (the "Account"), in immediately available funds; (ii) $976,982 in cash (the "Other Shareholder Payment" which collectively with the Crawley Cash Payment, shall hereinafter be called the "Cash Payment") to be paid to the Shareholders of Continental other than Crawley (the "Other Shareholders") as set forth on Exhibit "B" hereto and to be transferred in immediately available funds by wire transfer to the Account; (iii) that number of shares of HCCH Common Stock (the "Share Payment") equal to (x) $520,459 (y) divided by the HCCH Acquisition Price. The Share Payment shall be made to Kinnebrew and Saxon, as hereinafter defined, as set forth on Exhibit "B" hereto, in proportion to their shareholdings of Continental. As used herein, the HCCH Acquisition Price means the average of the closing prices of HCCH Common Stock as reported by the New York Stock Exchange ("NYSE") for the ten trading days ending three trading days before the Closing Date, hereinafter defined; and (iv) The Account into which the Cash Payments shall be transferred is: Fleet Bank of Massachusetts ABA Routing Number 011 000 138 For Credit to Account of Morrison Mahoney & Miller Client Account - IOLTA Account Number 079 676 3506 (b) No fractional shares of HCCH Common Stock shall be issued and Kinnebrew and Saxon (hereinafter collectively called the "Other Shareholders") shall be entitled to receive an additional cash payment equal to the fractional share of HCCH Common Stock any such Other Shareholder would otherwise be entitled to receive, multiplied by the HCCH Acquisition Price. SECTION 1.3 CLOSING DELIVERIES. At the Closing: (a) Shareholders shall deliver to HCCH (i) certificates representing the Continental Common Stock, endorsed or transferred to HCCH, which shall transfer to HCCH good and indefeasible title to the Continental Common Stock, free and clear of all encumbrances; and (ii) such other documents including officers' certificates and opinions of counsel as may be required by this Agreement or reasonably requested by HCCH. (b) HCCH shall (i) cause the Cash Payment to be transferred to the accounts designated by Shareholders in immediately available funds; and 2 (ii) deliver certificates of HCCH Common Stock in the amount of the Share Payment in the names and to the accounts designated by Kinnebrew and Saxon. Kinnebrew and Saxon agree and understand that such shares of HCCH Common Stock shall be unregistered and, therefore, restricted as to transfer and the share certificates shall bear an appropriate legend as set forth thereon; and (iii) deliver to Shareholders such other documents, including officers' certificates and opinions of counsel, as may be required by this Agreement or reasonably requested by Shareholders. ARTICLE II REPRESENTATIONS AND WARRANTIES OF CONTINENTAL AND SHAREHOLDERS Except as disclosed in a document referring specifically to this Agreement (the "Continental Disclosure Schedule") which has been delivered to HCCH on or before the date hereof, Continental and each of the Shareholders (jointly and severally) represent and warrant to HCCH as set forth below. SECTION 2.1 CORPORATE EXISTENCE AND POWER. Continental is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals (collectively, "Governmental Authorizations") required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect, as hereinafter defined, on Continental. Continental has delivered to HCCH true and complete copies of Continental's Articles of Incorporation and Bylaws as currently in effect. Continental is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect on Continental. For purposes of this Agreement, a "Material Adverse Effect," with respect to any person or entity (including without limitation Continental and HCCH), means a material adverse effect on the condition (financial or otherwise), business, properties, assets, liabilities (including contingent liabilities), results of operations or prospects of such person or entity and its affiliated companies and subsidiaries and/or parent corporation and/or corporations under the same stock ownership, taken as a whole; and "Material Adverse Change" means a change or a development involving a prospective change which would result in a Material Adverse Effect. 3 SECTION 2.2 AUTHORIZATION. (a) Each Shareholder represents and warrants that it has full right, power and authority to enter into this Agreement, the Representation Agreements to be entered into by each of them, and each of such other agreements to be entered into by them in connection with the transactions contemplated hereby and that this Agreement, the Representation Agreement, and such other agreements contemplated hereby constitute, or upon execution will constitute, valid and binding agreements of such Shareholders, enforceable against each in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws effecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 2.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by Shareholders of this Agreement, and the consummation of the transactions contemplated hereunder require no action by Continental or Shareholders or any filing by them with any governmental body, agency, official or authority other than in respect of: (a) compliance with any applicable requirements of the Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations promulgated thereunder; (b) compliance with any applicable foreign or state securities or "blue sky" laws; (c) compliance with any requirements of any federal, state, foreign or other insurance or reinsurance or intermediaries or managing general agent laws, including licensing or other related laws; (d) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain (i) would not reasonably be expected to have a Material Adverse Effect on Continental, or (ii) would not materially adversely affect the ability of Continental, each Shareholder or HCCH to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. SECTION 2.4 NON-CONTRAVENTION. The execution, delivery and performance by Shareholders of this Agreement, and the consummation by Shareholders of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with Continental's charter or bylaws; (b) assuming compliance with the matters referred to in Section 2.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to Continental or Shareholders; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in a contractual right to cause the termination or cancellation of or loss of a material 4 benefit under, or right to accelerate, any material agreement, contract or other instrument binding upon Continental or any Shareholder or any material license, franchise, permit or other similar authorization held by Continental or any Shareholder; or (d) result in the creation or imposition of any Lien (as hereinafter defined) on any material asset of Continental, except, with respect to clauses (b), (c) and (d) above, for contraventions, defaults, losses, Liens and other matters referred to in such clauses that in the aggregate would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on Continental. For purposes of this Agreement, the term "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 2.5 CAPITALIZATION. (a) As of May 30, 1997, the authorized, issued and outstanding capital stock of Continental was 1,000 shares authorized; 131.6 shares issued and outstanding all of which outstanding shares were owned by Shareholders free of any Liens or other encumbrances. (b) All outstanding shares set forth in (a) above have been, or will be prior to the Closing Date, duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in and as otherwise contemplated by this Agreement, for Continental there are outstanding (i) no shares of capital stock or other voting securities, (ii) no securities convertible into or exchangeable for shares of its capital stock or voting securities), (iii) no options or other rights to acquire, and no obligation to issue, any capital stock, voting securities or securities convertible into or exchangeable for its capital stock or other voting securities (the items in clauses (i), (ii) and (iii) being referred to collectively as the "Continental Securities"), (iv) no obligations to repurchase, redeem or otherwise acquire any of Continental Securities and (v) no contractual rights of any person or entity to include any such securities in any registration statement proposed to be filed under the Securities Act. SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES. (a) For purposes of this Section 2.6, (i) "Subsidiary" means, with respect to any entity, any corporation of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by such entity, and (ii) "Joint Venture" means, with respect to any entity, any corporation or organization (other than such entity and any Subsidiary thereof) of which such entity or any Subsidiary thereof is, directly or indirectly, the beneficial owner of 25% or more of any class of equity securities or equivalent profit participation interest. (b) As of the date hereof Continental has no Subsidiaries or Joint Ventures. 5 SECTION 2.7 CONTINENTAL FINANCIAL STATEMENTS. Continental has delivered to HCCH Continental's balance sheets as of December 31, 1996 (the "Balance Sheet Date") and 1995, Continental's income statements for the annual periods ended December 31, 1996 and 1995 and Continental's unaudited balance sheets and income statements for the period ending March 31, 1997 (collectively, the "Continental Financial Statements"). The Continental Financial Statements present fairly in all material respects, substantially in conformity with generally accepted accounting principles consistently applied (except as indicated in the notes thereto), the financial position of Continental as of the dates thereof and results of operations and cash flows for the periods therein indicated (subject to normal year-end adjustments in the case of any interim financial statements and the absence of certain footnotes in the case of unaudited financial statements). Continental has no material debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, that is not reflected, reserved against or disclosed in the Continental Financial Statements except for (i) those that are not required to be reported in accordance with the aforesaid accounting principles; (ii) normal or recurring liabilities incurred since December 31, 1996 in the ordinary course of business or (iii) as disclosed in the Continental Disclosure Schedule. SECTION 2.8 ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, Continental has in all material respects conducted its business in the ordinary course and there has not been: (a) any Material Adverse Change with respect thereto or any event, occurrence or development of a state of circumstances or facts known to Continental, which as of the date hereof could reasonably be expected to have a Material Adverse Effect on Continental; (b) any declaration, setting aside or payment or any dividend or other distribution in respect of any shares of capital stock of Continental other than the declaration, setting aside or payment of dividends in accordance with its existing dividend policy or practice, which policy or practice is not inconsistent with Continental's past policy or practice; (c) any repurchase, redemption or other acquisition by Continental of any outstanding shares of capital stock or other securities of or other ownership interests in Continental; (d) any amendment of any term of any outstanding securities of Continental; (e) any damage, destruction or other property or casualty loss (whether or not covered by insurance) affecting the business, assets, liabilities, earnings or prospects of Continental which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on Continental; (f) any increase in indebtedness for borrowed money or capitalized lease obligations of Continental, except in the ordinary course of business; 6 (g) any sale, assignment, transfer or other disposition of any tangible or intangible asset material to the business of Continental, except in the ordinary course of business and for a fair and adequate consideration; (h) any amendment, termination or waiver by Continental of any right of substantial value under any agreement, contract or other written commitment to which it is a party or by which it is bound; (i) any material reduction in the amounts of coverage provided by existing casualty and liability insurance policies with respect to the business or properties of Continental; (j) other than the severance contract with Ted A. Showalter, Jr. in the amount of $10,000 ("Showalter Payment"), any (i) grant of any severance or termination pay to any director, officer or employee of Continental, (ii) entering into of any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of Continental, (iii) any increase in benefits payable under any existing severance or termination pay policies or employment agreements, or (iv) any increase in compensation, bonus or other benefits payable to directors, officers or employees of Continental, in each case other than in the ordinary course of business consistent with past practice; (k) any new or amendment to or alteration of any existing bonus, incentive, compensation, severance, stock option, stock appreciation right, pension, matching gift, profit-sharing, employee stock ownership, retirement, pension group insurance, death benefit, or other fringe benefit plan, arrangement or trust agreement adopted or implemented by Continental which would result in a material increase in cost; (l) any capital expenditures, capital additions or capital improvements incurred or undertaken by Continental except in the ordinary course of business; or (m) the entering into of any agreement by Continental or any person on behalf of Continental to take any of the foregoing actions, provided, however, that Continental shall be entitled to utilize up to $579,000 (the "Continental Permitted Payment") prior to the Closing Date for payment of the Showalter Payment, employee and management bonuses, director's fees, dividends, and management fees to Crawley. SECTION 2.9 NO UNDISCLOSED LIABILITIES. There are no existing liabilities of Continental of any kind whatsoever that are, individually or in the aggregate, material to Continental, other than: (a) liabilities disclosed or provided for in the respective financial statements as of and for the fiscal year ended December 31, 1996 (including the notes thereto) of Continental; 7 (b) liabilities incurred in the ordinary course of business consistent with past practice since December 31, 1996; (c) liabilities under this Agreement or indicated in the Continental Disclosure Schedule. SECTION 2.10 LITIGATION. Other than actions, suits, proceedings, claims or investigation occurring in the ordinary course of business involving respective amounts in controversy of less than $10,000 each and $30,000 in the aggregate, there is no action, suit, proceeding, claim or to the knowledge of Continental or Shareholders, investigation pending against, nor have Continental or Shareholders received written notice of a claim threatened against Continental or any of its assets or against or involving any of its officers, directors or employees in connection with the business or affairs of Continental, including, without limitation, any such claims for indemnification arising under any agreement to which Continental is a party. Continental has not received written notice that it is subject, or in default with respect, to any writ, order, judgment, injunction or decree which could, individually or in the aggregate, have a Material Adverse Effect on Continental. SECTION 2.11 TAXES. (a) Continental (i) has filed when due (taking into account extensions) with the appropriate federal, state, local, foreign and other governmental agencies, all material tax returns, estimates and reports required to be filed by it, (ii) either paid when due and payable or established adequate reserves or otherwise accrued on the Continental's Financial Statements all material federal, state, local or foreign taxes, levies, imposts, duties, licenses and registration fees and charges of any nature whatsoever, and unemployment and social security taxes and income tax withholding, including interest and penalties thereon ("Taxes") and there are no tax deficiencies claimed in writing by any Taxing authority and received by Continental or Shareholders that, in the aggregate, would result in any tax liability in excess of the amount of the reserves or accruals and (iii) has or will establish in accordance with its normal accounting practices and procedures accruals and reserves that, in the aggregate, are adequate for the payment of all Taxes not yet due and payable and attributable to any period preceding the Effective Time. The Continental Disclosure Schedule sets forth those tax returns for all periods that to the knowledge of Continental or Shareholders, currently are the subject of audit by any federal, state, local or foreign taxing authority. (b) There are no material taxes, interest, penalties, assessments or deficiencies claimed in writing by any Taxing authority and received by Continental or Shareholders to be due in respect of any tax returns filed by Continental (or any predecessor corporations). Neither Continental nor any predecessor corporation, has executed or filed with the Internal Revenue Service ("IRS") or any other Taxing authority any agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes. 8 (c) Continental is not a party to or bound by (or will prior to the Closing Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax allocation agreement or other similar arrangement. Continental is not a member of an affiliated group or filed or been included in a combined, consolidated or unitary Tax return. SECTION 2.12 EMPLOYEE BENEFIT PLANS, ERISA. (a) Continental is not a party to any oral or written (i) employment, severance, collective bargaining or consulting agreement not terminable on 60 days' or less notice, (ii) agreement with any executive officer or other key employee of Continental (A) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving Continental of the nature of any of the transactions contemplated by this Agreement, (B) providing any term of employment or compensation guarantee extending for a period longer than one year, or (C) providing severance benefits or other benefits after the termination of employment of such executive officer or key employee regardless of the reason for such termination of employment, (iii) agreement, plan or arrangement under which any person may receive payments subject to the tax imposed by Section 4999 of the Code, or (iv) agreement or plan, including, without limitation, any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, the benefits of which would be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. (b) Neither Continental nor any corporation or other entity which under Section 4001(b) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), is under common control with Continental (a "Continental ERISA Affiliate") maintains or within the past five years has maintained, contributed to, or been obligated to contribute to, any "Employee Pension Benefit Plan" ("Pension Plan") or any "Employee Welfare Benefit Plan" ("Welfare Plan") as such terms are defined in Sections 3(2) and 3(1) respectively of ERISA, which is subject to ERISA. Each Pension Plan and Welfare Plan disclosed in the Continental Disclosure Schedule (which Plans have been heretofore delivered to HCCH) and maintained by Continental has been maintained in all material respects in compliance with their terms and all provisions of ERISA and the Code (including rules and regulations thereunder) applicable thereto. (c) Continental has no Pension Plan or Welfare Plan. (d) No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, resulting in liability to Continental or any Continental ERISA Affiliate has occurred with respect to any Pension Plan or Welfare Plan. Each of Continental or Original Shareholders has no knowledge of any breach of fiduciary responsibility under Part 4 of Title I of ERISA which has resulted in liability of Continental and Continental ERISA Affiliate, any trustee, administrator or fiduciary of any Pension Plan or Welfare Plan. 9 (e) Neither Continental nor any Continental ERISA Affiliate, since January 1, 1986, has maintained or contributed to, or been obligated or required to contribute to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of ERISA. Neither Continental nor any Continental ERISA Affiliate has either withdrawn, partially or completely, or instituted steps to withdraw, partially or completely, from any Multiemployer Plan nor has any event occurred which would enable a Multiemployer Plan to give notice of and demand payment of any withdrawal liability with respect to Continental or any Continental ERISA Affiliate. (f) There is no contract, agreement, plan or arrangement covering any employee or former employee of Continental or any Continental ERISA Affiliate that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Sections 162(a)(I) or 280G of the Code. (g) With respect to Continental and each Continental ERISA Affiliate, the Continental Disclosure Schedule correctly identifies each material agreement, policy, plan or other arrangement, whether written or oral, express or implied, fixed or contingent, to which Continental is a party or by which Continental or any property or asset of Continental is bound, which is or relates to a pension, option, bonus, deferred compensation, retirement, stock purchase, profit-sharing, severance pay, health, welfare, incentive, vacation, sick leave, medical disability, hospitalization, life or other insurance or fringe benefit plan, policy or arrangement. (h) Neither Continental nor any Continental ERISA Affiliate maintains or has maintained or contributed to any Pension Plan that is or was subject to Section 302 of Title IV of ERISA or Section 412 of the Code. Continental has made available to HCCH, for each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code, a copy of the most recent determination letter issued by the IRS to the effect that each such Plan is so qualified and that each trust created thereunder is tax exempt under Section 501 of the Code, and Continental is unaware of any fact or circumstances that would jeopardize the qualified status of each such Pension Plan or the tax exempt status of each trust created thereunder. SECTION 2.13 MATERIAL AGREEMENTS. (a) The Continental Disclosure Schedule includes a complete and accurate list of all contracts, agreements, leases (other than Continental Property Leases, as hereinafter defined), and instruments to which Continental is a party or by which it or its properties or assets are bound which individually involve net payments or receipts in excess of $25,000 per annum, inclusive of contracts entered into with customers and suppliers in the ordinary course of business, or that pertain to employment or severance benefits for any officer, director or employee of Continental, whether written or oral, but exclusive of contracts, agreements, leases and instruments terminable without penalty upon 60 days' or less prior written notice to the other party or parties thereto (the "Material Continental Agreements"). 10 (b) Neither Continental nor, to the knowledge of Continental, any other party is in default under any Material Continental Agreement and no event has occurred which (after notice or lapse of time or both) would become a breach or default under, or would permit modification, cancellation, acceleration or termination of any Material Continental Agreement or result in the creation of any security interest upon, or any person obtaining any right to acquire, any properties, assets or rights of Continental, which, in any such case, has had or would reasonably be expected to have a Material Adverse Effect. (c) To the knowledge of Continental, each such Material Continental Agreement is in full force and effect and is valid and legally binding and there are no material unresolved disputes involving or with respect to any Material Continental Agreement. No party to a Material Continental Agreement has advised Continental or Shareholders that it intends either to terminate a Material Continental Agreement or to refuse to renew a Material Continental Agreement upon the expiration of the term thereof. No representation or warranty is made that all benefits contemplated in the Material Continental Agreements will be received. (d) Continental is not in violation of, or in default with respect to, any term of its Articles of Incorporation or Bylaws. SECTION 2.14 PROPERTIES. Continental owns no real estate, and all leases of real property to which Continental is a party or by which it is bound ("Continental Property Leases") are in full force and effect. There exists no default under such Continental Property Leases, nor any event which with notice or lapse of time or both would constitute a default thereunder, which default would have a Material Adverse Effect. All of the properties and assets which are owned by Continental are owned free and clear of any Lien, except for Liens which do not have a Material Adverse Effect. Continental has good and indefeasible title with respect to such owned properties and assets subject to no Liens, other than those permitted under this Section 2.14, to all of the properties and assets necessary for the conduct of their business other than to the extent that the failure to have such title would not have a Material Adverse Effect. SECTION 2.15 ENVIRONMENTAL MATTERS. (a) For the purposes of this Agreement, the following terms have the following meanings: "Environmental Laws" shall mean any and all federal, state, local and foreign statutes, laws (including case law), regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and governmental restrictions relating to human health, the environment or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances (as hereinafter defined) or wastes into the environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. 11 "Environmental Liabilities" shall mean all liabilities, whether vested or unvested, contingent or fixed, actual or potential, which (i) arise under or relate to Environmental Laws and (ii) relate to actions occurring or conditions existing on or prior to the Effective Time. "Hazardous Substances" shall mean any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Regulated Activity" shall mean any generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Substances. (b) No notice, notification, demand, request for information, citation, summons, complaint or order has been received, no complaint has been filed, no penalty has been assessed and no investigation or review is pending, or to any such party's knowledge, has been threatened by any governmental entity or other party with respect to any (i) alleged violation of any Environmental Law, (ii) alleged failure to have any environmental permit, certificate, license, approval, registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity. (c) Continental has no material Environmental Liabilities and there has been no release of Hazardous Substances into the environment by Continental or with respect to any of its properties which has had, or would reasonably be expected to have, a Material Adverse Effect. SECTION 2.16 LABOR MATTERS. Continental is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by Continental, nor does it know of any activities or proceedings of any labor union to organize any such employees. SECTION 2.17 COMPLIANCE WITH LAWS. Except for violations which do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, Continental has received no notice that it is in violation of, or has violated, any applicable provisions of any laws, statutes, ordinances or regulations or any term of any judgment, decree, injunction or order binding against it. SECTION 2.18 TRADEMARKS, TRADENAMES, ETC. Continental owns or possesses, or holds a valid right or license to use, all intellectual property, patents, trademarks, tradenames, servicemarks, copyrights and licenses (collectively "Intellectual Property"), and all rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others. A schedule of all Intellectual Property owned, possessed or held by Continental is contained on Continental's Disclosure Schedule. SECTION 2.19 SALE OF CONTINENTAL. Except as contemplated by this Agreement, there are currently no discussions to which Continental or any of the Shareholders is a party relating to 12 (a) the sale of any material portion of Continental's assets, (b) any merger, consolidation, liquidation, dissolution or similar transaction involving Continental whereby Continental will issue any securities or for which Continental is required to obtain the approval of its shareholders, or (c) the sale of the Continental Common Stock. SECTION 2.20 BROKER'S FEES. Neither Continental, Shareholders nor anyone acting on the behalf or at the request thereof has any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with this Agreement. SECTION 2.21 INVESTMENT REPRESENTATION. The shares of HCCH Common Stock to be acquired by each of the Other Shareholders pursuant to this Agreement will be acquired solely for the account of such Other Shareholder, for investment purposes only and not with a view to the distribution thereof. The Other Shareholders are not participating, directly or indirectly, in any distribution or transfer of such HCCH Common Stock, nor are they participating, directly or indirectly, in underwriting any such distribution of HCCH Common Stock within the meaning of the Securities Act. The Other Shareholders have such knowledge and experience in business matters that each is capable of evaluating the merits and risks of an investment in HCCH and the acquisition of the shares of HCCH Common Stock, and each is making an informed investment decision with respect thereto. The Other Shareholders have been informed by HCCH that the shares of HCCH Common Stock to be issued pursuant to this Agreement and the documents to be executed in connection herewith will not be registered under the Securities Act at the time of their issuance and may not be transferred, assigned or otherwise disposed of absent registration under the Securities Act or availability of an appropriate exemption therefrom. The Other Shareholders have further been informed that HCCH will be under no obligation to register the shares of HCCH Common Stock under the Securities Act or to take any steps to assist the Other Shareholders to comply with any applicable exemption under the Securities Act with respect to the shares of HCCH Common Stock; provided, however, HCCH shall promptly approve the Other Shareholder's pledge of its HCCH Common Stock to any national bank having three or more bank locations or state bank chartered in the State of Tennessee having a minimum deposits of $50,000,000. ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH Except as disclosed in a document referring specifically to this Agreement or in a document, exhibit, or appendix filed with the Securities and Exchange Commission ("SEC") which has been filed on or before the date hereof, (collectively referred to herein as the "HCCH Disclosure Schedule") which has been made available to Shareholders on or before the date hereof, HCCH represents and warrants to Shareholders (it being agreed that the disclosure on the HCCH Disclosure Schedule of the existence of any document or fact or circumstance or situation relating to any representation, warranty, covenant or agreement in any section of this Agreement 13 shall be automatically deemed to be disclosure of such document or fact or circumstance or situation for purposes of all other representations, warranties, covenants and agreements in this Agreement): SECTION 3.1 CORPORATE EXISTENCE AND POWER. HCCH and each of its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation. Each of HCCH and each of its Subsidiaries has all corporate powers and all material Governmental Authorizations required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect on HCCH. HCCH has delivered to Continental true and complete copies of HCCH's Certificate of Incorporation and Bylaws, as currently in effect. SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by HCCH of this Agreement, and the consummation by HCCH of the transactions contemplated hereby are within the corporate powers of HCCH and have been duly authorized by all necessary corporate action. This Agreement constitutes, or upon execution will constitute, valid and binding agreements of HCCH enforceable in each case in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 3.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by HCCH of this Agreement, require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than: (a) compliance with any applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder; (b) compliance with any applicable requirements of the Securities Act and the rules and regulations promulgated thereunder; (c) compliance with any applicable foreign or state securities or "blue sky" laws and the rules and regulations of the NYSE; (d) compliance with any applicable requirements of any insurance regulatory agency having authority over HCCH and its Subsidiaries; and (e) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain (i) would not reasonably be expected to have a Material Adverse Effect on HCCH or (ii) would 14 not materially adversely affect the ability of Continental or HCCH to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. SECTION 3.4 NON-CONTRAVENTION. The execution, delivery and performance by HCCH of this Agreement and the consummation by HCCH of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with the Certificate of Incorporation, or Bylaws of HCCH; (b) assuming compliance with the matters referred to in Section 3.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to HCCH or any Subsidiary of HCCH; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in a contractual right to cause the termination or cancellation of or loss of a material benefit under, or right to accelerate, any material agreement, contract or other instrument binding upon HCCH or any other Subsidiary of HCCH or any material license, franchise, permit or other similar authorization held by HCCH or any Subsidiary of HCCH; or (d) result in the creation or imposition of any Lien on any material asset of HCCH or any Subsidiary of HCCH, except, with respect to clauses (b), (c) and (d) above, for contraventions, defaults, losses, Liens and other matters referred to in such clauses that in the aggregate would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on HCCH. SECTION 3.5 CAPITALIZATION OF HCCH. (a) The authorized capital stock of HCCH consists of 100,000,000 shares of HCCH Common Stock. As of March 31, 1997, there were 36,168,185 shares of HCCH Common Stock issued and outstanding. All outstanding shares of HCCH Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in this Section and as otherwise contemplated by this Agreement and except as disclosed in public filings made by HCCH with the SEC prior to the Closing Date or on the HCCH Disclosure Schedule and except for changes since December 31, 1996 resulting from the exercise of employee and director stock options or resulting from other mergers, acquisitions or purchases, there are outstanding (i) no shares of capital stock or other voting securities of HCCH, (ii) no securities of HCCH convertible into or exchangeable for shares of capital stock or voting securities of HCCH and (iii) no options or other rights to acquire from HCCH, and no obligation of HCCH to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or other voting securities of HCCH (the items in clauses (i), (ii) and (iii) being referred to collectively as the "HCCH Securities"). There are no outstanding obligations of HCCH or any of its Subsidiaries to repurchase, redeem or otherwise acquire any HCCH Securities. 15 (b) All shares of HCCH Common Stock issued to Shareholders shall, upon issuance, be fully paid, validly issued and nonassessable. SECTION 3.6 SUBSIDIARIES. (a) Each HCCH Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers and all material Governmental Authorizations required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect on HCCH, and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by HCCH, or the nature of its activities make such qualification necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on HCCH. All Subsidiaries and Joint Ventures material to the business of HCCH ("Material HCCH Subsidiaries") and their respective jurisdictions of incorporation or organization and HCCH's ownership interest therein are identified in the HCCH Disclosure Schedule. Other than its investments in its Subsidiaries and Joint Ventures, and shares of stock in publicly held companies aggregating less than 10% of such public company's outstanding stock, HCCH does not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, Joint Venture or other entity. (b) All of the outstanding capital stock of, or other ownership interests in, each Material HCCH Subsidiary that is owned by HCCH, is owned by HCCH, directly or indirectly, free and clear of any material Lien and free of any other material limitation or restriction on its rights as owner thereof (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests), other than those imposed by applicable law. There are no existing options, calls or commitments of any character relating to the issued or unissued capital stock or other securities or equity interests (collectively, "HCCH Subsidiary Securities") of any HCCH Subsidiary. SECTION 3.7 SEC FILINGS. (a) HCCH has since October 28, 1992 filed all forms, proxy statements, schedules, reports and other documents required to be filed by it with the SEC pursuant to the Exchange Act. (b) HCCH has made available, and will promptly make available in the case of any of the following filed with the SEC on or after the date hereof and prior to the Closing Date, to Continental: (i) its annual reports on Form 10-K for its fiscal years ended December 31, 1996, 1995 and 1994; 16 (ii) any current reports on Form 8-K since January 1, 1997 and its proxy or information statements relating to meetings of, or actions taken without a meeting by, the shareholders of HCCH held since January 1, 1997; and (iii) all of its other reports, including reports on Form 10-Q, statements, schedules and registration statements filed with the SEC since December 31, 1996. None of HCCH's Subsidiaries is required to file any forms, reports or other documents with the SEC. (c) As of its filing date, no such report or statement filed pursuant to the Exchange Act contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (d) No registration statement filed pursuant to the Securities Act, if declared effective by the SEC, as of the date such statement or amendment became effective, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading. SECTION 3.8 FINANCIAL STATEMENTS. The audited consolidated financial statements of HCCH included in its annual reports on Form 10-K and the unaudited financial statements of HCCH included in its quarterly reports on Form 10-Q referred to in Section 3.7 present fairly, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of HCCH and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject to normal year-end adjustments in the case of any interim financial statements). For purposes of this Agreement, "HCCH Balance Sheet" means the consolidated balance sheet of HCCH as of December 31, 1996, and the notes thereto, contained in HCCH's annual report on Form 10-K filed with the SEC, and "HCCH Balance Sheet Date" means December 31, 1996. SECTION 3.