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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000893220-02-000393.txt : 20020415
<SEC-HEADER>0000893220-02-000393.hdr.sgml : 20020415
ACCESSION NUMBER: 0000893220-02-000393
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 18
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020401
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: RADIAN GROUP INC
CENTRAL INDEX KEY: 0000890926
STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351]
IRS NUMBER: 232691170
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-11356
FILM NUMBER: 02595605
BUSINESS ADDRESS:
STREET 1: 1601 MARKET STREET
STREET 2: 12TH FLOOR
CITY: PHILADELPHIA
STATE: PA
ZIP: 19103
BUSINESS PHONE: 2155646600
MAIL ADDRESS:
STREET 1: 1601 MARKET ST
STREET 2: 12TH FLOOR
CITY: PHILADELPHIA
STATE: PA
ZIP: 19103
FORMER COMPANY:
FORMER CONFORMED NAME: CMAC INVESTMENT CORP
DATE OF NAME CHANGE: 19960126
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>w56746e10-k.txt
<DESCRIPTION>FORM 10-K RADIAN
<TEXT>
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11356
------------------------
RADIAN GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
<S> <C>
DELAWARE 23-2691170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
(Address of principal executive offices) (zip code)
</Table>
(215) 564-6600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.)
$4,462,225,944 as of March 22, 2002 which amount excludes the value of all
shares beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by officers and directors of the registrant (however this
does not constitute a representation or acknowledgment that any such individuals
is an affiliate of the registrant).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 94,578,761 shares of
Common Stock, $.001 par value, outstanding on March 22, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
<Table>
<Caption>
DOCUMENT FORM 10-K REFERENCE
- -------- -------------------
<S> <C>
Annual Report to security holders for fiscal year ended Part II,
December 31, 2001......................................... Items 5-8
Definitive Proxy Statement relating to the Registrant's 2002
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A not later than 120 days following the end Part III,
of the Registrant's last fiscal year...................... Items 10-13
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Radian Group Inc. (the "Company") provides through its subsidiaries and
affiliates, credit-based insurance and mortgage services to financial
institutions in the United States and globally. The principal business segments
of the Company are mortgage insurance, financial guaranty and mortgage services.
The following table shows the percentage contributions to total revenues and net
income of these businesses for 2001:
<Table>
<Caption>
REVENUES NET INCOME
-------- ----------
<S> <C> <C>
Mortgage Insurance.......................................... 76.8% 77.7%
Financial Guaranty.......................................... 16.7% 15.6%
Mortgage Services........................................... 6.5% 6.7%
</Table>
The Company was formed on June 9, 1999 by the merger of CMAC Investment
Corporation ("CMAC") and Amerin Corporation ("Amerin"). At that time the
Company's sole product was mortgage insurance. Since that time, the Company has
diversified its revenue and net income by expanding its mortgage service
business and expanding into other areas such as internet-based mortgage services
and financial guaranty insurance and reinsurance. This diversification has been
achieved primarily through the acquisition of other businesses, including
RadianExpress.com, ("RadianExpress", formerly ExpressClose.com, Inc.) and
Enhance Financial Services Group Inc. ("Financial Guaranty"). For selected
financial information about each segment, see note 1 of the Notes to
Consolidated Financial Statements under the caption "Segment Reporting". The
Notes to Consolidated Financial Statements are incorporated by reference into
this report from the 2001 Annual Report to Stockholders and included as an
exhibit to this report.
MORTGAGE INSURANCE BUSINESS
The Company provides, through its wholly owned subsidiaries, Radian
Guaranty Inc. and Amerin Guaranty Corporation (individually referred to as
"Radian Guaranty" and "Amerin Guaranty," and together referred to as "Mortgage
Insurance"), private mortgage insurance and risk management services to mortgage
lending institutions located throughout the United States and globally. Private
mortgage insurance protects mortgage lenders and investors from default related
losses on residential first mortgage loans made primarily to home buyers who
make down payments of less than 20% of the home's purchase price. Private
mortgage insurance also facilitates the sale of such mortgage loans in the
secondary mortgage market, principally to Freddie Mac and Fannie Mae (Government
Sponsored Entities, "GSEs"). Radian Guaranty is restricted to providing
insurance on residential first mortgage loans only. Beginning October 1, 2001,
Amerin Guaranty was licensed to conduct second mortgage insurance and most
likely, any second mortgage insurance issued by the Company will be written in
Amerin Guaranty. Mortgage Insurance offers two principal types of private
mortgage insurance coverage, primary and pool. At December 31, 2001, primary
insurance comprised 94.3% of total risk in force and pool insurance comprised
5.7% of total risk in force. During the third quarter of 2000, the Company
commenced operations in Radian Insurance Inc., a subsidiary of Radian Guaranty,
which writes credit insurance on non-traditional mortgage related assets, such
as second mortgages and manufactured housing, and provides credit enhancement to
mortgage related capital market transactions. The Company also recently began
offering an alternative to title insurance, Radian Lien Protection ("RLP"),
providing lien protection insurance on refinanced second mortgages and home
equity loans.
Primary Insurance
Primary insurance provides mortgage default protection on individual loans
at a specified coverage percentage, which is applied to the unpaid loan
principal, delinquent interest and certain expenses, associated with the default
and subsequent foreclosure (collectively, the "claim amount"). The Company's
obligation to an insured lender in respect of a claim is determined by applying
the appropriate coverage percentage to the claim amount. The Company's "risk" on
each insured loan is the unpaid loan principal multiplied by the coverage
percentage. Much of the Company's current business is written with 30% coverage
on loans with a loan-to-value ("LTV") ratio between 90.01% and 95% ("95s") and
25% coverage on loans with an LTV ratio
2
<PAGE>
between 85.01% and 90% ("90s"). As of December 31, 2001, approximately 57% of
the Company's primary insurance in force outstanding had such coverages. In
January 1999, Fannie Mae announced a program that allows for lower levels of
required mortgage insurance for certain low down payment loans approved through
its "Desktop Underwriter" automated underwriting system. In March 1999, Freddie
Mac announced a similar program for loans approved through its "Loan Prospector"
automated underwriting system. Through the end of 2001, a minimal amount of
insurance was written in these programs. For more information on these
developments, see "Other Direct Regulation -- Freddie Mac and Fannie Mae" on
page 33.
Under the Company's master policy, upon a default, the Company has the
option of paying the entire claim amount and taking title to the mortgage
property (at which time it is typically sold quickly), or paying the coverage
percentage in full satisfaction of its obligations under the insurance written.
In 2001, the entire claim amount was paid in approximately 4% of filed claims
because of the expected economic advantage associated with that choice. Similar
to 2000, this percentage is significantly higher than in past years and is due
to the good economic conditions experienced over the past few years in which
property values have remained generally strong. However, housing values may not
remain strong in the future.
Pool Insurance
Pool insurance differs from primary insurance in that the exposure on pool
insurance is not limited to a specific coverage percentage on each individual
loan. Because of this feature and the generally lower premium rates associated
with pool insurance, the rating agency capital requirements for the product are
more restrictive than primary insurance. There is an aggregate exposure limit
("stop loss") on a "pool" of loans that is generally between 1% and 10% of the
initial aggregate loan balance. Modified pool insurance has a stop loss like
pool insurance, but also has exposure limits on each individual loan.
The Company offers pool insurance on a selected basis to various state
housing finance agencies on the collateral for their bond issues, as a credit
enhancement to mortgage loans included in mortgage-backed securities or in whole
loan sales, and in certain other structured transactions. Since 1996, the
Company has offered pool insurance on mortgage product sold to Freddie Mac and
Fannie Mae by the Company's primary insurance customers ("GSE Pool"). This pool
insurance has a very low stop loss, generally 1.0% to 1.5%, and the insured
pools contain loans with and without primary insurance. Loans without primary
insurance have an LTV ratio of 80.0% or below. Premium rates on this business
are significantly lower than primary insurance rates and the expected
profitability on this business is lower than that of primary insurance. During
2001, the Company had pool risk written of $255 million or 2.3% of the Company's
total risk written, consisting primarily of GSE Pool business, compared to $188
million in 2000 and $421 million in 1999. The Company expects Mortgage Insurance
to continue to write a limited amount of GSE Pool insurance in 2002, and will
continue to write other forms of pool or modified pool insurance as market
opportunities arise.
Structured Transactions
The Company, from time to time, engages in structured transactions that may
include either primary insurance, pool insurance or some combination thereof. A
structured transaction generally involves insuring a large group of seasoned or
unseasoned loans or issuing a commitment to insure new loan originations under
negotiated terms. Some structured transactions contain a risk-sharing component
under which the insured or a third party assumes a first-loss position or shares
in losses in some other manner. Opportunities for structured transactions have
increased during the last three years and this trend is expected to continue,
however the Company competes with other mortgage insurers as well as capital
market executions such as senior/subordinated security structures to obtain such
business. Most structured transactions involve non-traditional mortgage or
mortgage related assets such as Alternative A or A- ("Non-Prime") mortgages.
Alternative A or A- mortgages are known as our nonprime business. Competition
for this business is generally based upon price and is also based on the
percentage of a given pool of loans that the Company is willing to insure. In
2001, the Company wrote $8.7 billion of primary insurance in structured
transactions, which represented 19.3% of primary new insurance written. All of
the pool risk written in 2001 and substantially all of the $3.4 billion of new
insurance written in Radian Insurance was written in structured transactions.
3
<PAGE>
Revenue Sharing Products
The Company, like other mortgage insurers, offers financial products to its
mortgage lending customers that are designed to allow the customer to
participate in the risks and rewards of the mortgage insurance business. The
most common product is captive reinsurance, in which a lender sets up a
reinsurance company that assumes part of the risk associated with that lender's
insured book of business. In most cases, the risk assumed by the reinsurer is an
excess layer of aggregate losses that would be penetrated only in a situation of
adverse loss development. The Company had approximately 30 active captive
reinsurance agreements in place at December 31, 2001 and could enter into
several new agreements or modify existing agreements in 2002, some with large
national lenders. Premiums ceded to captive reinsurance companies in 2001 were
$55.7 million, representing 9.1% of total mortgage insurance premiums earned, as
compared to $39.6 million, or 7.0% of total premiums earned in 2000. Primary
insurance written in 2001 that had captive reinsurance associated with it was
$14.7 billion, or 32.9% of the Company's total primary insurance written as
compared to $8.1 billion or 32.6% in 2000. During 2000, Freddie Mac issued
standards for captive reinsurance through its mortgage insurance eligibility
requirements. Additionally, a task force consisting of lenders, mortgage
insurers and accounting firms has been set up to study risk transfer and the
appropriate accounting treatment for captive reinsurance. In addition to captive
reinsurance, the Company has entered into revenue sharing arrangements with the
GSEs whereby the primary insurance coverage amount on certain loans is recast
and the overall risk to the Company is reduced in return for a payment made to
the GSE. Premiums ceded under such programs in 2001 were not significant.
Radian Insurance Inc.
Radian Insurance was reorganized and rated in September 2000 to write
credit insurance on non-traditional mortgage related assets such as second
mortgages and manufactured housing and to provide credit enhancement to mortgage
related capital market transactions. The Company feels that there are many
opportunities to take advantage of its expertise in credit underwriting and
evaluation of asset performance to write business that it is precluded from
writing in its monoline mortgage guaranty companies, Radian Guaranty and Amerin
Guaranty. Radian Insurance obtained a AA rating from Standard & Poor's Rating
Services ("S&P") and Fitch Ratings ("Fitch") and a Aa3 rating from Moody's
Investors Service, Inc. ("Moody's") based on a prudent business plan and a Net
Worth and Liquidity Maintenance Agreement from Radian Guaranty, which obligates
Radian Guaranty to maintain at least $30 million of capital in Radian Insurance.
The insurance structures typically used in Radian Insurance are pool insurance
or modified pool insurance that can have a reserve or first loss position in
front of Radian Insurance's layer of risk. In addition to the Net Worth and
Liquidity Maintenance Agreement, the Company intends to capitalize Radian
Insurance at all times in an amount that would support the existing risk in
force. As of October 1, 2001, much of the business written in Radian Insurance
was reinsured by Radian Asset Assurance, thereby leaving Radian Insurance with
most of its net risk in second mortgage insurance. Because the Company
anticipates that Radian Asset Assurance will be the primary writer of most of
the Company's future financial guaranty business and that Amerin Guaranty will
be the primary writer of second mortgage insurance in the future, the business
written by Radian Insurance will likely be substantially reduced in 2002.
FINANCIAL GUARANTY INSURANCE BUSINESS
On February 28, 2001, the Company acquired the financial guaranty and other
businesses of Financial Guaranty, a New York based insurance holding company
that primarily insures and reinsures credit-based risks at a purchase price of
approximately $581.5 million. The financial guaranty insurance business is
conducted primarily through two insurance subsidiaries, Radian Reinsurance Inc.
("Radian Re", formerly Enhance Reinsurance Company) and Radian Asset Assurance
Inc. ("Radian Asset Assurance", formerly Asset Guaranty Company) and also to a
limited extent through a Class III Bermuda domiciled insurance company, Enhance
Reinsurance (Bermuda) Limited. In addition, Financial Guaranty has a partial
equity interest in two active credit-based asset businesses: Credit-Based Asset
Servicing and Securitization LLC ("C-BASS") and Sherman Financial Services Group
LLC, ("Sherman"). Several smaller businesses are either in run-off or have been
terminated. The purchase price represented the value of the Company's common
stock and stock options issued in connection with the acquisition and other
consideration in
4
<PAGE>
accordance with an Agreement and Plan of Merger, dated November 13, 2000, by and
among the Company, a wholly-owned subsidiary of the Company and Financial
Guaranty. The acquisition, which was structured as a merger of a wholly-owned
subsidiary of the Company with and into Financial Guaranty, entitled Financial
Guaranty stockholders to receive 0.22 shares of the Company's common stock in a
tax-free exchange for each share of Financial Guaranty's common stock that they
owned at the time of the merger. The acquisition was treated as a purchase for
accounting purposes, and accordingly, the assets and liabilities were recorded
based on their fair values at the date of acquisition. The fair value of assets
acquired was $1,357.9 million. The liabilities assumed were $833.1 million. The
excess of purchase price over fair value of net assets acquired of $56.7 million
represented the future value of insurance profits, which is being amortized over
a period that approximates the future life of the insurance book of business.
The results of Financial Guaranty's operations have been included in the
Company's financial statements for the period from the date of the acquisition
through December 31, 2001.
Financial guaranty insurance provides an unconditional and irrevocable
guaranty to the holder of a debt obligation of full and timely payment of
principal and interest. In the event of a default under the obligation, the
insurer has recourse against the issuer and/or any related collateral (which is
a component of many insured asset-backed obligations and other non-municipal
debt but is not typically a component of municipal obligations) for amounts paid
under the terms of the policy. Payments under the insurance policy may not be
accelerated by the holder of the debt obligation. Absent payment in full at the
option of the insurer, in the event of a default under an insured obligation,
the holder continues to receive payments of principal and interest on schedule,
as if no default had occurred. Each subsequent purchaser of the obligation
generally receives the benefit of such guaranty.
The issuer of the obligation pays the premium for financial guaranty
insurance either in full at the inception of the policy or in installments on an
annual basis. Premium rates are typically calculated as a percentage of either
the principal amount of the debt or total exposure (principal and interest).
Rate setting reflects such factors as the credit strength of the issuer, type of
issue, sources of income, collateral pledged, restrictive covenants, maturity
and competition from other insurers.
Premiums are generally non-refundable and are earned in proportion to the
level amortization of insured principal over the contract period. Premiums
written on a monthly basis are primarily earned as they are received. This long
and relatively predictable earnings pattern is characteristic of the financial
guaranty insurance industry and, along with a conservative investment policy,
provides a relatively stable source of future revenues and claims-paying ability
to financial guaranty insurers and reinsurers such as Financial Guaranty.
The primary financial guaranty insurance market currently consists of two
main sectors: municipal bond insurance and structured finance business including
insurance on collateralized debt obligations, credit default swaps and
asset-backed debt. The following table summarizes the net premiums for the
indicated Financial Guaranty lines of business written by Financial Guaranty for
2001 since the date of acquisition of Financial Guaranty by the Company:
<Table>
<Caption>
DATE OF ACQUISITION
THROUGH
DECEMBER 31, 2001
-------------------
($ IN THOUSANDS)
<S> <C>
NET PREMIUMS WRITTEN:
Municipal Direct............................................ $ 35,652
Municipal Reinsurance....................................... 36,773
Non-Municipal Direct........................................ 12,016
Non-Municipal Reinsurance................................... 36,427
Trade Credit Reinsurance.................................... 22,362
--------
Total.................................................. $143,230
--------
</Table>
Municipal Bond Market. Municipal bond insurance provides credit
enhancement of bonds, notes and other evidences of indebtedness issued by states
and their political subdivisions (for example, counties, cities, or towns),
utility districts, public universities and hospitals, public housing and
transportation authorities, and
5
<PAGE>
other public and quasi-public entities. Municipal bonds are supported by the
issuer's taxing power in the case of general obligation or special tax-supported
bonds, or by its ability to impose and collect fees and charges for public
services or specific projects in the case of most revenue bonds. Insurance
provided to the municipal bond market has been and continues to be a major
source of revenue for the financial guaranty insurance industry.
Non-Municipal Bond Market. Asset-backed transactions or securitizations
constitute a form of structured financing that is distinguished from unsecured
debt issues by being secured by a specific pool of assets held by the issuing
entity, rather than relying on the general unsecured creditworthiness of the
issuer of the obligation. While most asset-backed debt obligations represent
interests in pools of assets, such as residential and commercial mortgages and
credit card and auto loan receivables, financial guarantors have also insured
asset-backed debt obligations secured by one or a few assets, such as utility
mortgage bonds and multi-family housing bonds and obligations under credit
default swaps, both funded and synthetic. A synthetic credit default swap
involves the transfer of credit risk without the removal of assets from the
issuer's balance sheet. The asset-backed securities market including both
synthetic and funded collateralized debt obligations has grown significantly in
recent years although consensus estimates are lacking as to the insured volume.
The Company anticipates Financial Guaranty's increased participation in this
market on a global basis in 2002.
Financial Guaranty Reinsurance
Reinsurance is the commitment by one insurance company, the "reinsurer", to
reimburse another insurance company, the "ceding company," for a specified
portion of the insurance risks underwritten by the ceding company. Because the
insured party contracts for coverage solely with the ceding company, the failure
of the reinsurer to perform does not relieve the ceding company of its
obligation to the insured party under the terms of the insurance contract.
Similarly, the failure of the ceding company to perform does not diminish the
reinsurer's obligations under the reinsurance contract to the ceding company.
While reinsurance provides various benefits to the ceding company, more
important is that it enables a primary insurer to write greater single risks and
greater aggregate risks without contravening the capital requirements of
applicable state insurance laws and rating agency guidelines. State insurance
regulators allow primary insurers to reduce the liabilities appearing on their
balance sheets to the extent of reinsurance coverage obtained from licensed
reinsurers or from unlicensed reinsurers meeting certain solvency and other
financial criteria. Similarly, the rating agencies permit such a reduction for
reinsurance in an amount that depends on the claims-paying ability or financial
strength rating of the reinsurer.
The principal forms of reinsurance are treaty and facultative. Under a
treaty arrangement the ceding company is obligated to cede, and the reinsurer is
correspondingly obligated to assume, a specified portion of a specified type of
risk or risks insured by the ceding company during the term of the treaty
(although the reinsurance risk thereafter extends for the life of the respective
underlying obligations). Under a facultative agreement, the ceding company from
time to time during the term of the agreement offers a portion of specific risks
to the reinsurer, usually in connection with particular debt obligations. A
facultative arrangement further differs from a treaty arrangement in that under
a facultative arrangement the reinsurer oftentimes performs its own underwriting
credit analysis to determine whether to accept a particular risk, while in a
treaty arrangement the reinsurer generally relies on the ceding company's credit
analysis. Both treaty and facultative agreements are typically entered into for
a term of one year, subject to a right of termination under certain
circumstances.
Treaty and facultative reinsurance are typically written on either a
proportional or non-proportional basis. Proportional relationships are those in
which the ceding company and the reinsurer share the premiums, as well as the
losses and expenses, of a single risk or group of risks in an agreed percentage.
In addition, the reinsurer generally pays the ceding company a ceding
commission, which is typically related to the ceding company's cost of obtaining
the business being reinsured. Non-proportional reinsurance relationships are
typically on an excess-of-loss basis. An excess-of-loss relationship provides
coverage to a ceding company up to a specified dollar limit for losses, if any,
incurred by the ceding company in excess of a specified threshold amount.
Reinsurers may also, in turn, purchase reinsurance under retrocessional
agreements to cover all or a portion of their own exposure for reasons similar
to those that cause primary insurers to purchase reinsurance.
6
<PAGE>
Other Financial Guaranty Insurance Businesses
Radian Asset Assurance provides trade credit reinsurance, which protects
sellers of goods under certain circumstances against non-payment of the
receivables they hold from buyers of those goods. Financial Guaranty covers
receivables both where the buyer and seller are in the same country as well as
cross-border receivables. Sometimes in the latter instance, the coverage extends
to certain political risks (foreign currency controls, expropriation, etc.) that
interfere with the payment from the buyer. As of December 31, 2001, the Company
through its ownership of Financial Guaranty, owned an indirect 36.5% equity
interest in EIC Corporation Ltd. ("Exporters"), an insurance holding company
which through its wholly-owned insurance subsidiary licensed in Bermuda, insures
primarily foreign trade receivables for multinational companies. Financial
Guaranty provides significant reinsurance capacity to this joint venture on a
quota-share, surplus share and excess-of-loss basis.
Financial Guaranty also provides surety and credit insurance to securities
firms mostly in the United States and to exchanges throughout the world. A
primary example of such coverage is excess Securities Investor Protection
Corporation ("SIPC") insurance, whereby Financial Guaranty covers non-investment
related losses (as a result of securities and in some cases cash missing from a
customer's account) of a securities firm's customers covered by SIPC in excess
of the $500,000 covered currently provided by SIPC in the United States.
Premiums written on these types of insurance were $2.8 million during 2001.
MORTGAGE SERVICES
RadianExpress.com Acquisition
On November 9, 2000, the Company acquired RadianExpress, an Iowa
Corporation engaged in the business of Internet-based mortgage processing,
closing and settlement services for approximately $8.0 million, consisting of
cash, the Company's common stock, stock options and other consideration. This
transaction has allowed the Company to expand further into the mortgage service
business, which is considered an important adjunct to both the primary mortgage
insurance business and the second mortgage activities of the Company.
RadianExpress had $16.0 million of other income and $17.4 million of operating
expense, for 2001. RadianExpress processed approximately 402,000 applications
during 2001 with approximately 37,000 of the transactions related to net funding
services, whereby RadianExpress receives and disburses mortgages funded on
behalf of its customers.
Asset-Based Businesses
The Company is engaged in certain asset-based businesses, including the
purchase, servicing and/or securitization of special assets, including
sub-performing/non-performing and seller-financed residential mortgages and
delinquent unsecured consumer assets, which utilizes the Company's expertise in
performing sophisticated analysis of complex, credit-based risks.
The most significant of the asset-based businesses is the Company's 46%
interest in C-BASS, a mortgage investment and servicing firm specializing in
credit sensitive, single-family residential mortgage assets and residential
mortgage-backed securities. C-BASS invests in whole loans, single-family
residential properties that have been, or are being, foreclosed, subordinated
securities, known as "B pieces," collateralized by residential loans and
seller-financed notes. By using sophisticated analytics, C-BASS essentially
seeks to take advantage of what it believes to be the mispricing of credit risk
for certain of these assets in the marketplace. In addition, its residential
mortgage servicing company, Litton Loan Servicing LP, which specializes in loss
mitigation, default collection, collection of insurance claims and guaranty
collections under government-sponsored mortgage programs, services whole loans
and real estate. Litton Loan Servicing's subsidiaries service seller-financed
loans and buy and sell seller-financed loans. As part of its investment
strategy, C-BASS holds some assets on its books, securitizes certain assets and
sells other assets directly into the secondary market.
The Company also owns a 45.5% interest in Sherman, a consumer asset and
servicing firm specializing in purchases of and services related to charged off
and bankruptcy plan consumer assets and charged off high loan to value mortgage
receivables from national financial institutions and major retail corporations.
The consumer assets and mortgage receivables are purchased at deep discounts to
their original face value.
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In 2000, Financial Guaranty decided to wind down, sell or otherwise dispose
of, its purchase, servicing and/or securitization of state lottery awards,
structured settlements and viatical (life insurance payment) businesses of
Singer Asset Finance Company, L.L.C. and a related subsidiary Enhance Consumer
Services LLC (collectively, "Singer", an entity acquired in connection with the
acquisition of Financed Guaranty. In connection therewith, in October 2000,
Financial Guaranty sold certain assets and intangibles of its viatical
settlements business and in December 2000 and July 2001 it sold to the prior
management thereof certain of its balance sheet and off-balance sheet assets,
including its pipeline of lottery and structured settlement transactions and
certain intangibles.
Singer is currently operating on a run-off basis. Its operations consist of
servicing and/or disposing of Singer's prior originations of non-consolidated
special purpose vehicles.
CUSTOMERS
Mortgage originators, such as mortgage bankers, mortgage brokers,
commercial banks and savings institutions, are the Company's principal
customers, although individual mortgage borrowers generally incur the cost of
primary insurance coverage. The Company does offer lender-paid mortgage
insurance whereby mortgage insurance premiums are charged to the mortgage lender
or loan servicer. On the lender-paid product, the interest rate to the borrower
is usually higher to compensate for the mortgage insurance premium that the
lender is paying. In 2001, approximately 43% of the Company's primary mortgage
insurance was originated on a lender-paid basis. This lender-paid business is
highly concentrated among a few large mortgage lender customers.
To obtain primary insurance from the Company, a mortgage lender must first
apply for and receive a master policy from the Company. The Company's approval
of a lender as a master policyholder is based, among other factors, upon an
evaluation of the lender's financial position and its management's demonstrated
adherence to sound loan origination practices. The Company's quality control
function then monitors the master policyholder based on a number of criteria.
The number of primary individual mortgage insurance policies the Company
had in force was 891,693 at December 31, 2001, 858,413 at December 31, 2000, and
807,286 at December 31, 1999.
The top 10 mortgage insurance customers were responsible for 45.0% of the
Company's primary new insurance written in 2001 compared to 43.4% in 2000 and
44.6% in 1999. The largest single mortgage insurance customer (including
branches and affiliates of such customer), measured by primary new insurance
written, accounted for 12.6% of primary new insurance written during 2001
compared to 11.2 % in 2000 and 12.2% in 1999.
Financial Guaranty's insurance customers consist of many of the major
global financial institutions that participate in municipal bond transactions,
asset-backed securities and other structured products such as collateralized
debt obligations. These institutions are typically large commercial banks or
investment banks. It is the Company's intention to establish a broad
relationship with a limited number of such institutions to help ensure
consistent, high quality deals in the structured product and municipal areas.
Financial Guaranty's reinsurance customers consist primarily of the Major
Monolines-MBIA Insurance Corporation; Ambac Assurance Corporation; Financial
Guaranty Insurance Company; and Financial Security Assurance Inc. In June 2000,
The Dexia Group acquired the corporate parent of Financial Security Assurance.
The Major Monolines were responsible for 42.0% of Financial Guaranty's
gross premiums written in 2001, compared to 43.0% in 2000 and 45.0% in 1999. The
largest single customer of Financial Guaranty, measured by gross premiums
written, accounted for 18.8% of gross premiums written during 2001 compared to
17% in 2000 and 20% in 1999. This customer concentration results from the small
number of primary insurance companies that are licensed to write financial
guaranty insurance.
Financial Guaranty has maintained close and long-standing relationships
with the Major Monolines, dating from either Financial Guaranty's or the given
primary insurer's inception. In the Company's opinion, these relationships
provide Financial Guaranty with a comprehensive understanding of their
procedures and
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reinsurance requirements and allow the clients to utilize Financial Guaranty's
underwriting expertise effectively, thus improving the service they receive.
Financial Guaranty is a party to facultative and treaty agreements with all
the Major Monolines. Financial Guaranty's facultative and treaty agreements are
generally subject to termination (i) upon written notice (ranging from 90 to 120
days) prior to the specified deadline for renewal, (ii) at the option of the
primary insurer if Financial Guaranty fails to maintain certain financial,
regulatory and rating agency criteria that are equivalent to or more stringent
than those Financial Guaranty's operating subsidiaries are otherwise required to
maintain for their own compliance with the New York Insurance Law and to
maintain a specified claims-paying ability or financial strength rating for the
particular operating subsidiary or (iii) upon certain changes of control. The
Company obtained a waiver of these provisions for the merger transaction between
the Company and Financial Guaranty. Upon termination under the conditions set
forth in (ii) and (iii) above, the Company may be required (under some of their
reinsurance agreements) to return to the primary insurer all unearned premiums,
less ceding commissions, attributable to reinsurance ceded pursuant to such
agreements. Upon the occurrence of the conditions set forth in (ii) above,
unless the agreement is terminated, the Company may be required to obtain a
letter of credit or alternative form of security to collateralize its obligation
to perform under that agreement. In addition, a substantial portion of Radian
Asset Assurance's written business is subject to similar provisions with respect
to any downgrade of its financial strength rating.
SALES, MARKETING AND COMPETITION
Sales and Marketing
The Company employs a mortgage insurance field sales force of approximately
eighty-four (84) persons, organized into three regions, providing local sales
representation throughout the United States. Each of the three regions is
supervised by a regional business manager who is directly responsible for
several area sales managers and several service centers where underwriting and
application processing are performed. The regional business managers are
responsible for managing the profitability of business in their regions
including premiums, losses and expenses. The area sales managers are responsible
for managing a small sales force in different areas within the region. In
addition, a new position of key account manager ("KAM") was created in 2000.
KAMs are intended to manage specific accounts within a region that are not
national accounts but that need more targeted oversight and attention. Mortgage
insurance sales personnel are compensated by salary, commissions on new
insurance written and a production incentive based on the achievement of various
goals. During 2001, these goals were related to volume and market share and this
is generally expected to continue in 2002. In addition to securing business from
small and mid-size regional customers, the mortgage insurance business regions
provide support to the national account effort in the field.
National Accounts. In recognition of the increased consolidation in the
mortgage lending business and the large proportional amount of mortgage business
done by large national accounts, the Company has a focused national accounts
team consisting of five national account managers ("NAM") and a dedicated "A
Team" that is directly and solely responsible for supporting national accounts.
Each NAM is responsible for a select group of dedicated accounts and is
compensated on the results for those accounts as well as the results of the
Company. There has been a trend among national accounts to move to a more
centralized decision about mortgage insurance based on revenue sharing products
and other value added services provided by the mortgage insurance companies. The
Company also has a dedicated NAM who is primarily responsible for relations with
and programs implemented with Fannie Mae and Freddie Mac. National accounts
business represented approximately 52% of the Company's primary new insurance
written in 2001 and is expected to provide a similar percentage in 2002.
The financial guaranty insurance business is derived from relationships
Financial Guaranty has established and maintains with many global financial
institutions and primary insurance companies. These relationships provide
business for Financial Guaranty in the following major areas: (1) deal flow on
municipal bond trading transactions, asset-backed securities and other
structured products; (2) reinsurance for municipal bonds and asset-backed
securities (in which area one or both of Radian Re and Radian Asset Assurance
currently has either treaty or facultative agreements with all but one of the
highest rated monoline primary companies); (3) trade credit reinsurance; and (4)
reinsurance for affiliated-companies (including
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Exporters). Financial Guaranty markets directly to the monoline insurers writing
credit enhancement business and has direct relationships with their affiliated
primary insurers. Specialist reinsurance intermediaries, most of whom are
located in London, usually present to Financial Guaranty reinsurance
opportunities in the credit insurance sector. These brokers work with Financial
Guaranty marketing personnel in introducing Financial Guaranty to the primary
credit insurance markets and in structuring reinsurance to meet the needs of the
primary insurers. Intermediaries are typically compensated by the reinsurer
based on a percentage of premium assumed, which varies from agreement to
agreement.
Competition
The Company competes directly with six other private mortgage insurers and
with various federal government agencies, principally the Federal Housing
Administration ("FHA"). In addition, the Company and other private mortgage
insurers face competition from state-supported mortgage insurance funds. The
private mortgage insurance industry consists of the Company and six other active
mortgage insurance companies. During 2001, the Company was the fourth largest
private mortgage insurer, measured by market share and had, according to
industry data, a market share of new primary mortgage insurance written of 15.6%
as compared to 15.2% in 2000. The Company believes that the market share
increase was due, in part, to an increase in its share of new insurance written
under structured transactions that are included in industry new insurance
written figures.
Financial Guaranty is subject to competition from companies that specialize
in financial guaranty reinsurance including ACE Limited, Axa Reassurance
Finance, S.A. and RAM Reinsurance Co. Ltd. In addition, several multiline
insurers have recently increased their participation in financial guaranty
reinsurance. Certain of these multiline insurers have formed strategic alliances
with some of the U.S. primary financial guaranty insurers. Competition in the
financial guaranty reinsurance business is based upon many factors, including
overall financial strength, pricing, service and evaluation by the rating
agencies of claims-paying ability or financial strength. The agencies allow
credit to a ceding primary insurer's capital requirements and single-risk limits
for reinsurance ceded in an amount that is a function of the claims-paying
ability or financial strength rating of the reinsurer. The Company believes that
competition from multiline reinsurers and new monoline financial guaranty
insurers will continue to be limited due to (a) the declining number of
multiline insurers with the required financial strength and (b) the barriers to
entry for new reinsurers posed by state insurance law and rating agency criteria
governing minimum capitalization. Financial guaranty insurance, including
municipal bond insurance and the structured business, also competes with other
forms of credit enhancement, including letters of credit, guaranties and credit
default swaps provided primarily by foreign banks and other financial
institutions, some of which are governmental entities or have been assigned the
highest credit ratings awarded by one or more of the major rating agencies.
However, these credit enhancements serve to provide primary insurers with
increased insurance capacity only for rating agency purposes. They do not
qualify as capital for state regulatory purposes, nor do they constitute credit
against specific liabilities that would allow the primary insurer greater
single-risk capacity.
The Company believes that Financial Guaranty has a number of direct
competitors in their other insurance businesses, some of which have greater
financial and other resources than Financial Guaranty. As a primary insurer, the
Company writes insurance on those types of municipal bonds with respect to which
such primary insurers have sometimes declined to participate because of the size
or complexity of such bond issuances relative to the anticipated premium flow
and returns. The Company also serves as a reinsurer for certain specialty
primary insurers that are not monoline financial guaranty insurers. These
specialty primary insurers are themselves subject to competition from other
primary insurers, many of which have greater financial and other resources.
RISK MANAGEMENT
The Company considers effective risk management to be critical to its
long-term financial stability. Market analysis, prudent underwriting, the use of
automated risk evaluation models and quality control are all important elements
of the Company's risk management process. The Company also utilizes Enterprise
Risk Management (ERM) in evaluating its risk. This involves reviewing its
consolidated and interdependent credit
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risk, market or funding risk, interest rate risk, operational risk, and legal
risk across all of its businesses, and the development of risk adjusted return
on capital models.
Mortgage Insurance Business
Risk Management Personnel
In addition to a centralized Risk Management department in the home office,
each of the Company's mortgage insurance service regions has an assigned Risk
Manager responsible for evaluating risk and monitoring the risk profiles of
major lenders in the region. The Company employs an underwriting and support
staff of approximately ninety (90) persons who are located in Mortgage
Insurance's twelve (12) service centers. Additionally, the Company has two
agency operations in place for the states of Alaska and Hawaii.
Underwriting Process
The Company has generally accepted applications for primary mortgage
insurance (other than in connection with structured transactions) under three
basic programs: the traditional fully documented program, a limited
documentation program and the delegated underwriting program. Programs that
involve less than fully documented file submissions have become more prevalent
in recent years. In order to meet this demand, the Company introduced to the
marketplace the process referred to as Radian Steamlined Doc ("Streamlined
Doc"). A lender utilizing Streamlined Doc can submit loans to the Company for
insurance with abbreviated levels of documentation based on the type of loan
being submitted for insurance. During 2001, 46% of the commitments issued for
primary insurance were received by the Company under the Streamlined Doc
program. In the Streamlined Doc program, the Company has agreed to underwrite
certain loans with less documentation by relying upon a scoring model created by
the Company during 1996 known as the "Prophet Score(R)" System (described
below).
Delegated Underwriting
The Company has a delegated underwriting program with a majority of its
customers. The Company's delegated underwriting program, which was implemented
in 1989, currently involves only lenders that are approved by the Company's risk
management department. The delegated underwriting program allows the lender's
underwriters to commit the Company to insure loans based on agreed upon
underwriting guidelines. Delegated loans are submitted to the Company in various
ways -- fax, electronic data interchange ("EDI") and through the Internet. The
Company routinely audits loans submitted under this program. As of December 31,
2001, approximately 21% of the risk in force on the Company's books was
originated on a delegated basis and during 2001 and 2000, respectively, 37% and
63% of the primary loans insured by the Company during such years were
originated on a delegated basis. This decrease from 2000 is primarily the result
of the increase in insurance written on loans resulting from structured
transactions.
Mortgage Scoring Models
During the last few years, the use of scoring mechanisms to predict loan
performance has become prevalent in the marketplace, especially with the GSEs
advocacy of the use of credit scores in the mortgage loan underwriting process.
The use of credit scores was pioneered by Fair Isaac and Company ("FICO") and
became popular in the mid-1980s. The FICO model calculates a score based on a
borrower's credit history. This credit score based scorecard is used to predict
the future performance of a loan over a one or two year time horizon. The higher
the credit score the lower the likelihood that a borrower will default on a
loan. The Company's Prophet Score begins with a FICO score then adds specific
additional data regarding the borrower, the loan and the property such as LTV,
loan type, loan amount, property type, occupancy status and borrower employment.
The Company believes that it is this additional mortgage data that expands the
integrity of the Company's Prophet Score over the entire life of the loan. In
addition to the Prophet Score, the Company's housing analysts regularly review
major metropolitan areas to assess the impact that key indicators such as
housing permits, employment trends, and median home sale prices have on local
lending. The healthier the real estate market, the lower the risk. The Company
refers to this score as a GEOScore. Beginning in October 1996, the Prophet Score
and GEOScore have appeared on each insurance commitment that Mortgage Insurance
issued.