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the HCCH Disclosure Schedule, since the HCCH Balance Sheet Date, HCCH and each of its Subsidiaries have in all material respects conducted their business in the ordinary course and there has not been: (a) any Material Adverse Change with respect to HCCH or any event, occurrence or development of a state of circumstances or facts known to HCCH, which as of the date hereof could reasonably be expected to have a Material Adverse Effect on HCCH; (b) any amendment of any material term of any outstanding HCCH Securities; (c) the entering into of any agreement by HCCH or any person on behalf of HCCH to take any of the foregoing actions. 17 SECTION 3.10 NO UNDISCLOSED LIABILITIES. There are no liabilities of HCCH or any of its Subsidiaries of any kind whatsoever that are, individually or in the aggregate, material to HCCH and its Subsidiaries, taken as a whole, other than: (a) liabilities disclosed or provided for in the HCCH Balance Sheet (including the notes thereto); (b) liabilities incurred in the ordinary course of business consistent with past practice since the HCCH Balance Sheet Date; and (c) liabilities under this Agreement or as indicated in the HCCH Disclosure Schedule. SECTION 3.11 LITIGATION. Other than actions, suits, proceedings, claims or investigations occurring in the ordinary course of business or such actions, suits, proceedings, claims or investigations involving respective amounts in controversy of less than $100,000 each, there is no action, suit, proceeding, claim or investigation pending or, to the knowledge of HCCH, overtly threatened, against HCCH or any of its Subsidiaries or any of their assets or against or involving any of its officers, directors or employees in connection with the business or affairs of HCCH, including, without limitation, any such claims for indemnification arising under any agreement to which HCCH or any of its Subsidiaries is a party, which could, individually or in the aggregate, have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries are not subject to or in default with respect to any writ, order, judgment, injunction or decree which could, individually or in the aggregate, have a Material Adverse Effect on HCCH. SECTION 3.12 TAXES. (a) HCCH and each of its Subsidiaries (i) has filed when due (taking into account extensions) with the appropriate federal, state, local, foreign and other governmental agencies, all material tax returns, estimates and reports required to be filed by it, (ii) either paid when due and payable or established adequate reserves or otherwise accrued on the HCCH Balance Sheet all material Taxes, and there are no tax deficiencies claimed in writing by any Taxing authority and received by HCCH that, in the aggregate, would result in any tax liability in excess of the amount of the reserves or accruals, and (iii) has or will establish in accordance with its normal accounting practices and procedures accruals and reserves that, in the aggregate, are adequate for the payment of all Taxes not yet due and payable and attributable to any period preceding the Effective Time. The HCCH Disclosure Schedule sets forth those tax returns of HCCH (or any predecessor entities) for all periods that currently are the subject of audit by any federal, state, local or foreign taxing authority. (b) There are no material taxes, interest, penalties, assessments or deficiencies claimed in writing by any taxing authority and received by HCCH or any of its Subsidiaries to be due in respect of any tax returns filed by HCCH (or any predecessor corporations) or any of its Subsidiaries. Neither HCCH nor any predecessor corporation, nor any of their respective Subsidiaries, has executed or filed with the IRS or any other Taxing authority any agreement or 18 other document extending, or having the effect of extending, the period of assessment or collection of any Taxes. (c) HCCH is not a party to or bound by (or will prior to the Closing Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax allocation agreement or other similar arrangement which includes a party other than HCCH and its Subsidiaries. Neither HCCH nor any of its Subsidiaries has been a member of an affiliated group other than one of which HCCH was the common parent, or filed or been included in a combined, consolidated or unitary Tax return other than one filed by HCCH (or a return for a group consisting solely of its Subsidiaries and predecessors). SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA. (a) Each Pension Plan and Welfare Plan maintained by HCCH has been maintained in all material respects in compliance with their terms and all provisions of ERISA and the Code (including rules and regulations thereunder) applicable thereto. (b) HCCH has made available to Continental for each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code, a copy of the most recent determination letter issued by the IRS to the effect that each such Plan is so qualified and that each trust created thereunder is tax exempt under Section 501 of the Code, and HCCH is unaware of any fact or circumstances that would jeopardize the qualified status of each such Pension Plan or the tax exempt status of each trust created thereunder. (c) To the knowledge of HCCH, no Pension Plan or Welfare Plan is currently subject to an audit or other investigation by the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other governmental agency or office nor are any such Plans subject to any lawsuits or legal proceedings of any kind or to any material pending disputed claims by employees or beneficiaries covered under any such Plan or by any other parties. (d) No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, resulting in liability to HCCH or any HCCH ERISA Affiliate has occurred with respect to any Pension Plan or Welfare Plan. HCCH has no knowledge of any breach of fiduciary responsibility under Part 4 of Title I of ERISA which has resulted in liability of HCCH, any HCCH ERISA Affiliate, any trustee, administrator or fiduciary of any Pension Plan or Welfare Plan. (e) Neither HCCH nor any HCCH ERISA Affiliate, since January 1, 1986, has maintained or contributed to, or been obligated or required to contribute to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of ERISA. Neither HCCH nor any HCCH ERISA Affiliate has either withdrawn, partially or completely, or instituted steps to withdraw, partially or completely, from any Multiemployer Plan nor has any event occurred which would enable a Multiemployer Plan to give notice of and demand payment of any withdrawal liability with respect to HCCH or any HCCH ERISA Affiliate. 19 (f) With respect to HCCH and each HCCH ERISA Affiliate, the HCCH Disclosure Schedule correctly identifies each material agreement, policy, plan or other arrangement, whether written or oral, express or implied, fixed or contingent, to which HCCH is a party or by which HCCH or any property or asset of HCCH is bound, which is or relates to a pension, option, bonus, deferred compensation, retirement, stock purchase, profit-sharing, severance pay, health, welfare, incentive, vacation, sick leave, medical disability, hospitalization, life or other insurance or fringe benefit plan, policy or arrangement. SECTION 3.14 MATERIAL AGREEMENTS. (a) HCCH has disclosed either in its Disclosure Schedule or in filings with the SEC a complete and accurate list of all contracts, agreements, leases (other than HCCH Property Leases, as hereinafter defined) and instruments to which HCCH or any of its Subsidiaries is a party or by which it or its properties or assets are bound which individually involve net payments or receipts in excess of $10,000,000 per annum, inclusive of contracts that pertain to employment or severance benefits for any officer, director or employee of HCCH, whether written or oral, but exclusive of contracts entered into with customers and suppliers in the ordinary course of business or contracts, agreements, leases and instruments terminable without penalty by HCCH upon 60 days or less prior written notice to the other party or parties thereto (the "Material HCCH Agreements"). (b) Neither HCCH, any HCCH Subsidiary, nor, to the knowledge of HCCH, any other party is in default under any Material HCCH Agreement and no event has occurred which (after notice or lapse of time or both) would become a breach or default under, or would permit modification, cancellation, acceleration or termination of any Material HCCH Agreement or result in the creation of any security interest upon, or any person obtaining any right to acquire, any properties, assets or rights of HCCH which, in any such case, has had or would reasonably be expected to have a Material Adverse Effect on HCCH. (c) To the knowledge of HCCH, each such Material HCCH Agreement is in full force and effect and is valid and legally binding and there are no material unresolved disputes involving or with respect to any Material HCCH Agreement. No party to a Material HCCH Agreement has advised HCCH or any of its Subsidiaries that it intends either to terminate a Material HCCH Agreement or to refuse to renew a Material HCCH Agreement upon the expiration of the term thereof. (d) Each of HCCH, and each HCCH Subsidiary is not in violation of, or in default with respect to, any term of its Certificate of Incorporation or Bylaws. SECTION 3.15 PROPERTIES. To the knowledge of HCCH, all leases of real property to which HCCH or any of its Subsidiaries is a party or by which it or any of its Subsidiaries is bound ("HCCH Property Leases") which are material to the business of HCCH and its Subsidiaries taken as a whole are in full force and effect. To the knowledge of HCCH, there exists no default under such HCCH Property Leases, nor any event which with notice or lapse 20 of time or both would constitute a default thereunder by HCCH or any of its Subsidiaries, which default would have a Material Adverse Effect on HCCH. All of the properties and assets which are owned by HCCH and each of its Subsidiaries are owned by each of them, respectively, free and clear of any Lien, except for Liens which do not have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries have good and indefeasible title with respect to such owned properties and assets subject to no Liens, other than those permitted under this Section 3.15, to all of the properties and assets necessary for the conduct of their business other than to the extent that the failure to have such title would not have a Material Adverse Effect on HCCH. SECTION 3.16 ENVIRONMENTAL MATTERS. (a) To the knowledge of HCCH, no notice, notification, demand, request for information, citation, summons, complaint or order has been received, no complaint has been filed, no penalty has been assessed and no investigation or review is pending, or to HCCH's knowledge, has been threatened by any governmental entity or other party with respect to any (i) alleged violation by HCCH or any of its Subsidiaries of any Environmental Law, (ii) alleged failure by HCCH or any such Subsidiary to have any environmental permit, certificate, license, approval, registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity. (b) To the knowledge of HCCH, neither HCCH nor any of its Subsidiaries has any material Environmental Liabilities and there has been no release of Hazardous Substances into the environment by HCCH or any such Subsidiary or with respect to any of their respective properties which has had, or would be reasonably expected to have, a Material Adverse Effect on HCCH. SECTION 3.17 LABOR MATTERS. Neither HCCH nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by HCCH or any such Subsidiary, nor do the executive officers of HCCH know of any activities or proceedings of any labor union to organize any such employees. SECTION 3.18 COMPLIANCE WITH LAWS. Except for violations which do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on HCCH, neither HCCH nor any of its Subsidiaries is in violation of, or has violated, any applicable provisions of any laws, statutes, ordinances or regulations or any term of any judgment, decree, injunction or order binding against it. SECTION 3.19 TRADEMARKS, TRADENAMES, ETC. HCCH owns or possesses, or holds a valid right or license to use, all intellectual property, patents, trademarks, tradenames, servicemarks, copyrights and licenses, and all rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others. SECTION 3.20 BROKER'S FEES. Neither HCCH, nor anyone acting on the behalf or at the request thereof has any liability to any broker, finder, investment banker or agent, or has agreed 21 to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with the transactions contemplated by this Agreement. ARTICLE IV COVENANTS OF CONTINENTAL AND SHAREHOLDERS From the date hereof until the occurrence of the earlier of (i) the Effective Time or (ii) termination of this Agreement pursuant to Section 8.1 hereof, Continental and each of the Shareholders agree that, other than utilization of the Continental Permitted Payment: SECTION 4.1 CONDUCT OF CONTINENTAL. Continental shall in all material respects conduct its business in the ordinary course. Without limiting the generality of the foregoing, from the date hereof until the Effective Time, except as contemplated by this Agreement: (a) Continental will not adopt or propose any change in its Articles of Incorporation or Bylaws; (b) Continental will not enter into or amend any employment agreements (oral or written) or increase the compensation payable or to become payable by it to any of its officers, directors, or consultants over the amount payable as of December 31, 1996, or increase the compensation payable to any other employees (other than (i) increases in the ordinary course of business which are not in the aggregate material, or (ii) pursuant to plans disclosed in Continental Disclosure Schedule), or adopt or amend any employee benefit plan or arrangement (oral or written); (c) Continental will not issue any Continental Securities; (d) Continental will keep in full force and effect any existing directors' and officers' liability insurance and will not modify or reduce the coverage thereunder; (e) Continental will not pay any dividend or make any other distribution to holders of its capital stock nor redeem or otherwise acquire any Continental Securities; (f) Continental will not, directly or indirectly, dispose of or acquire any material properties or assets except in the ordinary course of business; (g) Continental will not incur any additional indebtedness for borrowed money except pursuant to existing arrangements which have been disclosed to HCCH prior to the date hereof; 22 (h) Continental will not amend or change the period of exercisability or accelerate the exercisability of any outstanding options or warrants to acquire shares of capital stock, or accelerate, amend or change the vesting period of any outstanding restricted stock; (i) Continental will not (i) change accounting methods except as necessitated by changes which Continental is required to make in order to prepare its federal, state and local tax returns; (ii) amend or terminate any contract, agreement or license to which it is a party (except pursuant to arrangements previously disclosed in writing to HCCH or disclosed in the Continental Disclosure Schedule) except those amended or terminated in the ordinary course of business, consistent with past practices, or involving changes which are not materially adverse in amount or effect to Continental individually or taken as a whole; (iii) lend any amount to any person or entity, other than advances for travel and expenses which are incurred in the ordinary course of business consistent with past practices, and which are not material in amount to Continental taken as a whole, which travel and expenses shall be documented by receipts for the claimed amounts; (iv) enter into any guarantee or suretyship for any obligation except for the endorsements of checks and other negotiable instruments in ordinary course of business, consistent with past practice; (v) waive or release any material right or claim except in the ordinary course of business, consistent with past practice; (vi) issue or sell any shares of its capital stock of any class or any other of its securities, or issue or create any warrants, obligations, subscriptions, options, convertible securities, stock appreciation rights or other commitments to issue shares of capital stock, or take any action other than this transaction to accelerate the vesting of any outstanding option or other security (except pursuant to existing arrangements disclosed in writing to HCCH before the date of this agreement); (vii) merge, consolidate or reorganize with or acquire any entity; (viii) agree to any audit assessment by any tax authority or file any federal or state income or franchise tax return unless copies of such returns have been delivered to HCCH for its review prior to such agreement or filing; and (ix) terminate the employment of any key executive employee; and (j) Continental and Shareholders will not, directly or indirectly, agree or commit to do any of the foregoing. SECTION 4.2 ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. Continental and Shareholders will give HCCH, its counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours to their offices, properties, books and records, will furnish to HCCH, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data as such persons may reasonably request and will instruct its employees, counsel and financial advisors to cooperate with HCCH in its investigation of the business of Continental and in the planning for the combination of the businesses of Continental and HCCH following the consummation of the transactions contemplated by this Agreement; PROVIDED that no investigation pursuant to this Section shall affect any representation or warranty given hereunder. In addition, following the public announcement of this Agreement or the transactions contemplated hereby, Continental will cooperate in arranging joint meetings among representatives of Continental and HCCH and persons with whom they maintain business relationships. 23 SECTION 4.3 OTHER OFFERS. (a) Continental and Shareholders will not, directly or indirectly, (i) take any action to solicit, initiate or discuss any Acquisition Proposal (as hereinafter defined), or (ii) engage in negotiations with, or disclose any nonpublic information relating to, Continental or afford access to the properties, books or records of Continental to, any person or entity that may be considering making, or has made, an Acquisition Proposal. To the extent that Continental or any of their respective officers, directors, employees or other agents, or Shareholders are currently involved in any discussions with respect to any Acquisition Proposal or contemplated or proposed Acquisition Proposal, Continental, and Shareholders shall terminate, and shall use their best efforts to cause, where applicable, their respective officers, directors, employees or other agents to terminate, such discussions immediately. The term "Acquisition Proposal" as used herein means any offer or proposal for, or any indication of interest in, a merger or other business combination involving Continental or the acquisition of any equity interest in, or a substantial portion of the assets of, Continental other than the transactions contemplated by this Agreement. SECTION 4.4 MAINTENANCE OF BUSINESS. Continental will use its reasonable best efforts to carry on its business, keep available the services of its officers and employees and preserve its relationships with those of its customers, agents, suppliers, licensors and others having business relationships with it that are material to its business in substantially the same manner as it has prior to the date hereof. If Continental becomes aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any customers, supplier, licensor or others having business relationships with it, it will promptly in writing bring such information to the attention of the HCCH in writing. SECTION 4.5 COMPLIANCE WITH OBLIGATIONS. Continental shall use its reasonable best efforts to comply in all material respects with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, including its respective charter and bylaws, by which it, its properties or its assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to Continental and its respective properties or assets. SECTION 4.6 NOTICES OF CERTAIN EVENTS. Continental shall, upon obtaining knowledge of any of the following, promptly notify HCCH of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with this Agreement, (b) any notice or other communication from any governmental or regulatory agency or authority in connection with this Agreement, and (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against Continental which, if pending on the date of this Agreement, would have 24 been required to have been disclosed pursuant hereto or which relate to the consummation of transactions contemplated by this Agreement. SECTION 4.7 REPRESENTATION AGREEMENT. Shareholders shall deliver to HCCH simultaneously with the execution of this Agreement, a written agreement from each of the Shareholders in form and substance reasonably satisfactory to HCCH relating to their intent to hold any HCCH Common Stock acquired pursuant to this Agreement for investment purposes. SECTION 4.8 NECESSARY CONSENTS. Continental shall use its reasonable best efforts to obtain such written consent and take such other actions as may be necessary or appropriate for Continental to facilitate and allow the consummation of the transactions provided for herein and to facilitate and allow HCCH to carry on the acquired business after the Closing Date (as defined in Section 9.1 hereof). SECTION 4.9 REGULATORY APPROVAL. Continental, and, where required pursuant to the rules or regulations of any regulatory agency, Shareholders, will execute and file, or join in the execution and filing, with any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign which may be reasonably required, or which HCCH may reasonably request, in connection with the consummation of the transaction provided for in this Agreement. Continental and Shareholders, will use reasonable best efforts to obtain or assist HCCH in obtaining all such authorizations, approvals and consents. SECTION 4.10 SATISFACTION OF CONDITIONS PRECEDENT. Continental and Shareholders shall use their reasonable best efforts to cause the transactions provided for in this Agreement to be consummated, and, without limiting the generality of the foregoing to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions provided for herein. ARTICLE V COVENANTS OF HCCH From the date hereof until the occurrence of the earlier of (i) the Effective Time or (ii) the termination of this Agreement pursuant to Section 8.1 hereof, HCCH agrees that, except as otherwise permitted with the written consent of Shareholders, which consent shall not be unreasonably withheld: SECTION 5.1 CONDUCT OF HCCH. HCCH and its Subsidiaries shall in all material respects conduct their business in the ordinary course PROVIDED, HOWEVER, THAT nothing in this Agreement shall be construed to prohibit or otherwise restrain HCCH in any manner from acquiring other businesses or substantially all of the assets thereof. Without limiting the 25 generality of the foregoing, from the date hereof until the Effective Time, except as contemplated hereby or previously disclosed by HCCH to Shareholders in writing: (a) HCCH will not adopt or propose any change in its Certificate of Incorporation or Bylaws; (b) HCCH will not take any action that would result in a failure to maintain the trading of HCCH Common Stock on the NYSE; and (c) HCCH will not, and will not permit any of its Subsidiaries to, agree or commit to do any of the foregoing. SECTION 5.2 LISTING OF HCCH COMMON STOCK. HCCH shall cause the shares of HCCH Common Stock to be issued hereunder to be approved for listing on the NYSE within sixty days of the Effective Time. SECTION 5.3 ACCESS TO INFORMATION. HCCH will furnish promptly to Shareholders copies of all reports, schedules, registration statements, correspondence and other documents filed with or delivered to the SEC, PROVIDED that no investigation pursuant to this Section shall affect any representation or warranty given by HCCH to Shareholders hereunder. In addition, if requested by Shareholders following the public announcement of this Agreement, HCCH will cooperate in arranging joint meetings among representatives of HCCH and Continental and persons with whom HCCH maintains business relationships. All requests for information made pursuant to this Section shall be directed to the President of HCCH or such person as may be designated by him in writing. SECTION 5.4 MAINTENANCE OF BUSINESS. HCCH will use its reasonable efforts to carry on its business, keep available the services of its officers and employees and preserve its relationships with those of its customers, suppliers, licensors and others having business relationships with it that are material to its business in substantially the same manner as it has prior to the date hereof. If HCCH becomes aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any material customer, supplier, licensor or others having business relationships with it, it will promptly bring such information to the attention of Continental in writing. SECTION 5.5 COMPLIANCE WITH OBLIGATIONS. HCCH and its Subsidiaries shall each use its reasonable best efforts to comply in all material respects with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, including its respective charter and bylaws, by which it, its properties or its assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to HCCH and its Subsidiaries and their respective properties or assets; except to the extent that the failure to comply with matters in clauses (i), (ii) and (iii) would not have a Material Adverse Effect on HCCH. 26 SECTION 5.6 NOTICES OF CERTAIN EVENTS. HCCH shall, upon obtaining knowledge of any of the following, promptly notify Shareholders of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with this Agreement; and (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against HCCH or any of its Subsidiaries which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.11 or which relate to the consummation of the transactions contemplated by this Agreement. SECTION 5.7 EMPLOYEE MATTERS. HCCH agrees that all employees of Continental that remain employed after the Effective Time shall, within a reasonable time following the Effective Time, be entitled to receive the same benefits to which other employees of HCCH are entitled to receive and shall be entitled to participate in HCCH's Employee Benefit Plan provided such employees have satisfied the plan's eligibility requirements. ARTICLE VI COVENANTS OF HCCH, SHAREHOLDERS AND CONTINENTAL From the date hereof until the occurrence of the earlier of (i) the Effective Time or (ii) termination of this Agreement pursuant to Section 8.1 hereof, each of the Shareholders, Continental and HCCH agree that: SECTION 6.1 ADVICE OF CHANGES. Each will promptly advise the others in writing (i) of any event known to any of its executive officers or Shareholders occurring subsequent to the date of this Agreement that in its or their reasonable judgment renders any representation or warranty of such party contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue, inaccurate or misleading in any material respect and (ii) of any Material Adverse Change in the business condition of the party. SECTION 6.2 REGULATORY APPROVALS. Each shall execute and file, or join in the execution and filing of, any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be requested in connection with the consummation of the transactions contemplated by this Agreement. Each shall use its reasonable best efforts to obtain all such authorizations, approvals and consents. SECTION 6.3 CERTAIN FILINGS. Shareholders and HCCH shall cooperate with one another: 27 (a) in determining whether any action by or in respect of, or filing with, any governmental body, agency or official, or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement; and (b) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. SECTION 6.4 COMMUNICATIONS. Neither Shareholders, Continental nor HCCH will furnish any communication outside of their respective companies, if the subject matter thereof relates to the transactions contemplated by this Agreement and is not in the ordinary course of business, without the prior approval of the other of them as to the content thereof, which approval shall not be unreasonably withheld; PROVIDED that the foregoing shall not be deemed to prohibit any disclosure required by any applicable law or rule of the NYSE. SECTION 6.5 SATISFACTION OF CONDITIONS PRECEDENT. HCCH, Continental and Shareholders will each use its reasonable best efforts to satisfy or cause to be satisfied all the conditions precedent that are applicable to each of them, and to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all material consents and authorizations of third parties and to make filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby. SECTION 6.6 TAX COOPERATION. HCCH, Continental and Shareholders shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes or fees which become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed on or before the Effective Time. SECTION 6.7 CONFIDENTIALITY. Between the date of this Agreement and the Closing Date, each party, and Continental, will maintain in confidence, and cause its directors, officers, employees, agents, and advisors to maintain in confidence, and not use to the detriment of another party, any written or oral or other information obtained in confidence from another party or Continental in connection with this Agreement or the transactions contemplated hereby unless such information is already known to such party or to others not bound by a duty of confidentiality or unless such information becomes publicly available through no fault of such party, unless the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the transaction contemplated hereby or unless the furnishing or use of such information is required by or necessary or appropriate in connection with legal proceedings. 28 If the transactions contemplated by this Agreement are not consummated, each party will return or destroy as much of such written information as may be reasonably requested. Whether or not the Closing takes place, Shareholders waives, and will upon request cause Continental to waive, any cause of action, right or claim arising out of the access of HCCH or its representatives to any trade secrets or other confidential information of Continental except for the intentional competitive misuse by HCCH of such trade secrets or confidential information. ARTICLE VII CONDITIONS TO CLOSING SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH. The obligations of HCCH hereunder are subject to the fulfillment or satisfaction, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived by HCCH, but only in a writing signed by HCCH): (a) The representations and warranties of Continental and Shareholders contained in Article III remain true and accurate in all material respects on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except to the extent a representation or warranty speaks specifically as of an earlier date and except for changes contemplated by this Agreement) and Continental and Shareholders shall have provided HCCH with a certificate executed by the President and the Chief Financial Officer of the corporation or individually, as the case may be, dated as of the Closing Date, to such effect. (b) Continental and Shareholders shall have performed and complied in all material respects with all of the covenants contained herein on or before the Closing Date, and HCCH shall receive a certificate to such effect signed by the President and Chief Financial Officer of the corporation or individually, as the case may be. (c) Except as set forth in the Continental Disclosure Schedule, there shall have been no Material Adverse Change in Continental since December 31, 1996. (d) HCCH shall have received from (i) each person or entity it deems necessary or desirable a duly executed Investment Letter and (ii) Shareholders, the written agreement contemplated to be entered into by such person pursuant to Section 4.7 and such agreements shall remain in full force and effect. (e) All written consents, assignments, waivers or authorizations, other than Governmental Authorizations, that are required as a result of the transaction contemplated by this Agreement for the continuation in full force and effect of any material contracts or leases of Continental shall have been obtained. 29 (f) HCCH shall have received the opinion of counsel to Continental and Shareholders in form and substance satisfactory to HCCH. (g) All underwriting agreements of Continental in force on the date hereof shall be in force on the Closing Date, except for such agreements which have been replaced with agreements of similar like and kind or any agreements with Reliance Insurance Company or any affiliate thereof. (h) E. R. ("Butch") Kinnebrew, III ("Kinnebrew") shall be alive and not, in any way, Disabled. For purposes of this Agreement, Kinnebrew shall be deemed to be "Disabled" if he is unable to engage in any substantial portion of his regular duties for Continental by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. (i) Continental shall have received a review opinion of independent public accountants to Continental on their financial statements for the most recent fiscal year end. (j) Continental shall have delivered to HCCH its unaudited balance sheet and its unaudited income statement for each of the two most recent fiscal year ends. (k) Continental shall have earned no less than $156,000 after tax for the fiscal year ended December 31, 1996 and, assuming that Continental continued to be operated as it had in the past, on a pro-forma basis, as reasonably determined by HCCH, be expected to earn at least $280,000 after tax for the year ended December 31, 1997. (l) Shareholders shall have transferred all the Continental Common Stock to HCCH, free and clear of all Liens and encumbrances, with transfer taxes, if any, paid by Shareholders. No claim shall have been filed, made or threatened by any person or entity asserting that he, she or it is entitled to any part of the Purchase Price paid for the Continental Common Stock. (m) On or prior to the Closing Date, Shareholders or Continental shall have furnished HCCH with evidence of such consents as Shareholders or Continental shall know, or HCCH shall determine, to be required to enable HCCH to continue to enjoy the benefit of any lease, license, permit, contract or other agreement or instrument to or of which Continental is a party or beneficiary and which can, by its terms (with consent) and consistent with applicable law, be so enjoyed after the transfer of the Continental Common Stock to HCCH. If there is in existence any lease, governmental license, permit or contract that by its terms or applicable law, expires, terminates or is otherwise rendered invalid upon the transfer of the Continental Common Stock to HCCH, and such lease, license, permit, or contract is required in order for the business of Continental to continue to be conducted following the transfer of the Continental Common Stock in the same manner as conducted previously, HCCH shall have obtained, or been furnished by Shareholders an equivalent of, that lease, license, permit, or contract effective as of and after the Closing Date. 30 (n) HCCH shall have received resignations of all persons who are officers or directors of Continental immediately prior to the Closing. (o) HCCH shall have received general releases in favor of Continental and HCCH executed by Shareholders and any such other employees, officers or directors of Continental as HCCH may designate. Those releases will not relate to rights or obligations arising under this Agreement. (p) HCCH shall have received possession on the premises of Continental of all corporate, accounting, business and tax records of Continental. (q) The form and substance of all actions, proceedings, instruments and documents required to consummate the transactions contemplated by this Agreement shall have been satisfactory in all reasonable respects to HCCH and HCCH's counsel. SECTION 7.2 CONDITIONS TO OBLIGATIONS OF SHAREHOLDERS. Shareholders' obligations hereunder are subject to the fulfillment or satisfaction, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived, but only in a writing signed by such party): (a) The representations and warranties of HCCH set forth herein shall be true and accurate in all material respects on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except to the extent a representation or warranty speaks specifically as of an earlier date and except for changes contemplated by this Agreement) and HCCH shall have provided Shareholders with a certificate executed by the President and the Chief Financial Officer of HCCH, dated as of the Closing Date, to such effect. For the purposes of determining the accuracy of the representations and warranties of HCCH, any change or effect in the business of HCCH that results in substantial part as a consequence of the public announcement or pendency of the intended acquisition of the Continental Common Stock by HCCH shall not be deemed a Material Adverse Change or Material Adverse Effect or other breach of representation or warranty with respect to HCCH. (b) HCCH shall have performed and complied with all of its covenants contained herein in all material respects on or before the Closing Date, and Shareholders shall receive a certificate to such effect signed by HCCH's President and Chief Financial Officer. (c) Except as set forth in the HCCH Disclosure Schedule, there shall have been no Material Adverse Change in HCCH since the HCCH Balance Sheet Date. (d) Shareholders shall have received from Winstead Sechrest & Minick P.C., counsel to HCCH, an opinion in form and substance satisfactory to the Shareholders. (e) HCCH shall have executed and delivered to each of Kinnebrew and Saxon an Employment Agreement in a mutually agreed to form. 31 (f) The form and substance of all actions, proceedings, instruments and documents required to consummate the transactions contemplated by this Agreement shall have been satisfactory in all reasonable respects to Shareholders and their counsel. SECTION 7.