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Automated Underwriting
Mortgage Insurance's frontline computer system for input and underwriting
loan file information is called MINACS. In utilizing MINACS, the Company
captures information from all segments of a loan file including the borrower's
employment and income history and appraisal information. This information is
then channeled through various edits and subfiles (including Prophet and
GEOScore) to assist the underwriter in determining the total risk profile on a
given file. This system also includes: a) tracking loans by borrowers who have
previously defaulted on a loan insured by the Company or loans where the Company
has paid a claim, b) identifying borrowers who have previously applied for the
Company insurance, and c) information about the lender involved including
volume, commitment rates and delinquency rates.
Alternative Products
An increasingly popular form of mortgage lending is in the area of
non-prime loans. Subsets of this category in which the Company has become
involved are Alternative A ("Alt A"), A minus and B/C loans. The Company has
continued to limit its participation in these non-prime markets to mostly Alt A
and A minus loans rather than "B or "C" loans and has targeted the business
insured to specific lenders with proven good results and servicing experience in
this area. The Company's corporate due diligence has identified such lenders as
"Tier 1" lenders.
Alternative A Loans
Alt A loans can now be segregated into two distinct credit profiles:
borrowers with a better credit profile than the Company's typical insured
borrowers, with a FICO score greater than 680 ("FICO >680"), and borrowers with
a credit profile equal to the Company's typical insured borrower, with a FICO
score from 660 to 679 ("FICO 660-679"). The Company charges a higher premium for
Alt A business due to the reduced income and/or asset documentation received at
origination. The premium rate is also risk adjusted to reflect the difference in
credit profile of the FICO >680 borrower and FICO 660-679 borrower. While the
Company believes the Alt A loans with a FICO of 660-679 category present a
slightly higher risk than its normal business, the premium surcharge compensates
the Company for this additional risk. Alt A loans represented 9.4% of total
primary risk in force at the end of 2001 and Alt A products made up 18.3% of the
Company's primary new insurance written in 2001 as compared to 13.4% in 2000.
A Minus Loans
The A minus program can also be segregated into two distinct credit
profiles. A "near-miss" prime A loan has a FICO score from 590-619 ("FICO
590-619"). These borrowers were forced into the A minus markets in 1996 when the
GSEs set a 620 FICO score as the base for a prime borrower. These were typically
borrowers the Company insured prior to 1996 and mortgage insurance on loans made
to this class of borrowers has resurfaced as the GSEs have entered the A minus
market. The Company receives a significantly higher premium for insuring this
product that is commensurate with the additional default risk. The second credit
profile contains borrowers with a FICO score from 570-589 ("FICO 570-589"). This
product comes to the Company primarily through primary structured transactions
and the insurance is typically lender-paid. The Company also receives a
significantly higher premium for insuring this product that is commensurate with
the increased default risk and which is normally a variable rate based on the
Prophet Score. A minus loans represented 7.8% of total primary risk in force at
the end of 2001 and A minus loans made up 10.0% of the Company's primary new
insurance written in 2001 as compared to 8.1% in 2000.
B/C Loans
The Company has no approved programs to insure loans that are defined as
B/C risk grades. However, some pools of loans submitted for insurance as primary
structured transactions might contain a limited number of these loans. The
Company receives significantly higher premium on these loans due to the
increased default risk associated with this type of loan. B/C loans represented
approximately 3.6% of total primary new insurance written during 2001 compared
to less than 1% of total primary new insurance written during 2000. This
increase is primarily the result of the increase in insurance written on loans
resulting from structured transactions.
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Contract Underwriting
The Company utilizes its underwriting skills to provide an outsource
contract underwriting service to its customers. For a fee, the Company
underwrites fully documented underwriting files for secondary market compliance,
while concurrently assessing the file for mortgage insurance, if applicable. The
automated underwriting service introduced in the latter part of 1997 has become
a major part of the Company's contract underwriting service. This service offers
customers access to Fannie Mae's Desktop Underwriter and Freddie Mac's Loan
Prospector loan origination systems. Contract underwriting continues to be a
popular service to mortgage insurance customers. During 2001, loans underwritten
via contract underwriting accounted for 34.5% of applications, 32.0% of
commitments for insurance and 25.8% of insurance certificates issued. The
Company gives recourse to its customers on loans it underwrites for compliance.
If the loan does not meet agreed upon guidelines, the Company agrees to remedy
the situation either by placing mortgage insurance coverage on the loan or by
purchasing the loan. During 2001, the Company processed requests for remedies on
less than 1% of the contract loans underwritten and sold a number of loans
previously acquired as part of the remedy process. Providing these remedies
means the Company assumes some credit risk and interest rate risk if an error is
found during the limited remedy period in the agreements. Rising mortgage
interest rates or an economic downturn may expose the mortgage insurance
business to higher losses. During 2001, the financial impact of these remedies
was insignificant although there is no assurance that such results will continue
in 2002 and beyond.
Quality Control
As part of the Company's system of internal control, the Risk Management
function maintains a Quality Control ("QC") Department. The QC function is
responsible for ensuring that the Company's portfolio of insured loans meets
good underwriting standards and conforms to the Company's guidelines for
insurability, thus minimizing the Company's exposure to controllable risk. Among
its other activities, the QC function accomplishes this objective primarily by
performing contract underwriting audits, delegated lender audits, and due
diligence reviews of structured transactions.
Contract Underwriting Audits
The QC function routinely audits the performance of the Company's contract
underwriters. In order to ensure the most effective use and allocation of audit
resources, a risk assessment model has been developed which identifies high,
medium, and low risk contract underwriters based upon six weighted risk factors
applied to each underwriter. The models are continually updated with current
information. Audit rotation is more frequent for high risk underwriters and less
frequent for those classified as low risk. Audit results are communicated to
management and impact whether additional targeted training is necessary or
whether termination of the underwriter's services is appropriate.
Contract underwriting audits help to ensure that customers receive quality
underwriting services. The audits also protect the Company in that they
facilitate the Company's efforts to improve quality control.
Delegated Lender Audits
Through the use of borrower credit scoring and its own proprietary mortgage
scoring system, the Company is able to monitor the credit quality of loans
submitted for insurance. The Company also conducts a periodic, on-site review of
a delegated lender's insured delegated underwriting business. Lenders with
significant risk concerns, as identified in past reviews and through the
Company's regular risk reporting and analysis of the business, may be reviewed
more frequently.
Loans are selected for review on a random sample basis, and this sample may
be augmented by a targeted sample based upon specific risk factors or trends
identified through the monitoring process described above. The objective of the
loan review is to identify errors in the loan data transmitted to the Company,
to determine lender compliance with the Company's underwriting guidelines and
eligible loan criteria, to assess the quality of a lender's underwriting
decisions, and to rate the risk of the individual loans insured. The Company has
developed a proprietary data collection and risk analysis application to
facilitate these reviews. Audits are graded based upon the risk ratings of the
loans reviewed, lender compliance, and data integrity. The results of each audit
are summarized in a report to the lender and to Company management. The audit
results are used
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as a means to improve the quality of the business the lender submits to the
Company for insurance. Issues raised in the reports that are not resolved in a
manner and within a time period acceptable to the Company may result in
restriction or termination of the lender's delegated underwriting authority.
Due Diligence of Structured Transactions
The QC function, in conjunction with other members of the Risk Management
group, also performs due diligence of structured transactions. These due
diligence reviews may be precipitated either by a desire to develop an ongoing
relationship with selected lenders, or by the submission of a proposed
transaction by a given lender. Due diligence can take two forms: business level
and loan level.
Business Level Due Diligence
The Company believes that a key component of understanding the risks posed
by a potential business deal is understanding the business partner. The
Company's objective is to understand the lender's business model in sufficient
depth to determine whether the Company should have confidence in the firm as a
potential long-term business partner and customer. Business level due diligence
may be performed on any prospective lender with whom a structured deal is
contemplated and with whom the Company has had no prior business experience.
Business level due diligence includes a review of: the lender's company
structure, management, business philosophy, and financial health, the company's
credit management processes, the quality control processes, and servicing
relations.
Loan Level Due Diligence
Loan level due diligence is conducted on pending structured transactions in
order to determine whether appropriate underwriting guidelines have been adhered
to, whether loans conform to Company guidelines, to evaluate data integrity, and
to detect any fraudulent loans. Loans are selected for audit on a sample basis,
and audit results are communicated to the Company's management. The results of
loan level due diligence assist management in determining whether the pending
deal should be consummated, and if so, provides data that can be used to
determine appropriate pricing. It also provides management with a database of
information on the quality of a particular lender's underwriting practices for
future reference.
The results of these due diligence reviews are summarized in reports to the
Company's management. Letter grades are assigned to each section of the business
and loan level reviews. Weights are then assigned to each section of the review
(e.g., corporate, credit, quality control, servicing) that vary based upon the
product under review, (e.g., prime first liens, A minus first liens, prime
second liens, etc.) which results in an overall letter grade assigned to the
lender. The grade conveys to the Company's management the opinion of Risk
Management as to the overall risk profile presented by a lender and therefore
the relative appeal of a potential relationship with that lender.
Financial Guaranty Business
The Company believes its financial guaranty underwriting discipline is
critical to the profitability and growth of the financial guaranty insurance
businesses. Financial Guaranty has a structured underwriting process to
determine the characteristics and creditworthiness of risks that Financial
Guaranty directly insures or reinsures, which process, in the case of
reinsurance transactions, supplements the underwriting procedures of the primary
insurers. Rather than relying entirely upon the underwriting performed by the
primary insurers, Radian Re and Radian Asset Assurance, as applicable, and the
rating agencies conduct extensive reviews of the primary insurers. Moreover, the
ceding insurer is typically required to retain at least 25% of the exposure on
any single risk assumed.
Financial Guaranty carefully evaluates the risk underwriting and management
of treaty customers, monitors the insured portfolio performance and conducts a
detailed underwriting review of the facultative insurance it writes. Financial
Guaranty believes that the reinsurance of municipal bond guaranties provides a
relatively stable source of premium income. In addition, most premiums received
are credited as deferred premium revenue and are earned as the related risks
amortize, thereby providing a relatively stable, predictable source of earned
premiums.
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Financial Guaranty conducts periodic detailed reviews of each Major
Monoline and other carriers with which it does facultative business. That review
entails an examination of the primary insurer's operating, underwriting and
surveillance procedures, personnel, organization and existing book of business,
as well as the primary insurer's underwriting of a sample of business assumed
under the treaty. Facultative transactions are reviewed individually under
procedures adopted by Financial Guaranty's credit committees. Any underwriting
issues are discussed internally by the credit committee and with the primary
insurer's personnel. In connection with Financial Guaranty's direct insurance
business, it conducts periodic reviews of its insured parties, whether in
connection with policy renewal or otherwise. That review includes an examination
of the insured party's operations, internal control procedures, personnel and
organization.
Limitations on Financial Guaranty's single-risk exposure derive from state
insurance regulation, rating agency guidelines and internally established
criteria. The primary factor in determining single-risk capacity is the class or
sector of business being underwritten. For municipal credits, Financial Guaranty
has self-imposed single-risk guidelines which range widely, depending upon the
perceived risk of default of the municipal obligation insured or reinsured. For
asset-backed transactions, the single-risk guidelines generally follow state
insurance regulation limitations, as well as additional self-imposed single risk
and cumulative servicer-related risk. On individual underwritings, the credit
committee may limit its insurance or reinsurance participation to an amount
below that allowed by the single-risk guidelines noted above. Moreover,
Financial Guaranty relies on ongoing oversight by its credit committees with
input from risk management and surveillance to avoid undue exposure
concentration in any given type of obligation or geographic area.
Financial Guaranty's surveillance procedures include reviews of those
exposures assumed as a reinsurer as to which it may have concerns. Financial
Guaranty also maintains regular communication with the surveillance departments
of the ceding primary insurers.
The underwriting criteria applied in evaluating a given issue for primary
insurance coverage and the internal procedures (for example, credit committee
review) for approval of the issue are substantially the same as for the
underwriting of reinsurance. The entire underwriting responsibility rests with
Financial Guaranty as the primary insurer. As a result, Financial Guaranty
participates more actively in the structuring of the transaction and conducts
more detailed reviews of the parties it insures in which Financial Guaranty is a
primary insurer than it does as a reinsurer. Financial Guaranty conducts, in
most cases annually, in-depth surveillance of issues insured as a primary
insurer.
RATINGS
The Company has its claims-paying ability and/or financial strength rated
by S&P, Moody's and Fitch. The rating criteria used by the rating agencies focus
on the following factors: capital resources; financial strength; commitment of
management to, and alignment of shareholder interests with, the insurance
business; demonstrated management expertise in the insurance business conducted
by the company; credit analysis; systems development; marketing; capital markets
and investment operations, including the ability to raise additional capital;
and a minimum policyholders' surplus comparable to primary company requirements,
with initial capital sufficient to meet projected growth as well as access to
such additional capital as may be necessary to continue to meet standards for
capital adequacy. As part of their rating process, S&P, Moody's and Fitch test
the Company's insurance subsidiaries by subjecting them to a "worst-case
depression scenario." Expected losses over a depression period are established
by applying capital charges to the existing and projected insurance portfolio.
The claims-paying ability and financial strength ratings assigned by the
rating agencies to an insurance or reinsurance company are based upon factors
relevant to policyholders and are not directed toward the protection of the
insurer's or reinsurer's securityholders. Such a rating is neither a rating of
securities nor a recommendation to buy, hold or sell any security. Claims-paying
ability and financial strength ratings assigned to the insurance subsidiaries
should not be viewed as indicative of or relevant to any ratings which may be
assigned to the Company's outstanding debt securities by any rating agency and
should not be considered an evaluation of the likelihood of the timely payment
of principal or interest under such securities. However, these ratings are an
indication to an insurer's customers of the insurer's present financial strength
and its capacity to honor its future claims payment obligations. Therefore,
ratings are generally considered critical to
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an insurer's ability to compete for new insurance business. Currently, Radian
Guaranty, Amerin Guaranty, and Radian Insurance are rated "AA" by S&P and Fitch
and "Aa3" by Moody's.
Radian Re is rated by S&P, Fitch and Moody's. S&P and Fitch have each
assigned Radian Re an "AAA" claims-paying ability rating, its highest rating,
and Moody's has assigned Radian Re an "Aa2" financial strength rating. Radian
Asset Assurance has been assigned "AA" claims-paying ability ratings by each of
S&P and Fitch.
Radian Group, Inc., has been assigned a senior debt rating of A+ by Fitch,
A by S&P, and A2 by Moody's.
Pursuant to the terms of Financial Guaranty's reinsurance agreements, a
downgrade in either Radian Re's or Radian Asset Assurance's financial strength
rating to (or below) "A" could have a material adverse effect on their
respective competitive position. A downgrade may so diminish the value of their
reinsurance to the Major Monolines that they could either materially increase
the costs to Radian Re or Radian Asset Assurance associated with cessions under
the Major Monolines' treaties with Radian Re or Radian Asset Assurance or
recapture business previously ceded to Radian Re or Radian Asset Assurance. In
either case, the effect of such changes could materially adversely affect
Financial Guaranty's ability to continue to engage in the reinsurance of
monoline financial guaranty insurers business. While Financial Guaranty believes
that the recapture of business by the primaries would otherwise be inconsistent
with their long-standing risk management practices, such action, if it occurs
and depending on its magnitude, could have a material adverse effect on
Financial Guaranty. In March 2002, S&P changed the outlook for the financial
guaranty reinsurance industry from "stable" to "negative". Although this change
does not represent a downgrade or a credit watch event with respect to Radian Re
specifically, the Company anticipates such change to prompt a more thorough
review of the financial guaranty reinsurance industry, generally, and Radian Re,
specifically. Financial Guaranty believes that the same consequences as set
forth above would occur were Radian Asset Assurance to experience any such
downgrade, which, in turn, could materially adversely affect its ability to
continue to engage in certain specialty businesses, principally insurance of
municipal bonds.
REINSURANCE CEDED
Amerin Guaranty and Radian Guaranty currently use reinsurance from
affiliated companies in order to remain in compliance with the insurance
regulations of certain states that require that a mortgage insurer limit its
coverage percentage of any single risk to 25%. Amerin Guaranty and Radian
Guaranty currently intend to use such reinsurance solely for purposes of such
compliance. Radian Re and Radian Asset Assurance also use reinsurance from
affiliated companies in order to remain in compliance with applicable insurance
regulations, including single risk limitations. Radian Re and Radian Asset
Assurance currently intend to use such reinsurance from affiliated companies
solely for the purpose of such compliance.
Radian Guaranty reinsures all direct insurance in force under an excess of
loss reinsurance program that it considers to be an effective catastrophic
reinsurance coverage. Under this program, the reinsurer is responsible for 100%
of covered losses in excess of Radian Guaranty's retention. The annual retention
is determined by a formula that contains variable components. The estimated 2002
retention is approximately $735 million of loss, which represents 120% of
expected premiums earned by Radian Guaranty. The reinsurer's aggregate annual
limit of liability is also determined by a formula with variable components and
is currently estimated to be $140 million. In addition, in 1999, a limit was set
on the amount of annual pool insurance losses that can be counted in the
reinsurance recoverable calculation. For 2002, this limit is $90 million. If the
reinsurer decides not to renew the reinsurance arrangement and is not replaced
by Radian Guaranty, the reinsurer must provide six years of runoff coverage.
There is an overall aggregate limit of liability applicable to any runoff period
equal to four times the annual limit in effect for the calendar year of such
nonrenewal. For 2002, this aggregate limit is estimated to be $560 million. The
excess of loss reinsurance program also provides restrictions and limitations on
the payment of dividends by Radian Guaranty, investments, mergers or
acquisitions involving other private mortgage insurance companies and
reinsurance of exposure retained by Radian Guaranty. The Company is currently
reviewing this reinsurance program and could replace the provider by 2003.
16
<PAGE>
In addition, Radian Guaranty entered into a variable quota-share ("VQS")
treaty for primary risk in the 1994 to 1997 origination years and a portion of
the pool risk written in 1997. In this treaty, quota-share loss relief is
provided at varying levels ranging from 7.5% to 15.0% based upon the loss ratio
on the reinsured book. The higher the loss ratio, the greater the potential
reinsurance relief, which protects Radian Guaranty in adverse loss situations. A
ceding commission is paid by the reinsurer to Radian Guaranty and the agreement
is noncancelable for ten years by either party. As of December 31, 2001, the
risk in force covered by the VQS treaty was approximately $4.0 billion, or
approximately 14.3% of total primary risk in force and $51.4 million, or
approximately 4.1% of total pool risk in force. The Company did not reinsure any
additional business pursuant to the VQS treaty for the 2001 origination year.
Amerin Guaranty was party, until December 31, 2000, to a reinsurance
agreement pursuant to which the reinsurer was obligated to repay, up to an
aggregate amount of $100 million, all losses and allocated loss adjustment
expenses paid by Amerin Guaranty during periods in which (i) the ratio of Amerin
Guaranty's risk in force divided by the sum of policyholders' surplus plus the
contingency reserve calculated in accordance with statutory accounting practices
exceeded 24.9 to 1 and (ii) the sum of Amerin Guaranty's expense ratio and loss
ratio exceeded 100%. This reinsurance treaty was cancelled as of January 1,
2001.
Financial Guaranty is a party to certain facultative retrocession (the
ceding of reinsured business) agreements, pursuant to which it cedes to certain
retrocessionnaires a portion of its reinsurance exposure. Since it is required
to pay its obligations in full to the primary insurer regardless of whether it
is entitled to receive payments from its retrocessionnaire, the Company believes
that it is important that its retrocessionnaires be very creditworthy. The
Company also cedes to reinsurers a portion of its direct insurance exposure, and
the foregoing also describes in general the relationship between the Company and
its reinsurers. Financial Guaranty has historically retroceded relatively little
of its financial guaranty reinsurance exposure for risk management reasons. In
its specialty insurance businesses, Financial Guaranty in recent years has
reinsured a portion of its direct insurance exposure, particularly that incurred
in its excess-SIPC program, principally in order to comply with applicable
regulatory single-risk limitations. Most of the reinsurance capacity for its
excess-SIPC program is provided by certain of the Major Monolines.
Radian Re is party to an excess-of-loss reinsurance agreement with a
reinsurance company under which it is entitled, subject to certain conditions,
to draw from such reinsurer up to $25 million under certain circumstances. The
agreement has a term of one year and is cancelable annually at the option of
either party, except that Radian Re has the option to force a seven-year run-off
period.
In November 2001, Radian Re entered into a credit agreement with a group of
major foreign banks under which Radian Re is entitled, upon reaching a $200
million threshold of losses and subject to certain conditions, to draw from such
banks up to $90 million under certain circumstances. The agreement has an
initial term of seven years and may be extended annually for additional one-year
periods.
In February 2001, Radian Asset Assurance entered into a credit agreement
with a major foreign bank under which Radian Asset Assurance is entitled, upon
reaching a $100 million threshold of losses and subject to certain conditions,
to draw from such bank up to $25 million under certain circumstances. The
agreement has an initial term of seven years and may be extended annually for
additional one-year periods.
CROSS GUARANTY AGREEMENT
A Guaranty Agreement was entered into on August 11, 1999 by Radian Guaranty
and Amerin Guaranty. The agreement provides that in the event Radian Guaranty
fails to make a payment to any of its policyholders, Amerin Guaranty will make
the payment; in the event Amerin Guaranty fails to make a payment to any of its
policyholders, then Radian Guaranty will make the payment. Under the terms of
the agreement, the obligations of both parties are unconditional and
irrevocable; however, no payments will be made without prior approval by the
Pennsylvania Department of Insurance.
DEFAULTS AND CLAIMS
Defaults
The default and claim cycle on loans which have private mortgage insurance
begins with the insurer's receipt from the lender of notification of a default
on an insured loan. The master policy requires lenders to
17
<PAGE>
notify the Company of an uncured default on a mortgage loan within 75 days (45
days for an uncured default in the first year of the loan), although many
lenders do so earlier. The incidence of default is affected by a variety of
factors, including change in borrower income, unemployment, divorce and illness,
the level of interest rates and general borrower creditworthiness. Defaults that
are not cured result in claims to the Company. Borrowers may cure defaults by
making all delinquent loan payments or by selling the property and satisfying
all amounts due under the mortgage.
The following table shows the number of primary and pool loans insured,
related loans in default and the percentage of loans in default (default rate)
as of the dates indicated:
DEFAULT STATISTICS
<Table>
<Caption>
DECEMBER 31
-----------------------------
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
PRIMARY INSURANCE:
Prime:
Insured loans in force........................... 752,519 792,813 774,003
Loans in default(1).............................. 23,312 17,840 16,605
Percentage of loans in default................... 3.1% 2.3% 2.2%
Non-Prime:
Insured loans in force........................... 139,174 65,600 33,283
Loans in default(1).............................. 7,704 2,690 1,193
Percentage of loans in default................... 5.5% 4.1% 3.6%
Total Primary Insurance:
Insured loans in force........................... 891,693 858,413 807,286
Loans in default(1).............................. 31,016 20,530 17,798
Percentage of loans in default................... 3.5% 2.4% 2.2%
POOL INSURANCE(2):
Insured loans in force........................... 869,226 768,388 676,454
Loans in default(1).............................. 8,213 5,989 4,352
Percentage of loans in default................... 0.9% 0.8% 0.6%
</Table>
- ---------------
(1) Loans in default exclude those loans 45 days past due or less and loans in
default for which the Company feels it will not be liable for a claim
payment.
(2) Includes traditional and modified pool insurance of prime and non-prime
loans.
Regions of the United States may experience different default rates due to
varying economic conditions. The following table shows the primary mortgage
insurance default rates by the Company's defined regions as of the dates
indicated, including prime and non-prime loans.
DEFAULT RATES BY REGION
<Table>
<Caption>
DECEMBER 31
--------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
North....................................................... 3.85% 2.50% 1.88%
South....................................................... 4.15 2.10 2.59
West........................................................ 3.38 2.21 2.10
Alaska...................................................... 0.86 1.08 0.82
Hawaii...................................................... 1.77 2.23 2.03
</Table>
As of December 31, 2001, primary mortgage insurance default rates for the
Company's two largest states measured by risk in force, California and Florida,
were 2.9% and 4.6% respectively, compared to 2.3% and 3.9% respectively, at
December 31, 2000.
18
<PAGE>
Claims
In the mortgage insurance business, the likelihood that a claim will result
from a default and the amount of such claim depend principally on the borrower's
equity at the time of default and the borrower's (or the lender's) ability to
sell the home for an amount sufficient to satisfy all amounts due under the
mortgage, as well as the effectiveness of loss mitigation efforts. Claims are
also affected by local housing prices, interest rates, unemployment levels and
the housing supply.
Claim activity is not evenly spread through the coverage period of a book
of business. Relatively few claims are received during the first two years
following issuance of the policy. This is followed by a period of rising claims
which, based on industry experience, has historically reached its highest level
in the third through fifth years after the year of loan origination. Thereafter,
the number of claims received has historically declined at a gradual rate,
although the rate of decline can be affected by conditions in the economy.
Approximately 66.9% of total primary risk, including most of the Company's risk
in force on alternative products, and approximately 59.3% of total pool risk in
force at December 31, 2001 had not yet reached its anticipated highest claim
frequency years.
In the financial guaranty business, the Company is typically obligated to
pay amounts equal to defaulted payments on insured obligations on their
respective due dates. In municipal, asset-backed, and other structured products,
the Company primarily underwrites with a zero-loss or remote loss underwriting
objective. As such, the patterns of claim payments tend to fluctuate and may be
low in frequency and high in severity. In trade credit protection, the Company
underwrites and prices to encompass historical loss patterns experienced by the
Company and by ceding companies in similar businesses. The claim payments in
trade credit tend to follow a more historical loss pattern that is reflective of
overall global economic conditions.
Loss Mitigation
The Mortgage Insurance loan workout staff consists of nineteen (19)
employees, including several full time loan workout specialists who proactively
intervene in the default process, working with borrowers to reduce the frequency
and severity of foreclosure losses. The size of the loan workout staff has
decreased over the past few years, primarily due to an enhancement in the
ability of loan servicers to perform this function adequately with less
assistance needed by the Company. Once a notice of default is received, the
Company scores the default using a proprietary model that predicts the
likelihood that the default will become a claim. Using this model the loan
workout specialists prioritize cases for proactive intervention to counsel and
assist borrowers. Loss mitigation techniques include pre-foreclosure sales,
extensions of credit to borrowers to reinstate insured loans, loan modifications
and deficiency settlements. The Company still considers its loss mitigation
efforts to be an effective way to reduce claim payments.
Subsequent to foreclosure, the Company uses post-foreclosure sales and the
exercise of the full claim payment option to further mitigate loss. This was
considered an extremely effective loss mitigation tool in 2001 due to relatively
strong property values, although there can be no assurance that such positive
results will continue.
Financial Guaranty's surveillance group is responsible for detecting any
deterioration in credit quality or changes in the economic or political
environment that could effect the timely payment of debt service on an insured
issue. Once a problem is detected, the group then works with the appropriate
parties in order to avoid a default. Claims are generally mitigated by
restructuring the obligation, enforcing in a timely fashion any security
arrangements, and working with the issuer to solve management or potential
political problems. Issuers are typically under no obligation to restructure
insured issues in order to prevent losses. Financial Guaranty believes that
early detection and continued involvement by the surveillance group has reduced
claims. There can be no assurance, however, that there will be no material
losses in the future regarding Financial Guaranty's business.
Homeownership Counseling
In 1995, Mortgage Insurance established a Homeownership Counseling Center
(the "Center") to work with borrowers receiving insured loans under Community
Homebuyer, 97% LTV ("97s") or other "affordable housing" programs. The Company
considers this counseling to be very important to the future success of those
19
<PAGE>
particular borrowers with regard to sustaining their mortgage payments. In
addition, the Center counsels such borrowers early in the default process in an
attempt to help cure the loan and assist the borrower in meeting their mortgage
obligation.
Loss Reserves -- Mortgage Insurance
The Company establishes reserves to provide for the estimated costs of
settling claims in respect of loans reported to be in default and loans that are
in default which have not yet been reported to the Company. Consistent with
accounting principles generally accepted in the United States of America
("GAAP") and industry accounting practices, the Company does not establish loss
reserves for future claims on insured loans which are not currently in default.
In determining the liability for unpaid losses related to reported outstanding
defaults, the Company establishes loss reserves on a case-by-case basis. The
amount reserved for any particular loan is dependent upon the characteristics of
the loan, the status of the loan as reported by the servicer of the insured loan
as well as the economic condition and estimated foreclosure period in the area
in which the default exists. As the default progresses closer to foreclosure,
the amount of loss reserve for that particular loan will be increased, in
stages, to approximately 100% of the Company's exposure.
Loss Reserves -- Financial Guaranty Insurance Businesses
Financial Guaranty establishes a provision for losses and related loss
adjustment expenses as to a particular insured risk when the ceding companies
report a loss on the risk or when, in its opinion, the risk is in default or a
default is probable and the amount of the loss is reasonably estimable.
Financial Guaranty bases the provision for losses and loss adjustment expenses
on the estimated loss, including expenses associated with settlement of the
loss, through the full term of the insured obligation. In the case of
obligations with fixed periodic payments, the provision for losses and loss
adjustment expenses represents the present value of the ultimate expected
losses, adjusted for estimated recoveries under salvage or subrogation rights.
On any given municipal and asset-backed reinsurance transaction, Financial
Guaranty and its primary insurer customers underwrite with a zero-loss
underwriting objective. For the trade credit reinsurance business, loss reserves
are established based on historical loss development patterns experienced by
Financial Guaranty and by ceding companies in similar businesses. The estimate
of reserves for losses and loss adjustment expenses, which includes a
non-specific loss reserve, is periodically evaluated by Financial Guaranty, and
changes in estimate are reflected in income currently.
Financial Guaranty's total unallocated or non-specific loss and loss
adjustment expenses reserve for the financial guaranty business, as of December
31, 2001 is $51.5 million, having been increased from $16.1 million as of
December 31, 2000. Financial Guaranty believes that after giving effect to this
increase, their reserves for losses and loss adjustment expenses, including case
and unallocated or non-specific reserves, are adequate to cover the ultimate net
cost of claims. However, the reserves are necessarily based on estimates, and
there can be no assurance that the ultimate liability will not exceed such
estimates.
As anticipated, Financial Guaranty experienced relatively higher loss
levels in certain of its other insurance businesses than it experienced in its
financial guaranty reinsurance business. Financial Guaranty believes that the
higher premiums they receive in these businesses adequately compensates them for
the risks involved.
At December 31, 2001, Financial Guaranty had established $123.2 million in
net reserves for losses and loss adjustment expenses (of which $58.5 million
represented incurred but not reported and non-specific
20
<PAGE>
reserves). The following table sets forth certain information regarding
Financial Guaranty's loss experience for the years indicated:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net reserve for losses and loss adjustment expenses at
beginning of year........................................ $ 70.0 $49.7 $33.7
------ ----- -----
Net provision for losses and loss adjustment expenses
Occurring in current year............................. 19.5 19.0 23.9
Occurring in prior years.............................. 48.4 15.7 2.3
------ ----- -----
Total............................................ 67.9 34.7 26.2
------ ----- -----
Net payments for losses and loss adjustment expenses
Occurring in current year............................. 3.6 1.3 1.5
Occurring in prior years.............................. 11.1 13.1 8.7
------ ----- -----
Total............................................ 14.7 14.4 10.2
------ ----- -----
Net reserve for losses and loss adjustment expenses at end
of year.................................................. $123.2 $70.0 $49.7
====== ===== =====
</Table>
The provision for losses and paid loss information presented above is
classified as "current year" and "prior year" based upon the year in which the
related reinsurance contract or insurance policy was underwritten. Therefore,
amounts presented as "Occurring in prior years" are not indicative of
redundancies or deficiencies in total reserves held as of prior year ends.
In 2001, 2000 and 1999, Financial Guaranty recorded losses of $24.9
million, $21.9 million and $9.9 million, respectively, in connection with its
trade credit businesses.
Analysis of Primary Risk in Force
The Company's business strategy has been to disperse risk as widely as
possible. The Company analyzes its portfolio in a number of ways to identify any
concentrations or imbalances in risk dispersion. The Company believes the
quality of its insurance portfolio is affected significantly by:
- the geographic dispersion of the properties securing the insured loans;
- the quality of loan originations;
- the types of loans insured (including LTV ratio, purpose of the loan,
type of loan instrument and type of underlying property securing the
loan); and
- the age of the loans insured.
Financial Guaranty seeks to maintain a diversified insurance portfolio
designed to spread its risk based on insurer, type of debt obligation insured,
and geographic concentration.
Primary Risk In Force By Policy Year
The following table sets forth the percentage of the Company's primary
mortgage insurance risk in force by policy origination year as of December 31,
2001:
<Table>
<S> <C>
1996 and prior.............................................. 10.9%
1997........................................................ 5.8
1998........................................................ 16.4
1999........................................................ 17.7
2000........................................................ 13.0
2001........................................................ 36.2
-----
100.0%
=====
</Table>
21
<PAGE>
Geographic Dispersion
The following tables reflect the percentage of direct primary mortgage
insurance risk in force on the Company's book of business (by location of
property) for the top ten states and top 15 metropolitan statistical areas
("MSAs") as of December 31, 2001 and 2000:
<Table>
<Caption>
TOP TEN STATES 2001 2000
- -------------- ---- ----
<S> <C> <C>
California.................................................. 16.4% 16.8%
Florida..................................................... 7.4 7.4
New York.................................................... 6.4 6.1
Texas....................................................... 5.2 5.3
Georgia..................................................... 4.4 4.3
Arizona..................................................... 4.0 3.8
New Jersey.................................................. 3.8 3.9
Illinois.................................................... 3.6 3.7
Pennsylvania................................................ 3.6 3.7
Colorado.................................................... 2.8 3.1
---- ----
Total............................................. 57.6% 58.1%
==== ====
</Table>
<Table>
<Caption>
TOP FIFTEEN MSAS 2001 2000
- ---------------- ---- ----
<S> <C> <C>
Los Angeles-Long Beach, CA.................................. 4.1% 4.1%
Atlanta, GA................................................. 3.4 3.4
Chicago, IL................................................. 3.0 3.2
Phoenix/Mesa, AZ............................................ 3.2 3.1
Washington, DC-MD-VA........................................ 2.6 2.9
New York, NY................................................ 2.6 2.5
Philadelphia, PA-NJ......................................... 2.2 2.4
Riverside-San Bernardino, CA................................ 2.2 2.1
Nassau/Suffolk, NY.......................................... 1.9 1.9
Denver, CO.................................................. 1.5 1.6
Detroit, MI................................................. 1.4 1.6
Orange County, CA........................................... 1.4 1.6
Las Vegas, NV............................................... 1.5 1.5
Houston, TX................................................. 1.4 1.4
Miami-Hialeah, FL........................................... 1.4 1.3
---- ----
Total............................................. 33.8% 34.8%
==== ====
</Table>
The following table sets forth the distribution by state of Financial
Guaranty's insurance in force as a December 31, 2001 and 2000:
<Table>
<Caption>
JURISDICTION 2001 2000
- ------------ ----- -----
<S> <C> <C>
California.................................................. 9.8% 10.7%
New York.................................................... 9.7 9.0
Florida..................................................... 5.8 6.5
Texas....................................................... 5.3 5.2
Pennsylvania................................................ 4.5 5.2
Illinois.................................................... 4.3 4.3
Other(1).................................................... 58.5 59.1
----- -----
Total............................................. 100.0% 100.0%
===== =====
</Table>
- ---------------
(1) Represents all remaining states, the District of Columbia and several
foreign countries, in which obligations insured and reinsured by Financial
Guaranty arise, none of which individually constitutes greater than 3.7% for
2001 and 4.0% for 2000 of Financial Guaranty's insurance in force.
22
<PAGE>
Lender and Product Characteristics
While geographic dispersion is an important component of overall risk
dispersion and it has been a strategy of the Company to limit its exposure in
the top ten states and top 15 MSAs, the Company believes the quality of the risk
in force should be considered in conjunction with other elements of risk
dispersion, such as product distribution, as well as the Company's risk
management and underwriting practices.
The following table reflects the percentage of the Company's direct risk in
force (as determined on the basis of information available on the date of
mortgage origination) by the categories indicated as of December 31, 2001 and
2000:
DIRECT MORTGAGE INSURANCE RISK IN FORCE
<Table>
<Caption>
2001 2000
----- -----
<S> <C> <C>
Product Type:
Primary................................................ 94.3% 94.7%
Pool(1)................................................ 5.7 5.3
----- -----
Total............................................. 100.0% 100.0%
===== =====
</Table>
DIRECT PRIMARY RISK IN FORCE
<Table>
<Caption>
2001 2000
------- -------
<S> <C> <C>
Direct Primary Risk in Force (dollars in millions).......... $26,004 $24,622
Lender Concentration:
Top 10 lenders (by original applicant)................. 40.4% 42.8%
Top 20 lenders (by original applicant)................. 49.6% 58.7%
LTV:
95.01% to 100.00%...................................... 6.0% 6.7%
90.01% to 95.00%....................................... 43.5 39.5
85.01% to 90.00%....................................... 40.2 41.4
85.00% and below....................................... 10.3 12.4
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Grade:
Prime.................................................. 79.7% 90.3%
Non-Prime.............................................. 20.3 9.7
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Type:
Fixed.................................................. 86.3% 86.0%
Adjustable rate mortgage ("ARM") (fully indexed)(2).... 13.0 11.8
ARM (potential negative amortization)(3)............... 0.7 2.2
------- -------
Total............................................. 100.0% 100.0%
======= =======
Mortgage Term:
15 years and under..................................... 2.7% 2.7%
Over 15 years.......................................... 97.3 97.3
------- -------
Total............................................. 100.0% 100.0%
======= =======
Property Type:
Non-condominium (principally single-family detached)... 96.2% 97.1%
Condominium or cooperative............................. 3.8 2.9
------- -------
Total............................................. 100.0% 100.0%
======= =======
</Table>
23
<PAGE>
<Table>
<Caption>
2001 2000
------- -------
<S> <C> <C>
Occupancy Status:
Primary residence...................................... 96.2% 94.6%
Second home............................................ 1.7 2.2
Non-owner occupied..................................... 2.1 3.2
------- -------
Total............................................. 100.0% 100.0%
======= =======
Mortgage Amount:
$200,000 or less....................................... 78.1% 85.9%
Over $200,000.......................................... 21.9 14.1
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Purpose:
Purchase............................................... 74.4% 81.5%
Refinance.............................................. 25.6 18.5
------- -------
Total............................................. 100.0% 100.0%
======= =======
</Table>
- ---------------
(1) Includes traditional and modified pool insurance.