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective obligations of the parties hereunder are subject to the fulfillment, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived by such parties, but only in a writing signed by such parties): (a) No statute, rule, regulation, executive order, decree, injunction or restraining order shall have been enacted, promulgated or enforced (and not repealed, superseded or otherwise made inapplicable) by any court or governmental authority which prohibits the consummation of the transaction contemplated by this Agreement (each party agreeing to use its reasonable best efforts to have any such order, decree or injunction lifted). (b) There shall have been obtained any and all Governmental Authorizations, permits, approvals and consents of securities or "blue sky" commissions of any jurisdiction and of any other governmental body or agency, that may reasonably be deemed necessary so that the consummation of the transaction contemplated by this Agreement will be in compliance with applicable laws, the failure to comply with which would have a Material Adverse Effect on HCCH, Continental, or would be reasonably likely to subject any of HCCH, Continental or any of their respective directors or officers to penalties or criminal liability. ARTICLE VIII TERMINATION OF AGREEMENT SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time: (a) By the mutual consent of Shareholders and the Board of Directors of HCCH. (b) By the Board of Directors of HCCH or by Shareholders owning at least 85% of Continental if there has been a material breach by the other of any representation or warranty contained in this Agreement, which in either case cannot be, or has not been, cured within 15 days after written notice of such breach is given to the party committing such breach, provided that the right to effect such cure shall not extend beyond the date set forth in subparagraph (c) below. (c) By the Board of Directors of HCCH or by Shareholders owning at least 85% of Continental if all conditions of Closing required by Article VII hereof have not been met or waived by August 31, 1997, provided, however, that neither HCCH nor Shareholders, shall be 32 entitled to terminate this Agreement pursuant to this subparagraph (c) if such party is in willful and material violation of any of its representations, warranties or covenants in this Agreement. (d) If any governmental authority shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable. (e) By the Board of Directors of HCCH, if Kinnebrew shall have become Disabled or shall have died. SECTION 8.2 EFFECT OF TERMINATION. Upon termination of this Agreement pursuant to this Article VIII, this Agreement shall be void and of no effect and shall result in no obligation of or liability to any party or their respective directors, officers, employees, agents or shareholders, unless such termination was the result of an intentional breach of any representation, warranty or covenant in this Agreement, in which case the party who breached the representation, warranty or covenant shall be liable to the other party for damages, and all costs and expenses incurred in connection with the preparation, negotiation, execution and performance of this Agreement. ARTICLE IX CLOSING MATTERS SECTION 9.1 THE CLOSING. Subject to termination of this Agreement as provided in Article VIII above, the closing of the transactions provided for herein (the "Closing") will take place at the offices of Winstead Sechrest & Minick P.C., 910 Travis Street, Suite 1700, Houston, Texas 77002 at 10:00 a.m. (the "Effective Time"), Houston Time on July 31, 1997 or, if all conditions to Closing have not been satisfied or waived by such date, such other place, time and date as Shareholders and HCCH may mutually select (the "Closing Date"). ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS SECTION 10.1 AGREEMENT TO INDEMNIFY. Subject to the limitations set forth in this Article X, from and after the Effective Time, Shareholders will indemnify and hold harmless HCCH and its respective officers, directors, agents and employees, and each person, if any, who controls or may control HCCH within the meaning of the Securities Act (hereinafter referred to individually as a "Continental Indemnified Person" and collectively as "Continental Indemnified Persons") from and against any and all claims, demands, actions, causes of action, losses, costs, 33 damages, liabilities and expenses including, without limitation, reasonable legal fees, (net of: (i) any recoveries under insurance policies; (ii) recoveries from third parties; and (iii) tax savings known to Continental Indemnified Persons at the time of resolution of the claims hereunder) made against or incurred by Continental Indemnified Persons (hereafter in this Section 10.1 referred to as "HCCH Damages"), arising out of any material misrepresentation or breach of or default under any of the representations, warranties, covenants or agreements given or made in this Agreement or any certificate or exhibit delivered by or on behalf of Continental or Shareholders pursuant hereto. The indemnification provided for in this Section 10.1 will not apply unless and until the aggregate HCCH Damages for which one or more Continental Indemnified Persons seeks indemnification exceeds $25,000 in the aggregate, in which event the indemnification provided for will include all HCCH Damages (a franchise deductible) and shall be limited in the aggregate to the amount of the Purchase Price (the "Cap"). The Continental Indemnified Persons are only entitled to be reimbursed for the actual indemnified expenditures or damages incurred by them for the above described losses not to exceed the Cap. Such Continental Indemnified Persons are not entitled to consequential, special, or other speculative or punitive categories of damages. Without limiting the indemnification otherwise set forth herein, Crawley agrees to indemnify and hold Continental and HCCH harmless from any and all liabilities relating to Continental's participation in the Crawley, Health and Welfare Benefit Plan with Great-West Life & Annuity Insurance Company prior to the Closing Date. SECTION 10.2 HCCH AGREEMENT TO INDEMNIFY. Subject to the limitations set forth in this Article X, from and after the Effective Time HCCH will indemnify and hold harmless Continental and Shareholders and their officers, shareholders, directors, administrators, heirs, personal representatives, successors and assigns (hereinafter in this Section 10.2 referred to individually as an "HCCH Indemnified Person" and collectively as "HCCH Indemnified Persons") from and against any and all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees (net of: (i) any recoveries under insurance policies; (ii) recoveries from third parties; and (iii) tax savings known to HCCH Indemnified Persons at the time of making a claim hereunder) (hereafter in this Section 10.2 referred to as "Continental Damages") arising out of any misrepresentation or breach of or default under any of the representations, warranties, covenants and agreements given or made by HCCH in this Agreement or any certificate or exhibit delivered by or on behalf of HCCH pursuant hereto. The indemnification provided for in this Section 10.2 will not apply unless and until the aggregate Continental Damages for which one or more HCCH Indemnified Person seeks indemnification exceeds $25,000 in the aggregate, in which event the indemnification provided for will include all Continental Damages (a franchise deductible) and shall be limited in the aggregate to the Cap. The HCCH Indemnified Persons are only entitled to be reimbursed for the actual indemnified expenditures or damages incurred by them for the above described losses not to exceed the Cap. Such HCCH Indemnified Persons are not entitled to consequential, special, or other speculative or punitive categories of damages. SECTION 10.3 SURVIVAL OF REPRESENTATIONS. The right to enforce the breach of each representation, warranty, covenant and agreement set forth in this Agreement will remain operative and in full force and effect for the maximum period permitted by applicable law after 34 the Closing (the last date of such applicable period being herein called the "Final Date"), regardless of any investigation made by or on behalf of the parties to this Agreement, upon which Final Date such representations, warranties, covenants and agreements shall expire and be of no further force and effect. Any litigation or other action of any kind arising out of or attributable to a breach of any representation, warranty, covenant or agreement contained in this Agreement, must be commenced prior to the Final Date. If not so commenced prior to the Final Date, any claims or indemnifications brought under this Article X will thereafter conclusively be deemed to be waived regardless of when such claim is or should have been discovered. Any such claim for indemnification brought under this Article X, brought before the Final Date, shall survive until a final resolution of such claim is effective. As set forth herein, no investigation by any party hereto into the business, operations and conditions of the other party shall diminish in any way the effect of any representation or warranty made by any such party in this Agreement or shall relieve any party of any of its obligations under this Agreement. SECTION 10.4 PROCEDURE FOR INDEMNIFICATION; THIRD PARTY CLAIMS. (a) Promptly after receipt by an indemnified party under this Article X of notice of a claim against it for indemnification brought under this Article X (a "Claim"), the indemnified party will, if a claim is to be made against an indemnifying party, give prompt written notice to the indemnified party of the Claim, but the failure to promptly notify the indemnified party will not relieve the indemnified party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudice by the indemnifying party's failure to give such prompt notice. Such notice shall contain a description in reasonable detail of facts upon which such Claim is based and, to the extent known, the amount thereof. (b) If any Claim referred to in this Article X is made by a third party against an indemnified party and such indemnified party gives written notice to the indemnifying party of the Claim, the indemnifying party will be entitled to participate in the defense of Claim and, to the extent that it wishes to assume the defense of the Claim and, after written notice from the indemnifying party to the indemnified party of its election to assume the defense of the Claim, the indemnifying party shall assume such defense and will not be liable to the indemnified party under this Article X for any fees of other counsel or any other expenses with respect to the defense of the Claim in each case subsequently incurred by the indemnified party in connection with the defense of the Claim. SECTION 10.5 APPOINTMENT OF REPRESENTATIVE. Subject to the successorship provisions of this Section 10.5, Kinnebrew (the "Representative") is hereby irrevocably appointed as the attorney-in-fact and representative of the interests of the Shareholders holding Continental Common Stock for all purposes of this Agreement, and notice is hereby given thereof to HCCH, and, without independent verification, HCCH may rely upon Representative's undertakings in such capacity. The Representative shall have full and irrevocable authority on behalf of the Shareholders, and shall promptly and completely exercise such authority in a timely fashion to: 35 (a) participate in, represent and bind the Shareholders in all respects with respect to any arbitration or legal proceeding relating to this Agreement, including without limitation, all matters relating to any indemnification under this Section 10.5, taking any action under Section 10.4 including, without limitation, the defense and settlement of any matter, and the calculation thereof for every purpose thereunder, consent to jurisdiction, enter into any settlement, and consent to entry of judgment, each with respect to any or all of the Shareholders; (b) receive, accept and give notices and other communications relating to this Agreement; (c) take any action that the Representative deems necessary or desirable in order to fully effectuate the transactions contemplated by this Agreement; (d) execute and deliver any instrument or document that the Representative deems necessary or desirable in the exercise of his authority under this Section 10.5; and (e) waive the fulfillment of any condition or conditions to the Closing. Those Shareholders who, as of the Closing Date, hold a majority of the Continental Common Stock may, at any time and by written action delivered to HCCH, remove the Representative or any successor thereto, but such removal shall be effective only upon the replacement of such Representative or successor by a new Representative designated, by written notice delivered to HCCH, by the holders of a majority of Continental Common Stock, PROVIDED, however, that any such notice shall be effective upon actual receipt by HCCH. Any such written notice shall be delivered to HCCH in accordance with the notice provisions set forth herein. If any Representative shall have died, become incapacitated or unable to serve, those Shareholders of Continental Common Stock who, as of the date hereof, hold a majority thereof, shall promptly designate by written notice delivered to HCCH a replacement Representative. Any costs and expenses incurred by the Representative in connection with actions taken pursuant to or permitted by this Section 10.5 will be borne by the Shareholders and paid or reimbursed to the Representative pro rata. The foregoing authorization is granted and conferred in consideration for the various agreements and covenants of HCCH contained herein. In consideration of the foregoing, and subject to the successorship provisions of this Section 10.5, this authorization granted to the Representative shall be irrevocable and shall not be terminated by any act of any of the Shareholders or by operation of law, whether by death or incompetence of any Shareholder or by the occurrence of any other event except the termination of this Agreement pursuant to the provisions hereof. If after the execution hereof any such Shareholder shall die or become incompetent, the Representative is nevertheless authorized and directed to exercise the authority granted in this Section 10.5 as if such death or incompetence had not occurred and regardless of notice thereof. The Representative shall have no liability to any Shareholder for any act or omission or obligation hereunder, provided that such action or omission is taken by the Representative in good faith and without willful misconduct. 36 ARTICLE XI MISCELLANEOUS SECTION 11.1 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. SECTION 11.2 FEES AND EXPENSES. Until otherwise agreed by the parties, each party shall bear its own fees and expenses, including counsel fees and fees of brokers and investment bankers contracted by such party, in connection with the transaction contemplated hereby. SECTION 11.3 NOTICES. Whenever any party hereto desires or is required to give any notice, demand, or request with respect to this Agreement, each such communication shall be in writing and shall be effective only if it is delivered by personal service or mailed, United States registered or certified mail, postage prepaid, or sent by prepaid overnight courier, addressed as follows: HCCH: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, TX 77040-6094 Telecopy: (713) 462-2401 Attention: Frank J. Bramanti, President With a copy to (which shall not constitute notice): Winstead Sechrest & Minick P.C. 910 Travis, Suite 1700 (until August 23, 1997- then Suite 2400) Houston, TX 77002-5895 Telecopy: (713) 951-3800 (until August 23, 1997 - then (713) 650-2400) Attention: Arthur S. Berner, Esq. Continental and Representative: E. R. Kinnebrew, III 232 Windover Grove Drive Memphis, TN 38111 37 With a copy to (which shall not constitute notice): Morrison, Mahoney & Miller 250 Summer Street Boston, MA 02210-1181 Telecopy: (617) 439-7590 Attention: David A. Bakst, Esq Such communications shall be effective when they are received by the addressee thereof. Any party may change its address for such communications by giving notice thereof to other parties in conformity with this Section. SECTION 11.4 GOVERNING LAW. The internal laws of the State of Texas (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. Any dispute arising hereunder shall lie exclusively in the state courts of the State of Texas. SECTION 11.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. This Agreement and the provisions hereof shall be binding upon each of the parties, their permitted successors and assigns. This Agreement may not be assigned by any party without the prior consent of the other. SECTION 11.6 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason or to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances shall continue in full force and effect and in no way be affected, impaired or invalidated. SECTION 11.7 ENTIRE AGREEMENT. This Agreement, together with the Confidentiality Agreement, and any other agreement and instrument referenced herein constitute the entire understanding and agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between parties with respect hereto. SECTION 11.8 AMENDMENT AND WAIVERS. Any amendment or waiver affecting the Shareholders shall be valid if consented to in writing by Shareholders. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by Shareholders. The waiver by Shareholders of any breach hereof or default in the performance hereof shall not be deemed to constitute a waiver of any other default or any succeeding breach or default, unless such waiver so expressly states. At any time before the Effective Time, this Agreement may be amended or supplemented by Continental, Shareholders or HCCH with respect to any of the terms contained in this Agreement. 38 SECTION 11.9 NO WAIVER. The failure of any party to enforce any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions. SECTION 11.10 CONSTRUCTION OF AGREEMENT. A reference to an Article, Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement which shall be considered as a whole. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." SECTION 11.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all the parties reflected hereon as signatories. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 39 HCC INSURANCE HOLDINGS, INC. By: /s/ Frank J. Bramanti ------------------------------------- Name: Frank J. Bramanti, Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. CONTINENTAL AVIATION UNDERWRITERS, INC. By: /s/ E. R. Kinnebrew, III ------------------------------------- Name: E. R. Kinnebrew, III Title: President SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. CRAWLEY WARREN (USA) INC. By: /s/ David A. Bakst ------------------------------------- Name: David A. Bakst Title: Treasurer SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. /s/ EDWARD R. KINNEBREW, III ---------------------------------------- EDWARD R. KINNEBREW, III SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. NATIONAL BANK OF COMMERCE, Trustee, of the Sidney A. Stewart, Jr. Trust under Declaration of Trust dated May 14, 1997 By: /s/ Virginia Thornton ------------------------------------- Name: Virginia Thornton Title: Vice President & Trust Officer SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. /s/ CHARLES H. HARPER ---------------------------------------- CHARLES H. HARPER SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. /s/ EUGENE M. SAXON ---------------------------------------- EUGENE M. SAXON SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. /s/ NOEL PARRISH ---------------------------------------- NOEL PARRISH SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC. AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC., AND CONTINENTAL AVIATION UNDERWRITERS, INC. EXHIBIT "A" CONTINENTAL AVIATION UNDERWRITERS, INC. SCHEDULE OF SHAREHOLDING INTEREST SHAREHOLDERS NUMBER AND TAXPAYER AND PERCENTAGE OF IDENTIFICATION ADDRESSES SHARES NUMBER --------- ------ ------ Crawley Warren (USA) Inc. 71.0 shares 53.95% 04-2565423 c/o David A. Bakst, Esq. Morrison, Mahoney & Miller 250 Summer Street Boston, MA 02210 Edward R. Kinnebrew, III ("Kinnebrew") 17.4 shares 13.22% ###-##-#### 232 Windover Grove Drive Memphis, TN 38111 Sidney A. Stewart, Jr. Trust 12.5 shares 9.50% 62-6323844 Under Declaration of Trust Dated May 14, 1997 ("Stewart Trust") c/o National Bank of Commerce Trust Division 1 Commerce Square Memphis, TN 38150 Trustee - National Bank of Commerce Beneficiary - Sidney A. Stewart, Jr. Charles H. Harper ("Harper") 12.5 shares 9.50% ###-##-#### 102 Overlook Drive Little Rock, AR 72207 Eugene M. Saxon ("Saxon") 11.6 shares 8.81% ###-##-#### 334 N. Rose Road Memphis, TN 38117 Noel Parrish ("Parrish") 6.6 shares 5.02% ###-##-#### 821 Club Drive Mt. Vernon, OH 43050 --------------------- 131.6 shares 100.00% EXHIBIT "B" Defined terms are as defined on Exhibit "A" CASH $ AMOUNT ---- OF HCCH COMMON STOCK ------------ Kinnebrew $133,853 $312,322 Saxon 89,201 208,137 Stewart Trust 298,181 ------- Harper 298,181 ------- Parrish 157,565 ------- EX-10.337 3 EX 10.337 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ACQUISITION AGREEMENT DATED AS OF AUGUST 8, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC., SOUTHERN AVIATION INSURANCE UNDERWRITERS, INC., AVIATION CLAIMS ADMINISTRATORS, INC., AND TRUMAN A. THOMAS, III, DONALD J. BARKER, ALEXANDER D. HAHN AS THE SHAREHOLDERS OF SOUTHERN AVIATION INSURANCE UNDERWRITERS, INC. AND AVIATION CLAIMS ADMINISTRATORS, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE I TRANSFER OF THE SOUTHERN COMMON STOCK AND THE ACA COMMON STOCK . . . . . . . . . . . . . . . . . 2 SECTION 1.1 TRANSFER OF SOUTHERN COMMON STOCK AND ACA COMMON STOCK. 2 SECTION 1.2 PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . 2 SECTION 1.3 CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . 2 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SOUTHERN, ACA AND SHAREHOLDERS . . . . . . . . . . . . . 3 SECTION 2.1 CORPORATE EXISTENCE AND POWER. . . . . . . . . . . . . 3 SECTION 2.2 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.3 GOVERNMENTAL AUTHORIZATION . . . . . . . . . . . . . . 4 SECTION 2.4 NON-CONTRAVENTION. . . . . . . . . . . . . . . . . . . 5 SECTION 2.5 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES. . . . . . . . . . . . 6 SECTION 2.7 SOUTHERN FINANCIAL STATEMENTS. . . . . . . . . . . . . 6 SECTION 2.8 ABSENCE OF CERTAIN CHANGES . . . . . . . . . . . . . . 7 SECTION 2.9 NO UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . 8 SECTION 2.10 LITIGATION . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.11 ACCOUNTING MATTERS . . . . . . . . . . . . . . . . . . 9 SECTION 2.12 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2.13 EMPLOYEE BENEFIT PLANS, ERISA. . . . . . . . . . . . . 10 SECTION 2.14 MATERIAL AGREEMENTS. . . . . . . . . . . . . . . . . . 11 SECTION 2.15 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.16 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 12 SECTION 2.17 LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . 13 SECTION 2.18 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 13 SECTION 2.19 TRADEMARKS, TRADENAMES, ETC. . . . . . . . . . . . . . 13 SECTION 2.20 SALE OF THE COMPANIES. . . . . . . . . . . . . . . . . 14 SECTION 2.21 BROKER'S FEES. . . . . . . . . . . . . . . . . . . . . 14 SECTION 2.22 INVESTMENT REPRESENTATION. . . . . . . . . . . . . . . 14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH. . . . . . . . . . . 15 SECTION 3.1 CORPORATE EXISTENCE AND POWER. . . . . . . . . . . . . 15 SECTION 3.2 CORPORATE AUTHORIZATION. . . . . . . . . . . . . . . . 15 SECTION 3.3 GOVERNMENTAL AUTHORIZATION . . . . . . . . . . . . . . 15 SECTION 3.4 NON-CONTRAVENTION. . . . . . . . . . . . . . . . . . . 16 SECTION 3.5 CAPITALIZATION OF HCCH . . . . . . . . . . . . . . . . 16 SECTION 3.6 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 17 SECTION 3.7 SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . 18 SECTION 3.8 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 18 SECTION 3.9 ABSENCE OF CERTAIN CHANGES . . . . . . . . . . . . . . 19 i TABLE OF CONTENTS (CONT.) PAGE SECTION 3.10 NO UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . 19 SECTION 3.11 LITIGATION . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.12 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA. . . . . . . . . . . . . 20 SECTION 3.14 MATERIAL AGREEMENTS. . . . . . . . . . . . . . . . . . 21 SECTION 3.15 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.16 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 22 SECTION 3.17 LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . 23 SECTION 3.18 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 23 SECTION 3.19 TRADEMARKS, TRADE NAMES, ETC.. . . . . . . . . . . . . 23 SECTION 3.20 BROKER'S FEES. . . . . . . . . . . . . . . . . . . . . 23 ARTICLE IV COVENANTS OF SOUTHERN, ACA AND SHAREHOLDERS . . . . . . . . 23 SECTION 4.1 CONDUCT OF THE COMPANIES . . . . . . . . . . . . . . . 23 SECTION 4.2 ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. . . . 25 SECTION 4.3 OTHER OFFERS . . . . . . . . . . . . . . . . . . . . . 25 SECTION 4.4 MAINTENANCE OF BUSINESS. . . . . . . . . . . . . . . . 26 SECTION 4.5 COMPLIANCE WITH OBLIGATIONS. . . . . . . . . . . . . . 26 SECTION 4.6 NOTICES OF CERTAIN EVENTS. . . . . . . . . . . . . . . 26 SECTION 4.7 AFFILIATES AGREEMENT . . . . . . . . . . . . . . . . . 27 SECTION 4.8 NECESSARY CONSENTS . . . . . . . . . . . . . . . . . . 27 SECTION 4.9 REGULATORY APPROVAL. . . . . . . . . . . . . . . . . . 27 SECTION 4.10 SATISFACTION OF CONDITIONS PRECEDENT . . . . . . . . . 27 ARTICLE V COVENANTS OF HCCH . . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.1 CONDUCT OF HCCH. . . . . . . . . . . . . . . . . . . . 27 SECTION 5.2 ACCESS TO FINANCIAL AND OPERATION INFORMATION. . . . . 28 SECTION 5.3 MAINTENANCE OF BUSINESS. . . . . . . . . . . . . . . . 28 SECTION 5.4 COMPLIANCE WITH OBLIGATIONS. . . . . . . . . . . . . . 28 SECTION 5.5 NOTICES OF CERTAIN EVENTS. . . . . . . . . . . . . . . 29 SECTION 5.6 NOTICE TO AFFILIATES . . . . . . . . . . . . . . . . . 29 ARTICLE VI COVENANTS OF HCCH, THE COMPANIES AND SHAREHOLDERS . . . . . 29 SECTION 6.1 ADVICE OF CHANGES. . . . . . . . . . . . . . . . . . . 29 SECTION 6.2 REGULATORY APPROVALS. . . . . . . . . . . . . . . . . 29 SECTION 6.3 ACTIONS CONTRARY TO STATED INTENT. . . . . . . . . . . 30 SECTION 6.4 CERTAIN FILINGS. . . . . . . . . . . . . . . . . . . . 30 SECTION 6.5 COMMUNICATIONS . . . . . . . . . . . . . . . . . . . . 30 SECTION 6.6 SATISFACTION OF CONDITIONS PRECEDENT . . . . . . . . . 30 ii TABLE OF CONTENTS (CONT.) PAGE SECTION 6.7 TAX COOPERATION. . . . . . . . . . . . . . . . . . . . 30 ARTICLE VII CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . 31 SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH. . . . . . . . . . . 31 SECTION 7.2 CONDITIONS TO OBLIGATIONS OF THE COMPANIES AND SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . 33 SECTION 7.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. . . . . . . . 34 ARTICLE VIII TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . 34 SECTION 8.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . 34 SECTION 8.2 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . 35 ARTICLE IX CLOSING MATTERS . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 9.1 THE CLOSING. . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS. . . . . 36 SECTION 10.1 AGREEMENT TO INDEMNIFY . . . . . . . . . . . . . . . . 36 SECTION 10.2 INDEMNIFICATION WITH RESPECT TO TAXES AND ENVIRONMENT. 37 SECTION 10.3 HCCH AGREEMENT TO INDEMNIFY. . . . . . . . . . . . . . 37 SECTION 10.4 APPOINTMENT OF REPRESENTATIVE. . . . . . . . . . . . . 38 SECTION 10.5 SURVIVAL OF REPRESENTATIONS. . . . . . . . . . . . . . 39 SECTION 10.6 PROCEDURE FOR INDEMNIFICATION; THIRD PARTY CLAIMS. . . 39 ARTICLE XI POST-CLOSING COVENANTS OF HCCH. . . . . . . . . . . . . . . 40 SECTION 11.1 LISTING OF HCCH COMMON STOCK.. . . . . . . . . . . . . 40 SECTION 11.2 EMPLOYEE MATTERS . . . . . . . . . . . . . . . . . . . 40 SECTION 11.3 PRESIDENCY OF SOUTHERN . . . . . . . . . . . . . . . . 40 ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 12.1 FURTHER ASSURANCES.. . . . . . . . . . . . . . . . . . 40 SECTION 12.2 FEES AND EXPENSES. . . . . . . . . . . . . . . . . . . 41 SECTION 12.3 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 12.4 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . 42 SECTION 12.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. . . . 42 SECTION 12.6 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . 42 SECTION 12.7 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . 42 SECTION 12.8 AMENDMENT AND WAIVERS. . . . . . . . . . . . . . . . . 42 SECTION 12.9 NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 12.10 CONSTRUCTION OF AGREEMENT. . . . . . . . . . . . . . . 43 iii TABLE OF CONTENTS (CONT.) PAGE SECTION 12.11 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 43 SECTION 12.12 NO THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . 43 iv ACQUISITION AGREEMENT THIS ACQUISITION AGREEMENT (this "Agreement") is entered into as of the 8th day of August, 1997 by and among HCC Insurance Holdings, Inc. ("HCCH"), a Delaware corporation, Southern Aviation Insurance Underwriters, Inc. ("Southern"), an Alabama corporation, Aviation Claims Administrators, Inc., ("ACA"), an Alabama corporation, and Truman A. Thomas, III ("Thomas"), a resident of Alabama, Donald J. Barker, a resident of Alabama, and Alexander D. Hahn, a resident of Florida, together all of the shareholders of Southern and ACA (individually a "Shareholder" and collectively the "Shareholders"). For purposes of this Agreement, Southern and ACA shall be referred to herein collectively as the "Companies" and individually as a "Company". RECITALS: A. Shareholders own all of the outstanding stock of Southern, a company engaged in the insurance business. B. Shareholders also own all of the outstanding stock of ACA, a third party administrator for insurance companies. C. HCCH desires to acquire all of the outstanding stock of Southern and ACA for shares of common stock of HCCH (the "HCCH Common Stock") and Shareholders desire to acquire the HCCH Common Stock in exchange for all of their shares in Southern (being all of the outstanding stock of Southern) and ACA (being all of the outstanding stock of ACA) for the consideration and on the terms set forth in this Agreement. D. The parties intend for the transactions contemplated by this Agreement to be accounted for as a "pooling-of-interests" for accounting purposes and to qualify as a plan of reorganization in accordance with the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, the parties hereto do hereby agree as follows: ARTICLE I TRANSFER OF THE SOUTHERN COMMON STOCK AND THE ACA COMMON STOCK SECTION 1.1 TRANSFER OF SOUTHERN COMMON STOCK AND ACA COMMON STOCK. (a) Subject to the terms and conditions of this Agreement, at the Closing (hereinafter defined), Shareholders shall transfer and deliver to HCCH, and HCCH shall acquire from Shareholders, all of the outstanding stock of Southern (the "Southern Common Stock"). (b) Subject to the terms and conditions of this Agreement, at the Closing, Shareholders shall transfer and deliver to HCCH, and HCCH shall acquire from Shareholders, all of the outstanding stock of ACA (the "ACA Common Stock"). SECTION 1.2 PURCHASE PRICE. (a) At the Closing, HCCH shall deliver to Shareholders 225,000 shares of HCCH Common Stock in accordance with the Schedule set forth in Exhibit "A" in exchange for the Shareholders' respective shares in Southern and ACA (the "Share Payment"). (b) No fractional shares of HCCH Common Stock shall be issued to Shareholders hereunder. SECTION 1.3 CLOSING DELIVERIES. At the Closing: (a) Shareholders shall deliver to HCCH (i) certificates representing the Southern Common Stock, endorsed or transferred to HCCH, which shall transfer to HCCH good and indefeasible title to the Southern Common Stock, free and clear of all encumbrances; (ii) certificates representing the ACA Common Stock, endorsed or transferred to HCCH, which shall transfer to HCCH good and indefeasible title to the ACA Common Stock, free and clear of all encumbrances; and (iii) such other documents including officer's certificates and opinions of counsel as may be required by this Agreement or reasonably requested by HCCH. (b) HCCH shall deliver to Shareholders 2 (i) certificates of HCCH Common Stock representing the amount of the Share Payment to each of the Shareholders as set forth in Exhibit "A". Shareholders agree and acknowledge that such shares of HCCH Common Stock shall be unregistered and, therefore, restricted as to transfer and the share certificates shall bear an appropriate legend as set forth thereon with respect to same; and (ii) such other documents including officer's certificates and opinions of counsel, as may be required by this Agreement or reasonably requested by Shareholders. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SOUTHERN, ACA AND SHAREHOLDERS Except as disclosed in a document referring specifically to this Agreement (the "Southern/ ACA Disclosure Schedule") which has been delivered to HCCH on or before the date hereof, each of Southern, ACA and each Shareholder (jointly and severally) represents and warrants to HCCH as set forth below (it being agreed that the disclosure on the Southern/ACA Disclosure Schedule of the existence of any document or fact or circumstance or situation relating to any representations, warranties, covenants or agreements in any section of this Agreement shall be automatically deemed to be disclosure of such document or fact or circumstance or situation for purposes of all other representations, warranties, covenants, and agreements in this Agreement). SECTION 2.1 CORPORATE EXISTENCE AND POWER. Each of Southern and ACA is a corporation duly organized, validly existing and in good standing under the laws of Alabama, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals (collectively, "Governmental Authorizations") required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect, as hereinafter defined, on the Companies. The Companies have each delivered to HCCH true and complete copies of their Articles of Incorporation or Certificate of Incorporation, as the case may be, and Bylaws as currently in effect. Each of Southern and ACA is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect on the Companies. For purposes of this Agreement, a "Material Adverse Effect," with respect to any person or entity (including without limitation Southern, ACA and HCCH), means a material adverse effect on the condition (financial or otherwise), business, properties, assets, liabilities (including contingent liabilities), results of operations or prospects of such person or entity and its affiliated companies and subsidiaries and/or parent corporation and/or corporations under the same stock ownership, taken as a whole; and "Material Adverse Change" means a change or a development involving a prospective change which would result in a Material Adverse Effect. 3 SECTION 2.2 AUTHORIZATION. (a) The execution, delivery and performance by the Companies of this Agreement and the consummation by the Companies of the transactions contemplated hereby and thereby, are within the corporate powers of the Companies and have been duly authorized by all necessary corporate action. This Agreement constitutes, or upon execution will constitute, valid and binding agreements of the Companies, enforceable against the Companies in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. (b) Each of the Shareholders, severally, represents and warrants that he has full right, power and authority to enter into this Agreement, the Affiliates Agreement (hereinafter defined) to be entered into by him, and each other agreement to be entered into by him in connection with the transactions contemplated hereby and that this Agreement, the Affiliates Agreement, and such other agreements contemplated hereby constitute, or upon execution will constitute, valid and binding agreements of such Shareholder, enforceable against him in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws effecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 2.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by the Companies and each Shareholder of this Agreement, and the consummation of the transactions contemplated hereunder require no action by the Companies or any Shareholder or any filing by them with any governmental body, agency, official or authority other than: (a) compliance with any applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder; (b) compliance with any applicable foreign or state securities or "blue sky" laws; (c) compliance with any requirements of any federal, state, foreign or other insurance or reinsurance or intermediaries or managing general agent laws, including licensing or other related laws; (d) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain (i) would not reasonably be expected to have a Material Adverse Effect on the Companies, or (ii) would not materially adversely affect the ability of the Companies, each Shareholder or HCCH to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. 4 SECTION 2.4 NON-CONTRAVENTION. The execution, delivery and performance by the Companies and Shareholders of this Agreement and the consummation by the Companies and Shareholders of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with the Companies' charter or bylaws; (b) assuming compliance with the matters referred to in Section 2.