(2) Refers to loans where payment adjustments are the same as mortgage interest
rate adjustments.
(3) Loans with potential negative amortization will not have increasing
principal balances unless interest rates increase as contrasted with
scheduled negative amortization where an increase in loan balance will occur
even if interest rates do not change.
One of the most important determinants of claim incidence is the relative
amount of borrower's equity, or down payment, in the home. The expectation of
claim incidence on 95% LTV loans ("95s") is approximately two times the expected
claim incidence on 90s. The Company believes that the higher premium rates it
charges on 95s adequately reflect the additional risk on these loans. The
industry and the Company have been insuring 97s since 1995 and 100% LTV Loans
("100s") since 2000. These loans are expected to have a higher claim incidence
than 95s; however, with proper counseling efforts and by limiting insurance on
these loans to sensible affordable housing programs, it is the Company's belief
that the claim incidence should not be materially (more than one and one-half
times) worse than on 95s, although there can be no assurance that claim
incidence will not be materially worse on 97s or 100s than on 95s. Premium rates
on 100s and 97s are higher than on 95s to compensate for the additional risk and
the higher expected frequency and severity of claims.
In recent years, the Company has increased its insurance on mortgages
identified by its customers as "affordable housing" loans. These loans are
typically made to low- and moderate-income borrowers in conjunction with special
programs developed by state or local housing agencies, Fannie Mae or Freddie
Mac. Such programs usually include 95s, 97s and 100s and may require the
liberalization of certain underwriting guidelines in order to achieve their
objectives. The Company's participation in these programs is dependent upon
acceptable borrower counseling. Default experience on these programs has been
worse than non-"affordable housing" loans; however, the Company does not believe
the ultimate claims will materially affect its financial results due to the
relatively small amount of such business in the Company's insured book combined
with higher premium rates and risk-sharing elements.
The Company believes that the risk of claim on non-prime loans is
significantly higher than that of prime loans. Non-prime loans generally include
Alternative A and A minus products and although higher premium rates and
surcharges are charged in order to compensate for the additional risk, these
products are relatively new and have never been insured in an adverse economic
situation so there is no assurance that the premium rates are adequate or the
loss performance will be at, or close to, expected levels.
The Company's claim frequency on insured ARMs has been higher than on all
other loan types. The Company believes that the risk on ARM loans is greater
than on fixed rate loans due to possible monthly payment increases if interest
rates rise.
The Company believes that 15-year mortgages present a lower level of risk
than 30-year mortgages, primarily as a result of the faster amortization and the
more rapid accumulation of borrower equity in the property. Premium rates for
15-year mortgages are lower to reflect the lower risk.
24
<PAGE>
The Company believes that the risk of claim is also affected by the type of
property securing the insured loan. In the Company's opinion, loans on
single-family detached housing are subject to less risk of claim incidence than
loans on other types of properties. Conversely, loans on attached housing types,
particularly condominiums and cooperatives, are generally considered by the
Company to be a higher risk, due to the higher density of such properties and
because a detached unit is the preferred housing type in most areas. The
Company's more stringent underwriting guidelines on condominiums and
cooperatives reflect this higher expected risk.
The Company believes that the risk of claim on relocation loans and loans
originated by credit unions is extremely low and offers lower premium rates on
such loans to compensate for the lower risk.
The Company believes that loans on non-owner occupied homes purchased for
investment purposes represent a substantially higher risk of claim incidence,
and are subject to greater value declines than loans on either primary or second
homes. The Company underwrites loans on non-owner occupied homes more
stringently, and sometimes requires that the investor indemnify the Company
directly for any loss suffered by the Company. The Company also charges a
significantly higher premium rate than the rate charged for insuring loans on
owner occupied homes.
The Company believes that higher priced properties experience wider
fluctuations in value than moderately priced residences and that the income of
many people who buy higher priced homes is less stable than that of people with
moderate incomes. Underwriting guidelines for such higher priced properties
reflect this concern.
The following table sets forth the distribution of Financial Guaranty's
insurance in force by type of issue and as a percentage of total financial
guaranty insurance in force as of December 31, 2001 and 2000:
<Table>
<Caption>
INSURANCE IN FORCE(1)
--------------------------------------
2001 2000
----------------- -----------------
TYPE OF OBLIGATION AMOUNT PERCENT AMOUNT PERCENT
- ------------------ ------ ------- ------ -------
(IN BILLIONS)
<S> <C> <C> <C> <C>
Municipal:
General obligation and other tax
supported................................ $27.1 27.7% $26.8 28.9%
Water/sewer/electric gas and investor-owned
utilities................................ 17.9 18.3 18.1 19.5
Health care................................ 15.2 15.5 14.1 15.2
Airports/transportation.................... 11.1 11.3 10.5 11.4
Other municipal(2)......................... 8.5 8.7 8.8 9.5
Housing revenue............................ 2.6 2.7 2.4 2.6
----- ----- ----- -----
Total municipal....................... 82.4 84.2 80.7 87.1
Structured finance:
Asset-backed............................... 10.9 11.1 9.4 10.1
Other...................................... 4.6 4.7 2.6 2.8
----- ----- ----- -----
Total structured finance.............. 15.5 15.8 12.0 12.9
----- ----- ----- -----
Total................................. $97.9 100.0% $92.7 100.0%
===== ===== ===== =====
</Table>
- ---------------
(1) Represents Financial Guaranty's proportionate share of the aggregate
outstanding principal and interest payable on such insured obligations.
(2) Represents other types of municipal obligations, none of which individually
constitutes a material amount of Financial Guaranty's insurance in force.
25
<PAGE>
The following table identifies the issuers of Financial Guaranty's ten
largest single-risk insurance in force by par amounts outstanding as of December
31, 2001 and the credit rating assigned by S&P as of that date (in the absence
of financial guaranty insurance) to each such issuer:
<Table>
<Caption>
NET PAR IN FORCE
CREDIT CREDIT RATING OBLIGATION TYPE AS OF DECEMBER 31, 2001
- ------ ------------- ------------------ -----------------------
(IN MILLIONS)
<S> <C> <C> <C>
Commerzbank -- Citibank London.... AAA Asset-Backed Corp. $407
Port Authority of New York and New
Jersey.......................... AA- Airport 406
New York City Municipal Water
Finance Authority............... AA Water & Sewer 388
State of California............... A+ General Obligation 376
New York City, NY................. A- General Obligation 373
San Francisco, California Airport
Commission...................... A+ Airport 371
Long Island, NY Power Authority... A- Water & Sewer 366
Lehman Brothers Sprint 3.......... AAA Asset-Backed Corp. 350
Cap Proj Fin Auth, FL Hosp
Assoc........................... AAA Other Muni 300
California State Public Works..... A- Lease-State 297
</Table>
The following table identifies the Financial Guaranty insurance in force
amount outstanding at December 31, 2001 by credit rating assigned by S&P to each
issuer:
<Table>
<Caption>
AS OF DECEMBER 31, 2001
-----------------------------
INSURANCE IN FORCE PERCENT
------------------ -------
(IN BILLIONS)
<S> <C> <C>
AAA......................................................... $ 7.3 7.5%
AA.......................................................... 19.5 19.9
A........................................................... 40.5 41.4
BBB......................................................... 23.2 23.7
IG.......................................................... 4.1 4.2
NIG......................................................... 1.8 1.8
Not rated................................................... 1.5 1.5
----- -----
Total....................................................... $97.9 100.0%
===== =====
</Table>
INVESTMENT POLICY AND PORTFOLIO
The Company's income from its investment portfolio is one of the Company's
primary sources of cash flow to support its operations and claim payments.
The Company follows an investment policy that at a minimum requires:
- 95% of its investment portfolio to consist of cash equivalents and debt
securities (including redeemable preferred stocks) which, at the date of
purchase, were rated investment grade by a nationally recognized rating
agency (e.g., "BBB" or better by S&P); and
- at least 50% of its investment portfolio to consist of cash, cash
equivalents and debt securities (including redeemable preferred stocks)
which, at the date of purchase, were rated the highest investment grade
by a nationally recognized rating agency (e.g., "AAA" by S&P).
The Company is permitted to invest in equity securities (including
convertible debt and convertible preferred stock), provided its equity component
does not exceed 20% of the total investment portfolio.
At December 31, 2001, the Company's investment portfolio had a carrying
value of $3,369.5 million and a market value of $3,389.2 million, including
$210.8 million of short-term investments. The Company's investment portfolio did
not include any real estate or mortgage loans. The portfolio included 305
privately placed, investment-grade securities with an aggregate carrying value
of $101.1 million. At December 31, 2001,
26
<PAGE>
99.4% of the Company's investment portfolio (which excludes cash) consisted of
cash equivalents and debt securities (including redeemable preferred stocks)
that were rated investment grade.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the then existing
or anticipated financial condition and operating requirements, including the tax
position, of the Company.
The diversification of the Company's investment portfolio (other than
short-term investments) at December 31, 2001 is shown in the table below:
INVESTMENT PORTFOLIO DIVERSIFICATION
<Table>
<Caption>
DECEMBER 31, 2001
--------------------------------------
AMORTIZED FAIR
COST VALUE PERCENT(1)
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities held to maturity:
U.S. government securities(2).............. $ 9,730 $ 9,592 2.2%
State and municipal obligations(3)......... 432,468 452,370 97.8
---------- ---------- -----
Total................................. $ 442,198 $ 461,962 100.0%
---------- ---------- -----
Fixed maturities available for sale:
U.S. government securities(2).............. $ 102,781 $ 102,174 4.0%
U.S. government agency securities(2)....... 109,118 109,114 4.2
State and municipal obligations(3)......... 1,952,650 1,956,321 76.5
Corporate obligations(3)................... 231,893 247,648 9.1
Asset-backed securities.................... 40,552 40,586 1.6
Redeemable preferred stocks(3)............. 25,382 25,360 1.0
Private placements......................... 89,090 84,544 3.5
Foreign governments........................ 1,464 1,453 0.1
---------- ---------- -----
Total................................. $2,552,930 $2,567,200 100.0%
---------- ---------- -----
Equity securities.......................... $ 116,978 $ 120,320
Trading securities......................... 22,599 21,659
Other invested assets...................... 7,310 7,310
---------- ----------
Total................................. $3,142,015 $3,178,451
========== ==========
</Table>
- ---------------
(1) Percentage of amortized cost.
(2) Substantially all of these securities are backed by the full faith and
credit of the U.S. government.
(3) Consists primarily of investment-grade securities.
The following table shows the scheduled maturities of the securities held
in the Company's investment portfolio at December 31, 2001:
INVESTMENT PORTFOLIO SCHEDULED MATURITY(1)
<Table>
<Caption>
DECEMBER 31, 2001
---------------------
CARRYING
VALUE PERCENT
---------- -------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments...................................... 210,788 6.3%
Less than one year.......................................... 42,247 1.3
One to five years........................................... 435,084 12.9
Five to ten years........................................... 528,779 15.7
Over ten years.............................................. 1,828,228 54.3
Mortgage-backed securities(2)............................... 109,114 3.2
Asset-backed securities(2).................................. 40,586 1.2
Redeemable preferred stocks (3)............................. 25,360 0.7
</Table>
27
<PAGE>
<Table>
<Caption>
DECEMBER 31, 2001
---------------------
CARRYING
VALUE PERCENT
---------- -------
(IN THOUSANDS)
<S> <C> <C>
Equity securities(3)........................................ 120,320 3.6
Trading securities(3)....................................... 21,659 0.6
Other invested assets(3).................................... 7,310 0.2
---------- -----
Total............................................. $3,369,475 100.0%
========== =====
</Table>
- ---------------
(1) Actual maturities may differ as a result of calls prior to scheduled
maturity.
(2) Substantially all of these securities are backed by the Government National
Mortgage Association ("GNMA") or the Federal National Mortgage Association
("Fannie Mae").
(3) No stated maturity date.
The following table shows the ratings by S&P of the Company's investment
portfolio (other than short-term investments) as of December 31, 2001:
INVESTMENT PORTFOLIO BY S&P RATING
<Table>
<Caption>
DECEMBER 31, 2001
---------------------
CARRYING
VALUE PERCENT
---------- -------
(IN THOUSANDS)
<S> <C> <C>
RATING(1)
Fixed maturities:
U.S. government and agency securities.................. $ 178,676 5.7%
AAA.................................................... 1,698,062 53.8
AA..................................................... 652,240 20.7
A...................................................... 180,984 5.7
BBB.................................................... 140,257 4.4
BB and below and other(2).............................. 19,874 0.6
Not rated(3)........................................... 139,305 4.4
Trading securities.......................................... 21,659 0.7
Equity securities........................................... 120,320 3.8
Other invested assets....................................... 7,310 0.2
---------- -----
Total............................................. $3,158,687 100.0%
========== =====
</Table>
- ---------------
(1) As assigned by S&P as of December 31, 2001.
(2) Securities in this category have been rated non-investment grade by S&P as
of December 31, 2001.
(3) Securities in this category have not been rated by S&P as of December 31,
2001 but have been rated investment grade as of December 31, 2001 by at
least one other nationally recognized securities rating agency.
REGULATION
Direct Regulation
State Regulation
The Company and its insurance subsidiaries are subject to comprehensive,
detailed regulation principally designed for the protection of policyholders,
rather than for the benefit of investors, by the insurance departments in the
various states where the Company and its insurance subsidiaries are licensed to
transact business. Insurance laws vary from state to state, but generally grant
broad supervisory powers to agencies or officials to examine insurance companies
and enforce rules or exercise discretion affecting almost every significant
aspect of the insurance business.
Insurance regulations relate, among other things, to the licensing of
companies to transact business, claims handling, reinsurance requirements,
premium rates and policy forms offered to customers, financial statements,
periodic reporting, permissible investments and adherence to financial standards
relating to
28
<PAGE>
surplus, dividends and other criteria of solvency intended to assure the
satisfaction of obligations to policyholders.
Mortgage insurers are generally restricted to writing residential mortgage
guaranty insurance business and financial guaranty insurers are generally
restricted to writing financial guaranty insurance business. The non-insurance
businesses of the Company, which consist of mortgage insurance related services,
are not generally subject to regulation under state insurance laws.
Radian Re and Radian Asset Assurance are domiciled and licensed in the
State of New York as financial guaranty insurers. They are also subject to the
provisions of the New York Insurance Law and related rules and regulations
governing property-casualty insurers to the extent such provisions are not
inconsistent with the financial guaranty insurance statute. Both Radian Re and
Radian Asset Assurance are also licensed under the New York Insurance Law to
write surety insurance, credit insurance and residual value insurance, which are
the only other types of insurance that a financial guaranty insurer licensed
under the New York Insurance Law may be authorized to write.
Each insurance subsidiary is required by its state of domicile and each
other jurisdiction in which it is licensed to make various filings, including
quarterly and annual financial statements prepared in accordance with statutory
accounting practices, with those jurisdictions and with the National Association
of Insurance Commissioners.
Additionally, each insurance subsidiary is subject to detailed regulation
in each of those states, including risk limits, investment restrictions and
diversification requirements.
Each insurance subsidiary must maintain both a reserve for unearned
premiums and for incurred losses and a special, formulaically derived
contingency reserve to protect policyholders against the impact of excessive
losses occurring during adverse economic cycles. Each calculated reserve may be
drawn on with the approval of the New York Insurance Department under specified
but limited circumstances.
Insurance Holding Company Regulation. All states have enacted legislation
that requires each insurance company in an insurance holding company system to
register with the insurance regulatory authority of its state of domicile and to
furnish to such regulator financial and other information concerning the
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of insurers within the
system.
Because the Company is an insurance holding company, Radian Guaranty and
Radian Insurance are Pennsylvania insurance companies, Amerin Guaranty is an
Illinois insurance company, and Radian Re and Radian Asset Assurance are New
York insurance companies, the Pennsylvania, Illinois and New York insurance laws
regulate, among other things, certain transactions in the Company's common stock
and certain transactions between Radian Guaranty, Radian Insurance, Amerin
Guaranty, Radian Re, Radian Asset Assurance, the Company's other insurance
subsidiaries, and their parent or affiliates. Specifically, no person may,
directly or indirectly, offer to acquire or acquire "control" of the Company, or
its insurance subsidiaries, unless such person files a statement and other
documents with the relevant state's Commissioner of Insurance and obtains such
Commissioner's prior approval. The Commissioner may hold a public hearing on the
matter. "Control" is presumed to exist if 10% or more of the Company or its
insurance subsidiaries' voting securities are owned or controlled, directly or
indirectly, by a person, although "control" may or may not be deemed to exist
where a person owns or controls a lesser amount of securities. In addition,
material transactions between the Company and its insurance subsidiaries and
their parent or affiliates are subject to certain conditions, including that
they be "fair and reasonable." These restrictions generally apply to all persons
controlling or under common control with the Company or its insurance
subsidiaries. Certain transactions between the Company's insurance subsidiaries
and their parent or affiliates may not be entered into unless the relevant
Commissioner of Insurance is given 30 days prior notification and does not
disapprove the transaction during such 30-day period.
Dividends. The ability of Radian Guaranty to pay dividends on its common
stock is restricted by certain provisions of the insurance laws of the
Commonwealth of Pennsylvania, its state of domicile. The insurance laws of
Pennsylvania establish a test limiting the maximum amount of dividends that may
be paid without prior approval by the Pennsylvania Insurance Commissioner. Under
such test, Radian Guaranty may pay
29
<PAGE>
dividends during any 12-month period in an amount equal to the greater of (i)
10% of the preceding year-end statutory policyholders' surplus or (ii) the
preceding year's statutory net income. In accordance with such restrictions,
$252.8 million would be available for dividends in 2002. However, an amendment
to the Pennsylvania statute requires that dividends and other distributions be
paid out of an insurer's unassigned surplus. Because of the unique nature of the
method of accounting for contingency reserves, Radian Guaranty has negative
unassigned surplus. Thus, prior approval by the Pennsylvania Insurance
Commissioner is required for Radian Guaranty to pay dividends or make other
distributions so long as Radian Guaranty has negative unassigned surplus. The
Pennsylvania Insurance Commissioner has approved all distributions by Radian
Guaranty since the passage of this amendment and management has an expectation
that the Insurance Department will continue to approve such distributions in the
future, provided that the financial condition of Radian Guaranty does not
materially change.
The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from unassigned surplus by an
insurer without prior approval by the Illinois Insurance Commissioner. Under
such test, Amerin Guaranty may pay dividends during any 12-month period in an
amount equal to the greater of (i) 10 percent of the preceding year-end
statutory policyholders' surplus or (ii) the preceding year's statutory net
income. In accordance with such restrictions, $53.2 million would be available
for dividends in 2002 without prior regulatory approval, which represents the
positive unassigned surplus of Amerin Guaranty at December 31, 2001.
Under the New York Insurance Law, the financial guaranty insurance
subsidiaries may declare or distribute dividends only out of earned surplus. The
maximum amount of dividends, which may be paid by the financial guaranty
insurance subsidiaries without prior approval of the Superintendent of
Insurance, is subject to restrictions relating to statutory surplus and net
investment income as defined by statute. At December 31, 2001, Radian Re would
not be able to pay any dividends in 2002 and Radian Asset Assurance had $13.3
million available for dividends in 2002 without prior approvals. In connection
with the approval of the acquisition of Financial Guaranty, Radian Re and Radian
Asset Assurance agreed to refrain and the Company agreed to refrain from causing
Radian Re and Radian Asset Assurance from paying any dividends for a period of
two years from the date of acquisition of control without the prior written
consent of the New York Insurance Department.
The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for as long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9.9 million), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holder of the $4.125 Preferred Stock is entitled to enforce the
agreement's provisions as if such holder was signatory to the agreement.
The Company may not pay any dividends on its shares of common stock unless
the Company has paid all accrued dividends on, and has complied with all sinking
fund and redemption obligations relating to, its outstanding shares of $4.125
Preferred Stock.
The Company's current excess of loss reinsurance agreement prohibits the
payment of any dividend that would have the effect of reducing the total of its
statutory policyholders' surplus plus its contingency reserve below $85.0
million. As of December 31, 2001, Radian Guaranty had statutory policyholders'
surplus of $185.3 million and a contingency reserve of $1,348.5 million, for a
total of $1,533.8 million.
Risk to Capital. A number of states limit a private mortgage insurer's
risk in force to 25 times the total of the insurer's policyholders' surplus plus
the statutory contingency reserve, commonly known as the "risk-to-capital"
requirement. As of December 31, 2001, the consolidated risk-to-capital ratio for
Mortgage Insurance was 14.1 to 1, compared to 15.4 to 1 in 2000. The Cross
Guaranty Agreement between Radian Guaranty and Amerin Guaranty makes it
appropriate to look at risk-to-capital on a consolidated basis.
30
<PAGE>
Reserves. For statutory reporting, the mortgage insurance companies are
required annually to provide for additions to the contingency reserve in an
amount equal to 50% of earned premiums. Such amounts cannot be withdrawn for a
period of 10 years except under certain circumstances. The contingency reserve,
designed to be a reserve against catastrophic losses, essentially restricts
dividends and other distributions by the mortgage insurance companies. The
mortgage insurance companies classify the contingency reserve as a statutory
liability. At December 31, 2001, Radian Guaranty had policyholders' surplus of
$185.3 million and a contingency reserve of $1,348.5 million and Amerin Guaranty
had policyholders' surplus of $298.8 million. During 2001, Radian Guaranty and
Amerin Guaranty entered into an assumption agreement, whereby Radian Guaranty
assumed 100% of the rights, duties and obligations related to first lien
mortgage guaranty insurance written by Amerin Guaranty. The contingency reserve
of $310.9 million related to these was transferred as well.
In accordance with New York Insurance Law, Financial Guaranty must
establish a contingency reserve, equal to the greater of 50% of premiums written
or a stated percentage of the principal guaranteed, ratably over 15-20 years
dependent upon the category of obligation insured. Reinsurers are required to
establish a contingency reserve equal to their proportionate share of the
reserve established by the primary insurer. At December 31, 2001, Radian Re had
policyholders' surplus of $188.6 million and a contingency reserve of $309.0
million and Radian Asset Assurance had policyholders' surplus of $133.1 million
and a contingency reserve $37.0 million.
Premium Rates and Policy Forms. Mortgage Insurance and Financial
Guaranty's premium rates and policy forms are subject to regulation in every
state in which it is licensed to transact business in order to protect
policyholders against the adverse effects of excessive, inadequate or unfairly
discriminatory rates and to encourage competition in the insurance marketplace.
In most states, premium rates and policy forms must be filed prior to their use.
In some states, such rates and forms must also be approved prior to use. Changes
in premium rates are subject to justification, generally on the basis of the
insurer's loss experience, expenses and future trend analysis. The general
default experience in the mortgage insurance industry may also be considered.
Reinsurance. Certain restrictions apply under the laws of several states
to any licensed company ceding business to an unlicensed reinsurer. Under such
laws, if a reinsurer is not admitted or approved in such states, the company
ceding business to the reinsurer cannot take credit in its statutory financial
statements for the risk ceded to such reinsurer absent compliance with certain
reinsurance security requirements. In addition, several states also have special
restrictions on mortgage insurance and, several states limit the amount of risk
a mortgage insurer may retain with respect to coverage on an insured loan to 25%
of the insured's claim amount. Coverage in excess of 25% (i.e., deep coverage)
must be reinsured.
Examination. The Company's insurance subsidiaries are subject to
examination of their affairs by the insurance departments of each of the states
in which they are licensed to transact business.
New York Circular Letter. The New York Insurance Department (the
"Department") issued Circular Letter No. 2 dated February 1, 1999 (the "Letter")
that discusses their position concerning various transactions between mortgage
guaranty insurance companies licensed in New York and mortgage lenders. The
Letter confirms that captive reinsurance transactions are permissible if they
"constitute a legitimate transfer of risk" and "are fair and equitable to the
parties". The Letter also states that "supernotes/performance notes," "dollar
pool" insurance, and "un-captive captives" violate New York law.
Accreditation. The National Association of Insurance Commissioners has
instituted the Financial Regulatory Accreditation Standards Program, known as
"FRASP," in response to federal initiatives to regulate the business of
insurance. FRASP provides standards intended to establish effective state
regulation of the financial condition of insurance companies. FRASP requires
states to adopt certain laws and regulations, institute required regulatory
practices and procedures, and have adequate personnel to enforce such items in
order to become accredited. In accordance with the National Association of
Insurance Commissioners' Model Law on Examinations, accredited states are not
permitted to accept certain financial examination reports of insurers prepared
solely by the insurance regulatory agency in states not accredited by January 1,
1994. Although the State of New York is not accredited, no states where Radian
Re and Radian Asset Assurance are licensed have refused to accept the New York
Insurance Department's Reports on Examination for Radian Re and Radian Asset
Assurance. However, there can be no assurance that, should the
31
<PAGE>
New York Insurance Department remain unaccredited, other states that are
accredited will continue to accept financial examination reports prepared solely
by New York. The Company does not believe that the refusal by an accredited
state to continue accepting financial examination reports prepared by New York,
should that occur, will have a material adverse impact on its insurance
businesses.
Federal Regulation
RESPA. The origination or refinance of a federally regulated mortgage loan
is a settlement service, and therefore subject to the Real Estate Settlement
Practices Act of 1974, and the regulations promulgated thereunder (collectively,
"RESPA"). In December 1992, regulations were issued which stated that mortgage
insurance is also a settlement service, and therefore, that mortgage insurers
are subject to the provisions of Section 8(a) of RESPA, which generally
prohibits persons from accepting anything of value for referring real estate
settlement services to any provider of such services. Although many states
prohibit mortgage insurers from giving rebates, RESPA has been interpreted to
cover many non-fee services as well. HUD's interest in pursuing violations of
RESPA has increased awareness of both mortgage insurers and their customers of
the possible sanctions of this law.
The Company and all of its competitors have been sued in similar actions
alleging violations of RESPA. The Company is contesting the action brought
against it and believes its products and services comply with RESPA, as well as
all other applicable laws and regulations. See "Item 3. Legal Proceedings" below
for further details.
HMDA. Most originators of mortgage loans are required to collect and
report data relating to a mortgage loan applicant's race, nationality, gender,
marital status and census tract to HUD or the Federal Reserve under the Home
Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect
possible discrimination in home lending and, through disclosure, to discourage
such discrimination. Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of several states,
mortgage insurers are currently prohibited from discriminating on the basis of
certain classifications.
The active mortgage insurers, through their trade association, Mortgage
Insurance Companies of America ("MICA"), entered into an agreement with the
Federal Financial Institutions Examinations Council ("FFIEC") to report the same
data on loans submitted for insurance as is required for most mortgage lenders
under HMDA. Reports of HMDA-type data for the mortgage insurance industry have
been submitted by MICA to the FFIEC since 1993. Management is not aware of any
pending or expected actions by governmental agencies in response to the reports
submitted by MICA to the FFIEC.
Mortgage Insurance Cancellation. The Homeowners Protection Act of 1998
(the "Act") was signed into law on July 29, 1998. The Act imposes certain
cancellation and termination requirements for borrower-paid private mortgage
insurance and requires certain disclosures to borrowers regarding their rights
under the law. The Act also requires certain disclosures for loans covered by
lender-paid private mortgage insurance. Specifically, the Act provides that
private mortgage insurance on most loans originated on or after July 29, 1999
may be canceled at the request of the borrower once the LTV reaches 80%,
provided that certain conditions are satisfied. Private mortgage insurance must
be canceled automatically once the LTV reaches 78% (or, if the loan is not
current on that date, on the date that the loan becomes current). The Act
establishes special rules for the termination of private mortgage insurance in
connection with loans that are "high risk". The Act does not define "high risk"
loans but leaves that determination to Fannie Mae and Freddie Mac for loans up
to the conforming loan limit and to the mortgagee for any other loan. For "high
risk" loans above the conforming loan limit, private mortgage insurance must be
terminated on the date that the LTV is first scheduled to reach 77%. In no case,
however, may private mortgage insurance be required beyond the midpoint of the
amortization period of the loan if the mortgagor is current on the payments
required by the terms of the mortgage. The Company feels that the Act will have
an immaterial impact on the persistency of the Company's insured loans, on the
Company's insured book of business, and on the Company's financial results.
32
<PAGE>
Other Direct Regulation
Freddie Mac and Fannie Mae
As the most significant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie
Mae impose requirements on private mortgage insurers so that they may be
eligible to insure loans sold to such agencies. Freddie Mac's current
eligibility requirements impose limitations on the type of risk insured,
standards for the geographic and customer diversification of risk, procedures
for claims handling, acceptable underwriting practices, standards for certain
reinsurance cessions and financial requirements which generally mirror state
insurance regulatory requirements. These requirements are subject to change from
time to time. Fannie Mae also has eligibility requirements, although such
requirements are not published. Radian Guaranty and Amerin Guaranty are approved
mortgage insurers for both Freddie Mac and Fannie Mae.
In January 1999, Fannie Mae announced a new program that allows for lower
levels of required mortgage insurance coverage for low down payment 30-year
fixed rate loans approved through its Desktop Underwriter automated underwriting
system. The insurance levels are similar to those required prior to 1995. Fannie
Mae will replace some of the coverage with a layer of investor mortgage
insurance coverage provided by at least two mortgage insurers, one of which will
be Mortgage Insurance. Fannie Mae also announced that it intends to purchase
additional insurance for certain eligible "Flex 97" and investor loans, and
Mortgage Insurance has been selected to provide this coverage on a pilot basis.
The Company does not believe that these developments will adversely affect the
demand for or the profitability of mortgage insurance in the near future.
The office of Federal Housing Enterprise Oversight issued new risk based
capital regulations for Fannie Mae and Freddie Mac, which take effect September
13, 2002. The most relevant provision to the Company is a distinction between
AAA rated insurers and AA rated insurers. The new regulations would impose a
credit haircut that the GSEs are given for exposure ceded to AAA insurers by
3.5% and to AA insurers by 8.75%. This would be phased in over a ten-year period
commencing on the effective date of the regulation. The Company believes that
this distinction will not have material effect on its business.
Indirect Regulation
The Company is also indirectly, but significantly, impacted by regulations
affecting originators and purchasers of mortgage loans, particularly Freddie Mac
and Fannie Mae, and regulations affecting governmental insurers such as the FHA
and VA. Private mortgage insurers, including Mortgage Insurance, are highly
dependent upon federal housing legislation and other laws and regulations which
affect the demand for private mortgage insurance and the housing market
generally. For example, legislation which increases the number of persons
eligible for FHA or VA mortgages could have a material adverse effect on the
Company's ability to compete with the FHA or VA.
The FHA single family loan limits were raised in the fall of 1998. These
increased loan limits vary by geographic region from $109,032 to $197,620. The
Company does not believe that demand for private mortgage insurance has been or
will be materially adversely affected by this change.
Proposals have been advanced which would allow Fannie Mae and Freddie Mac
additional flexibility in determining the amount and nature of alternative
recourse arrangements or other credit enhancements which they could utilize as
substitutes for private mortgage insurance. The Company cannot predict if or
when any of the foregoing legislation or proposals will be adopted, but if
adopted and depending upon the nature and extent of revisions made, demand for
private mortgage insurance may be adversely affected. There can be no assurance
that other federal laws affecting such institutions and entities will not
change, or that new legislation or regulations will not be adopted. In addition,
Fannie Mae and Freddie Mac have entered into, and may in the future seek to
enter into, alternative recourse arrangements or other enhancements based on
their existing legislative authority.
In the fall of 1998, Freddie Mac proposed to Congress an amendment to its
charter that would have permitted it to substitute other forms of loss
protection for private mortgage insurance. Although the proposed amendment was
defeated, it is not clear what, if any, changes or new products may emerge;
there is a possibility that any changes in this regard may materially affect the
mortgage insurance industry.
33
<PAGE>
There can be no assurance that the above-mentioned federal laws and
regulations or other federal laws and regulations affecting lenders, private and
governmental mortgage insurers, or purchasers of insured mortgage loans, will
not be amended, or that new legislation or regulations will not be adopted, in
either case, in a manner which will adversely affect the demand for private
mortgage insurance.
Foreign Regulation
The Company is also subject to certain regulation in various foreign
countries primarily the United Kingdom and Bermuda as a result of its operation
in those jurisdictions.
EMPLOYEES
At December 31, 2001, the Company had 1,194 employees, of which
approximately one-third were located at its Philadelphia headquarters facility,
111 are employees of Financial Guaranty and 90 are employees of RadianExpress.
Approximately 600 employees are classified as contract underwriting employees
and their employment level is commensurate with the level of production activity
in the mortgage industry. The Company's employees are not unionized and
management considers employee relations to be good.
Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995
The statements contained herein that are not historical facts are
forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve certain risks and uncertainties including, but not limited to: the
possibility that interest rates may increase rather than remain stable or
decrease; the possibility that housing demand may decrease for any number of
reasons, some of which may be out of the control of the Company, including
changes in interest rates, adverse economic conditions, or other reasons; the
Company's market share may decrease as a result of changes in underwriting
criteria by the Company or its competitors, or other reasons; performance of the
financial markets generally, changes in the demand for and market acceptance of
the Company's products; increased competition from government programs and the
use of substitutes for mortgage insurance; changes in government regulation or
tax laws that may affect one or more of the Company's businesses, changes in
investor perceptions regarding the strength of financial guaranty providers and
the guaranty offered by such providers, changes in investor concern regarding
the credit quality of municipalities and corporations, including the need or
desirability for financial guaranty insurance at all or as an alternative for
other credit enhancement; and changes in general financial conditions. Investors
are also directed to other risks discussed in documents filed by the Company
with the Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Company leases approximately 81,000 square feet for its corporate
headquarters in Philadelphia under leases that expire between 2003 and 2006. In
addition, it leases space for its Regional, Service Center and on-site offices
throughout the United States comprising approximately 36,000 square feet with
leases expiring between 2002 and 2004, and space for RadianExpress in Ohio
comprising approximately 25,000 square feet, with leases expiring in 2003.
Financial Guaranty leases 121,093 square feet of space for its operations in New
York with leases expiring in 2015. It also leases additional space for its
Florida and UK operations. With respect to all facilities, the Company believes
it will be able to obtain satisfactory lease renewal terms.
The Company believes its existing properties are well utilized and are
suitable and adequate for its present circumstances.
The Company currently maintains four data centers and two hotsites to
support its businesses. Over the next two years, the Company will be replacing
its legacy systems that currently support accounting, claims, risk management,
underwriting and other non-insurance operations. The Company's strategic
direction for all new system development is to deploy 100% web based custom or
off the shelf software on a Unix and Windows 2000 platform. PeopleSoft Financial
Systems are currently installed and operational for Financial Guaranty and will
be implemented through the Company during 2002 and 2003. In addition, the
Company will be building a new data center in Dayton, Ohio, which is expected to
be fully operational in 2002. Two
34
<PAGE>
separate fiber optic feeds will serve this data center. The center is cabled for
two separate power grids and has sufficient diesel standby generator power to
power the data center and personal work areas for critical staff. The home
office in Philadelphia will become the hotsite for all operations. Over the next
two years, the Company will migrate its operations from the current New York
site to the data center in Ohio and the two existing hotsites to the
Philadelphia hotsite. This will ensure 24/7/365 availability at the Dayton site
and full business recovery capability at the Philadelphia data center.
ITEM 3. LEGAL PROCEEDINGS
In December 2000, a complaint seeking class action status on behalf of a
nationwide class of home mortgage borrowers was filed against the Company in the
United States District Court for the Middle District of North Carolina
(Greensboro Division). The complaint alleges that the Company violated Section 8
of the Real Estate Settlement Procedures Act ("RESPA") which generally prohibits
the giving of any fee, kickback or thing of value pursuant to any agreement or
understanding that real estate settlement services will be referred. The
complaint asserts that the pricing of pool insurance, captive reinsurance,
contract underwriting, performance notes and other, unidentified "structured
transactions," should be interpreted as imputed kickbacks made in exchange for
the referral of primary mortgage insurance business, which, according to the
complaint, is a settlement service under RESPA. The complaint seeks injunctive
relief and damages of three times the amount of any mortgage insurance premiums
paid by persons who were referred to the Company pursuant to the alleged
agreement or understanding. The plaintiffs in the lawsuit are represented by the
same group of plaintiffs' lawyers who filed similar lawsuits against other
providers of primary mortgage insurance in federal court in Georgia. The Georgia
court dismissed those lawsuits for failure to state a claim. Three of those
lawsuits were settled prior to appeal; two were appealed. The Court of Appeals
has reversed the dismissal of one of the two appealed cases and has yet to
decide the other. The Company responded to the complaint by filing a motion to
dismiss, which was granted in part, denied in part. The plaintiffs have since
filed an amended complaint to which the Company has again filed a motion to
dismiss. Because this case is at a very early stage, it is not possible to
evaluate the likelihood of an unfavorable outcome or to estimate the amount or
range of potential loss. A similar action focusing on pool insurance was filed
in February 2001 in the United States District Court for the Eastern District of
Texas. The Company's motion to dismiss that case is pending.
In addition to the above, the Company is involved in certain litigation
arising in the normal course of its business. The Company is contesting the
allegations in each other such pending action and believes, based on current
knowledge and after consultation with counsel, that the outcome of such
litigation will not have a material adverse effect on the Company's consolidated
financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2001 to a vote of
holders of the Company's common stock.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information with respect to this item is included on page 47 of the
Company's 2001 Annual Report to Stockholders under the caption "Common Stock"
and is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in the table on page 15 of the Company's 2001
Annual Report to Stockholders under the caption "Selected Financial and
Statistical Data" is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth on pages 39 through 46 in the Company's 2001
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" is hereby
incorporated by reference.