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to the Companies or any Shareholder; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in a contractual right to cause the termination or cancellation of or loss of a material benefit under, or right to accelerate, any material agreement, contract or other instrument binding upon the Companies or any Shareholder or any material license, franchise, permit or other similar authorization held by the Companies or any Shareholder; or (d) result in the creation or imposition of any Lien (as hereinafter defined) on any material asset of the Companies; except, with respect to clauses (b), (c) and (d) above, for contraventions, defaults, losses, Liens and other matters referred to in such clauses that in the aggregate would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on the Companies or any Shareholder. For purposes of this Agreement, the term "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. (e) All of the outstanding capital stock of the Companies owned by the Shareholders directly or indirectly is or will be owned directly or indirectly by the Shareholders free and clear of any material Lien and free of any other material limitation or restriction on its or their rights as owner thereof (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests), other than those imposed by applicable law or this Agreement or the Affiliates Agreement. Each Shareholder represents and warrants only as to his or her individual ownership of Southern Common Stock and ACA Common Stock, respectively, for purposes of this Section. SECTION 2.5 CAPITALIZATION. (a) As of June 30, 1997, the authorized capital stock of Southern was 1,000 shares of common stock, par value $1.00 per share, and 1,000 shares of common stock are issued and outstanding and held by the Shareholders in the percentages as set forth on Exhibit "A". All outstanding shares set forth above have been, or will be prior to the Closing Date, duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in and as otherwise contemplated by this Agreement, there are 5 outstanding, with respect to Southern, (i) no shares of capital stock or other voting securities, (ii) no securities convertible into or exchangeable for shares of its capital stock or voting securities), (iii) no options or other rights to acquire, and no obligation to issue, any capital stock, voting securities or securities convertible into or exchangeable for its capital stock or other voting securities (the items in clauses (i), (ii) and (iii) being referred to collectively as the "Southern Securities"), (iv) no obligations to repurchase, redeem or otherwise acquire any of Southern Securities and (v) no contractual rights of any person or entity to include any such securities in any registration statement proposed to be filed under the Securities Act. (b) As of June 30, 1997, the authorized capital stock of ACA was 1,000 shares of common stock, par value $1.00 per share, and 1,000 shares of common stock are issued and outstanding and held by the Shareholders in the percentages set forth on Exhibit "A". All outstanding shares set forth above have been, or will be prior to the Closing Date, duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in and as otherwise contemplated by this Agreement, there are outstanding, with respect to ACA, (i) no shares of capital stock or other voting securities, (ii) no securities convertible into or exchangeable for shares of its capital stock or voting securities), (iii) no options or other rights to acquire, and no obligation to issue, any capital stock, voting securities or securities convertible into or exchangeable for its capital stock or other voting securities (the items in clauses (i), (ii) and (iii) being referred to collectively as the "ACA Securities"), (iv) no obligations to repurchase, redeem or otherwise acquire any of ACA Securities and (v) no contractual rights of any person or entity to include any such securities in any registration statement proposed to be filed under the Securities Act. SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES. (a) For purposes of this Section 2.6, (i) "Subsidiary" means, with respect to any entity, any corporation of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by such entity, and (ii) "Joint Venture" means, with respect to any entity, any corporation or organization (other than such entity and any Subsidiary thereof) of which such entity or any Subsidiary thereof is, directly or indirectly, the beneficial owner of 25% or more of any class of equity securities or equivalent profit participation interest. (b) Except as set forth in the Southern/ACA Disclosure Schedule, as of the date hereof, the Companies do not have any Subsidiaries or Joint Ventures which are material to the business of the Companies. The Companies do not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, Joint Venture or other entity. SECTION 2.7 SOUTHERN FINANCIAL STATEMENTS. Southern has delivered to HCCH Southern's audited balance sheets as of December 31, 1996 (the "Balance Sheet Date") and Southern's unaudited income statements for the annual period ended December 31, 1996, (collectively, the "Southern Financial Statements"). ACA has delivered to HCCH ACA's audited balance sheets as of April 30, 1997 and ACA's unaudited income statements for the annual period 6 ended April 30, 1996 (collectively, the "ACA Financial Statements"). The Southern Financial Statements and ACA Financial Statements present fairly in all material respects (except as indicated in the notes thereto), the financial position of the Companies as of the dates thereof and results of operations and cash flows for the periods therein indicated (subject to normal year-end adjustments in the case of any interim financial statements and the absence of certain footnotes in the case of unaudited financial statements). The Companies have no material debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, that is not reflected, reserved against or disclosed in the Southern Financial Statements and the ACA Financial Statements, except for (i) those that are not required to be reported in accordance with the aforesaid accounting principles; (ii) normal or recurring liabilities incurred since December 31, 1996 in the ordinary course of business or (iii) as disclosed in the Southern/ACA Disclosure Schedule. SECTION 2.8 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Southern/ACA Disclosure Schedule, since December 31, 1996, Southern and ACA have in all material respects conducted their business in the ordinary course and there has not been: (a) any Material Adverse Change with respect thereto or any event, occurrence or development of a state of circumstances or facts known to the Companies which as of the date hereof could reasonably be expected to have a Material Adverse Effect on the Companies; (b) any declaration, setting aside or payment of any dividend or other distribution in respect of any shares of capital stock of the Companies other than the declaration, setting aside or payment of dividends in accordance with their existing dividend policy or practice, which policy or practice is not inconsistent with past policy or practice; (c) any repurchase, redemption or other acquisition by the Companies of any outstanding shares of capital stock or other securities of or other ownership interests in the Companies; (d) any amendment of any term of any outstanding securities of the Companies; (e) any damage, destruction or other property or casualty loss (whether or not covered by insurance) affecting the business, assets, liabilities, earnings or prospects of the Companies which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on the Companies; (f) any increase in indebtedness for borrowed money or capitalized lease obligations of the Companies, except in the ordinary course of business; (g) any sale, assignment, transfer or other disposition of any tangible or intangible asset material to the business of the Companies, except in the ordinary course of business and for a fair and adequate consideration; 7 (h) any amendment, termination or waiver by the Companies of any right of substantial value under any agreement, contract or other written commitment to which it is a party or by which it is bound; (i) any material reduction in the amounts of coverage provided by existing casualty and liability insurance policies with respect to the business or properties of the Companies; (j) any (i) grant of any severance or termination pay to any director, officer or employee of the Companies, (ii) entering into of any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Companies, (iii) any increase in benefits payable under any existing severance or termination pay policies or employment agreements, or (iv) any increase in compensation, bonus or other benefits payable to directors, officers or employees of the Companies, in each case other than in the ordinary course of business consistent with past practice; (k) any new or amendment to or alteration of any existing bonus, incentive, compensation, severance, stock option, stock appreciation right, pension, matching gift, profit-sharing, employee stock ownership, retirement, pension group insurance, death benefit, or other fringe benefit plan, arrangement or trust agreement adopted or implemented by the Companies which would result in a material increase in cost; (l) any capital expenditures, capital additions or capital improvements incurred or undertaken by the Companies, except in the ordinary course of business; or (m) the entering into of any agreement by the Companies or any person on behalf of the Companies to take any of the foregoing actions. SECTION 2.9 NO UNDISCLOSED LIABILITIES. There are no liabilities of the Companies of any kind whatsoever that are, individually or in the aggregate, material to the Companies, other than: (a) liabilities disclosed or provided for in the respective unaudited financial statements as of and for the fiscal year ended December 31, 1996 (including the notes thereto) of the Companies; (b) liabilities incurred in the ordinary course of business consistent with past practice since December 31, 1996; (c) liabilities under this Agreement or indicated in the Southern/ACA Disclosure Schedule. SECTION 2.10 LITIGATION. Except as set forth in the Southern/ACA Disclosure Schedule and other than actions, suits, proceedings, claims or investigation occurring in the ordinary course of business involving respective amounts in controversy of less than $10,000 each and $100,000 8 in the aggregate, there is no action, suit, proceeding, claim or investigation pending or threatened, against the Companies or any of their assets or against or involving any of their officers, directors or employees in connection with the business or affairs of the Companies, including, without limitation, any such claims for indemnification arising under any agreement to which the Companies are a party. The Companies are not subject, or in default with respect, to any writ, order, judgment, injunction or decree which could, individually or in the aggregate, have a Material Adverse Effect on the Companies. SECTION 2.11 ACCOUNTING MATTERS. Except for all actions disclosed to and approved by HCCH, neither the Companies nor any of the Shareholders has taken or agreed to take any action that (without giving effect to any action taken or agreed to be taken by HCCH or any of its affiliates) would prevent HCCH from accounting for the business combination to be effected by the Agreement as a pooling-of-interests. SECTION 2.12 TAXES. (a) Each of the Companies (i) has filed when due (taking into account extensions) with the appropriate federal, state, local, foreign and other governmental agencies, all material tax returns, estimates and reports required to be filed by it, (ii) has either paid when due and payable or has established adequate reserves or otherwise accrued on the Southern Financial Statements and the ACA Financial Statements all material federal, state, local or foreign taxes, levies, imposts, duties, licenses and registration fees and charges of any nature whatsoever, and unemployment and social security taxes and income tax withholding, including interest and penalties thereon ("Taxes" or "Tax", as the case may be) and there are no tax deficiencies claimed in writing by any taxing authority and received by the Companies or Shareholders that, in the aggregate, would result in any Tax liability in excess of the amount of the reserves or accruals and (iii) has or will establish in accordance with its normal accounting practices and procedures accruals and reserves that, in the aggregate, are adequate for the payment of all Taxes not yet due and payable and attributable to any period preceding the Closing Date. The Southern/ACA Disclosure Schedule sets forth those tax returns of the Companies (or any predecessor entities) for all periods that currently are the subject of audit by any federal, state, local or foreign taxing authority. (b) There are no material taxes, interest, penalties, assessments or deficiencies claimed in writing by any taxing authority and received by the Companies or the Shareholders to be due in respect of any tax returns filed by the Companies (or any predecessor corporations). Neither Company nor any predecessor corporation has executed or filed with the Internal Revenue Service ("IRS") or any other taxing authority any agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes. (c) The Companies are not a party to or bound by (or will not prior to the Closing Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax allocation agreement or other similar arrangement. The Companies have not been a member of an affiliated group or filed or been included in a combined, consolidated or unitary tax return. 9 SECTION 2.13 EMPLOYEE BENEFIT PLANS, ERISA. (a) The Companies are not a party to any oral or written (i) employment, severance, collective bargaining or consulting agreement not terminable on 60 days' or less notice, (ii) agreement with any executive officer or other key employee of the Companies (A) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Companies of the nature of any of the transactions contemplated by this Agreement, (B) providing any term of employment or compensation guarantee extending for a period longer than one year, or (C) providing severance benefits or other benefits after the termination of employment of such executive officer or key employee regardless of the reason for such termination of employment, (iii) agreement, plan or arrangement under which any person may receive payments subject to the tax imposed by Section 4999 of the Code, or (iv) agreement or plan, including, without limitation, any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, the benefits of which would be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. (b) Neither the Companies nor any corporation or other entity which under Section 4001(b) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), is under common control with the Companies (a "Company ERISA Affiliate") maintains or within the past five years has maintained, contributed to, or been obligated to contribute to, any "Employee Pension Benefit Plan" ("Pension Plan") or any "Employee Welfare Benefit Plan" ("Welfare Plan") as such terms are defined in Sections 3(2) and 3(1) respectively of ERISA, which is subject to ERISA. Each Pension Plan and Welfare Plan disclosed in the Southern/ACA Disclosure Schedule (which Plans have been heretofore delivered to HCCH) and maintained by the Companies have been maintained in all material respects in compliance with their terms and all provisions of ERISA and the Code (including rules and regulations thereunder) applicable thereto. (c) No Pension Plan or Welfare Plan is currently subject to an audit or other investigation by the IRS, the Department of Labor (the "DOL"), the Pension Benefit Guaranty Corporation or any other governmental agency or office nor are any such Plans subject to any lawsuits or legal proceedings of any kind or to any material pending disputed claims by employees or beneficiaries covered under any such Plan or by any other parties. (d) No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, resulting in liability to the Companies or any Company ERISA Affiliate has occurred with respect to any Pension Plan or Welfare Plan. Neither the Companies nor any Shareholder has any knowledge of any breach of fiduciary responsibility under Part 4 of Title I of ERISA which has resulted in liability of the Companies and the Company ERISA Affiliate, any trustee, administrator or fiduciary of any Pension Plan or Welfare Plan. 10 (e) Neither the Companies nor any Company ERISA Affiliate, since January 1, 1986, has maintained or contributed to, or been obligated or required to contribute to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of ERISA. Neither the Companies nor any Company ERISA Affiliate has either withdrawn, partially or completely, or instituted steps to withdraw, partially or completely, from any Multiemployer Plan nor has any event occurred which would enable a Multiemployer Plan to give notice of and demand payment of any withdrawal liability with respect to the Companies or any Company ERISA Affiliate. (f) There is no contract, agreement, plan or arrangement covering any employee or former employee of the Companies or any Company ERISA Affiliate that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Sections 162(a)(I) or 280G of the Code. (g) With respect to the Companies and each Company ERISA Affiliate, the Southern/ACA Disclosure Schedule correctly identifies each material agreement, policy, plan or other arrangement, whether written or oral, express or implied, fixed or contingent, to which the Companies are a party or by which the Companies or any property or asset of the Companies are bound, which is or relates to a pension, option, bonus, deferred compensation, retirement, stock purchase, profit-sharing, severance pay, health, welfare, incentive, vacation, sick leave, medical disability, hospitalization, life or other insurance or fringe benefit plan, policy or arrangement. (h) Neither the Companies nor any Company ERISA Affiliate maintains or has maintained or contributed to any Pension Plan that is or was subject to Section 302 of Title IV of ERISA or Section 412 of the Code. The Companies have made available to HCCH, for each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code, a copy of the most recent determination letter issued by the IRS to the effect that each such Plan is so qualified and that each trust created thereunder is tax exempt under Section 501 of the Code, and the Companies are unaware of any fact or circumstances that would jeopardize the qualified status of each such Pension Plan or the tax exempt status of each trust created thereunder. SECTION 2.14 MATERIAL AGREEMENTS. (a) The Southern/ACA Disclosure Schedule includes a complete and accurate list of all contracts, agreements, leases (other than Company Property Leases, as hereinafter defined), and instruments to which the Companies are a party or by which it or its properties or assets are bound which individually involve net payments or receipts in excess of $25,000 per annum, inclusive of contracts entered into with customers and suppliers in the ordinary course of business, or that pertain to employment or severance benefits for any officer, director or employee of the Companies, whether written or oral, but exclusive of contracts, agreements, leases and instruments terminable without penalty upon 60 days' or less prior written notice to the other party or parties thereto (the "Material Company Agreements"). 11 (b) Neither the Companies nor, to the knowledge of the Companies or any Shareholder, any other party is in default under any Material Company Agreement and no event has occurred which (after notice or lapse of time or both) would become a breach or default under, or would permit modification, cancellation, acceleration or termination of any Material Company Agreement or result in the creation of any security interest upon, or any person obtaining any right to acquire, any properties, assets or rights of the Companies, which, in any such case, has had or would reasonably be expected to have a Material Adverse Effect. (c) Each such Material Company Agreement is in full force and effect and is valid and legally binding and there are no material unresolved disputes involving or with respect to any Material Company Agreement. No party to a Material Company Agreement has advised the Company or any Shareholder that it intends either to terminate a Material Company Agreement or to refuse to renew a Material Company Agreement upon the expiration of the term thereof. (d) No representation or warranty is made that all benefits contemplated in the Material Company Agreements will be received. (e) The Companies are not in violation of, or in default with respect to, any term of their Articles or Certificate of Incorporation, as the case may be, or Bylaws. SECTION 2.15 PROPERTIES. The Companies own no real estate, and all leases of real property to which the Companies are a party or by which they are bound ("the Company Property Leases") are in full force and effect. There exists no default under such Company Property Leases, nor any event which with notice or lapse of time or both would constitute a default thereunder, which default would have a Material Adverse Effect. All of the properties and assets which are owned by the Companies are owned by the Companies free and clear of any Lien, except for Liens which do not have a Material Adverse Effect. The Companies have good and indefeasible title with respect to such owned properties and assets subject to no Liens, other than those permitted under this Section 2.15, to all of the properties and assets necessary for the conduct of their business other than to the extent that the failure to have such title would not have a Material Adverse Effect. SECTION 2.16 ENVIRONMENTAL MATTERS. (a) For the purposes of this Agreement, the following terms have the following meanings: "Environmental Laws" shall mean any and all federal, state, local and foreign statutes, laws (including case law), regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and governmental restrictions relating to human health, the environment or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances (as hereinafter defined) or wastes into the environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of 12 pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "Environmental Liabilities" shall mean all liabilities, whether vested or unvested, contingent or fixed, actual or potential, which (i) arise under or relate to Environmental Laws and (ii) relate to actions occurring or conditions existing on or prior to the Closing. "Hazardous Substances" shall mean any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Regulated Activity" shall mean any generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Substances. (b) No notice, notification, demand, request for information, citation, summons, complaint or order has been received, no complaint has been filed, no penalty has been assessed and, to the knowledge of the Companies and the Shareholders, no investigation or review is pending, or has been threatened by any governmental entity or other party with respect to any (i) alleged violation of any Environmental Law, (ii) alleged failure to have any environmental permit, certificate, license, approval, registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity. (c) The Companies have no material Environmental Liabilities and there has been no release of Hazardous Substances into the environment by the Companies or with respect to any of their properties which has had, or would reasonably be expected to have, a Material Adverse Effect. SECTION 2.17 LABOR MATTERS. The Companies are not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Companies, and the Companies do not know of any activities or proceedings of any labor union to organize any such employees. SECTION 2.18 COMPLIANCE WITH LAWS. Except for violations which do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, the Companies are not in violation of, and have not violated, any applicable provisions of any laws, statutes, ordinances or regulations or any term of any judgment, decree, injunction or order binding against it. SECTION 2.19 TRADEMARKS, TRADENAMES, ETC. The Companies own or possess, or hold a valid right or license to use, all intellectual property, patents, trademarks, trade names, service marks, copyrights and licenses (collectively "Intellectual Property"), and all rights with respect to the foregoing, necessary for the conduct of their business as now conducted, without any 13 known conflict with the rights of others. The Southern/ACA Disclosure Schedule lists all Intellectual Property owned, possessed or held by the Companies. SECTION 2.20 SALE OF THE COMPANIES. Except as contemplated by this Agreement, there are currently no discussions to which the Companies or Shareholders are a party relating to (a) the sale of any material portion of its assets, (b) any merger, consolidation, liquidation, dissolution or similar transaction involving the Companies whereby the Companies will issue any securities or for which the Companies are required to obtain the approval of their shareholders, or (c) the sale of the Southern Common Stock or ACA Common Stock. SECTION 2.21 BROKER'S FEES. Neither the Companies, any Shareholder nor anyone acting on the behalf or at the request thereof has any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with this Agreement. SECTION 2.22 INVESTMENT REPRESENTATION. The shares of HCCH Common Stock to be acquired by the Shareholders pursuant to this Agreement will be acquired solely for the account of such Shareholders, for investment purposes only and not with a view to the distribution thereof. The Shareholders are not participating, directly or indirectly, in any distribution or transfer of such HCCH Common Stock, nor are they participating, directly or indirectly, in underwriting any such distribution of HCCH Common Stock within the meaning of the Securities Act. Each Shareholder has such knowledge and experience in business matters that he is capable of evaluating the merits and risks of an investment in HCCH and the acquisition of the shares of HCCH Common Stock, and he is making an informed investment decision with respect thereto. The Shareholders have been informed by HCCH that the shares of HCCH Common Stock to be issued pursuant to this Agreement and the documents to be executed in connection herewith will not be registered under the Securities Act at the time of their issuance and may not be transferred, assigned or otherwise disposed of absent registration under the Securities Act or availability of an appropriate exemption therefrom. The Shareholders have further been informed that HCCH will be under no obligation to register the shares of HCCH Common Stock under the Securities Act or to take any steps to assist the Shareholders to comply with any applicable exemption under the Securities Act with respect to the shares of HCCH Common Stock. Provided, however, the foregoing provisions of Article II are limited in the following respect: the representations and warranties made hereunder by the Shareholders are made based on each such Shareholder's current, actual knowledge after having conducted an investigation. 14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH Except as disclosed in a document referring specifically to this Agreement or in a document, exhibit, or appendix filed with the Securities and Exchange Commission ("SEC") which has been filed on or before the date hereof, (collectively referred to herein as the "HCCH Disclosure Schedule") which have been made available to the Companies or any of the Shareholders on or before the date hereof, HCCH represents and warrants to the Companies and Shareholders as set forth below (it being agreed that the disclosure on the HCCH Disclosure Schedule of the existence of any document or fact or circumstance or situation relating to any representations, warranties, covenants or agreements in any section of this Agreement shall be automatically deemed to be disclosure of such document or fact or circumstance or situation for purposes of all other representations, warranties, covenants and agreements in this Agreement): SECTION 3.1 CORPORATE EXISTENCE AND POWER. HCCH is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation. HCCH has all corporate powers and all material Governmental Authorizations required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect on HCCH. HCCH is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect on HCCH. HCCH has delivered to the Companies true and complete copies of HCCH's Certificate of Incorporation and Bylaws as currently in effect. SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by HCCH of this Agreement and the consummation by HCCH of the transactions contemplated hereby are within the corporate powers of HCCH and have been duly authorized by all necessary corporate action. This Agreement constitutes or upon execution will constitute, a valid and binding agreement of HCCH enforceable against HCCH in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 3.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by HCCH of this Agreement requires no action by or in respect of, or filing with, any governmental body, agency, official or authority other than: (a) compliance with any applicable requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; (b) compliance with any applicable requirements of the Securities Act and the rules and regulations promulgated thereunder; 15 (c) compliance with any applicable foreign or state securities or "blue sky" laws and the rules and regulations of the NYSE; (d) compliance with any applicable requirements of any insurance regulatory agency having authority over HCCH; and (e) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain (i) would not reasonably be expected to have a Material Adverse Effect on HCCH or (ii) would not materially adversely affect the ability of the Companies or HCCH to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. SECTION 3.4 NON-CONTRAVENTION. The execution, delivery and performance by HCCH of this Agreement and the consummation by HCCH of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with the Certificate of Incorporation or Bylaws of HCCH; (b) assuming compliance with the matters referred to in Section 3.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to HCCH; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in a contractual right to cause the termination or cancellation of or loss of a material benefit under, or right to accelerate, any material agreement, contract or other instrument binding upon HCCH or any material license, franchise, permit or other similar authorization held by HCCH; or (d) result in the creation or imposition of any Lien on any material asset of HCCH, except, with respect to clauses (b), (c) and (d) above, for contraventions, defaults, losses, Liens and other matters referred to in such clauses that in the aggregate would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on HCCH. SECTION 3.5 CAPITALIZATION OF HCCH. (a) The authorized capital stock of HCCH consists of 100,000,000 shares of HCCH Common Stock. As of March 31, 1997, there were 36,168,185 shares of HCCH Common Stock issued and outstanding. All outstanding shares of HCCH Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in this Section and as otherwise contemplated by this Agreement and except as disclosed in public filings made by HCCH with the SEC prior to the Closing Date or pursuant to publicly disseminated policy releases, or on the HCCH Disclosure Schedule and except for changes since March 31, 1997 resulting from the exercise of employee and director 16 stock options, or resulting from other mergers, acquisitions or purchases, there are outstanding (i) no shares of capital stock or other voting securities of HCCH, (ii) no securities of HCCH convertible into or exchangeable for shares of capital stock or voting securities of HCCH and (iii) no options or other rights to acquire from HCCH, and no obligation of HCCH to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or other voting securities of HCCH (the items in clauses (i), (ii) and (iii) being referred to collectively as the "HCCH Securities"). There are no outstanding obligations of HCCH or any of its Subsidiaries to repurchase, redeem or otherwise acquire any HCCH Securities. (b) All shares of HCCH Common Stock issued to Shareholders shall, upon issuance, be fully paid, validly issued and nonassessable. SECTION 3.6 SUBSIDIARIES. (a) Each HCCH Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers and all material Governmental Authorizations required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect on HCCH, and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by HCCH, or the nature of its activities make such qualification necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on HCCH. All Subsidiaries and Joint Ventures material to the business of HCCH ("Material HCCH Subsidiaries") and their respective jurisdictions of incorporation or organization and HCCH's ownership interest therein are identified in the HCCH Disclosure Schedule. Other than its investments in its Subsidiaries and Joint Ventures, and shares of stock in publicly held companies aggregating less than 10% of such public company's outstanding stock, HCCH does not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, Joint Venture or other entity. (b) All of the outstanding capital stock of, or other ownership interests in, each Material HCCH Subsidiary that is owned by HCCH, is owned by HCCH, directly or indirectly, free and clear of any material Lien and free of any other material limitation or restriction on its rights as owner thereof (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests), other than those imposed by applicable law. There are no existing options, calls or commitments of any character relating to the issued or unissued capital stock or other securities or equity interests (collectively, "HCCH Subsidiary Securities") of any HCCH Subsidiary. 17 SECTION 3.7 SEC FILINGS. (a) HCCH has since October 28, 1992 filed all forms, proxy statements, schedules, reports and other documents required to be filed by it with the SEC pursuant to the Exchange Act. (b) HCCH has made available, and will promptly make available in the case of any of the following filed with the SEC on or after the date hereof and prior to the Closing Date, to the Shareholders: (i) its annual reports on Form 10-K for its fiscal years ended December 31, 1996, 1995 and 1994; (ii) any current reports on Form 8-K since January 1, 1997 and its proxy or information statements relating to meetings of, or actions taken without a meeting by, the shareholders of HCCH held since January 1, 1997; and (iii) all of its other reports, including reports on Form 10-Q, statements, schedules and registration statements filed with the SEC since December 31, 1996. None of HCCH's Subsidiaries is required to file any forms, reports or other documents with the SEC. (c) As of its filing date, no such report or statement filed pursuant to the Exchange Act contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (d) No registration statement filed pursuant to the Securities Act, if declared effective by the SEC, as of the date such statement or amendment became effective, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading. SECTION 3.8 FINANCIAL STATEMENTS. The audited consolidated financial statements of HCCH included in its annual reports on Form 10-K and the unaudited financial statements of HCCH included in its quarterly reports on Form 10-Q referred to in Section 3.7 present fairly, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of HCCH and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject to normal year-end adjustments in the case of any interim financial statements). For purposes of this Agreement, "HCCH Balance Sheet" means the consolidated balance sheet of HCCH as of December 31, 1996, and the notes thereto, contained in HCCH's annual report on Form 10-K filed with the SEC, and "HCCH Balance Sheet Date" means December 31, 1996. 18 SECTION 3.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the HCCH Disclosure Schedule, since the HCCH Balance Sheet Date, HCCH and each of its Subsidiaries have in all material respects conducted their business in the ordinary course and there has not been: (a) any Material Adverse Change with respect to HCCH or any event, occurrence or development of a state of circumstances or facts known to HCCH, which as of the date hereof could reasonably be expected to have a Material Adverse Effect on HCCH; (b) any amendment of any material term of any outstanding HCCH Securities; (c) any action by HCCH or, to HCCH's knowledge, any affiliate of HCCH which would preclude the ability of HCCH to account for the business combination to be effected hereunder as a pooling-of-interests under generally accepted accounting principles; or (d) the entering into of any agreement by HCCH or any person on behalf of HCCH to take any of the foregoing actions. SECTION 3.10 NO UNDISCLOSED LIABILITIES. There are no liabilities of HCCH or any of its Subsidiaries of any kind whatsoever that are, individually or in the aggregate, material to HCCH and its Subsidiaries, taken as a whole, other than: (a) liabilities disclosed or provided for in the HCCH Balance Sheet (including the notes thereto); (b) liabilities incurred in the ordinary course of business consistent with past practice since the HCCH Balance Sheet Date; and (c) liabilities under this Agreement or as indicated in the HCCH Disclosure Schedule. SECTION 3.11 LITIGATION. Other than actions, suits, proceedings, claims or investigations occurring in the ordinary course of business or such actions, suits, proceedings, claims or investigations involving respective amounts in controversy of less than $1,000,000 each, there is no action, suit, proceeding, claim or investigation pending or, to the knowledge of HCCH, overtly threatened, against HCCH or any of its Subsidiaries or any of their assets or against or involving any of its officers, directors or employees in connection with the business or affairs of HCCH, including, without limitation, any such claims for indemnification arising under any agreement to which HCCH or any of its Subsidiaries is a party, which could, individually or in the aggregate, have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries are not subject to or in default with respect to any writ, order, judgment, injunction or decree which could, individually or in the aggregate, have a Material Adverse Effect on HCCH. 19 SECTION 3.12 TAXES. (a) HCCH and each of its Subsidiaries (i) has filed when due (taking into account extensions) with the appropriate federal, state, local, foreign and other governmental agencies, all material tax returns, estimates and reports required to be filed by it, (ii) either paid when due and payable or established adequate reserves or otherwise accrued on the HCCH Balance Sheet all material Taxes, and there are no tax deficiencies claimed in writing by any taxing authority and received by HCCH that, in the aggregate, would result in any Tax liability in excess of the amount of the reserves or accruals, and (iii) has or will establish in accordance with its normal accounting practices and procedures accruals and reserves that, in the aggregate, are adequate for the payment of all Taxes not yet due and payable and attributable to any period preceding the Closing. The HCCH Disclosure Schedule sets forth those tax returns of HCCH (or any predecessor entities) for all periods that currently are the subject of audit by any federal, state, local or foreign taxing authority. (b) There are no material taxes, interest, penalties, assessments or deficiencies claimed in writing by any taxing authority and received by HCCH or any of its Subsidiaries to be due in respect of any tax returns filed by HCCH (or any predecessor corporations) or any of its Subsidiaries. Neither HCCH nor any predecessor corporation, nor any of their respective Subsidiaries, has executed or filed with the IRS or any other taxing authority any agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes. (c) HCCH is not a party to or bound by (or will prior to the Closing Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax allocation agreement or other similar arrangement which includes a party other than HCCH and its Subsidiaries. Neither HCCH nor any of its Subsidiaries has been a member of an affiliated group other than one of which HCCH was the common parent, or filed or been included in a combined, consolidated or unitary tax return other than one filed by HCCH (or a return for a group consisting solely of its Subsidiaries and predecessors). SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA. (a) Neither HCCH nor any corporation or other entity which under Section 4001(b) of ERISA is under common control with HCCH (an "HCCH ERISA Affiliate") maintains or within the past five years has maintained, contributed to, or been obligated to contribute to, any Pension Plan or any Welfare Plan which is subject to ERISA. Each Pension Plan and Welfare Plan disclosed in the HCCH Disclosure Schedule (which Plans have been heretofore delivered to the Companies) and maintained by HCCH has been maintained in all material respects in compliance with their terms and all provisions of ERISA and the Code (including rules and regulations thereunder) applicable thereto. (b) Neither HCCH nor any HCCH ERISA Affiliate maintains or has maintained or contributed to any Pension Plan that is or was subject to Section 302 or Title IV of ERISA or 20 Section 412 of the Code. HCCH has made available to the Companies for each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code, a copy of the most recent determination letter issued by the IRS to the effect that each such Plan is so qualified and that each trust created thereunder is tax exempt under Section 501 of the Code, and HCCH is unaware of any fact or circumstances that would jeopardize the qualified status of each such Pension Plan or the tax exempt status of each trust created thereunder. (c) To the knowledge of HCCH, no Pension Plan or Welfare Plan is currently subject to an audit or other investigation by the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other governmental agency or office nor are any such Plans subject to any lawsuits or legal proceedings of any kind or to any material pending disputed claims by employees or beneficiaries covered under any such Plan or by any other parties. (d) No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, resulting in liability to HCCH or any HCCH ERISA Affiliate has occurred with respect to any Pension Plan or Welfare Plan. HCCH has no knowledge of any breach of fiduciary responsibility under Part 4 of Title I of ERISA which has resulted in liability of HCCH, any HCCH ERISA Affiliate, any trustee, administrator or fiduciary of any Pension Plan or Welfare Plan. (e) Neither HCCH nor any HCCH ERISA Affiliate, since January 1, 1986, has maintained or contributed to, or been obligated or required to contribute to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of ERISA. Neither HCCH nor any HCCH ERISA Affiliate has either withdrawn, partially or completely, or instituted steps to withdraw, partially or completely, from any Multiemployer Plan nor has any event occurred which would enable a Multiemployer Plan to give notice of and demand payment of any withdrawal liability with respect to HCCH or any HCCH ERISA Affiliate. (f) With respect to HCCH and each