35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on page 46 in the Company's 2001 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Quantitative and Qualitative
Disclosures about Market Risk" is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of income, of changes in common stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2001, and the related consolidated balance sheets of the Company as
of December 31, 2001 and 2000, together with the related notes thereto, the
report on management's responsibility and the independent auditors' report, as
well as the unaudited quarterly financial data, all set forth on pages 16
through 38 of the Company's 2001 Annual Report to Stockholders, are hereby
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on the directors and executive officers of the Registrant
is included in the Company's Proxy Statement for the 2002 Annual Meeting of
Stockholders under the captions, "ELECTION OF DIRECTORS", "EXECUTIVE OFFICERS OF
THE COMPANY" and "Section 16(a) Beneficial Ownership Reporting Compliance", and
is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is included in the Company's Proxy Statement for the 2002
Annual Meeting of Stockholders under the caption "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS", and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included in the Company's Proxy Statement for the 2002
Annual Meeting of Stockholders under the caption "SECURITY OWNERSHIP OF
MANAGEMENT AND CERTAIN BENEFICIAL OWNERS", and is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included in the Company's Proxy Statement for the 2002
Annual Meeting of Stockholders under the caption "CERTAIN TRANSACTIONS", and is
hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial statements -- The financial statements listed in the
accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are incorporated by reference from the
Company's 2001 Annual Report to Stockholders into Item 8 of Part II
of this Form 10-K.
2. Financial statement schedules -- The financial statement schedules
listed in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedules are filed as part of
this Form 10-K.
3. Exhibits -- The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-K.
(b) Reports on Form 8-K.
36
<PAGE>
The Company has filed the following reports on Form 8-K since September 30,
2001:
(i) On November 8, 2001, the Company filed a Current Report on Form 8-K
reporting the Company's announcement on November 7, 2001 that it
extended the expiration of its exchange offering for $250 million of
its 7.75% Debentures due 2011, which were privately placed under Rule
144A, for $250 million of its 7.75% Debentures due 2011, that have
been registered under the Securities Act of 1933, to 5:00 p.m. eastern
standard time on November 26, 2001.
(ii) On November 27, 2001, the Company filed a Current Report on Form 8-K
reporting the Company's announcement on November 26, 2001, that its
exchange offering for $250,000,000 of its 7.75% Debentures due 2011,
which were privately placed under Rule 144A for $250,000,000 worth of
7.75% Debentures due 2011, that have been registered under the
Securities Act of 1933 expired at 5:00 p.m. eastern standard time on
November 26, 2001, $249,000,000 of its 7.75% Debentures due 2011,
which were privately placed under Rule 144A were exchanged for a like
amount of 7.75% Debentures due 2011, that have been registered under
the Securities Act of 1933.
(c) The response to Item 14(c) is contained in Item 14(a)(3) above.
(d) The response to Item 14(d) is contained in pages F-1 through F-6 of
this Form 10-K.
37
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 14(a) 1 AND 2)
<Table>
<Caption>
PAGE
-----------------------
2001
ANNUAL
FORM REPORT TO
10-K STOCKHOLDERS
------- ------------
<S> <C> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets at December 31, 2001 and 2000... -- 16
Consolidated statements of income for each of the three
years in the period ended December 31, 2001............... -- 17
Consolidated statements of changes in common stockholders'
equity for each of the three years in the period ended
December 31, 2001......................................... -- 18
Consolidated statements of cash flows for each of the three
years in the period ended December 31, 2001............... -- 19
Notes to consolidated financial statements.................. -- 20-37
Report on management's responsibility....................... -- 38
Independent auditors' report................................ -- 38
FINANCIAL STATEMENT SCHEDULES
Independent auditors' report on financial statement
schedules................................................. F-1 --
Schedule I -- Summary of investments -- other than
investments in related parties (December 31, 2001)........ F-2 --
Schedule III -- Condensed financial information of
Registrant (December 31, 2001)............................ F-3-F-5 --
Schedule VI -- Reinsurance (December 31, 2001).............. F-6 --
</Table>
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.
38
<PAGE>
INDEX TO EXHIBITS
(ITEM 14(a) 3)
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
2.1 -- Agreement and Plan of Merger dated as of November 22, 1998
between Registrant and Amerin Corporation.(8)(Exhibit 2.1)
2.2 -- Stock Purchase Agreement dated as of October 27, 2000 by and
among Registrant, ExpressClose.com, Inc. and The Founding
Stockholders of ExpressClose.com, Inc.(12)(Exhibit 2.2)
2.3 -- Agreement and Plan of Merger dated as of November 13, 2000
by and among Registrant, GOLD Acquisition Corporation, and
Enhance Financial Services Group Inc.(9)(Exhibit 2.1)
2.4 -- Shareholder Support Agreement by and among Registrant and
Daniel Gross, dated as of November 18, 2000.(9)(Exhibit 2.2)
2.5 -- Shareholder Support Agreement by and among Registrant and
Wallace O. Sellers, dated as of November 18,
2000.(9)(Exhibit 2.3)
2.6 -- Shareholder Support Agreement by and among Registrant and
Allan R. Tessler, dated as of November 18, 2000.(9)(Exhibit
2.4)
*3.1 -- Second Amended and Restated Certificate of Incorporation of
the Registrant.
*3.2 -- Amendment to Second Amended and Restated Certificate of
Incorporation of the Registrant filed with the Secretary of
the State of Delaware on June 14, 2001.
3.3 -- Amended and restated by-laws of the Registrant.(8)(Exhibit
3.2)
4.1 -- Specimen certificate for Common Stock.(4)(Exhibit 4.1)
*4.2 -- Certificate of Designations relating to $4.125 Preferred
Stock of the Company
4.3 -- Specimen certificate for $4.125 Preferred Stock of the
Company.(1)(Exhibit 4.3)
*4.4 -- Standstill and Voting Agreement dated October 27, 1992
between the Company and Reliance Group Holdings, Inc.
4.5 -- Amended and Restated Shareholders Rights Agreement.(8)
(Exhibit 4.4)
4.6 -- Indenture dated May 29, 2001 between Registrant and First
Union National Bank, as Trustee.(10)(Exhibit 4.1)
4.7 -- Form of 7.75% Debentures Due 2011. (included within Exhibit
4.6)
4.8 -- Form of Indenture dated as of February , 1993 between
Enhance Financial Services Group Inc. and Chase, as
Trustee.(11)(Exhibit 4.1)
4.9 -- Form of Enhance Financial Services Group Inc. Debentures Due
2003.(11)(Exhibit 4.3.3)
*4.10 -- Indenture dated January 11, 2002 between Registrant and
First Union National Bank, as Trustee.
*4.11 -- Form of 2.25% Senior Convertible Debentures Due 2012.
(included within Exhibit 4.10)
*10.1 -- Tax Indemnification Agreement dated October 28, 1992 among
the Company, Commonwealth Land Title Insurance Company,
Reliance Insurance Company and Reliance Group Holdings, Inc.
10.2 -- Tax Allocation Agreement dated as of April 1, 1992, among
Reliance Insurance Company and certain of its subsidiaries,
including Commonwealth Mortgage Assurance Company.(1)
(Exhibit 10.4)
*10.3 -- Form of Change of Control Agreement dated January 25, 1995,
between the Company and each of Frank P. Filipps, Paul F.
Fischer and C. Robert Quint.(6)
10.4 -- Change of Control Agreement dated October 30, 1997, between
the Company and Howard S. Yaruss.(2)(6)(Exhibit 10.7)
10.5 -- Change of Control Agreement dated February 6, 1998, between
the Company and Scott Stevens.(3)(6)(Exhibit 10.5)
</Table>
39
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
10.6 -- Change of Control Agreement dated March 12, 1999, between
the Company and Roy J. Kasmar.(6)(8)(10.40)
10.7 -- Change of Control Agreement dated July 19, 2000, between the
Company and Bruce Van Fleet.(6)(12)(Exhibit 10.8)
10.8 -- Employment Agreement dated March 12, 1999, between the
Company and Roy J. Kasmar.(6)(8)(10.39)
*10.9 -- Radian Group Inc. Pension Plan.(6)
*10.10 -- Radian Group Inc. Savings Incentive Plan, as amended and
restated through January 1, 1997.(6)
*10.11 -- Radian Group Inc. 1992 Stock Option Plan, as amended.
10.12 -- Radian Group Inc. Amended and restated Equity Compensation
Plan.(3)(6)(Exhibit 10.9)
10.13 -- Radian Deferred Compensation Plan(6)(4)(Exhibit 10.13)
10.14 -- Purchase Agreement dated October 29, 1992 between the
Company and Commonwealth Land Title Insurance Company
regarding $4.125 Preferred Stock.(10)(Exhibit 10.10)
10.15 -- Registration Rights Agreement dated October 27, 1992 between
the Company and Commonwealth Land Title Insurance
Company.(10)(Exhibit 10.11)
10.16 -- Form of Commonwealth Mortgage Assurance Company Master
Policy.(1)(Exhibit 10.16)
10.17 -- Risk-to-Capital Ratio Maintenance Agreement between the
Company and Commonwealth Mortgage Assurance Company
regarding matters relating to Moody's financial strength
rating as amended through October 22, 1993.(10)(Exhibit
10.13)
10.18 -- Reserve Account Agreement dated August 14, 1992, between the
Company and Commonwealth Mortgage Assurance Company
regarding $4.125 Preferred Stock.(1) (Exhibit 10.18)
10.19 -- First Layer Binder of Reinsurance, effective March 1, 1992,
among Commonwealth Mortgage Assurance Company, Commonwealth
Mortgage Assurance Company of Arizona, and AXA Reinsurance
SA.(1)(Exhibit 10.19)
10.20 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1994, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.16)
10.21 -- Capital Reinsurance Company Reinsurance Agreement, effective
January 1, 1994, between Commonwealth Mortgage Assurance
Company and Capital Reinsurance Company.(10) (Exhibit 10.17)
10.22 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1995, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.18)
10.23 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1996, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.19)
10.24 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1997, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(10)(Exhibit 10.20)
10.25 -- Amended form of Commonwealth Mortgage Assurance Company
Master Policy, effective June 1, 1995.(10)(Exhibit 10.21)
10.26 -- Radian Group Inc. 1997 Employee Stock Purchase Plan.(5)
10.27 -- Amended and Restated Amerin Corporation 1992 Long-Term
Incentive Plan.(6)(7) (Exhibit 10.2)
</Table>
40
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
*10.28 -- Credit Agreement dated as of February 8, 2002, between the
Registrant and First Union National Bank, as Lender.
*10.29 -- Credit Agreement, dated as of February 27, 2001, between
Deutsche Bank AG and Asset Guaranty Insurance Company (now
know as Radian Asset Assurance Inc.)
*10.30 -- Credit Agreement, dated as of November 7, 2001, among
Enhance Reinsurance Company (now known as Radian Reinsurance
Inc.), Banks from time to time party thereto and Deutsche
Bank AG, New York Branch, as Agent.
10.31 -- 1987 Long Term Incentive Plan for Key Employees of Enhance
Financial Services Group Inc.(13)(Exhibit 10.2.1)
10.32 -- 1997 Long Term Incentive Plan for Key Employees of Enhance
Financial Services Group Inc., as amended and restated as of
June 3, 1999.(6)(14)(Exhibit 10.2.2)
10.33 -- Enhance Reinsurance Company Supplemental Pension
Plan.(6)(15)(Exhibit 10.4)
10.34 -- Non-Employee-Director Stock Option Plan of Enhance Financial
Services Group Inc., as amended.(16)(Annex A)
*10.35 -- Form of Second Amended and Restated Change-In-Control
Protection Agreement dated November 15, 1999 between Enhance
Financial Services Group Inc. and Martin Kamarck, amended
and restated as of March 23, 2000.
*13 -- Portions of Registrant's Annual Report to Shareholders for
the fiscal year ended December 31, 2001 (which, except for
those portions thereof expressly incorporated herein by
reference, is furnished for the information of the
Commission and is not deemed "filed" as part of this
report.)
*21 -- Revised Subsidiaries of the Company.
*23 -- Consent of Deloitte & Touche LLP.
</Table>
- ---------------
* Filed herewith.
(1) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-1 filed
August 24, 1992 and amendments thereto (File No. 33-51188).
(2) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
(3) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
(4) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
(5) Incorporated by reference filed in the Registrant's Registration Statement
on Form S-8 filed November 20, 1997 (File No. 333-40623).
(6) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
(7) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in Amerin Corporation's Registration Statement on Form S-1
(File No. 33-97514).
(8) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-4 filed
May 6, 1999 (File No. 333-77957).
(9) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-4 filed
December 27, 2000 (File No. 333-52762).
(10) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-4 filed
July 19, 2001, and any amendment thereto (File No. 333-65440).
(11) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in Enhance Financial Services Group Inc.'s Registration
Statement on Form S-1 filed December 18, 1992, and any amendment thereto
(File no. 33-55958).
(12) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000.
(13) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Annual Report on Form 10-K for the year ended December
31, 1996 of Enhance Financial Services Group Inc.
(14) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Quarterly Report on Form 10-Q for the period ended
June 30, 1999, of Enhance Financial Services Group Inc.
(15) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit to Enhance Financial Services Group Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999.
(16) Incorporated by reference to the annex identified in parentheses, filed as
an annex to Enhance Financial Services Group Inc.'s Schedule 14A filed with
the Securities and Exchange Commission on May 5, 1998.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 2002.
Radian Group Inc.
By: /s/ FRANK P. FILIPPS
------------------------------------
Frank P. Filipps
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 29, 2002 by the following persons on
behalf of the registrant and in the capacities indicated.
<Table>
<Caption>
NAME TITLE
---- -----
<S> <C>
/s/ FRANK P. FILIPPS Chairman of the Board, Chief Executive
- -------------------------------------------------------- Officer and Director
Frank P. Filipps
/s/ ROY J. KASMAR President, Chief Operating Officer and
- -------------------------------------------------------- Director
Roy J. Kasmar
/s/ C. ROBERT QUINT Executive Vice President, Chief Financial
- -------------------------------------------------------- Officer
C. Robert Quint
/s/ HOWARD S. YARUSS Executive Vice President, Secretary &
- -------------------------------------------------------- General Counsel
Howard S. Yaruss
/s/ JOHN J. CALAMARI Vice President, Corporate Controller
- --------------------------------------------------------
John J. Calamari
/s/ HERBERT WENDER Lead Director
- --------------------------------------------------------
Herbert Wender
/s/ DAVID C. CARNEY Director
- --------------------------------------------------------
David C. Carney
/s/ HOWARD B. CULANG Director
- --------------------------------------------------------
Howard B. Culang
/s/ CLAIRE M. FAGIN, PH.D., R.N. Director
- --------------------------------------------------------
Claire M. Fagin, Ph.D., R.N.
/s/ ROSEMARIE B. GRECO Director
- --------------------------------------------------------
Rosemarie B. Greco
/s/ STEPHEN T. HOPKINS Director
- --------------------------------------------------------
Stephen T. Hopkins
/s/ JAMES W. JENNINGS Director
- --------------------------------------------------------
James W. Jennings
/s/ RONALD W. MOORE Director
- --------------------------------------------------------
Ronald W. Moore
</Table>
42
<PAGE>
<Table>
<Caption>
NAME TITLE
---- -----
<S> <C>
/s/ ROBERT W. RICHARDS Director
- --------------------------------------------------------
Robert W. Richards
/s/ ANTHONY W. SCHWEIGER Director
- --------------------------------------------------------
Anthony W. Schweiger
</Table>
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Radian Group Inc.
Philadelphia, Pennsylvania
We have audited the consolidated financial statements of Radian Group Inc.,
(the "Company") as of December 31, 2001 and 2000, and for each of the three
years in the period ended December 31, 2001, and have issued our report thereon
dated March 15, 2002; such consolidated financial statements and reports are
included in your 2001 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedules of
Radian Group Inc., listed in Item 14. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 15, 2002
F-1
<PAGE>
RADIAN GROUP INC.
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
<Table>
<Caption>
AMOUNT
AT WHICH
SHOWN ON
AMORTIZED FAIR THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------ ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
U. S. government and government agencies and
authorities................................ $ 221,629 $ 220,880 $ 221,018
State and municipal obligations.............. 2,385,118 2,408,691 2,388,789
Corporate obligations........................ 231,893 247,648 247,648
Asset-backed securities...................... 40,552 40,586 40,586
Private placements........................... 89,090 84,544 84,544
Foreign governments.......................... 1,464 1,453 1,453
Redeemable preferred stocks....................... 25,382 25,360 25,360
---------- ---------- ----------
Total fixed maturities................................. 2,995,128 3,029,162 3,009,398
Trading securities..................................... 22,559 21,659 21,659
Equity securities...................................... 116,978 120,320 120,320
Short-term investments................................. 210,788 210,788 210,788
Other invested assets.................................. 7,310 7,310 7,310
---------- ---------- ----------
Total investments other than investments in related
parties.............................................. $3,352,763 $3,389,239 $3,369,475
========== ========== ==========
</Table>
F-2
<PAGE>
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
<Table>
<Caption>
DECEMBER 31
----------------------------
2001 2000
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER-SHARE AMOUNTS)
<S> <C> <C>
Assets
Investments
Fixed maturities held to maturity -- at amortized cost
(fair value $10,104 and $10,160)...................... $ 9,838 $ 9,808
Fixed maturities available for sale -- at fair value
(amortized cost $391)................................. -- 407
Short-term investments................................. 12,908 4,724
Cash........................................................ 1,236 21
Investment in subsidiaries, at equity in net assets......... 2,573,202 1,401,026
Federal income taxes........................................ 1,356 --
Debt issuance costs......................................... 2,040 --
Due from affiliates, net.................................... 6,596 --
Other assets................................................ 766 427
---------- ----------
$2,607,942 $1,416,413
========== ==========
Liabilities and Stockholders' Equity
Accounts payable -- affiliates.............................. $ -- $ 2,183
Accounts payable -- other................................... 3,241 1,742
Notes payable............................................... 5,936 6,684
Federal income taxes........................................ -- 3,194
Accrued interest payable.................................... 2,948
Long-term debt.............................................. 249,076 --
Other liabilities........................................... 413 413
---------- ----------
261,614 14,216
---------- ----------
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding -- at redemption
value..................................................... 40,000 40,000
---------- ----------
Common stockholders' equity
Common stock, par value $.001 per share; 200,000,000
shares authorized; 94,170,300 and 37,945,483 shares
issued in 2001 and 2000, respectively................. 94 38
Treasury stock; 188,092 and 37,706 shares in 2001 and
2000, respectively.................................... (7,874) (2,159)
Additional paid-in capital............................. 1,210,088 549,154
Retained earnings...................................... 1,093,580 789,831
Accumulated other comprehensive income................. 10,440 25,333
---------- ----------
2,306,328 1,362,197
---------- ----------
$2,607,942 $1,416,413
========== ==========
</Table>
F-3
<PAGE>
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
PARENT COMPANY ONLY
<Table>
<Caption>
YEAR ENDED DECEMBER 31
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Dividends received from subsidiaries.................. $ 25,000 $ 6,000 $ --
Net investment income................................. 1,276 83 200
Gain on sales of investments, net..................... 461 -- --
-------- -------- --------
26,737 6,083 200
-------- -------- --------
Expenses
Interest expense...................................... 10,978 -- --
Operating expenses.................................... 10,572 6,455 2,241
Merger expenses....................................... -- -- 12,812
-------- -------- --------
21,550 6,455 15,053
-------- -------- --------
Income (loss) before income taxes and equity in
undistributed income of subsidiaries..................... 5,187 (372) (14,853)
Income tax benefit (expense)............................... 9,283 (1,851) 2,407
-------- -------- --------
Income before equity in undistributed income of
subsidiaries............................................. 14,470 (2,223) (12,446)
Equity in undistributed net income of subsidiaries......... 345,949 251,161 160,584
-------- -------- --------
Net income................................................. $360,419 $248,938 $148,138
======== ======== ========
</Table>
F-4
<PAGE>
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-----------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 360,419 $ 248,938 $ 148,138
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of
subsidiaries................................ (345,949) (251,161) (160,584)
(Decrease) increase in federal income taxes... (4,550) 3,462 3,645
(Decrease) increase in notes payable.......... (748) 3,197 1,444
Net change in other assets, accounts payable
and other liabilities....................... 3,472 2,110 1,589
--------- --------- ---------
Net cash provided by (used in) operating activities..... 12,644 6,546 (5,768)
--------- --------- ---------
Cash flows from investing activities:
Sales of fixed maturity investments available for
sale............................................. 407 -- --
Purchases of short-term investments -- net......... (8,184) (4,019) (530)
Other.............................................. (30) (27) (16)
--------- --------- ---------
Net cash used in investing activities................... (7,807) (4,046) (546)
--------- --------- ---------
Cash flows from financing activities:
Dividends paid..................................... (10,052) (7,791) (6,860)
Capital contributions.............................. (260,819) (11,067) (2,593)
Purchase of treasury stock......................... (5,715) (2,159) --
Issuance of long-term debt......................... 247,036 -- --
Proceeds from issuance of common stock............. 25,928 18,432 13,488
--------- --------- ---------
Net cash (used in) provided by financing activities..... (3,622) (2,585) 4,035
--------- --------- ---------
Increase (decrease) in cash............................. 1,215 (85) (2,279)
Cash, beginning of year................................. 21 106 2,385
--------- --------- ---------
Cash, end of year....................................... $ 1,236 $ 21 $ 106
========= ========= =========
</Table>
F-5
<PAGE>
RADIAN GROUP INC.