HCCH ERISA Affiliate, the HCCH Disclosure Schedule correctly identifies each material agreement, policy, plan or other arrangement, whether written or oral, express or implied, fixed or contingent, to which HCCH is a party or by which HCCH or any property or asset of HCCH is bound, which is or relates to a pension, option, bonus, deferred compensation, retirement, stock purchase, profit-sharing, severance pay, health, welfare, incentive, vacation, sick leave, medical disability, hospitalization, life or other insurance or fringe benefit plan, policy or arrangement. SECTION 3.14 MATERIAL AGREEMENTS. (a) The HCCH Disclosure Schedule or its filings with the SEC includes a complete and accurate list of all contracts, agreements, leases (other than HCCH Property Leases, as hereinafter defined) and instruments to which HCCH or any of its Subsidiaries is a party or by which it or its properties or assets are bound which individually involve net payments or receipts in excess of $10,000,000 per annum, inclusive of contracts that pertain to employment or severance benefits for any officer, director or employee of HCCH, whether written or oral, but 21 exclusive of contracts entered into with customers and suppliers in the ordinary course of business or contracts, agreements, leases and instruments terminable without penalty by HCCH upon 60 days or less prior written notice to the other party or parties thereto (the "Material HCCH Agreements"). (b) Neither HCCH, any HCCH Subsidiary, nor, to the knowledge of HCCH, any other party is in default under any Material HCCH Agreement and no event has occurred which (after notice or lapse of time or both) would become a breach or default under, or would permit modification, cancellation, acceleration or termination of any Material HCCH Agreement or result in the creation of any security interest upon, or any person obtaining any right to acquire, any properties, assets or rights of HCCH which, in any such case, has had or would reasonably be expected to have a Material Adverse Effect on HCCH. (c) Each such Material HCCH Agreement is in full force and effect and is valid and legally binding and there are no material unresolved disputes involving or with respect to any Material HCCH Agreement. No party to a Material HCCH Agreement has advised HCCH or any of its Subsidiaries that it intends either to terminate a Material HCCH Agreement or to refuse to renew a Material HCCH Agreement upon the expiration of the term thereof. (d) Each of HCCH and each HCCH Subsidiary is not in violation of, or in default with respect to, any term of its Certificate of Incorporation or Bylaws. SECTION 3.15 PROPERTIES. To the knowledge of HCCH, all leases of real property to which HCCH or any of its Subsidiaries is a party or by which it or any of its Subsidiaries is bound ("HCCH Property Leases") which are material to the business of HCCH and its Subsidiaries taken as a whole are in full force and effect. To the knowledge of HCCH, there exists no default under such HCCH Property Leases, nor any event which with notice or lapse of time or both would constitute a default thereunder by HCCH or any of its Subsidiaries, which default would have a Material Adverse Effect on HCCH. All of the properties and assets which are owned by HCCH and each of its Subsidiaries are owned by each of them, respectively, free and clear of any Lien, except for Liens which do not have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries have good and indefeasible title with respect to such owned properties and assets subject to no Liens, other than those permitted under this Section 3.15, to all of the properties and assets necessary for the conduct of their business other than to the extent that the failure to have such title would not have a Material Adverse Effect on HCCH. SECTION 3.16 ENVIRONMENTAL MATTERS. (a) No notice, notification, demand, request for information, citation, summons, complaint or order has been received, no complaint has been filed, no penalty has been assessed and, to the knowledge of HCCH, no investigation or review is pending, or to HCCH's knowledge, has been threatened by any governmental entity or other party with respect to any (i) alleged violation by HCCH or any of its Subsidiaries of any Environmental Law, (ii) alleged failure by HCCH or any such Subsidiary to have any environmental permit, certificate, license, approval, 22 registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity. (b) Neither HCCH nor any of its Subsidiaries has any material Environmental Liabilities and there has been no release of Hazardous Substances into the environment by HCCH or any such Subsidiary or with respect to any of their respective properties which has had, or would be reasonably expected to have, a Material Adverse Effect on HCCH. SECTION 3.17 LABOR MATTERS. HCCH is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by HCCH, nor do the executive officers of HCCH know of any activities or proceedings of any labor union to organize any such employees. SECTION 3.18 COMPLIANCE WITH LAWS. Except for violations which do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on HCCH, neither HCCH nor any of its Subsidiaries is in violation of, or has violated, any applicable provisions of any laws, statutes, ordinances or regulations or any term of any judgment, decree, injunction or order binding against it. SECTION 3.19 TRADEMARKS, TRADE NAMES, ETC. HCCH owns or possesses, or holds a valid right or license to use, all intellectual property, patents, trademarks, trade names, service marks, copyrights and licenses, and all rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others. SECTION 3.20 BROKER'S FEES. Neither HCCH nor anyone acting on the behalf or at the request thereof has any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with this Agreement. ARTICLE IV COVENANTS OF SOUTHERN, ACA AND SHAREHOLDERS From the date hereof until the occurrence of the earlier of (i) the Closing or (ii) termination of this Agreement pursuant to Section 8.1 hereof, (a) the Companies and each Shareholder agrees, except as otherwise permitted with the written consent of HCCH, that: SECTION 4.1 CONDUCT OF THE COMPANIES. The Companies shall in all material respects conduct their business in the ordinary course. Without limiting the generality of the foregoing, from the date hereof until the Closing, except as contemplated by this Agreement: (a) The Companies will not adopt or propose any change in their Articles or Certificate of Incorporation or Bylaws; 23 (b) The Companies will not enter into or amend any employment agreements (oral or written) or increase the compensation payable or to become payable by them to any of their officers, directors, or consultants over the amount payable as of December 31, 1996, or increase the compensation payable to any other employees (other than (i) increases in the ordinary course of business which are not in the aggregate material to the Companies, or (ii) pursuant to plans disclosed in the Southern/ACA Disclosure Schedule), or adopt or amend any employee benefit plan or arrangement (oral or written); (c) Southern will not issue any Southern Securities and ACA will not issue any ACA Securities; (d) The Companies will keep in full force and effect any existing directors' and officers' liability insurance and will not modify or reduce the coverage thereunder; (e) The Companies will not pay any dividends or make any other distributions to holders of its capital stock nor redeem or otherwise acquire any Southern Securities or ACA Securities; (f) The Companies will not, directly or indirectly, dispose of or acquire any material properties or assets except in the ordinary course of business; (g) The Companies will not incur any additional indebtedness for borrowed money except pursuant to existing arrangements which have been disclosed to HCCH prior to the date hereof; (h) The Companies will not amend or change the period of exercisability or accelerate the exercisability of any outstanding options or warrants to acquire shares of capital stock, or accelerate, amend or change the vesting period of any outstanding restricted stock; (i) The Companies and each Shareholder will not knowingly take any action, other than those which have been disclosed to and approved by HCCH, that would prevent the accounting for the business combination to be effected hereunder as a pooling-of-interests; (j) The Companies and each of the Shareholders will not, directly or indirectly, agree or commit to do any of the foregoing; and (k) The Companies will not (i) change accounting methods except as necessitated by changes which the Companies are required to make in order to prepare their federal, state and local tax returns; (ii) amend or terminate any contract, agreement or license to which they are a party (except pursuant to arrangements previously disclosed in writing to HCCH or disclosed in the Southern/ACA Disclosure Schedule) except those amended or terminated in the ordinary course of business, consistent with past practices, or involving changes which are not materially adverse in amount or effect to the Companies; (iii) lend any amount to any person or entity, other than advances for travel and expenses which are incurred in the ordinary course of business 24 consistent with past practices, and which are not material in amount to the Companies, which travel and expenses shall be documented by receipts for the claimed amounts; (iv) enter into any guarantee or suretyship for any obligation except for the endorsements of checks and other negotiable instruments in ordinary course of business, consistent with past practice; (v) waive or release any material right or claim except in the ordinary course of business, consistent with past practice; (vi) issue or sell any shares of its capital stock of any class or any other of its securities, or issue or create any warrants, obligations, subscriptions, options, convertible securities, stock appreciation rights or other commitments to issue shares of capital stock, or take any action other than this transaction to accelerate the vesting of any outstanding option or other security (except pursuant to existing arrangements disclosed in writing to HCCH before the date of this Agreement); (vii) merge, consolidate or reorganize with or acquire any entity; (viii) agree to any audit assessment by any tax authority or file any federal or state income or franchise tax return unless copies of such returns have been delivered to HCCH for its review prior to such agreement or filing; and (ix) terminate the employment of any key executive employee. SECTION 4.2 ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. The Companies and the Shareholders will give HCCH, its counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours to their offices, properties, books and records, will furnish to HCCH, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data as such persons may reasonably request and will instruct their employees, counsel and financial advisors to cooperate with HCCH in its investigation of the business of the Companies and in the planning for the combination of the businesses of the Companies and HCCH following the consummation of the transactions contemplated in this Agreement; PROVIDED that no investigation pursuant to this Section shall affect any representation or warranty given hereunder. In addition, following the public announcement of this Agreement or the transactions contemplated hereby, the Companies will cooperate in arranging joint meetings among representatives of the Companies and HCCH and persons with whom they maintain business relationships. All requests for information made pursuant to this Section shall be directed to Thomas or such person as may be designated by him in writing. All information conveyed pursuant to this Section 5.3 shall be governed by the Confidentiality Agreement between HCCH and Southern (the "Confidentiality Agreement"). SECTION 4.3 OTHER OFFERS. (a) The Companies and each of the Shareholders will not, and will use their best efforts to cause, where applicable, their respective officers, directors, employees or other agents and affiliates not to, directly or indirectly, (i) take any action to solicit, initiate or discuss any Acquisition Proposal (as hereinafter defined), or (ii) engage in negotiations with, or disclose any nonpublic information relating to, the Companies or afford access to the properties, books or records of the Companies to, any person or entity that may be considering making, or has made, an Acquisition Proposal. To the extent that the Companies or any of their respective officers, directors, employees or other agents, or Thomas is currently involved in any discussions with respect to any Acquisition Proposal or contemplated or proposed Acquisition Proposal, the Companies and Thomas shall terminate, and shall use their best efforts to cause, where 25 applicable, their respective officers, directors, employees or other agents to terminate, such discussions immediately. The term "Acquisition Proposal" as used herein means any offer or proposal for, or any indication of interest in, a merger or other business combination involving the Companies or the acquisition of any equity interest in, or a substantial portion of the assets of, the Companies other than the transactions contemplated by this Agreement. (b) Subject to their fiduciary duties, the Board of Directors of the Companies and each Shareholder shall not (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to HCCH, the approval or recommendation by such Board of Directors or Shareholder, of this Agreement or the other documents or transactions contemplated hereby, (ii) approve or recommend, or propose to approve or recommend, any Acquisition Proposal (other than an Acquisition Proposal made by HCCH or an affiliate of HCCH) or (iii) approve or authorize the entering into any agreement with respect to any Acquisition Proposal. SECTION 4.4 MAINTENANCE OF BUSINESS. The Companies will use their reasonable best efforts to carry on their respective business, keep available the services of its respective officers and employees and preserve their relationships with those of their customers, agents, suppliers, licensors and others having business relationships with them that are material to their business in substantially the same manner as they have prior to the date hereof. If the Companies become aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any customers, supplier, licensor or others having business relationships with them, they will promptly in writing bring such information to the attention of the HCCH in writing. SECTION 4.5 COMPLIANCE WITH OBLIGATIONS. The Companies shall use their reasonable best efforts to comply in all material respects with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, including their respective charter and bylaws, by which they, their properties or their assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to the Companies and their properties or assets. SECTION 4.6 NOTICES OF CERTAIN EVENTS. The Companies shall, upon obtaining knowledge of any of the following, promptly notify HCCH of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with this Agreement; and (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against the Companies which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant hereto or which relate to the consummation of the transactions contemplated by this Agreement. 26 SECTION 4.7 AFFILIATES AGREEMENT. To facilitate the treatment of the transactions hereunder for accounting purposes as a pooling-of-interests, each Shareholder shall deliver to HCCH simultaneously with the execution of this Agreement, a written agreement (the "Affiliates Agreement") from each Shareholder and from each "affiliate" (as that term is used in Rule 144 or 145 under the Securities Act) in form and substance reasonably satisfactory to HCCH relating to their intent to hold any HCCH Common Stock acquired pursuant to this Agreement for investment purposes. SECTION 4.8 NECESSARY CONSENTS. The Companies and each Shareholder shall use their reasonable best efforts to obtain such written consent and take such other actions as may be necessary or appropriate for the Companies to facilitate and allow the consummation of the transactions provided for herein and to facilitate and allow HCCH to carry on the acquired business after the Closing Date (as defined in Section 9.1 hereof). SECTION 4.9 REGULATORY APPROVAL. The Companies and, where required pursuant to the rules or regulations of any regulatory agency, all Shareholders will execute and file, or join in the execution and filing, with any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign which may be reasonably required, or which HCCH may reasonably request, in connection with the consummation of the transaction provided for in this Agreement. The Companies and Shareholders will use reasonable best efforts to obtain or assist HCCH in obtaining all such authorizations, approvals and consents. SECTION 4.10 SATISFACTION OF CONDITIONS PRECEDENT. The Companies and each Shareholder shall use their reasonable best efforts to cause the transactions provided for in this Agreement to be consummated, and, without limiting the generality of the foregoing to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions provided for herein. ARTICLE V COVENANTS OF HCCH From the date hereof until the occurrence of the earlier of (i) the Closing or (ii) the termination of this Agreement pursuant to Section 8.1 hereof, HCCH agrees that, except as otherwise permitted with the written consent of Shareholders, which consent shall not be unreasonably withheld: SECTION 5.1 CONDUCT OF HCCH. HCCH and its Subsidiaries shall in all material respects conduct their business in the ordinary course PROVIDED, HOWEVER, THAT nothing in this Agreement shall be construed to prohibit or otherwise restrain HCCH in any manner from acquiring other businesses or substantially all of the assets thereof. Without limiting the 27 generality of the foregoing, from the date hereof until the Closing, except as contemplated hereby or previously disclosed by HCCH to Shareholders in writing: (a) HCCH will not adopt or propose any change in its Certificate of Incorporation or Bylaws; (b) HCCH will not take any action that would result in a failure to maintain the trading of HCCH Common Stock on the NYSE; and (c) HCCH will not, and will not permit any of its Subsidiaries to, agree or commit to do any of the foregoing. SECTION 5.2 ACCESS TO FINANCIAL AND OPERATION INFORMATION. HCCH will give the Companies, their counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours to the offices, properties, books and records of HCCH and its Subsidiaries, will furnish to the Companies, their counsel, financial advisors, auditors and other authorized representatives such financial and operating data such as persons may reasonably request and will instruct HCCH's employees, counsel and financial advisors to cooperate with the Companies in their investigation of the business of HCCH and its Subsidiaries and in the planning for the combination of the businesses of the Companies and HCCH following the consummation of the transaction hereunder and will furnish promptly to the Companies copies of all reports, schedules, registration statements, correspondence and other documents filed with or delivered to the SEC, PROVIDED that no investigation pursuant to this Section shall affect any representation or warranty given by HCCH to the Companies or the Shareholders hereunder. In addition, if requested by the Companies following the public announcement of this Agreement, HCCH will cooperate in arranging joint meetings among representatives of HCCH and the Companies and persons with whom HCCH maintains business relationships. All requests for information made pursuant to this Section shall be directed to the President of HCCH or such person as may be designated by him in writing. SECTION 5.3 MAINTENANCE OF BUSINESS. HCCH will use its reasonable efforts to carry on its business, keep available the services of its officers and employees and preserve its relationships with those of its customers, suppliers, licensors and others having business relationships with it that are material to its business in substantially the same manner as it has prior to the date hereof. If HCCH becomes aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any material customer, supplier, licensor or others having business relationships with it, it will promptly bring such information to the attention of the Companies in writing. SECTION 5.4 COMPLIANCE WITH OBLIGATIONS. HCCH and its Subsidiaries shall each use its reasonable best efforts to comply in all material respects with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, including its respective charter and bylaws, by which it, its properties or its assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations 28 applicable to HCCH and its Subsidiaries and their respective properties or assets; except to the extent that the failure to comply with matters in clauses (i), (ii) and (iii) would not have a Material Adverse Effect on HCCH. SECTION 5.5 NOTICES OF CERTAIN EVENTS. HCCH shall, upon obtaining knowledge of any of the following, promptly notify the Companies of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with this Agreement; and (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against HCCH or any of its Subsidiaries which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.11 or which relate to the consummation of the transactions contemplated in this Agreement. SECTION 5.6 NOTICE TO AFFILIATES. HCCH shall, at least 30 days prior to the Closing Date, cause to be delivered to each person HCCH believes to be an "affiliate," as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act, of HCCH a notice informing such persons of restrictions on transfer resulting from the transactions hereunder being accounted for as a pooling-of-interests in accordance with generally accepted principles and all published rules, regulations and policies of the SEC. ARTICLE VI COVENANTS OF HCCH, THE COMPANIES AND SHAREHOLDERS From the date hereof until the occurrence of the earlier of (i) the Closing or (ii) termination of this Agreement pursuant to Section 8.1 hereof, each of the Shareholders, where applicable, the Companies and HCCH agree that: SECTION 6.1 ADVICE OF CHANGES. It will promptly advise the others in writing (i) of any event known to any of its executive officers or the Shareholders occurring subsequent to the date of this Agreement that in its reasonable judgment renders any representation or warranty of such party contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue, inaccurate or misleading in any material respect and (ii) of any Material Adverse Change in the business condition of the party. SECTION 6.2 REGULATORY APPROVALS. It shall execute and file, or join in the execution and filing of, any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or 29 foreign, which may be requested in connection with the consummation of the transactions hereunder. Each party shall use its reasonable best efforts to obtain all such authorizations, approvals and consents. SECTION 6.3 ACTIONS CONTRARY TO STATED INTENT. It shall not, from or after the date hereof and either before or after the Closing, take any action that would prevent the transactions hereunder from qualifying as a reorganization under Section 368(a) of the Code or prevent the business combination to be effected by the transactions hereunder from being accounted for as a pooling-of-interests under generally accepted accounting principles. Each of HCCH and the Companies and the Shareholders shall use its reasonable best efforts to cause its affiliates not to take any action that would preclude the ability of HCCH to account for the business combination to be effected by the transactions hereunder as a pooling-of-interests. SECTION 6.4 CERTAIN FILINGS. Each of the Shareholders, the Companies and HCCH shall cooperate with one another: (a) in determining whether any action by or in respect of, or filing with, any governmental body, agency or official, or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement; and (b) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. SECTION 6.5 COMMUNICATIONS. Neither the Companies, any Shareholder nor HCCH will furnish any communication outside of their respective companies, if the subject matter thereof relates to the transactions contemplated by this Agreement and is not in the ordinary course of business, without the prior approval of the other of them as to the content thereof, which approval shall not be unreasonably withheld; PROVIDED that the foregoing shall not be deemed to prohibit any disclosure required by any applicable law or rule of the NYSE. SECTION 6.6 SATISFACTION OF CONDITIONS PRECEDENT. HCCH, the Companies and each Shareholder will use its reasonable best efforts to satisfy or cause to be satisfied all the conditions precedent that are applicable to each of them, and to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all material consents and authorizations of third parties and to make filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby. SECTION 6.7 TAX COOPERATION. HCCH, the Companies and the Shareholders shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes or fees 30 which become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed on or before the Closing. ARTICLE VII CONDITIONS TO CLOSING SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH. The obligations of HCCH hereunder are subject to the fulfillment or satisfaction, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived by HCCH, but only in a writing signed by HCCH): (a) The representations and warranties of the Companies and each Shareholder contained in Article II shall be true and accurate in all material respects on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except to the extent a representation or warranty speaks specifically as of an earlier date and except for changes contemplated by this Agreement) and the Companies and each Shareholder shall have provided HCCH with a certificate executed by the President and the Secretary of the Companies or individually, as the case may be, dated as of the Closing Date, to such effect. (b) The Companies and each Shareholder shall have performed and complied in all material respects with all of the covenants contained herein on or before the Closing Date, and HCCH shall receive a certificate to such effect signed by the President and Chief Financial Officer or individually, as the case may be. (c) Except as set forth in the Southern/ACA Disclosure Schedule and acceptable to HCCH, there shall have been no Material Adverse Change in the Companies since December 31, 1996. (d) HCCH shall have received from (i) each person or entity who may be deemed to be an affiliate of the Companies a duly executed Affiliates Agreement and (ii) each Shareholder, the written agreement contemplated to be entered into by such person pursuant to this Agreement and such agreements shall remain in full force and effect. (e) All written consents, assignments, waivers or authorizations, other than Governmental Authorizations, that are required for the continuation in full force and effect of any material contracts or leases of the Companies shall have been obtained. (f) HCCH shall have received a written opinion from its counsel to the effect that the transactions hereunder will qualify as a tax-free reorganization within the meaning of Section 368 of the Code. In preparing such opinion, counsel may rely on (and to the extent reasonably required, the parties and their shareholders shall make) reasonable representations related thereto. 31 (g) HCCH shall have received the opinion of counsel to the Companies and the Shareholders in form and substance satisfactory to HCCH. (h) All underwriting agreements of the Companies in force on the date hereof shall be in force on the Closing Date, except for such agreements which have been replaced with agreements of similar like and kind. (i) Thomas shall be alive and not, in any way, Disabled. For purposes of this Agreement, Thomas shall be deemed to be "Disabled" if he is unable to engage in any substantial portion of his regular duties for the Companies by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. (j) At HCCH's election, HCCH shall have received a report addressed to it from Coopers & Lybrand L.L.P. confirming that the Companies qualify as an entity that may be party to a business combination for which the pooling-of-interest method of accounting is available and that the transactions contemplated hereby will qualify for pooling-of-interests treatment under generally accepted accounting principles and all published rules, regulations, and policies of the SEC. (k) The Companies shall have delivered to HCCH their unaudited balance sheet and their unaudited income statement for each of the most recent fiscal year end. (l) The Companies shall have earned no less than $318,000 after taxes for the fiscal year ended December 31, 1996 and on a pro-forma combined basis, as reasonably determined by HCCH, be expected to earn at least $476,000 after taxes for the year ended December 31, 1997. (m) Shareholders shall have transferred all the Southern Common Stock and ACA Common Stock to HCCH, free and clear of all Liens and encumbrances, with transfer taxes, if any, paid by Shareholders. No claim shall have been filed, made or threatened by any person or entity asserting that he, she, or it is entitled to any part of the Share Payment for the Southern Common Stock or ACA Common Stock. (n) On or prior to the Closing Date, the Companies and Shareholders shall have furnished HCCH with evidence of such consents as the Companies or Shareholders shall know, or HCCH shall determine, to be required to enable HCCH to continue to enjoy the benefit of any lease, license, permit, contract or other agreement or instrument to or of which the Companies are a party or beneficiary and which can, by its terms (with consent) and consistent with applicable law, be so enjoyed after the transfer of the Southern Common Stock and ACA Common Stock to HCCH. If there is in existence any lease, governmental license, permit or contract that by its terms or applicable law, expires, terminates, or is otherwise rendered invalid upon the transfer of the Southern Common Stock or ACA Common Stock to HCCH, and such lease, license, permit, or contract is required in order for the business of the Companies to 32 continue to be conducted following the transfer of each Company's Common Stock in the same manner as conducted previously, HCCH shall have obtained, or been furnished by Shareholders an equivalent of, that lease, license, permit, or contract effective as of and after the Closing Date. (o) HCCH shall have received resignations of all persons who are officers or directors of the Companies immediately prior to the Closing. (p) HCCH shall have received general releases in favor of the Companies and HCCH executed by each Shareholder and any such other officers or directors of the Companies as HCCH may designate. Those releases will not relate to rights or obligations arising under this Agreement. (q) HCCH shall have received possession on the premises of each of the Companies of all corporate, accounting, business and tax records of each such Company. (r) The form and substance of all actions, proceedings, instruments and documents required to consummate the transactions contemplated by this Agreement shall have been satisfactory in all reasonable respects to HCCH and HCCH's counsel. SECTION 7.2 CONDITIONS TO OBLIGATIONS OF THE COMPANIES AND SHAREHOLDERS. The Companies' and each Shareholder's obligations hereunder are subject to the fulfillment or satisfaction, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived, but only in a writing signed by such party): (a) The representations and warranties of HCCH set forth herein shall be true and accurate in all material respects on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except to the extent a representation or warranty speaks specifically as of an earlier date and except for changes contemplated by this Agreement) and HCCH shall have provided the Companies with a certificate executed by the President and the Chief Financial Officer of HCCH, dated as of the Closing Date, to such effect. For the purposes of determining the accuracy of the representations and warranties of HCCH, any change or effect in the business of HCCH that results in substantial part as a consequence of the public announcement or pendency of the intended acquisition of the Companies by HCCH shall not be deemed a Material Adverse Change or Material Adverse Effect or other breach of representation or warranty with respect to HCCH. (b) HCCH shall have performed and complied with all of its covenants contained herein in all material respects on or before the Closing Date, and the Companies shall receive a certificate to such effect signed by HCCH's President and Chief Financial Officer. (c) Except as set forth in the HCCH Disclosure Schedule, there shall have been no Material Adverse Change in HCCH since the HCCH Balance Sheet Date. 33 (d) The Companies shall have received from Winstead Sechrest & Minick P.C., counsel to HCCH, an opinion in form and substance satisfactory to the Shareholders. (e) Thomas shall have received a letter from HCCH specifying the terms of his continued employment with the Companies including provision for a salary of $150,000 per year. Such letter of employment shall also include provisions for reimbursement of reasonable business related travel and entertainment expenses, consistent with that provided to other HCCH officers. (f) Each of the Shareholders shall agree to a three year non-compete provision beginning for those who are officers or directors of the Companies upon their ceasing to be employed by HCCH or the Companies and, for all others, from the Closing Date. (g) The form and substance of all actions, proceedings, instruments and documents required to consummate the transactions contemplated by this Agreement shall have been satisfactory in all reasonable respects to Shareholders and their counsel. SECTION 7.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective obligations of the parties hereunder are subject to the fulfillment, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived by such parties, but only in a writing signed by such parties): (a) No statute, rule, regulation, executive order, decree, injunction or restraining order shall have been enacted, promulgated or enforced (and not repealed, superseded or otherwise made inapplicable) by any court or governmental authority which prohibits the consummation of the transactions hereunder (each party agreeing to use its reasonable best efforts to have any such order, decree or injunction lifted). (b) There shall have been obtained any and all Governmental Authorizations, permits, approvals and consents of securities or "blue sky" commissions of any jurisdiction and of any other governmental body or agency, that may reasonably be deemed necessary so that the consummation of the transaction contemplated by this Agreement will be in compliance with applicable laws, the failure to comply with which would have a Material Adverse Effect on HCCH, the Companies, or would be reasonably likely to subject any of HCCH, the Companies or any of their respective directors or officers to penalties or criminal liability. ARTICLE VIII TERMINATION OF AGREEMENT SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing: 34 (a) By the mutual consent of the Boards of Directors of HCCH and the Shareholders of Southern and Aviation holding two-thirds of the outstanding shares. (b) By either the Board of Directors of HCCH or the Shareholders of Southern and Aviation holding two-thirds of the outstanding shares if there has been a material breach by the other of any representation or warranty contained in this Agreement, which in either case cannot be, or has not been, cured within 15 days after written notice of such breach is given to the party committing such breach, provided that the right to effect such cure shall not extend beyond the date set forth in subparagraph (c) below. (c) By either the Board of Directors of HCCH or the Shareholders of Southern and Aviation holding two-thirds of the outstanding shares if all conditions of Closing required by Article VII hereof have not been met or waived by September 30, 1997; provided, however, that neither HCCH nor the Shareholders, shall be entitled to terminate this Agreement pursuant to this subparagraph (c) if such party is in willful and material violation of any of its representations, warranties or covenants in this Agreement. (d) If any governmental authority shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions hereunder and such order, decree, ruling or other action shall have become final and nonappealable. (e) By the Board of Directors of HCCH, if Thomas shall have become Disabled or shall have died. SECTION 8.2 EFFECT OF TERMINATION. Upon termination of this Agreement pursuant to this Article VIII, this Agreement shall be void and of no effect and shall result in no obligation of or liability to any party or their respective directors, officers, employees, agents or shareholders, other than the obligations pursuant to the Confidentiality Agreement previously entered into by the parties hereto, unless such termination was the result of an intentional breach of any representation, warranty or covenant in this Agreement, in which case the party who breached the representation, warranty or covenant shall be liable to the other party for damages, and all costs and expenses incurred in connection with the preparation, negotiation, execution and performance of this Agreement. ARTICLE IX CLOSING MATTERS SECTION 9.1 THE CLOSING. Subject to termination of this Agreement as provided in Article VIII above, the closing of the transactions provided for herein (the "Closing") will take place at the offices of Winstead Sechrest & Minick P.C., 910 Travis Street, Suite 1700, Houston, Texas 77002 at 10:00 a.m., Houston Time on August 5, 1997, or, if all conditions to Closing 35 have not been satisfied or waived by such date, such other place, time and date as the Shareholders and HCCH may mutually select (the "Closing Date"). ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS SECTION 10.1 AGREEMENT TO INDEMNIFY. Subject to the limitations set forth in this Article X and except as set forth in Section 10.2, each Shareholder, severally and Pro Rata (as hereinafter defined), will indemnify and hold harmless HCCH and its respective officers, directors, agents and employees, and each person, if any, who controls or may control HCCH within the meaning of the Securities Act (hereinafter in this Section 10.1 and in Section 10.2 below referred to individually as a "Southern/ACA Indemnified Person" and collectively as the "Southern/ACA Indemnified Persons") from and against any and all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees, net of any recoveries under insurance policies, recoveries from third parties, and tax savings known to the Southern/ACA Indemnified Persons at the time of making of claims hereunder (hereafter in this Section 10.1 referred to as "HCCH Damages"), arising out of any misrepresentation or breach of or default under any of the representations, warranties, covenants or agreements given or made in this Agreement or any certificate or exhibit delivered by or on behalf of the Companies or any of the Shareholders pursuant hereto. "Pro Rata" for purposes of this Article X with respect to each Shareholder shall mean the proportion that such Shareholder's holdings of the Companies Common Stock as of immediately prior to the Closing bears to the total shares of the Companies Common Stock held by all Shareholders as of immediately prior to the Closing. The indemnification provided for in this Section 10.1 will not apply unless and until the aggregate HCCH Damages for which one or more Southern/ACA Indemnified Persons seeks indemnification exceeds $50,000 in the aggregate, in which event the indemnification provided for will include all HCCH Damages (a franchise deductible) up to the Maximum Shareholder Liability (as hereinafter defined). The Southern/ACA Indemnified Persons are only entitled to be reimbursed for the actual indemnified expenditures or damages incurred by them for the above described losses. Such Southern/ACA Indemnified Persons are not entitled to consequential, special, or other speculative or punitive categories of damages. In seeking indemnification for HCCH Damages under this Section 10.1 following the Closing, the Southern/ACA Indemnified Persons' remedy will be limited to receiving up to that number of shares of HCCH Common Stock determined by dividing (a) the amount of the HCCH Damages by (b) the closing sale price of HCCH's Common Stock on the New York Stock Exchange on the Closing Date (the "Closing Date Price"), provided, however, that irrespective as to the number of claims asserted by the Southern/ACA Indemnified Persons and the amount of the HCCH Damages for which indemnification is sought, any such Shareholder, in the aggregate, shall under no circumstances be required to make indemnification payments beyond the Closing Date Price multiplied by the number of shares of HCCH Common Stock received by such Shareholder at the time of Closing (the "Maximum Shareholder Liability"). Notwithstanding 36 anything to the contrary set forth herein, in the event that at the time of the resolution of any such indemnification claim, such Shareholder does not hold the number of shares of HCCH Common Stock (including any shares otherwise acquired at any time before or after the Closing or at any time after any claim is made for indemnification) necessary to settle any indemnification claim, then such Shareholder shall pay in cash or other immediately available funds the cash equivalent of the remainder of his in-stock indemnification obligations under this Section 10.1 up to his Maximum Shareholder Liability. In lieu of HCCH Common Stock, any Shareholder shall have the option to pay in cash or other immediately available funds the cash equivalent of all or any part of his in-stock Maximum Shareholder Liability. SECTION 10.2 INDEMNIFICATION WITH RESPECT TO TAXES AND ENVIRONMENT. In addition to the indemnification provided in Section 10.1 above, each Shareholder, severally and Pro Rata hereby specifically agrees individually to indemnify and hold harmless the Indemnified Persons from and against all HCCH Damages, whenever incurred, arising out of (a) any Taxes arising out of or relating to the business of the Companies, and (b) any liability, including any Environmental Liabilities, arising out of the violation of any Environmental Laws or the use of any Hazardous Substances incurred on any Company Property Leases or resulting from the ownership of any real estate by any Shareholder or the Companies which results in liability to any of the Companies or HCCH. SECTION 10.3 HCCH AGREEMENT TO INDEMNIFY. Subject to the limitations set forth in this Article X, from and after the Closing, HCCH will indemnify and hold harmless the Shareholders (hereinafter in this Section 10.3 referred to individually as an "HCCH Indemnified Person" and collectively as "HCCH Indemnified Persons") from and against any and all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees, net of any recoveries under insurance policies, recoveries from third parties and tax savings known to HCCH Indemnified Persons at the time of making a claim hereunder (hereafter in this Section 10.3 referred to as the "Shareholders' Damages") arising out of any misrepresentation or breach of or default under any of the representations, warranties, covenants and agreements given or made by HCCH in this Agreement or any certificate or exhibit delivered by or on behalf of HCCH pursuant hereto. In seeking indemnification for the Shareholders' Damages under this Section 10.3 following the Closing, the HCCH Indemnified Person's remedy will be limited to receiving up to that number of shares of HCCH Common Stock determined by dividing (a) the amount of the Shareholders' Damages by (b) the Closing Date Price; provided, however, that irrespective of the number of claims asserted by HCCH Indemnified Persons hereunder in the amount of the Shareholders' Damages for which indemnification is sought, HCCH, in the aggregate, shall under no circumstances be obligated to make an indemnification payment hereunder beyond that number of shares of HCCH Common Stock equal to the total number of shares of HCCH Common Stock provided to the Shareholders on the Closing Date (the "Maximum HCCH Liability"). The indemnification provided for in this Section 10.3 will not apply unless and until the aggregate Shareholders' Damages for which one or more HCCH Indemnified Person seeks indemnification exceeds $50,000 in the aggregate, in which event the indemnification provided for will include all Shareholders' Damages (a franchise deductible) up to the Maximum HCCH Liability. The HCCH Indemnified Persons are only 37 entitled to be reimbursed for the actual indemnified expenditures or damages incurred by them for the above described losses. Such HCCH Indemnified Persons are not entitled to consequential, special, or other speculative or punitive categories of damages. SECTION 10.4 APPOINTMENT OF REPRESENTATIVE. Subject to the successorship provisions of this Section 10.4, Thomas (the "Representative") is hereby irrevocably appointed as the attorney-in-fact and representative of the interests of the Shareholders for all purposes of this Agreement, and notice is hereby given thereof to HCCH and, without independent verification, HCCH may rely upon Representative's undertakings in such capacity. The Representative shall have full and irrevocable authority on behalf of the Shareholders, and shall promptly and completely exercise such authority in a timely fashion to: (a) participate in, represent and bind the Shareholders in all respects with respect to any arbitration or legal proceeding relating to this Agreement, including, without limitation, the defense and settlement of any matter, and the calculation thereof for every purpose thereunder, consent to jurisdiction, enter into any settlement, and consent to entry of judgment, each with respect to any or all of the Shareholders; (b) receive, accept and give notices and other communications relating to this Agreement; (c) take any action that the Representative deems necessary or desirable in order to fully effectuate the transactions contemplated by this Agreement; (d) execute and deliver any instrument or document that the Representative deems necessary or desirable in the exercise of his authority under this Section 10.4; and (e) waive the fulfillment of any condition or conditions to the Closing. Those Shareholders who, as of the Closing Date, hold a majority of the Companies Common Stock may, at any time and by written action delivered to HCCH, remove the Representative or any successor thereto, but such removal shall be effective only upon the replacement of such Representative or successor by a new Representative designated, by written notice delivered to HCCH, by those Shareholders who, as of the date hereof hold a majority of the Companies Common Stock, PROVIDED, however, that any such notice shall be effective upon actual receipt by HCCH. Any such written notice shall be delivered to HCCH in accordance with the notice provisions set forth in Section 12.3 hereof. If any Representative shall have died, become incapacitated or unable to serve, those Shareholders who, as of the date hereof, hold a majority of the Companies' Common Stock shall promptly designate by written notice delivered to HCCH, a replacement Representative. Any costs and expenses incurred by the Representative in connection with actions taken pursuant to or permitted by this Section 10.4 will be borne by the Shareholders and paid or reimbursed to the Representative. 38 The foregoing authorization is granted and conferred in consideration for the various agreements and covenants of HCCH contained herein. In consideration of the foregoing, and subject to the successorship provisions of this Section 10.4, this authorization granted to the Representative shall be irrevocable and shall not be terminated by any act of any of the Shareholders or by operation of law, whether by death or incompetence of any Shareholder or by the occurrence of any other event except the termination of this Agreement pursuant to Section 8.1 hereof. If after the execution hereof any such Shareholder shall die or become incompetent, the Representative is nevertheless authorized and directed to exercise the authority granted in this Section 10.4 as if such death or incompetence had not occurred and regardless of notice thereof. The Representative shall have no liability to any Shareholder for any act or omission or obligation hereunder, provided that such action or omission is taken by the Representative in good faith and without willful misconduct. SECTION 10.5 SURVIVAL OF REPRESENTATIONS. Unless the right to enforce the breach of any representation, warranty, covenant or agreement is required to terminate at an earlier time in order to maintain the appropriate pooling-of-interest accounting treatment, the right to enforce the breach of each representation, warranty, covenant and agreement set forth in this Agreement will remain operative and in full force and effect until the filing by HCCH pursuant to the rules and regulations of the Exchange Act of the first Form 10-K following the Closing (the last date of such applicable period of not more than one year being herein called the "Final Date"), regardless of any investigation made by or on behalf of the parties to this Agreement, upon which Final Date such representations, warranties, covenants and agreements shall expire and be of no further force and effect. The indemnification referred to and set forth in Section 10.2 shall survive until a final resolution of such claim is effective. Any litigation or other action of any kind arising out of or attributable to a breach of any representation, warranty, covenant or agreement contained in this Agreement, except as set forth in Section 10.2, must be commenced prior to the Final Date. If not so commenced prior to the Final Date, any claims or indemnifications brought under this Article X will thereafter conclusively be deemed to be waived regardless of when such claim is or should have been discovered. Any such claim for indemnification brought under this Article X, brought before the Final Date, shall survive until a final resolution of such claim is effective. As set forth herein, no investigation by any party hereto into the business, operations and conditions of the other party shall diminish in any way the effect of any representation or warranty made by any such party in this Agreement or shall relieve any party of any of its obligations under this Agreement. SECTION 10.6 PROCEDURE FOR INDEMNIFICATION; THIRD PARTY CLAIMS. (a) Promptly after receipt by an indemnified party under this Article X of notice of a claim against it for indemnification brought under this Article X (a "Claim"), the indemnified party will, if a claim is to be made against an indemnifying party, give prompt written notice to the indemnified party of the Claim, but the failure to promptly notify the indemnified party will not relieve the indemnified party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudice by the indemnifying party's failure to give such prompt notice. Such notice shall 39 contain a description in reasonable detail of facts upon which such Claim is based and, to the extent known, the amount thereof. (b) If any Claim referred to in this Article X is made by a third party against an indemnified party and such indemnified party gives written notice to the indemnifying party of the Claim, the indemnifying party will be entitled to participate in the defense of Claim and, to the extent that it wishes to assume the defense of the Claim and, after written notice from the indemnifying party to the indemnified party of its election to assume the defense of the Claim, the indemnifying party shall assume such defense and will not be liable to the indemnified party under this Article X for any fees of other counsel or any other expenses with respect to the defense of the Claim in each case subsequently incurred by the indemnified party in connection with the defense of the Claim. ARTICLE XI POST-CLOSING COVENANTS OF HCCH SECTION 11.1 LISTING OF HCCH COMMON STOCK. HCCH shall cause the shares of HCCH Common Stock to be issued hereunder to be approved for listing on the NYSE within sixty (60) days of the Closing. SECTION 11.2 EMPLOYEE MATTERS. HCCH agrees that all employees of the Companies that remain employed after the Closing shall, within reasonable time following the Closing, be entitled to receive the same benefits to which other employees of HCCH are entitled to receive and shall be entitled to participate in HCCH's Employee Benefit Plan provided such employees have satisfied the plan's eligibility requirements. SECTION 11.3 PRESIDENCY OF SOUTHERN. As soon as practicable after the Closing, HCCH shall elect Thomas as President of Southern. ARTICLE XII MISCELLANEOUS SECTION 12.1 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 40 SECTION 12.2 FEES AND EXPENSES. Until otherwise agreed by the parties, each party shall bear its own fees and expenses, including counsel fees and fees of brokers and investment bankers contracted by such party, in connection with the transaction contemplated hereby. SECTION 12.3 NOTICES. Whenever any party hereto desires or is required to give any notice, demand, or request with respect to this Agreement, each such communication shall be in writing and shall be effective only if it is delivered by personal service or mailed, United States registered or certified mail, postage prepaid, or sent by prepaid overnight courier or confirmed telecopier, addressed as follows: HCCH: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, Texas 77040-6094 Telecopy: (713) 462-2401 Attention: Frank J. Bramanti, President With copies (which shall not constitute notice) to: Winstead Sechrest & Minick P.C. 910 Travis, Suite 1700 (until August 23, 1997 - then Suite 2400) Houston, Texas 77002 Telecopy: (713) 951-3800 (until August 23, 1997 - then (713) 650-2400) Attention: Arthur S. Berner, Esq. the Companies and all Shareholders: Truman A. Thomas, III c/o Southern Aviation Insurance Underwriters, Inc. 5616 Clifford Circle Birmingham, Alabama 35210 With copies (which shall not constitute notice) to: Burr & Forman, L.L.P. 420 North 20th Street, Suite 3100 Birmingham, Alabama 35203 Telecopy: (205) 458-5100 Attention: Lee Thuston Such communications shall be effective when they are received by the addressee thereof. Any party may change its address for such communications by giving notice thereof 41 to other parties in conformity with this Section. In the event Thomas is no longer the Representative, such successor Representative's address shall be the address for the Shareholders. SECTION 12.4 GOVERNING LAW. The internal laws of the State of Texas (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. Any dispute, claim, or cause of action arising hereunder shall lie exclusively in the state courts of Harris County, Texas or, if federal jurisdiction can be acquired, in the United States District Court for the Southern District of Texas, sitting in Harris County, Texas. SECTION 12.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. This Agreement and the provisions hereof shall be binding upon each of the parties, their permitted successors and assigns. This Agreement may not be assigned by any party without the prior consent of the others. SECTION 12.6 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason or to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances shall continue in full force and effect and in no way be affected, impaired or invalidated. SECTION 12.7 ENTIRE AGREEMENT. This Agreement and the other agreements and instruments referenced herein constitute the entire understanding and agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between parties with respect hereto. SECTION 12.8 AMENDMENT AND WAIVERS. Any amendment or waiver affecting the Shareholders shall be valid if consented to in writing by Shareholders holding a majority of the shares of each Company's Common Stock (i) if given or made prior to the Closing, such majority as determined as of the date of such amendment or waiver, and (ii) if given or made at or after the Closing, such majority as determined immediately prior to the Closing. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by those persons as provided in this Section 12.8. The waiver by a party of any breach hereof or default in the performance hereof shall not be deemed to constitute a waiver of any other default or any succeeding breach or default, unless such waiver so expressly states. At any time before the Closing, this Agreement may be amended or supplemented by the Companies, the Shareholders or HCCH with respect to any of the terms contained in this Agreement. SECTION 12.9 NO WAIVER. The failure of any party to enforce any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions. 42 SECTION 12.10 CONSTRUCTION OF AGREEMENT. A reference to an Article, Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement which shall be considered as a whole. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." SECTION 12.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all the parties reflected hereon as signatories. SECTION 12.12 NO THIRD PARTY BENEFICIARIES. Any agreement to perform any obligation herein contained, express or implied, shall be only for the benefit of HCCH, the Companies, the Shareholders and their permitted successors and assigns, and such agreements shall not inure to the benefit of an obligee, whomever, it being the intention of the undersigned parties that no one shall be or be deemed to be a third party beneficiary under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 43 "HCC INSURANCE HOLDINGS, INC." By: /s/ Frank J. Bramanti ------------------------------------- Name: Frank J. Bramanti Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] SIGNATURE PAGE OF ACQUISITION AGREEMENT "SOUTHERN AVIATION INSURANCE UNDERWRITERS, INC." By: /s/ Truman A. Thomas, III ---------------------------------------------- Name: Truman A. Thomas, III Title: President "AVIATION CLAIMS ADMINISTRATORS, INC." By: /s/ John D. Young ---------------------------------------------- Name: John D. Young Title: President "SHAREHOLDERS" /s/ Truman A. Thomas, III ---------------------------------------------- Truman A. Thomas, III /s/ Donald J. Barker ---------------------------------------------- Donald J. Barker /s/ Alexander D. Hahn ---------------------------------------------- Alexander D. Hahn SIGNATURE PAGE OF ACQUISITION AGREEMENT EXHIBIT "A" I. For the shares of Southern - 168,750 shares of HCCH Common Stock to be distributed as follows: - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- % OF SOUTHERN HCCH STOCK NAME STOCK OWNED TO BE RECEIVED - ---- ----------- -------------- - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Truman A. Thomas, III 71.2% 120,150 Shares - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Alexander D. Hahn 25.0% 42,187 Shares - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Donald J. Barker 3.8% 6,413 Shares - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- II. For the shares of ACA - 56,250 shares of HCCH Common Stock to be distributed as follows: - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- % OF ACA HCCH STOCK NAME STOCK OWNED TO BE RECEIVED - ---- ----------- -------------- - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Truman A. Thomas, III 70.0% 39,375 Shares - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Alexander D. Hahn 25.0% 14,062 Shares - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Donald J. Barker 5.0% 2,813 Shares - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- SOUTHERN/ACA DISCLOSURE SCHEDULE SECTION 2.6-SUBSIDIARIES AND JOINT VENTURES: Southern Aviation Insurance Underwriting Services, Inc., an Alabama corporation, is a wholly owned subsidiary of Southern. SECTION 2.7-SOUTHERN FINANCIAL STATEMENTS: None. SECTION 2.8-ABSENCE OF CERTAIN CHANGES: None. SECTION 2.9-NO UNDISCLOSED LIABILITIES: None. SECTION 2.10-LITIGATION: None. SECTION 2.12-TAXES: None. SECTION 2.13-EMPLOYEE BENEFIT PLANS, ERISA: 1. Split Dollar Insurance Agreement between Southern Aviation Insurance Underwriters, Inc. and Truman A. Thomas, III covering Insurance Policy No. 932812478 issued by Metropolitan Life Insurance Company on Truman A. Thomas, III. 2. Split Dollar Assignment Metropolitan Life Insurance Company between Truman A. Thomas, III and Southern Aviation Insurance Underwriters, Inc. 3. Life Insurance Policy issued by Protective Life Insurance Company, Policy No. PLO566575, insuring life of Truman A. Thomas, III, owner- Truman A. Thomas, III. 4. American Pioneer Life Insurance Company, Group Policy No. 3360000, $10,000 Life Insurance Policy for certain employees. 5. Liberty Mutual Worker's Compensation Policy No. WCI-355-2575611-016 (Southern). 6. Blue Cross and Blue Shield of Alabama, Group Health Benefit Plan, Group No. 21592 (Southern). 7. Blue Cross and Blue Shield of Alabama, Group Dental Plan, Group No. 21592 (Southern). SECTION 2.14-MATERIAL AGREEMENTS: 1. Split Dollar Insurance Agreement between Southern Aviation Insurance Underwriters, Inc. and Truman A. Thomas, III covering Insurance Policy No. 932812478 issued by Metropolitan Life Insurance Company on Truman A. Thomas, III. 2. Split Dollar Assignment Metropolitan Life Insurance Company between Truman A. Thomas, III and Southern Aviation Insurance Underwriters, Inc. 3. The Cincinnati Insurance Company, Policy No. CPP045 42 91 Commercial Property Coverage, Commercial Inland Marine, Commercial Crime, Building and Commercial Property, Builder's Risk, Condominium Association, Condominium Commercial Unit - Owner's Standard Policy. 4. Liberty Mutual Worker's Compensation Policy No. WCI-35S-257564-016. 5. Aviation Claims Administrators, Inc. Gulf Insurance Company Insurance Services Professionals Errors and Omissions Liability Insurance Policy, Policy No. IG6503095. 6. Commercial Lease, dated January 1, 1996 between T & O Racing, Inc., as Lessor and Southern Aviation Insurance Underwriters, Inc., as Lessee for 8200 square feet of office space located at 5616 Clifford Circle, Birmingham, Alabama 35210. 7. Claim Service Contract dated June 20, 1994 between Aviation Claims Administrators, Inc. and Northern American Speciality Insurance Company. 8. Commercial lease, dated January 1, 1996 between T & O Racing, Inc., as Lessor and Aviation Claims Administrators, Inc. as Lessee for 1800 square feet of office space located at 5616 Clifford Circle, Birmingham, Alabama 35210. 2 9. Note between Southern and First Commercial Bank dated October 8, 1993 for the principal sum of $24,575.00: a. Collateral - 1993 Ford Explorer. 10. Note between Southern and First Commercial Bank dated November 18, 1994 for the principal sum of $43,640.75: a. Security Agreement (Chattel Mortgage) dated September 17, 1992 for $43,640.75; b. Collateral-Security Agreement (Chattel Mortgage) dated November 18, 1994; Continuing Guaranty Agreement dated September 17, 1992 executed by Truman A. Thomas, III. 11. Note between Southern and First Commercial Bank dated September 17, 1992 for the Principal Sum of $125,035.00: a. Aircraft Chattel Mortgage dated September 17, 1996 for $125,035.00. 12. Note between Southern and First Commercial Bank dated November 8, 1996 for the principal sum of $162,880.71: a. Security Agreement dated November 8, 1996 for $162,880.71. 13. Note between Southern and First Commercial Bank dated December 17, 1996 for the principal sum of $185,035.00: a. Security Agreement (Accounts) dated March 22, 1994; b. Continuing Guaranty Agreement dated September 17, 1992 executed by Truman A. Thomas, III. 14. Unlimited Continuing Guaranty between Southern and First Commercial Bank (executed by Truman A. Thomas, III as Guarantor) dated May 29, 1997 for the principal sum of $200,075.00. 15. Note between ACA and First Commercial Bank dated June 27, 1996 for the principal sum of $125,035.00: a. Aircraft Chattel Mortgage dated June 27, 1995; b. Collateral - Continuing Guaranty Agreement dated June 27, 1995 executed by Truman A. Thomas, III. 3 16. Hangar Lease, dated February 24, 1995, between Airsouth, L.L.C. and Southern Aviation Insurance Underwriters, Inc. 17. Oral Hangar Lease between Airsouth, L.L.C. and Aviation Claims Administrators, Inc. for hangar space at St. Clair County Airport, St. Claim County, Alabama. SECTION 2.19-TRADEMARKS, TRADENAMES, ETC.: None. 4 EX-10.338 4 EXHIBIT 10.338 [LOGO] COMMERCIAL BANKING GROUP P.O. BOX 3326 HOUSTON, TX 77253-3326 (713) 250-1170 April 30, 1997 International Marine and General Insurance Company, Ltd. 13403 Northwest Freeway, Suite 200 Houston, TX 77040 Dear Gentlemen: This letter is to confirm that Wells Fargo Bank (Texas), National Association ("Bank"), subject to all terms and conditions contained herein, has agreed to make available to International Marine and General Insurance Company, Ltd. ("Borrower") a commitment under which Bank will issue standby letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit") from time to time up to and including April 30, 1998, not to exceed at any time the maximum principal amount of One Million Dollars ($1,000,000.00) ("Letter of Credit Line"). 1. LETTER OF CREDIT LINE: (a) LETTERS OF CREDIT. Letters of Credit shall be issued under the Letter of Credit Line in lieu of performance bonds; provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion; and provided further, that the aggregate of all undrawn amounts, and all amounts drawn and unreimbursed, under any Letters of Credit issued by Bank under the Letter of Credit Line shall not at any time exceed the maximum principal amount available thereunder, as set forth above. Each Letter of Credit shall be issued for a term not to exceed 365 days, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date subsequent to April 30, 1998. Each Letter of Credit shall be subject to the additional terms of the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof (each, a International Marine and General Insurance Company, Ltd. April 30, 1997 Page 2 "Letter of Credit Agreement" and collectively, "Letter of Credit Agreements"). (b) REPAYMENT OF DRAFTS. Each draft paid by Bank under any Letter of Credit shall be repaid by Borrower in accordance with the provisions of the applicable Letter of Credit Agreement. 2. COLLATERAL: As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to a Bank security interest of first priority in Borrower's custodial account #421281 maintained with the Bank of New York. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. II. INTEREST/FEES: 1. INTEREST. The amount of each draft paid by Bank under the Standby Letter of Credit shall bear interest from the date such draft is paid by Bank to the date such amount is fully repaid by Borrower at the rate of interest set forth in the Standby Letter of Credit Agreement. 2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a 360-day year, actual days elapsed, unless such calculation would result in a usurious rate, in which case interest shall be computed on the basis of a 365/366-day year, as the case may be, actual days elapsed. Interest shall be payable at the times and place set forth in the Standby Letter of Credit Note. 3. LETTER OF CREDIT FEES. Borrower shall pay to Bank (a) fees upon the issuance of each Letter of Credit equal to one percent (1.00%) of the face amount thereof, (b) fees upon the payment or negotiation by Bank of each draft under any Letter of Credit equal to one percent (1.00%) of the amount of such draft, and (c) fees upon the occurrence of any other activity with International Marine and General Insurance Company, Ltd. April 30, 1997 Page 3 respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. 4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under the Standby Letter of Credit by charging Borrower's demand deposit account number ______________ with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. III. REPRESENTATIONS AND WARRANTIES: Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this letter and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this letter. 1. LEGAL STATUS. Borrower is a limited liability company, duly organized and existing and in good standing under the laws of the Hashemite Kingdom of Jordan, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. 2. AUTHORIZATION AND VALIDITY. This letter, and each other document, contract or instrument deemed necessary by Bank to evidence any extension of credit to Borrower pursuant to the terms and conditions hereof, or now or at any time hereafter required by or delivered to Bank in connection with this letter (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. 3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, Articles of Organization or Operating Agreement of Borrower, or result in a breach of or International Marine and General Insurance Company, Ltd. April 30, 1997 Page 4 constitute a default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. 4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. 5. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. 6. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this letter to any other obligation of Borrower. 7. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and all rights to trademarks, trade names, patents and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. 8. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event, as defined in ERISA, has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. 9. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. International Marine and General Insurance Company, Ltd. April 30, 1997 Page 5 10. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. 11. LIMITED LIABILITY COMPANY. To the best of Borrower's knowledge, after reasonable investigation, Borrower qualifies for tax treatment as if it were a partnership for federal and state income tax purposes, and Borrower has no knowledge of any pending action, claim, investigation, suit or proceeding by or before any governmental authority, arbitrator, court or administrative agency challenging or denying such qualification. IV. CONDITIONS: 1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this letter is subject to fulfillment to Bank's satisfaction of all of the following conditions: (a) DOCUMENTATION. Bank shall have received each of the Loan Documents, duly executed and in form and substance satisfactory to Bank. (b) FINANCIAL CONDITION. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. (c) INSURANCE. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in International Marine and General Insurance Company, Ltd. April 30, 1997 Page 6 form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. 2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) COMPLIANCE. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this letter and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no default hereunder, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such a default, shall have occurred and be continuing or shall exist. (b) DOCUMENTATION. Bank shall have received all additional documents which may be required in connection with such extension of credit. V. COVENANTS: Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: 1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. 2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and inspect the properties of Borrower. International Marine and General Insurance Company, Ltd. April 30, 1997 Page 7 3. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to Borrower and/or its business. 4. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. 5. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. 6. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event that Borrower is obligated to make such payment. 7. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. 8. OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof. 9. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Not merge into or consolidate with any other entity; nor make any substantial change in the nature of Borrower's business as International Marine and General Insurance Company, Ltd. April 30, 1997 Page 8 conducted as of the date hereof; nor acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. 10. GUARANTIES. Not guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. 11. LOANS, ADVANCES, INVESTMENTS. Not make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof. VI. DEFAULT, REMEDIES: 1. DEFAULT, REMEDIES. Upon the violation of any term or condition of any of the Loan Documents, or upon the occurrence of any default or defined event of default under any of the Loan Documents: (a) all principal and accrued and unpaid interest outstanding under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, or any notices of any kind, including without limitation notice of nonperformance, notice of protest, protest, notice of dishonor, notice of intention to accelerate or notice of acceleration, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit extended by Bank to Borrower under any of the Loan Documents and to exercise any or all of the rights of a beneficiary or secured party pursuant to the applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of any such breach or default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. International Marine and General Insurance Company, Ltd. April 30, 1997 Page 9 2. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. VII. MISCELLANEOUS: 1. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this letter must be in writing delivered to each party at its address first set forth above, or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel to the extent permissible), expended or incurred by Bank in connection with (a) the negotiation and preparation of this letter and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. International Marine and General Insurance Company, Ltd. April 30, 1997 Page 10 3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith Bank may disclose all documents and information which Bank now has or hereafter may acquire relating to any credit extended by Bank to Borrower, Borrower or its business, or any collateral required hereunder. 4. AMENDMENT. This letter may be amended or modified only in writing signed by each party hereto. 5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this letter or any other of the Loan Documents to which it is not a party. 6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this letter. 7. GOVERNING LAW. This letter shall be governed by and construed in accordance with the laws of the State of Texas. 8. SAVINGS CLAUSE. It is the intention of the parties to comply strictly with applicable usury laws. Accordingly, notwithstanding any provision to the contrary in the Loan Documents, in no event shall any Loan Documents require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws that exceed the maximum amount permitted by such laws, as the same may be amended or modified from time to time (the "Maximum Rate"). If any such excess interest is called for, contracted for, charged, taken, reserved or received in connection with any Loan Documents, or in any communication by or any other person to Borrower or any other person, or in the event that all or part of the principal or interest hereof or thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the International Marine and General Insurance Company, Ltd. April 30, 1997 Page 11 amount of interest contracted for, charged, taken, reserved or received on the amount of principal actually outstanding from time to time under the Loan Documents shall exceed the Maximum Rate, then in such event it is agreed that: (i) the provisions of this paragraph shall govern and control; (ii) neither Borrower nor any other person or entity now or hereafter liable for the payment of any Loan Documents shall be obligated to pay the amount of such interest to the extent it is in excess of the Maximum Rate; (iii) any such excess interest which is or has been received by, notwithstanding this paragraph, shall be credited against the then unpaid principal balance hereof or thereof, or if any of the Loan Documents has been or would be paid in full by such credit, refunded to Borrower; and (iv) the provisions of each of the Loan Documents, and any other communication to Borrower, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the Maximum Rate. The right to accelerate the maturity of the Loan Documents does not include the right to accelerate, collect or charge unearned interest, but only such interest that has otherwise accrued as of the date of acceleration. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved or received in connection with any of the Loan Documents which are made for the purpose of determining whether such rate exceeds the Maximum Rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of such Loan Documents, including all prior and subsequent renewals and extensions hereof or thereof, all interest at any time contracted for, charged, taken, reserved or received by. The terms of this paragraph shall be deemed to be incorporated into each of the other Loan Documents. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to for the purpose of determining the Maximum Rate, Bank hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to 's right subsequently to change such method in accordance with applicable law, as the same may be amended or modified from time to time. 9. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of an Event of Default, (a) Borrower hereby authorizes Bank, at any time and from time to time, without notice, which is hereby expressly waived by each Borrower, and whether or not Bank shall have declared any credit extended hereunder to be due and payable in accordance with the terms hereof, to set off against, and to appropriate and apply to the payment of, Borrower's International Marine and General Insurance Company, Ltd. April 30, 1997 Page 12 obligations and liabilities under the Loan Documents (whether matured or unmatured, fixed or contingent, liquidated or unliquidated), any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars or any other currency, whether matured or unmatured, and in the case of deposits, whether general or special (except trust and escrow accounts), time or demand and however evidenced), and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as Bank, in its sole discretion, may elect. Borrower hereby grants to Bank a security interest in all deposits and accounts maintained with Bank and with any other financial institution to secure the payment of all obligations and liabilities of Borrower to Bank under the Loan Documents. 10. BUSINESS PURPOSE. Borrower represents and warrants that any credit extended hereunder is for a business, commercial, investment, agricultural or other similar purpose and not primarily for a personal, family or household use. 11. ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this letter. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) GOVERNING RULES. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States International Marine and General Insurance Company, Ltd. April 30, 1997 Page 13 Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in Texas selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder. (d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the Texas State Bar with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of Texas, (ii) may grant any remedy or relief that a court of the state of Texas could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be International Marine and General Insurance Company, Ltd. April 30, 1997 Page 14 decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of Texas, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of Texas. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of Texas. (f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS. International Marine and General Insurance Company, Ltd. April 30, 1997 Page 15 Your acknowledgment of this letter shall constitute acceptance of the foregoing terms and conditions. Bank's commitment to extend any credit to Borrower pursuant to the terms of this letter shall terminate on September 15, 1997, unless this letter is acknowledged by Borrower and returned to Bank on or before that date. Sincerely, WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ Jonathan Homeyer -------------------------------- Jonathan Homeyer Relationship Manager Acknowledged and accepted as of April 30, 1997: INTERNATIONAL MARINE AND GENERAL INSURANCE COMPANY, LTD. By: /s/ Frank J. Bramanti ---------------------------- Frank J. Bramanti Executive Vice President [LETTERHEAD] South Texas Regional Commercial Banking Office 1000 Louisiana, 3rd Floor Houston, TX 77002 April 30, 1997 Houston Casualty Company 13403 Northwest Freeway, Suite 200 Houston, TX 77040 Dear Gentlemen: This letter is to confirm that Wells Fargo Bank (Texas), National Association ("Bank"), subject to all terms and conditions contained herein, has agreed to make available to Houston Casualty Company ("Borrower") a commitment under which Bank will issue standby letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit") from time to time up to and including April 30, 1998, not to exceed at any time the maximum principal amount of Twelve Million Dollars ($12,000,000.00) ("Letter of Credit Line"). 1. LETTER OF CREDIT LINE: (a) LETTERS OF CREDIT. Letters of Credit shall be issued under the Letter of Credit Line in lieu of performance bonds; provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion; and provided further, that the aggregate of all undrawn amounts, and all amounts drawn and unreimbursed, under any Letters of Credit issued by Bank under the Letter of Credit Line shall not at any time exceed the maximum principal amount available thereunder, as set forth above. Each Letter of Credit shall be issued for a term not to exceed 365 days, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date subsequent to April 30, 1998. Each Letter of Credit shall be subject to the additional terms of the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of Credit Agreements"). Houston Casualty Company April 30, 1997 Page 2 (b) REPAYMENT OF DRAFTS. Each draft paid by Bank under any Letter of Credit shall be repaid by Borrower in accordance with the provisions of the applicable Letter of Credit Agreement. 2. COLLATERAL: As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to a Bank security interest of first priority in Borrower's custodial account #420954 maintained with the Bank of New York. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. II. INTEREST/FEES: 1. INTEREST. The amount of each draft paid by Bank under the Standby Letter of Credit shall bear interest from the date such draft is paid by Bank to the date such amount is fully repaid by Borrower at the rate of interest set forth in the Standby Letter of Credit Agreement. 2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a 360-day year, actual days elapsed, unless such calculation would result in a usurious rate, in which case interest shall be computed on the basis of a 365/366-day year, as the case may be, actual days elapsed. Interest shall be payable at the times and place set forth in the Standby Letter of Credit Note. 3. LETTER OF CREDIT FEES. Borrower shall pay to Bank (a) fees upon the issuance of each Letter of Credit equal to one percent (1.00%) of the face amount thereof, (b) fees upon the payment or negotiation by Bank of each draft under any Letter of Credit equal to one percent (1.00%) of the amount of such draft, and (c) fees upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. Houston Casualty Company April 30, 1997 Page 3 4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under the Standby Letter of Credit by charging Borrower's demand deposit account number ______________ with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. III. REPRESENTATIONS AND WARRANTIES: Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this letter and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this letter. 1. LEGAL STATUS. Borrower is corporation duly organized and existing and in good standing under the laws of the Texas, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. 2. AUTHORIZATION AND VALIDITY. This letter, and each other document, contract or instrument deemed necessary by Bank to evidence any extension of credit to Borrower pursuant to the terms and conditions hereof, or now or at any time hereafter required by or delivered to Bank in connection with this letter (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. 3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, Articles of Organization or Operating Agreement of Borrower, or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. 4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, Houston Casualty Company April 30, 1997 Page 4 arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. 5. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. 6. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this letter to any other obligation of Borrower. 7. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and all rights to trademarks, trade names, patents and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. 8. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event, as defined in ERISA, has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. 9. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 10. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, Houston Casualty Company April 30, 1997 Page 5 the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. IV. CONDITIONS: 1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this letter is subject to fulfillment to Bank's satisfaction of all of the following conditions: (a) DOCUMENTATION. Bank shall have received each of the Loan Documents, duly executed and in form and substance satisfactory to Bank. (b) FINANCIAL CONDITION. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. (c) INSURANCE. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. 2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) COMPLIANCE. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this letter and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no default hereunder, and no condition, event or act which with the giving of notice or the passage of time or both Houston Casualty Company April 30, 1997 Page 6 would constitute such a default, shall have occurred and be continuing or shall exist. (b) DOCUMENTATION. Bank shall have received all additional documents which may be required in connection with such extension of credit. V. COVENANTS: Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: 1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. 2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and inspect the properties of Borrower. 3. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to Borrower and/or its business. 4. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. Houston Casualty Company April 30, 1997 Page 7 5. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. 6. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event that Borrower is obligated to make such payment. 7. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. 8. OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof. 9. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Not merge into or consolidate with any other entity; nor make any substantial change in the nature of Borrower's business as conducted as of the date hereof; nor acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. 10. GUARANTIES. Not guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. 11. LOANS, ADVANCES, INVESTMENTS. Not make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof. Houston Casualty Company April 30, 1997 Page 8 12. DIVIDENDS, DISTRIBUTIONS. Not declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. VI. DEFAULT, REMEDIES: 1. DEFAULT, REMEDIES. Upon the violation of any term or condition of any of the Loan Documents, or upon the occurrence of any default or defined event of default under any of the Loan Documents: (a) all principal and accrued and unpaid interest outstanding under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, or any notices of any kind, including without limitation notice of nonperformance, notice of protest, protest, notice of dishonor, notice of intention to accelerate or notice of acceleration, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit extended by Bank to Borrower under any of the Loan Documents and to exercise any or all of the rights of a beneficiary or secured party pursuant to the applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of any such breach or default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. 2. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. Houston Casualty Company April 30, 1997 Page 9 VII. MISCELLANEOUS: 1. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this letter must be in writing delivered to each party at its address first set forth above, or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel to the extent permissible), expended or incurred by Bank in connection with (a) the negotiation and preparation of this letter and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. 3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith Bank may disclose all documents and information which Bank now has or hereafter may acquire relating to any credit extended by Bank to Borrower, Borrower or its business, or any collateral required hereunder. Houston Casualty Company April 30, 1997 Page 10 4. AMENDMENT. This letter may be amended or modified only in writing signed by each party hereto. 5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this letter or any other of the Loan Documents to which it is not a party. 6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this letter. 7. GOVERNING LAW. This letter shall be governed by and construed in accordance with the laws of the State of Texas. 8. SAVINGS CLAUSE. It is the intention of the parties to comply strictly with applicable usury laws. Accordingly, notwithstanding any provision to the contrary in the Loan Documents, in no event shall any Loan Documents require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws that exceed the maximum amount permitted by such laws, as the same may be amended or modified from time to time (the "Maximum Rate"). If any such excess interest is called for, contracted for, charged, taken, reserved or received in connection with any Loan Documents, or in any communication by or any other person to Borrower or any other person, or in the event that all or part of the principal or interest hereof or thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved or received on the amount of principal actually outstanding from time to time under the Loan Documents shall exceed the Maximum Rate, then in such event it is agreed that: (i) the provisions of this paragraph shall govern and control; (ii) neither Borrower nor any other person or entity now or hereafter liable for the payment of any Loan Documents shall be obligated to pay the amount of such interest to the extent it is in excess of the Maximum Rate; (iii) any such excess interest which is or has been received by , notwithstanding this paragraph, shall be credited against the then unpaid principal balance hereof or thereof, or if any of the Loan Documents has been or would be paid in full by such credit, refunded to Borrower; and (iv) the provisions of each of the Loan Documents, and any other communication to Houston Casualty Company April 30, 1997 Page 11 Borrower, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the Maximum Rate. The right to accelerate the maturity of the Loan Documents does not include the right to accelerate, collect or charge unearned interest, but only such interest that has otherwise accrued as of the date of acceleration. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved or received in connection with any of the Loan Documents which are made for the purpose of determining whether such rate exceeds the Maximum Rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of such Loan Documents, including all prior and subsequent renewals and extensions hereof or thereof, all interest at any time contracted for, charged, taken, reserved or received by . The terms of this paragraph shall be deemed to be incorporated into each of the other Loan Documents. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to for the purpose of determining the Maximum Rate, Bank hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to 's right subsequently to change such method in accordance with applicable law, as the same may be amended or modified from time to time. 9. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of an Event of Default, (a) Borrower hereby authorizes Bank, at any time and from time to time, without notice, which is hereby expressly waived by each Borrower, and whether or not Bank shall have declared any credit extended hereunder to be due and payable in accordance with the terms hereof, to set off against, and to appropriate and apply to the payment of, Borrower's obligations and liabilities under the Loan Documents (whether matured or unmatured, fixed or contingent, liquidated or unliquidated), any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars or any other currency, whether matured or unmatured, and in the case of deposits, whether general or special (except trust and escrow accounts), time or demand and however evidenced), and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as Bank, in its sole discretion, may elect. Borrower hereby grants to Bank a security interest in all deposits and accounts maintained with Bank and with any other financial institution to secure the payment of all obligations and liabilities of Borrower to Bank under the Loan Documents. Houston Casualty Company April 30, 1997 Page 12 10. BUSINESS PURPOSE. Borrower represents and warrants that any credit extended hereunder is for a business, commercial, investment, agricultural or other similar purpose and not primarily for a personal, family or household use. 11. ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this letter. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) GOVERNING RULES. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in Texas selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision hereof shall limit the right of any Houston Casualty Company April 30, 1997 Page 13 party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder. (d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the Texas State Bar with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of Texas, (ii) may grant any remedy or relief that a court of the state of Texas could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of Texas, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are Houston Casualty Company April 30, 1997 Page 14 supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of Texas. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of Texas. (f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS. Houston Casualty Company April 30, 1997 Page 15 Your acknowledgment of this letter shall constitute acceptance of the foregoing terms and conditions. Bank's commitment to extend any credit to Borrower pursuant to the terms of this letter shall terminate on September 15, 1997, unless this letter is acknowledged by Borrower and returned to Bank on or before that date. Sincerely, WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ Jonathan Homeyer ----------------------------- Jonathan Homeyer Relationship Manager Acknowledged and accepted as of April 30, 1997: HOUSTON CASUALTY COMPANY By: /s/ Frank J. Bramanti ---------------------------- Title: EVP & CFO CREDIT AGREEMENT THIS AGREEMENT is entered into as of ___________________, 1997, by and between HCC INSURANCE HOLDINGS, INC., a Delaware corporation ("Borrower"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank"). RECITAL Borrower has requested from Bank the credit accommodation described below, and Bank has agreed to provide said credit accommodation to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I THE CREDIT SECTION 1.1. LINE OF CREDIT. (a) LINE OF CREDIT. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including April 30, 1998, not to exceed at any time the aggregate principal amount of SIXTEEN MILLION FIVE HUNDRED THOUSAND AND NO/100 Dollars ($16,500,000.00) ("Line of Credit"), the proceeds of which shall be used for working capital. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit "A" attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) BORROWING AND REPAYMENT. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. INTEREST/FEES. (a) INTEREST. The outstanding principal balance of the Line of Credit Note shall bear interest at the rate of interest set forth in the Line of Credit Note. (b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a 360-day year, actual days elapsed, unless such calculation would result in a usurious rate, in which case interest shall be computed on the basis of a 365/366-day year, as the case may be, actual days elapsed. Interest shall be payable at the times and place set forth in the Line of Credit Note. (c) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to one-quarter percent (1/4%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears and Bank shall be entitled to debit the accounts of Borrower at Bank for such fees. 1 SECTION 1.3. COLLATERAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of first priority in 100% of the outstanding stock of Houston Casualty Company. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. SECTION 1.4. TERM LOAN. (a) Term Loan. Bank has made a loan to Borrower in the original principal amount of Twenty Million and No/100 Dollars ($20,000,000.00) ("Term Loan"), as evidenced by a promissory note dated November 29, 1994 ("Term Note"). (b) Repayment. Principal and interest on the Term Loan shall be repaid in accordance with the provisions of the Term Note. (c) Borrower expressly agrees that any default in the Term Note or in any documents executed in connection with or securing the Term Note or default in any other debt now or hereafter owed to Bank by Borrower or any of its subsidiaries or affiliates shall constitute a default under the Line of Credit Note, and that any default in the Line of Credit Note or any document executed in connection with or securing the Line of Credit Note or default in any other debt now or hereafter owed to Bank by Borrower or any of its subsidiaries or affiliates shall constitute a default in the Term Note. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Line of Credit Note, and each other document, contract and instrument required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any 2 contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated March 31, 1997, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material 3 expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel. (b) DOCUMENTATION. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and the Line of Credit Note. (ii) General Pledge Agreement. (iii) Certified Copy of Resolutions (iv) Notice and Acknowledgment of No Oral Agreement (v) Attorney Representation Notice (vi) Borrower's Affidavit (vii) Borrower's Certificate (viii) Statement of Purpose for an Extension of Credit Secured by Margin Stock (ix) Such other documents as Bank may require under any other Section of this Agreement. (c) FINANCIAL CONDITION. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. (d) INSURANCE. Borrower shall carry insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank and customary for the industry of Borrower, with loss payable endorsements in favor of Bank. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) COMPLIANCE. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) DOCUMENTATION. Bank shall have received all additional documents which may be required in connection with such extension of credit. 4 ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of the Line of Credit Note at any time exceeds any limitation on borrowings applicable thereto. Borrower authorizes Bank to debit Borrower's accounts at Bank for all principal, interest, fees or other liabilities due to Bank under any of the Loan Documents. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than one hundred twenty (120) days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a Certified Public Accountant acceptable to Bank, to include a copy of form 10-K of Borrower; (b) not later than ninety (90) days after and as of the end of each quarter, a financial statement of Borrower, prepared by Borrower, to include a copy of Form 10-Q of Borrower; (c) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a certificate of the president or chief financial officer of Borrower that said financial statements are accurate and that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default; (d) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. 5 SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation Federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower with a claim in excess of $100,000.00. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower's financial statements for the period ending March 31, 1997: (a) statutory Capital and Surplus of Borrower's insurance company subsidiaries not at anytime less than $200,000,000.00. Capital and Surplus shall equal common stock plus additional paid in capital plus retained earnings plus net unrealized investment gain (loss). (b) the statutory Combined Ratio of Borrower's insurance company subsidiaries for each fiscal quarter of Borrower not at anytime greater than 105% per consolidated financial statements of Borrower. Combined Ratio for a particular period of time, with respect to Borrower shall mean the sum of 1) the loss ratio percentage of Borrower, which shall be losses incurred plus loss expense incurred for such period divided by premiums earned by Borrower for such period, and 2) the expense ratio percentage of Borrower, which shall be other net operating expenses incurred for such period divided by net premiums earned by Borrower for such period, as such items would be reflected on a consolidated financial statement of Borrower for such period. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property in excess of an aggregate of $100,000.00. SECTION 4.11. SUBSIDIARY REQUIREMENTS. Ensure that: (a) the total of all equity securities owned by Houston Casualty Company in non-affiliated entities shall at no time from and after the date hereof exceed 15% of total cash and invested assets of Houston Casualty Company per statutory financial statements for such time. (b) all investments in bonds by Houston Casualty Company will from and after the date hereof be of investment grade quality, except as set out herein. The non-investment grade debt securities of Houston Casualty Company shall not exceed five percent (5%) of the Total Invested Assets of Houston Casualty Company; non-investment grade debt securities are defined as debt securities that Moody's or Standard & Poor would classify with less than an A rating; Total Invested Assets of Houston Casualty Company are defined as cash and invested assets as indicated in the statutory financial statements of Houston Casualty Company prepared in accordance with requirements of the State Board of Insurance of Texas; 6 (c) the total of all equity securities owned by International Marine & General Insurance Company, Ltd., a Jordanian exempt company ("IMG") in non-affiliated entities shall at no time from and after the date hereof, exceed 15% of total cash and invested assets of IMG per the financial statements of IMG for such time prepared in accordance with generally accepted accounting principles. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof. SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist with respect to Borrower, Houston Casualty Company or IMG, any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof and accounts payable and other accrued liabilities in the normal course of Borrower's business, and (c) other indebtedness of Borrower and its subsidiaries to creditors other than Bank not exceeding $5,000,000.00 in the aggregate at any time. SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Unless Borrower is the surviving entity, merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.5. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof. SECTION 5.6. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividends or distributions in excess of $10,000,000.00 in the aggregate per fiscal year of Borrower either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. SECTION 5.7. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. 7 ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower; or the recording of any abstract of judgment against Borrower in any county in which Borrower has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower; or the entry of a judgment against Borrower. (f) Borrower shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, or Borrower shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The dissolution or liquidation of Borrower; or Borrower, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all principal and accrued and unpaid interest outstanding under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, or any notices of any kind, including without limitation notice of nonperformance, notice of protest, protest, notice of dishonor, notice of intention to accelerate or notice 8 of acceleration, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit accommodation from Bank subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: HCC INSURANCE HOLDINGS, INC. 13403 Northwest Freeway, Suite 200 Houston, Texas 77040 BANK: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION 1000 Louisiana, 3rd Floor Houston, Texas 77002 Attn: Jonathan C. Homeyer or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel to the extent permissible), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. 9 SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit extended by Bank to Borrower, Borrower or its business, or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to any extension of credit by Bank subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only by a written instrument executed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. SECTION 7.11. SAVINGS CLAUSE. It is the intention of the parties to comply strictly with applicable usury laws. Accordingly, notwithstanding any provision to the contrary in the Loan Documents, in no event shall any Loan Documents require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws that exceed the maximum amount permitted by such laws, as the same may be amended or modified from time to time (the "Maximum Rate"). If any such excess interest is called for, contracted for, charged, taken, reserved or received in connection with any Loan Documents, or in any communication by Lender or any other person to Borrower or any other person, or in the event that all or part of the principal or interest hereof or thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved or received on the amount of principal actually outstanding from time to time under the Loan Documents shall exceed the Maximum Rate, then in such event it is agreed that: (i) the provisions of this paragraph shall govern and control; (ii) neither Borrower nor any other person or entity now or hereafter liable for the payment of any Loan Documents shall be obligated to pay the amount of such interest to the extent it is in excess of the Maximum Rate; (iii) any such excess interest which is or has been received by Lender, notwithstanding this paragraph, shall be credited against the then unpaid principal balance hereof or thereof, or if any of the Loan Documents has been or would be paid in full by such credit, refunded to Borrower; and (iv) the 10 provisions of each of the Loan Documents, and any other communication to Borrower, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the Maximum Rate. The right to accelerate the maturity of the Loan Documents does not include the right to accelerate, collect or charge unearned interest, but only such interest that has otherwise accrued as of the date of acceleration. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved or received in connection with any of the Loan Documents which are made for the purpose of determining whether such rate exceeds the Maximum Rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of such Loan Documents, including all prior and subsequent renewals and extensions hereof or thereof, all interest at any time contracted for, charged, taken, reserved or received by Lender. The terms of this paragraph shall be deemed to be incorporated into each of the other Loan Documents. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to Lender for the purpose of determining the Maximum Rate, Bank hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to Lender's right subsequently to change such method in accordance with applicable law, as the same may be amended or modified from time to time. SECTION 7.12. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of an Event of Default, (a) Borrower hereby authorizes Bank, at any time and from time to time, without notice, which is hereby expressly waived by each Borrower, and whether or not Bank shall have declared any credit extended hereunder to be due and payable in accordance with the terms hereof, to set off against, and to appropriate and apply to the payment of, Borrower's obligations and liabilities under the Loan Documents (whether matured or unmatured, fixed or contingent, liquidated or unliquidated), any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars or any other currency, whether matured or unmatured, and in the case of deposits, whether general or special (except trust and escrow accounts), time or demand and however evidenced), and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as Bank, in its sole discretion, may elect. Borrower hereby grants to Bank a security interest in all deposits and accounts maintained with Bank and with any other financial institution to secure the payment of all obligations and liabilities of Borrower to Bank under the Loan Documents. SECTION 7.13. BUSINESS PURPOSE. Borrower represents and warrants that any credit extended hereunder is for a business, commercial, investment, agricultural or other similar purpose and not primarily for a personal, family or household use. SECTION 7.14. ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) GOVERNING RULES. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance 11 with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in Texas selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder. (d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the Texas State Bar with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of Texas, (ii) may grant any remedy or relief that a court of the state of Texas could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of Texas, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of Texas. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of Texas. (f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any 12 judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- HCC INSURANCE HOLDINGS, INC., a Delaware corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 13 REVOLVING LINE OF CREDIT NOTE $16,500,000.00 Houston Texas _______________, 1997 FOR VALUE RECEIVED, the undersigned HCC INSURANCE HOLDINGS, INC., a Delaware corporation ("Borrower") promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank") at its office at 1000 Louisiana, Third Floor, Houston, Texas 77002, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of SIXTEEN MILLION FIVE HUNDRED THOUSAND AND NO/100 Dollars ($16,500,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in Texas are authorized or required by law to close. (b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for one (1), two (2) or three (3) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than One Million and No/100 Dollars ($1,000,000.00); and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR ------------------------------- 100% - LIBOR Reserve Percentage (i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. 1 (d) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) INTEREST. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed, unless such calculation would result in a usurious rate, in which case interest shall be computed on the basis of a 365/366-day year, as the case may be, actual days elapsed) at the lesser of (i) either (A) a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (B) a fixed rate per annum determined by Bank to be one and one-half percent (1.50%) above LIBOR in effect on the first day of the applicable Fixed Rate Term, or (ii) the Maximum Rate. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. (b) SELECTION OF INTEREST RATE OPTIONS. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, (A) Bank receives written confirmation from Borrower not later than three (3) Business Days after such telephone notice is given, and (B) such notice is given to Bank prior to 10:00 a.m., California time, three (3) Business Days before the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the applicable fixed rate to Borrower at approximately 10:00 a.m., California time, on the first day of the Fixed Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination by Bank of the applicable fixed rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) ADDITIONAL LIBOR PROVISIONS. (i) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (A) no new LIBOR option may be selected by Borrower, and (B) any portion of the outstanding principal balance hereof which bears interest 2 determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (ii) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (A) to make LIBOR options available hereunder, or (B) to maintain interest rates based on LIBOR, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be canceled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (iii) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (C) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (iv) Only one amount may be quoted a LIBOR rate, and that amount, except for permitted repayments, may not be changed between Fixed Rate Terms. (d) PAYMENT OF INTEREST. Interest accrued on any portion of this Note which bears interest determined in relation to the Prime Rate shall be payable on the last day of each calendar quarter, commencing September 30, 1997. Interest accrued on any portion of this Note which bears interest determined in relation to LIBOR shall be payable on the last day of each Fixed Rate Term. Borrower authorizes Bank to debit Borrower's accounts at Bank for all principal, interest, fees or other liabilities due to Bank under any of the Loan Documents as defined in the hereinafter described Credit Agreement. 3 (e) DEFAULT INTEREST. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed, unless such calculation would result in a usurious rate, in which case interest shall be computed on the basis of a 365/366-day year, as the case may be, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note, but in no event at a rate greater than the Maximum Rate. BORROWING AND REPAYMENT: (a) BORROWING AND REPAYMENT. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note together with all accrued but unpaid interest shall be due and payable in full on April 30, 1998. (b) ADVANCES. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Frank J. Bramanti or L. Edward Tuffly, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. (c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) PRIME RATE. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Hundred Thousand and No/100 Dollars ($100,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: 4 (i) DETERMINE the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) SUBTRACT from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of _______________, 1997, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) REMEDIES. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and accrued and unpaid interest outstanding hereunder to be immediately due and payable without presentment, demand, or any notices of any kind, including without limitation notice of nonperformance, notice of protest, protest, notice of dishonor, notice of intention to accelerate or notice of acceleration, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel to the extent permissible), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of Texas. (d) SAVINGS CLAUSE. It is the intention of the parties to comply strictly with applicable usury laws. Accordingly, notwithstanding any provision to the contrary in this Note, or in any contract, 5 instrument or document evidencing or securing the payment hereof or otherwise relating hereto (each, a "Related Document"), in no event shall this Note or any Related Document require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws that exceed the maximum amount permitted by such laws, as the same may be amended or modified from time to time (the "Maximum Rate"). If any such excess interest is called for, contracted for, charged, taken, reserved or received in connection with this Note or any Related Document, or in any communication by Bank or any other person to Borrower or any other person, or in the event that all or part of the principal or interest hereof or thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved or received on the amount of principal actually outstanding from time to time under this Note shall exceed the Maximum Rate, then in such event it is agreed that: (i) the provisions of this paragraph shall govern and control; (ii) neither Borrower nor any other person or entity now or hereafter liable for the payment of this Note or any Related Document shall be obligated to pay the amount of such interest to the extent it is in excess of the Maximum Rate; (iii) any such excess interest which is or has been received by Bank, notwithstanding this paragraph, shall be credited against the then unpaid principal balance hereof or thereof, or if this Note or any Related Document has been or would be paid in full by such credit, refunded to Borrower; and (iv) the provisions of this Note and each Related Document, and any other communication to Borrower, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the Maximum Rate. The right to accelerate the maturity of this Note or any Related Document does not include the right to accelerate, collect or charge unearned interest, but only such interest that has otherwise accrued as of the date of acceleration. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved or received in connection with this Note and any Related Document which are made for the purpose of determining whether such rate exceeds the Maximum Rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of this Note or such Related Document, including all prior and subsequent renewals and extensions hereof or thereof, all interest at any time contracted for, charged, taken, reserved or received by Bank. The terms of this paragraph shall be deemed to be incorporated into each Related Document. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to Bank's right subsequently to change such method in accordance with applicable law, as the same may be amended or modified from time to time. (e) RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of an Event of Default, (i) Borrower hereby authorizes Bank, at any time and from time to time, without notice, which is hereby expressly waived by Borrower, and whether or not Bank shall have declared this Note to be due and payable in accordance with the terms hereof, to set off against, and to appropriate and apply to the payment of, Borrower's obligations and liabilities under this Note (whether matured or unmatured, fixed or contingent, liquidated or unliquidated), any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars or any other currency, whether matured or unmatured, and in the case of deposits, whether general or special (except trust and escrow accounts), time or demand and however evidenced), and (ii) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as Bank, in its sole discretion, may elect. Borrower hereby grants to Bank a security interest in all deposits and accounts maintained with Bank and with any other financial institution to secure the payment of all obligations and liabilities of Borrower to Bank under this Note. (f) BUSINESS PURPOSE. Borrower represents and warrants that all loans evidenced by this Note are for a business, commercial, investment, agricultural or other similar purpose and not primarily for a personal, family or household use. 6 (g) CERTAIN TRI-PARTY ACCOUNTS. Borrower and Bank agree that Tex. Rev. Civ. Stat. Ann. Art. 5056, ch. 15 (which regulates certain revolving credit loan accounts and revolving triparty accounts) shall not apply to any revolving loan accounts created under this Note or maintained in connection herewith. NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS EVIDENCED HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. HCC INSURANCE HOLDINGS, INC., a Delaware corporation By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 7 SECURITY AGREEMENT; SECURITIES ACCOUNT 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned INTERNATIONAL MARINE AND GENERAL INSURANCE COMPANY, LTD., or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank") a security interest in (a) Debtor's Investment Account No. 421281 (the "Securities Account") maintained with the Bank of New York Trust Company of Florida, N.A. ("Intermediary"), (b) all financial assets credited to the Securities Account, (c) all security entitlements with respect to the financial assets credited to the Securities Account, and (d) any and all other investment property or assets maintained or recorded in the Securities Account (with all the foregoing defined as "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, (i) all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, (ii) all rights to payment with respect to any cause of action affecting or relating to any of the foregoing, and (iii) all stock rights, rights to subscribe, stock splits, liquidating dividends, cash dividends, dividends paid in stock, new securities or other property of any kind which Debtor is or may hereafter be entitled to receive on account of any securities pledged hereunder, including without limitation, stock received by Debtor due to stock splits or dividends paid in stock or sums paid upon or in respect of any securities pledged hereunder upon the liquidation or dissolution of the issuer thereof (hereinafter called "Proceeds"). Except as otherwise expressly permitted herein, in the event Debtor receives any such Proceeds, Debtor will hold the same in trust on behalf of and for the benefit of Bank and will immediately deliver all such Proceeds to Bank in the exact form received, with the endorsement of Debtor if necessary and/or appropriate undated stock powers duly executed in blank, to be held by Bank as part of the Collateral, subject to all terms hereof. As used herein, the terms "security entitlement," "financial asset" and "investment property" shall have the respective meanings set forth in the Texas Business and Commerce Code. 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. 4. OBLIGATIONS OF BANK. Bank shall have no duty to take any steps necessary to preserve the rights of Debtor against prior parties, or to initiate any action to protect against the possibility of a decline in the market value of the Collateral or Proceeds. Bank shall not be obligated to take any action with respect to the Collateral or Proceeds requested by Debtor unless such request is made in writing and Bank determines, in its sole discretion, that the requested action would not unreasonably jeopardize the value of the Collateral and Proceeds as security for the Indebtedness. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor is the sole owner of the Collateral and Proceeds; (b) Debtor has the right to grant a security interest in the Collateral and Proceeds; (c) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (d) all statements contained herein and, where applicable, in the Collateral, are true and complete in all material respects; (e) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; (f) no person or entity, other than Debtor, Bank and Intermediary, has any interest in or control over the Collateral; and (g) specifically with respect to Collateral and Proceeds consisting of investment securities, instruments, chattel paper, documents, contracts, insurance policies or any like property, (i) all persons appearing to be obligated thereon have authority and capacity to contract and are bound as they appear to be, and (ii) the same comply with applicable laws concerning form, content and manner of preparation and execution. 6. COVENANTS OF DEBTOR. (a) Debtor agrees in general: (i) to pay Indebtedness secured hereby when due; (ii) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind -2- caused by property subject hereto; (iii) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (iv) to permit Bank to exercise its powers; (v) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; and (vi) not to change its chief place of business (or personal residence, if applicable) or the places where Debtor keeps any of Debtor's records concerning the Collateral and Proceeds without first giving Bank written notice of the address to which Debtor is moving same. (b) Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (i) not to permit any security interest in or lien on the Collateral or Proceeds, except in favor of Bank and except liens in favor of Intermediary to the extent expressly permitted by Bank in writing; (ii) not to hypothecate or permit the transfer by operation of law of any of the Collateral or Proceeds or any interest therein; (iii) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (iv) if requested by Bank, to receive and use reasonable diligence to collect Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (v) in the event Bank elects to receive payments of Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, filing, recording, record keeping and expenses incidental thereto; (vi) to provide any service and do any other acts which may be necessary to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims; and (vii) if the Collateral or Proceeds consists of securities and so long as no Event of Default exists, to vote said securities and to give consents, waivers and ratifications with respect thereto, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would impair Bank's interests in the Collateral and Proceeds or be inconsistent with or violate any provisions of this Agreement. Debtor further agrees that any party now or at any time hereafter authorized by Debtor to advise or otherwise act with respect to the Securities Account shall be subject to all terms and conditions contained herein and in any control, custodial or other similar agreement at any time in effect among Bank, Debtor and Intermediary relating to the Collateral. -3- 7. POWERS OF BANK. Debtor appoints Bank its true attorney in fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to notify any person obligated on any security, instrument or other document subject to this Agreement of Bank's rights hereunder; (c) to collect by legal proceedings or otherwise all dividends, interest, principal or other sums now or hereafter payable upon or on account of the Collateral or Proceeds; (d) to enter into any extension, reorganization, deposit, merger or consolidation agreement, or any other agreement relating to or affecting the Collateral or Proceeds, and in connection therewith to deposit or surrender control of the Collateral and Proceeds, to accept other property in exchange for the Collateral and Proceeds, and to do and perform such acts and things as Bank may deem proper, with any money or property received in exchange for the Collateral or Proceeds, at Bank's option, to be applied to the Indebtedness or held by Bank under this Agreement; (e) to make any compromise or settlement Bank deems desirable or proper in respect of the Collateral and Proceeds; (f) to insure, process and preserve the Collateral and Proceeds; (g) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; and (h) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. To effect the purposes of this Agreement or otherwise upon instructions of Debtor, or any of them, Bank may cause any Collateral and/or Proceeds to be transferred to Bank's name or the name of Bank's nominee. If an Event of Default has occurred and is continuing, any or all Collateral and/or Proceeds consisting of securities may be registered, without notice, in the name of Bank or its nominee, and thereafter Bank or its nominee may exercise, without notice, all voting and corporate rights at any meeting of the shareholders of the issuer thereof, any and all rights of conversion, exchange or subscription, or any other rights, privileges or options pertaining to such Collateral and/or Proceeds, all as if it were the absolute owner thereof. The foregoing shall include, without limitation, the right of Bank or its nominee to exchange, at its discretion, any and all Collateral and/or Proceeds upon the merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof, or upon the exercise by the issuer thereof or Bank of any right, privilege or option pertaining to any shares of the Collateral and/or Proceeds, and in connection therewith, the right to deposit and deliver any and all of the Collateral and/or Proceeds with any committee, depository, transfer agent, registrar or other designated agency upon such terms and -4- conditions as Bank may determine. All of the foregoing rights, privileges or options may be exercised without liability on the part of Bank or its nominee except to account for property actually received by Bank. Bank shall have no duty to exercise any of the foregoing, or any other rights, privileges or options with respect to the Collateral or Proceeds and shall not be responsible for any failure to do so or delay in so doing. 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of Section 15 hereof, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, (ii) any other agreement between any Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness, or (iii) any control, custodial or other similar agreement in effect among Bank, Debtor and Intermediary relating to the Collateral; (b) any representation or warranty made by any Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) any Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any attachment or like levy on any property of any Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the Texas Business and Commerce Code or otherwise provided by law, including without limitation, the right to contact Intermediary and to instruct Intermediary to deliver all Collateral and/or Proceeds directly to Bank. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank -5- in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auction, are all commercially reasonable since differences in the sales prices generally realized in the different kinds of sales are ordinarily offset by the differences in the costs and credit risks of such sales. While an Event of Default exists: (a) Debtor will not dispose of any of the Collateral or Proceeds except on terms approved by Bank; (b) Bank may appropriate the Collateral and apply all Proceeds toward repayment of the Indebtedness in such order of application as Bank may from time to time elect; (c) Bank may take any action with respect to the Collateral contemplated by any control, custodial or other similar agreement then in effect among Bank, Debtor and Intermediary; and (d) at Bank's request, Debtor will assemble and deliver all books and records pertaining to the Collateral or Proceeds to Bank at a reasonably convenient place designated by Bank. For any Collateral or Proceeds consisting of securities, Bank shall have no obligation to delay a sale of any portion thereof for the period of time necessary to permit the issuer thereof to register such securities for public sale under any applicable state or Federal law, even if the issuer thereof would agree to do so. 11. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred, Bank shall retain all rights, powers, privileges and remedies herein given. Any proceeds of any disposition of any of the Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend -6- credit to Debtor have been terminated, the power of sale and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. 13. MISCELLANEOUS. (a) The obligations of Debtor hereunder are joint and several; (b) Debtor hereby waives any right (i) to require Bank to make any presentment or demand, or give any notices of any kind, including without limitation any notice of nonpayment or nonperformance, protest, notice of protest, notice of dishonor, notice of the intention to accelerate or notice of acceleration hereunder, (ii) to direct the application of payments or security for any Indebtedness of Debtor, or indebtedness of customers of Debtor, or (iii) to require proceedings against others or to require exhaustion of security; and (c) Debtor hereby consents to extensions, forbearances or alterations of the terms of Indebtedness, the release or substitution of security, and the release of any guarantors. Until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Any requirement of reasonable notice to Debtor with respect to the sale or other disposition of Collateral shall be met if such notice is given pursuant to the requirements of Section 14 hereof at least 5 days before the date of any public sale or the date after which any private sale or other disposition will be made. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or personal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel to the extent permissible), incurred by Bank in exercising any right, power, -7- privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor from the date of demand to the date paid in full with interest at the maximum rate permitted by applicable law. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Texas. 19. ADDENDUM. Additional terms and conditions relating to the Securities Account are set forth in an Addendum attached hereto and incorporated herein by this reference. Debtor warrants that its chief executive office (or personal residence, if applicable) is located at the following address: 13403 Northwest Freeway, Suite 200, Houston, Texas 77002. IN WITNESS WHEREOF, this Agreement has been duly executed as of April 30, 1997. INTERNATIONAL MARINE AND GENERAL INSURANCE COMPANY, LTD. By: /s/ Frank J. Bramanti ----------------------------- Frank J. Bramanti -8- ADDENDUM TO SECURITY AGREEMENT: SECURITIES ACCOUNT THIS ADDENDUM is attached to and made a part of that certain Security Agreement: Securities Account executed by INTERNATIONAL MARINE AND GENERAL INSURANCE COMPANY, LTD. ("Debtor") in favor of WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank"), dated as of April 30, 1997 (the "Agreement"). The following provisions are hereby incorporated into the Agreement: 1. SECURITIES ACCOUNT ACTIVITY. So long as no Event of Default exists, Debtor, or any party authorized by Debtor to act with respect to the Securities Account, may (a) receive payments of interest and/or cash dividends earned on financial assets maintained in the Securities Account, and (b) trade financial assets maintained in the Securities Account. Without Bank's prior written consent, except as permitted by the preceding sentence, neither Debtor nor any party other than Bank may withdraw or receive any distribution of any Collateral from the Securities Account. The Collateral Value of the Securities Account shall at all times be equal to or greater than one hundred twenty-five percent (125.00%) of all Indebtedness secured hereby. In the event that the Collateral Value of the Securities Account should, for any reason and at any time, be less than the required amount, Debtor shall promptly make a principal reduction on the Indebtedness, or deposit into the Securities Account additional assets, of a nature satisfactory to Bank, in either case, sufficient such that the Collateral Value of the Securities Account achieves the required amount. 2. "COLLATERAL VALUE OF THE SECURITIES ACCOUNT" means 100% of the market value of the Securities Account, with market value, in all instances, determined by Bank in its sole discretion, and excluding from such computation all WF Securities and Common Trust Funds. 3. EXCLUSION FROM COLLATERAL. Notwithstanding anything herein to the contrary, the terms "Collateral" and "Proceeds" do not include, and Bank disclaims a security interest in all WF Securities and Common Trust Funds now or hereafter maintained in the Securities Account. 4. "COMMON TRUST FUNDS" means common trust funds as described in 12 CFR 9.18 and includes, without limitation, common trust funds maintained by Bank for the exclusive use of its fiduciary clients. 5. "WF SECURITIES" means stock, securities or obligations of Wells Fargo & Company or of any affiliate thereof (as the term affiliate is defined in Section 23A of the Federal Reserve Act (12 USC 371(c), as amended from time to time). 6. LIMITATION ON INDEBTEDNESS. Notwithstanding anything in this Agreement to the contrary, the Indebtedness secured hereby is limited to all obligations of Debtor arising under or in connection with all letters of credit issued by Bank for the benefit of Borrower, and all extensions, renewals or modifications thereof, and restatements or substitutions therefor; provided that the maximum aggregate amount of such letters of credit shall not exceed $1,000,000.00. IN WITNESS WHEREOF, this Addendum has been executed as of the same date as the Agreement. INTERNATIONAL MARINE WELLS FARGO BANK (TEXAS), AND GENERAL INSURANCE NATIONAL ASSOCIATION COMPANY, LTD. By: /s/ Frank J. Bramanti By: ------------------------- ----------------------- Frank J. Bramanti Jonathan Homeyer Executive Vice President Relationship Manager -2- SECURITY AGREEMENT; SECURITIES ACCOUNT 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned HOUSTON CASUALTY COMPANY, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank") a security interest in (a) Debtor's Investment Account No. 420954 (the "Securities Account") maintained with the Bank of New York Trust Company of Florida, N.A. ("Intermediary"), (b) (b) all financial assets credited to the Securities Account, (c) all security entitlements with respect to the financial assets credited to the Securities Account, and (d) any and all other investment property or assets maintained or recorded in the Securities Account (with all the foregoing defined as "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, (i) all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, (ii) all rights to payment with respect to any cause of action affecting or relating to any of the foregoing, and (iii) all stock rights, rights to subscribe, stock splits, liquidating dividends, cash dividends, dividends paid in stock, new securities or other property of any kind which Debtor is or may hereafter be entitled to receive on account of any securities pledged hereunder, including without limitation, stock received by Debtor due to stock splits or dividends paid in stock or sums paid upon or in respect of any securities pledged hereunder upon the liquidation or dissolution of the issuer thereof (hereinafter called "Proceeds"). Except as otherwise expressly permitted herein, in the event Debtor receives any such Proceeds, Debtor will hold the same in trust on behalf of and for the benefit of Bank and will immediately deliver all such Proceeds to Bank in the exact form received, with the endorsement of Debtor if necessary and/or appropriate undated stock powers duly executed in blank, to be held by Bank as part of the Collateral, subject to all terms hereof. As used herein, the terms "security entitlement," "financial asset" and "investment property" shall have the respective meanings set forth in the Texas Business and Commerce Code. 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. 4. OBLIGATIONS OF BANK. Bank shall have no duty to take any steps necessary to preserve the rights of Debtor against prior parties, or to initiate any action to protect against the possibility of a decline in the market value of the Collateral or Proceeds. Bank shall not be obligated to take any action with respect to the Collateral or Proceeds requested by Debtor unless such request is made in writing and Bank determines, in its sole discretion, that the requested action would not unreasonably jeopardize the value of the Collateral and Proceeds as security for the Indebtedness. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor is the sole owner of the Collateral and Proceeds; (b) Debtor has the right to grant a security interest in the Collateral and Proceeds; (c) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (d) all statements contained herein and, where applicable, in the Collateral, are true and complete in all material respects; (e) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; (f) no person or entity, other than Debtor, Bank and Intermediary, has any interest in or control over the Collateral; and (g) specifically with respect to Collateral and Proceeds consisting of investment securities, instruments, chattel paper, documents, contracts, insurance policies or any like property, (i) all persons appearing to be obligated thereon have authority and capacity to contract and are bound as they appear to be, and (ii) the same comply with applicable laws concerning form, content and manner of preparation and execution. 6. COVENANTS OF DEBTOR. (a) Debtor agrees in general: (i) to pay Indebtedness secured hereby when due; (ii) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (iii) to pay all costs and -2- expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (iv) to permit Bank to exercise its powers; (v) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; and (vi) not to change its chief place of business (or personal residence, if applicable) or the places where Debtor keeps any of Debtor's records concerning the Collateral and Proceeds without first giving Bank written notice of the address to which Debtor is moving same. (b) Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (i) not to permit any security interest in or lien on the Collateral or Proceeds, except in favor of Bank and except liens in favor of Intermediary to the extent expressly permitted by Bank in writing; (ii) not to hypothecate or permit the transfer by operation of law of any of the Collateral or Proceeds or any interest therein; (iii) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (iv) if requested by Bank, to receive and use reasonable diligence to collect Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (v) in the event Bank elects to receive payments of Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, filing, recording, record keeping and expenses incidental thereto; (vi) to provide any service and do any other acts which may be necessary to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims; and (vii) if the Collateral or Proceeds consists of securities and so long as no Event of Default exists, to vote said securities and to give consents, waivers and ratifications with respect thereto, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would impair Bank's interests in the Collateral and Proceeds or be inconsistent with or violate any provisions of this Agreement. Debtor further agrees that any party now or at any time hereafter authorized by Debtor to advise or otherwise act with respect to the Securities Account shall be subject to all terms and conditions contained herein and in any control, custodial or other similar agreement at any time in effect among Bank, Debtor and Intermediary relating to the Collateral. -3- 7. POWERS OF BANK. Debtor appoints Bank its true attorney in fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to notify any person obligated on any security, instrument or other document subject to this Agreement of Bank's rights hereunder; (c) to collect by legal proceedings or otherwise all dividends, interest, principal or other sums now or hereafter payable upon or on account of the Collateral or Proceeds; (d) to enter into any extension, reorganization, deposit, merger or consolidation agreement, or any other agreement relating to or affecting the Collateral or Proceeds, and in connection therewith to deposit or surrender control of the Collateral and Proceeds, to accept other property in exchange for the Collateral and Proceeds, and to do and perform such acts and things as Bank may deem proper, with any money or property received in exchange for the Collateral or Proceeds, at Bank's option, to be applied to the Indebtedness or held by Bank under this Agreement; (e) to make any compromise or settlement Bank deems desirable or proper in respect of the Collateral and Proceeds; (f) to insure, process and preserve the Collateral and Proceeds; (g) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; and (h) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. To effect the purposes of this Agreement or otherwise upon instructions of Debtor, or any of them, Bank may cause any Collateral and/or Proceeds to be transferred to Bank's name or the name of Bank's nominee. If an Event of Default has occurred and is continuing, any or all Collateral and/or Proceeds consisting of securities may be registered, without notice, in the name of Bank or its nominee, and thereafter Bank or its nominee may exercise, without notice, all voting and corporate rights at any meeting of the shareholders of the issuer thereof, any and all rights of conversion, exchange or subscription, or any other rights, privileges or options pertaining to such Collateral and/or Proceeds, all as if it were the absolute owner thereof. The foregoing shall include, without limitation, the right of Bank or its nominee to exchange, at its discretion, any and all Collateral and/or Proceeds upon the merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof, or upon the exercise by the issuer thereof or Bank of any right, privilege or option pertaining to any shares of the Collateral and/or Proceeds, and in connection therewith, the right to deposit and deliver any and all of the Collateral and/or Proceeds with any committee, depository, transfer agent, registrar or other designated agency upon such terms and -4- conditions as Bank may determine. All of the foregoing rights, privileges or options may be exercised without liability on the part of Bank or its nominee except to account for property actually received by Bank. Bank shall have no duty to exercise any of the foregoing, or any other rights, privileges or options with respect to the Collateral or Proceeds and shall not be responsible for any failure to do so or delay in so doing. 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of Section 15 hereof, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, (ii) any other agreement between any Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness, or (iii) any control, custodial or other similar agreement in effect among Bank, Debtor and Intermediary relating to the Collateral; (b) any representation or warranty made by any Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) any Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any attachment or like levy on any property of any Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the Texas Business and Commerce Code or otherwise provided by law, including without limitation, the right to contact Intermediary and to instruct Intermediary to deliver all Collateral and/or Proceeds directly to Bank. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank -5- in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auction, are all commercially reasonable since differences in the sales prices generally realized in the different kinds of sales are ordinarily offset by the differences in the costs and credit risks of such sales. While an Event of Default exists: (a) Debtor will not dispose of any of the Collateral or Proceeds except on terms approved by Bank; (b) Bank may appropriate the Collateral and apply all Proceeds toward repayment of the Indebtedness in such order of application as Bank may from time to time elect; (c) Bank may take any action with respect to the Collateral contemplated by any control, custodial or other similar agreement then in effect among Bank, Debtor and Intermediary; and (d) at Bank's request, Debtor will assemble and deliver all books and records pertaining to the Collateral or Proceeds to Bank at a reasonably convenient place designated by Bank. For any Collateral or Proceeds consisting of securities, Bank shall have no obligation to delay a sale of any portion thereof for the period of time necessary to permit the issuer thereof to register such securities for public sale under any applicable state or Federal law, even if the issuer thereof would agree to do so. 11. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred, Bank shall retain all rights, powers, privileges and remedies herein given. Any proceeds of any disposition of any of the Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend -6- credit to Debtor have been terminated, the power of sale and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. 13. MISCELLANEOUS. (a) The obligations of Debtor hereunder are joint and several; (b) Debtor hereby waives any right (i) to require Bank to make any presentment or demand, or give any notices of any kind, including without limitation any notice of nonpayment or nonperformance, protest, notice of protest, notice of dishonor, notice of the intention to accelerate or notice of acceleration hereunder, (ii) to direct the application of payments or security for any Indebtedness of Debtor, or indebtedness of customers of Debtor, or (iii) to require proceedings against others or to require exhaustion of security; and (c) Debtor hereby consents to extensions, forbearances or alterations of the terms of Indebtedness, the release or substitution of security, and the release of any guarantors. Until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Any requirement of reasonable notice to Debtor with respect to the sale or other disposition of Collateral shall be met if such notice is given pursuant to the requirements of Section 14 hereof at least 5 days before the date of any public sale or the date after which any private sale or other disposition will be made. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or personal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel to the extent permissible), incurred by Bank in exercising any right, power, -7- privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor from the date of demand to the date paid in full with interest at the maximum rate permitted by applicable law. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Texas. 19. ADDENDUM. Additional terms and conditions relating to the Securities Account are set forth in an Addendum attached hereto and incorporated herein by this reference. Debtor warrants that its chief executive office (or personal residence, if applicable) is located at the following address: 13403 Northwest Freeway, Suite 200, Houston, Texas 77002. IN WITNESS WHEREOF, this Agreement has been duly executed as of April 30, 1997. HOUSTON CASUALTY COMPANY /s/ Frank J. Bramanti - ----------------------------- Title: EVP & CFO ----------------------- -8- ADDENDUM TO SECURITY AGREEMENT: SECURITIES ACCOUNT THIS ADDENDUM is attached to and made a part of that certain Security Agreement: Securities Account executed by HOUSTON CASUALTY COMPANY ("Debtor") in favor of WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank"), dated as of April 30, 1997 (the "Agreement"). The following provisions are hereby incorporated into the Agreement: 1. SECURITIES ACCOUNT ACTIVITY. So long as no Event of Default exists, Debtor, or any party authorized by Debtor to act with respect to the Securities Account, may (a) receive payments of interest and/or cash dividends earned on financial assets maintained in the Securities Account, and (b) trade financial assets maintained in the Securities Account. Without Bank's prior written consent, except as permitted by the preceding sentence, neither Debtor nor any party other than Bank may withdraw or receive any distribution of any Collateral from the Securities Account. The Collateral Value of the Securities Account shall at all times be equal to or greater than one hundred twenty-five percent (125.00%) of all Indebtedness secured hereby. In the event that the Collateral Value of the Securities Account should, for any reason and at any time, be less than the required amount, Debtor shall promptly make a principal reduction on the Indebtedness, or deposit into the Securities Account additional assets, of a nature satisfactory to Bank, in either case, sufficient such that the Collateral Value of the Securities Account achieves the required amount. 2. "COLLATERAL VALUE OF THE SECURITIES ACCOUNT" means 100% of the market value of the Securities Account, with market value, in all instances, determined by Bank in its sole discretion, and excluding from such computation all WF Securities and Common Trust Funds. 3. EXCLUSION FROM COLLATERAL. Notwithstanding anything herein to the contrary, the terms "Collateral" and "Proceeds" do not include, and Bank disclaims a security interest in all WF Securities and Common Trust Funds now or hereafter maintained in the Securities Account. 4. "COMMON TRUST FUNDS" means common trust funds as described in 12 CFR 9.18 and includes, without limitation, common trust funds maintained by Bank for the exclusive use of its fiduciary clients. 5. "WF SECURITIES" means stock, securities or obligations of Wells Fargo & Company or of any affiliate thereof (as the term affiliate is defined in Section 23A of the Federal Reserve Act (12 USC 371(c), as amended from time to time). 6. LIMITATION ON INDEBTEDNESS. Notwithstanding anything in this Agreement to the contrary, the Indebtedness secured hereby is limited to all obligations of Debtor arising under or in connection with all letters of credit issued by Bank for the benefit of Borrower, and all extensions, renewals or modifications thereof, and restatements or substitutions therefor; provided that the maximum aggregate amount of such letters of credit shall not exceed $12,000,000.00. IN WITNESS WHEREOF, this Addendum has been executed as of the same date as the Agreement. HOUSTON CASUALTY COMPANY WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ Frank J. Bramanti By: ------------------------- ----------------------- Jonathan Homeyer Title: EVP & CFO Relationship Manager ---------------------- -2- EX-11 5 EXHIBIT 11 EXHIBIT 11 HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) - ------------------------------------------------------------------------------- For the nine months ended September 30, 1997 1996 - ------------------------------------------------------------------------------- Net earnings $39,131,000 $26,542,000 ----------- ----------- ----------- ----------- Primary: Weighted average Common Stock and common stock equivalents outstanding 46,471,000 44,350,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.84 $ 0.60 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 46,007,000 42,970,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,312,000 1,212,000 Net changes in Common Stock for issuance (848,000) 168,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 46,471,000 44,350,000 ----------- ----------- ----------- ----------- Fully Diluted: Weighted average Common Stock and common stock equivalents outstanding 46,649,000 44,553,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.84 $ 0.60 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 46,007,000 42,970,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,291,000 1,398,000 Net changes in Common Stock for issuance (649,000) 185,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 46,649,000 44,553,000 ----------- ----------- ----------- ----------- Note: Share and option amounts have been restated for all periods presented to include the shares and options of AVEMCO Corporation prior to its combination with the Company (see notes 1 and 3 to the condensed consolidated financial statements). EXHIBIT 11 HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) - ------------------------------------------------------------------------------- For the three months ended September 30, 1997 1996 - ------------------------------------------------------------------------------- Net earnings $17,118,000 $13,749,000 ----------- ----------- ----------- ----------- Primary: Weighted average Common Stock and common stock equivalents outstanding 47,122,000 44,356,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.36 $ 0.31 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 46,007,000 42,970,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,292,000 1,370,000 Net changes in Common Stock for issuance (177,000) 16,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 47,122,000 44,356,000 ----------- ----------- ----------- ----------- Fully Diluted: Weighted average Common Stock and common stock equivalents outstanding 47,201,000 44,419,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.36 $ 0.31 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 46,007,000 42,970,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,292,000 1,431,000 Net changes in Common Stock for issuance (98,000) 18,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 47,201,000) 44,419,000 ----------- ----------- ----------- ----------- Note: Share and option amounts have been restated for all periods presented to include the shares and options of AVEMCO Corporation prior to its combination with the Company (see notes 1 and 3 to the condensed consolidated financial statements). EX-27 6 FDS
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 390,199,000 0 0 10,093,000 0 0 532,921,000 4,827,000 185,249,000 2,269,000 1,184,579,000 267,488,000 158,057,000 0 0 82,334,000 0 0 46,007,000 311,493,000 1,184,579,000 124,431,000 20,424,000 (258,000) 55,519,000 70,537,000 6,209,000 60,393,000 58,956,000 19,825,000 39,131,000 0 0 0 39,131,000 0.84 0.84 117,283,000 0 0 0 0 108,606,000 0
EX-27.1 7 FDS
7 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL STATEMENTS OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS SHOWN BELOW HAVE BEEN RESTATED DUE TO THE MERGER WITH AVEMCO ON SEPT. 17, 1997, WHICH WAS ACCOUNTED FOR AS A POOLING-OF-INTERESTS (SEE NOTE 1). 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 354,491,000 0 0 20,475,000 0 0 455,431,000 13,684,000 137,761,000 7,085,000 965,532,000 227,268,000 157,627,000 0 0 71,643,000 0 0 46,245,000 240,335,000 965,532,000 128,852,000 17,326,000 6,654,000 49,507,000 83,812,000 9,504,000 73,474,000 31,774,000 5,232,000 26,542,000 0 0 0 26,542,000 0.60 0.60 0 0 0 0 0 0 0
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