SCHEDULE VI -- REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2001................................ $699,085 $60,774 $77,569 $715,880 10.84%
======== ======= ======= ======== =====
2000................................ $570,425 $49,634 $ 80 $520,871 0.02%
======== ======= ======= ======== =====
1999................................ $517,364 $44,816 $ 87 $472,635 0.02%
======== ======= ======= ======== =====
</Table>
F-6
<PAGE>
This document has been printed entirely on recycled paper.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>3
<FILENAME>w56746ex3-1.txt
<DESCRIPTION>SECOND AMENDED AND RESTATED CERTIFICATE OF INC.
<TEXT>
<PAGE>
EXHIBIT 3.1
STATE OF DELAWARE
PAGE 1
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF THE STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
MERGER, WHICH MEANS:
"AMERIN CORPORATION", A DELAWARE CORPORATION,
WITH AND INTO "CMAC INVESTMENT CORPORATION" UNDER THE NAME OF RADIAN GROUP
INC.,", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF
DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE NINTH DAY OF JUNE, A.D. 1999,
AT 12:30 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL] /s/ Edward J. Freel
----------------------------------------
Edward J. Freel, Secretary of State
2280968 8100M AUTHENTICATION: 9794180
991231406 DATE: 06-09-99
<PAGE>
CERTIFICATE OF MERGER
OF
AMERIN CORPORATION
(a Delaware corporation)
WITH AND INTO
CMAC INVESTMENT CORPORATION
(a Delaware corporation)
----------------------------------------
Pursuant to Sections 103 and 251 of the General
Corporation Law of the State of Delaware
----------------------------------------
CMAC Investment Corporation, a Delaware corporation, which desires
to merge with Amerin Corporation, a Delaware corporation, pursuant to the
provisions of Section 251 of the General Corporation Law of the State of
Delaware (the "MERGER") hereby certifies as follows:
FIRST: The names and states of incorporation of the constituent
corporations in the Merger (the "CONSTITUENT CORPORATIONS") are as follows:
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
CMAC Investment Corporation Delaware
Amerin Corporation Delaware
</TABLE>
SECOND: An Agreement and Plan of Merger, dated as of November
22,1998, amended as of April 5,1999, between the Constituent Corporations (the
"MERGER AGREEMENT") has been approved, adopted, certified, executed and
acknowledged by each of the Constituent Corporations in accordance with the
requirements of Section 251 of the General Corporation Law of the State of
Delaware.
THIRD: The surviving corporation shall be CMAC Investment
Corporation (the "SURVIVING CORPORATION"), which shall change its name to
"RADIAN GROUP INC." at the effective time of the Merger.
FOURTH: The Restated Certificate of Incorporation of the Surviving
Corporation shall be the Restated Certificate of Incorporation of CMAC, except
that the Restated Certificate of Incorporation of CMAC shall be restated in its
entirety by reason of the Merger and shall read as set forth
<PAGE>
in Exhibit A hereto and said Restated Certificate of Incorporation as so
restated shall be the Certificate of Incorporation of the Surviving Corporation.
FIFTH: The executed Merger Agreement is on file at the principal
place of business of the Surviving Corporation. The address of the principal
place of business of the Surviving Corporation is 1601 Market Sweet,
Philadelphia, PA 19103.
SIXTH: A copy of the executed Merger Agreement will be furnished by
the Surviving Corporation, on request and without cost, to any stockholder of
either of the Constituent Corporations.
SEVENTH: The Merger shall become effective upon filing with the
Secretary of State of Delaware.
IN WITNESS WHEREOF, CMAC Investment Corporation has caused this
Certificate of Merger to be signed by its Senior Vice President, Secretary and
General Counsel as of this 9th day of June, 1999.
CMAC INVESTMENT CORPORATION
a Delaware corporation
By: /s/ Howard S. Yaruss
------------------------------------
Name: Howard S. Yaruss
Title: Senior Vice President,
Secretary and General Counsel
<PAGE>
EXHIBIT A
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RADIAN GROUP INC.
FIRST: CORPORATE NAME. The name of the corporation is Radian Group Inc.
(hereinafter refereed to as the "CORPORATION").
SECOND: REGISTERED OFFICE. The registered office of the Corporation is to be
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, in the County of New Castle, in the State of Delaware. The name of
its registered agent at that address is The Corporation Trust Company.
THIRD: CORPORATE PURPOSE. The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
Delaware General Corporation Law.
FOURTH: CAPITAL STOCK. The Corporation shall be authorized to issue one hundred
million (100,000,000) shares of capital stock, of which eighty million
(80,000,000) shares shall be Common Stock, par value $.001 per share, and twenty
million (20,000,000) shares shall be Preferred Stock, par value $.001 per share.
4.1 Authority of Board to Fix Term of Shares. The Preferred Stock
authorized by this Certificate of Incorporation may be issued from time to time
in one or more series. The Board of Directors of the Corporation shall have the
full authority permitted by law to establish one or more series and the number
of shares constituting each such series and to fix by resolution full, limited,
multiple or fractional, or no voting rights, and such designations, preferences,
qualifications, privileges, limitations, restrictions, options, conversion
rights and other special or relative rights of any series of the Preferred Stock
that may be desired. Subject to the limitation on the total number of shares of
Preferred Stock which the Corporation has authority to issue hereunder, the
Board of Directors is also authorized to increase or decrease the number of
shares of any series, subsequent to the issue of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
4.2 $4.125 Preferred Stock. The Corporation is authorized to issue a
series of Preferred Stock, which shall consist of 800,000 shares and is
designated as "$4,125 PREFERRED STOCK" The powers, preferences, rights,
restrictions and other matters relating to the $4.125 Preferred Stock are as
follows:
<PAGE>
(a) Designation. The designation of such series of the Preferred
Stock shall be $4.125 Preferred Stock (the "$4.125 Preferred Stock"). The number
of shares of the $4.125 Preferred Stock shall be 800,000. The number of
authorized shares of the $4.125 Preferred Stock may be reduced by the Board of
Directors of the Corporation or a duly authorized committee thereof and by the
filing of a certificate pursuant to the provisions of the General Corporation
Law of the State of Delaware stating that such reduction has been so authorized.
The number of authorized shares of the $4.125 Preferred Stock shall not be
increased.
(b) Certain Definitions. As used in this Section 4.2, the following
terms shall have the following respective meanings:
"AFFILIATE" has the meaning contained in Rule 12b-2 promulgated under the
Exchange Act, or any successor provision thereto.
"BENEFICIAL OWNER" has the meaning contained in Rule 13d-3 promulgated
under the Exchange Act, of any successor provision thereto.
"BUSINESS DAY" means any day except a Saturday, Sunday or any day on which
banking institutions are legally authorized or obligated to close in the
Commonwealth of Pennsylvania or a day on which the New York Stock Exchange is
not open for the regular transaction of business.
"BY-LAWS" means the By-laws of the Corporation, as amended from time to
time.
"CMAC" means Commonwealth Mortgage Assurance Company, a Pennsylvania
corporation, or any successor entity thereto which is the principal subsidiary
of the Corporation engaged in the business of providing private mortgage
insurance.
"COMMON SHARES" means any stock of the Corporation which has no preference
in respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation and which
is not subject to redemption by the Corporation.
"COMMON STOCK" means the common stock, par value $.001 per share, of the
Corporation as of the original date of issuance of shares of the $4.125
Preferred Stock, or shares of the Corporation of any class or classes resulting
from any reclassification or reclassification thereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FUNDAMENTAL TRANSACTION" means any merger, consolidation, sale of assets
or similar transaction on which the holders of Common Stock are entitled to
vote.
"JUNIOR DIVIDEND SHARE" means shares of any series or class of the
Corporation which are by their terms expressly made junior to shares of the
$4.125 Preferred Stock at the time outstanding as to dividends.
II-2
<PAGE>
"JUNIOR LIQUIDATION SHARES" means shares of any series or class of the
Corporation which are by their terms expressly made junior to shares of the
$4.125 Preferred Stock at the time outstanding as to the distribution of assets
on any voluntary or involuntary liquidation of the Corporation.
"PARITY DIVIDEND SHARES" means shares of any series or class of the
Corporation which are by their terms on a parity with shares of the $4.125
Preferred Stock at the time outstanding as to dividends.
"PARITY LIQUIDATION SHARES" means shares of any series or class of the
Corporation which are by their terms on a parity with shares of the $4.125
Preferred Stock at the time outstanding as to as to the distribution on assets
on any voluntary or involuntary liquidation of the Corporation.
"PERSON" means any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, or government or
political subdivision thereof.
"SENIOR DIVIDEND SHARES" means shares of any series or class of the
Corporation which are by their terms expressly made senior to shares of the
$4.125 Preferred Stock at the time outstanding as to dividends.
"SENIOR LIQUIDATION SHARES" means shares of any series or class of the
Corporation which are by their terms expressly made senior to shares of the
$4.125 Preferred Stock at the time outstanding as to the distribution of assets
on any voluntary or involuntary liquidation of the Corporation.
(c) VOTING RIGHTS. Except as otherwise required by law or as
expressly provided in this paragraph (c), holders of shares of the $4.125
Preferred Stock shall have no voting rights:
(1) Dividend Defaults.
(A) If and whenever accrued dividends on shares of the
$4.125 Preferred Stock or any Parity Dividend Shares shall not have been paid in
an aggregate amount equal to or greater than six quarterly dividends (whether
consecutive or not) on shares of the $4.125 Preferred stock or such Parity
Dividend Shares at the time outstanding, the number of directors then
constituting the entire Board of Directors of the Corporation shall be increased
automatically by two directors and the holders of shares of the $4.125 Preferred
Stock and the holders of any Parity Dividend Shares, voting non-cumulatively and
together as a single class, shall be entitled to fill such newly-created
directorships at the next annual meeting of stockholders of the Corporation or
at a special meeting called as hereinafter provided in this subparagraph
(c)(1)(A). Such right to vote as a single class to elect two directors shall,
when vested, continue until all dividends in default on shares of the $4.125
Preferred Stock and any Parity Dividend Shares, as the case may be, shall have
been paid in full and, when so paid, such right to elect two directors
separately as a class shall cease, subject to the same
II-3
<PAGE>
provisions for the vesting of such right to elect two directors separately as a
class in the case of future dividend defaults. At any time when such right to
elect two directors separately as a class shall have so vested, the Corporation
may, and, upon the written request of the holders of record of not less than 20%
of the total number of shares of the $4.125 Preferred Stock and any Parity
Dividend Shares then outstanding, shall call a special meeting of the holders of
such shares for the election of directors to fill such newly-created
directorships. In the case of such a written request, such special meeting shall
be held within 90 days after the receipt of such request and, in either case, at
the place and upon the notice provided by law and in the By-laws, except that
the Corporation shall not be required to call such a special meeting if such
request is received less than 120 days before the date fixed for the next
ensuing annual meeting of stockholders of the Corporation, at which meeting such
newly-created directorships shall be filled by the holders of shares of the
$4.125 Preferred Stock and any Parity Dividend Shares.
(B) So long as any shares of the $4.125 Preferred Stock
are outstanding, the By-laws shall contain provisions ensuring that the number
of directors of the Corporation shall at all times be such that the exercise, by
the holders of shares of the $4.125 Preferred Stock and the holders of Parity
Dividend Shares, of the right to elect directors under the circumstances
provided in subparagraph (c)(1)(A) above will not contravene any provisions of
the Corporation's Restated Certificate or By-laws.
(C) Directors elected pursuant to subparagraph (c)(1)(A)
shall not be elected to any particular class of the Board of Directors and shall
serve until the earlier of:
(i) the next annual meeting of the stockholders of the
Corporation and the election (by the holders of shares of the $4.125
Preferred Stock and the holders of Parity Dividend Shares) and
qualification of their respective successors; or
(ii) the date upon which all accumulations of unpaid
dividends on shares of the $4.125 Preferred Stock and such Parity Dividend
Shares shall have been paid in full.
If, prior to the end of the term of any director elected pursuant to
subparagraph (c)(1)(A), a vacancy in the office of such director shall occur
during the continuance of a default in dividends on the shares of the $4.125
Preferred Stock or such Parity Dividend Shares by reason of death, resignation,
disability or otherwise, such vacancy shall be filled for the unexpired term by
the appointment by the remaining director elected pursuant to subparagraph
(c)(1)(A) of a new director for the unexpired term of such former director.
(D) Notwithstanding any provision in this paragraph (c)
to the contrary, so long as Reliance Group Holdings, Inc. or any Affiliate
thereof is the Beneficial Owner of any shares of the $4.125 Preferred Stock,
such corporation or Affiliate shall have no voting rights with respect to such
shares of the $4.125 Preferred Stock in the event of the default on payment of
dividends by the Corporation and any
II-4
<PAGE>
shares so beneficially owned shall not be counted as outstanding and entitled to
vote for purposes of any vote or other action by the holders of the shares of
$4.125 Preferred Stock and Parity Dividend Shares pursuant to subparagraph
(c)(1).
(2) Miscellaneous. So long as any shares of the $4.125
Preferred Stock are outstanding, the Corporation shall not, without either the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of the $4.125 Preferred Stock voting at a meeting of such holders, or the
affirmative written consent of holders of at least two-thirds of the outstanding
shares of the $4.125 Preferred Stock:
(A) Authorize or issue any Senior Dividend Shares or
Senior Liquidation Shares.
(B) Consummate any Fundamental Transaction, unless all
outstanding shares of $4.125 Preferred Stock have been called for redemption
pursuant to paragraph (f)(2) below and the rights of the holders of such shares
have ceased in accordance with paragraph (f)(3) below.
(C) Subject to the remaining provisions of this
subparagraph (c)(2)(C), amend the Corporation's Certificate of Incorporation or
any certificate of designations or take other action so as to affect adversely
in any material respect the voting powers or other rights, privileges, powers or
preferences of shares of the $4.125 Preferred Stock. No class vote of the $4.125
Preferred Stock shall be required for any of the amendments to the Corporation's
Certificate of Incorporation or any certificate of designations set forth in
subparagraph (c)(2)(C)(i) below which shall be deemed not to affect adversely in
any material respect the voting powers or other rights and preferences of shares
of the 4.125% Preferred Stock:
(i) the authorization or issuance of any shares of any
series or class of the Corporation which are neither Senior Dividend
Shares nor Senior Liquidation Shares.
(D) Amend that certain Reserve Account Agreement dated
August 14,1992 by and between the Corporation and Commonwealth Mortgage
Assurance Company.
(d) Dividends.
(1) Cash Dividends. The cash dividend rate on shares of the
$4.125 Preferred Stock shall be $4.125 per annum per share. Cash dividends on
shares of the 4.125% Preferred Stock shall be payable quarterly at the rate of
$1.03125 per share, when, as and if declared by the Board of Directors out of
funds legally available for the payment of dividends, on the fifteenth day of
February, May, August and November of each year (each, a "PAYMENT DATE"),
commencing February 15, 1993, except that if any such Payment Date is not a
Business Day then such dividend shall be payable on the first immediately
succeeding Business Day. Any cash dividend payable on February 15, 1993 on
shares of the $4.125 Preferred Stock will be computed on the
II-5
<PAGE>
actual number of days from the date of issuance of the $4.125 Preferred Stock to
February 15, 1993. No interest or dividends will be payable in respect of any
accumulations of unpaid dividends on shares of the $4.125 Preferred Stock. The
holders of shares of the $4.125 Preferred Stock shall not be entitled to any
dividends other than the dividends provided in this paragraph (d).
(2) Record Date. Each cash dividend shall be paid to the
holders of record of shares of the $4.125 Preferred Stock as they appear on the
stock register of the Corporation on the fifteenth day of the month next
preceding such Payment Date (each, a "RECORD DATE"). Dividends on account of
accumulations of unpaid dividends may be declared and paid at any time, without
reference to any regular dividend Payment Date, to holders of record on such
date, nor exceeding 60 days preceding the payment date thereof, as may be fixed
by the Board of Directors of the Corporation.
(3) Priority of Dividends. If at any time the Corporation has
failed to pay or declare and set apart for payment accumulations of unpaid
dividends on any Senior Dividend Shares, the Corporation shall not pay any
dividend on the $4.125 Preferred Stock. Holders of shares of the $4.125
Preferred Stock shall be entitled to receive the dividends provided in this
paragraph (d) in preference to and in priority over dividends upon the Common
Shares and all Junior Dividend Shares.
(4) Default; Payment of Pro Rata Dividends. Unless and until
(x) all accumulations of unpaid dividends on shares of the $4.125 Preferred
Stock and any Parity Dividend Shares at the time outstanding have been paid in
full or declared in full and sums set apart for the payment thereof and (y) the
Corporation has fully complied with all scheduled redemption obligations,
sinking fund obligations and all other redemption obligations relating to the
shares of $4.125 Preferred Stock, any Parity Dividend Shares and any Parity
Liquidation Shares at the time outstanding, the payment of dividends on, and
redemptions and purchases of, shares of the Corporation's capital stock shall be
subject to the restrictions contained in paragraph (h) below.
Unless and until all accumulations of unpaid dividends on
shares of the $4.125 Preferred Stock and any Parity Dividend Shares at the time
outstanding have been paid in full or declared in full and sums set apart for
the payment thereof, all dividends declared by the Corporation upon shares of
the $4.125 Preferred Stock and Parity Dividend Shares shall be declared pro rata
with respect to all shares of the $4.125 Preferred Stock and Parity Dividend
Shares then outstanding, so that the amounts of any dividends declared by the
Corporation upon each share of $4.125 Preferred Stock and each Parity Dividend
Share shall in all cases bear to each other the same ratio that, at the time of
such declaration, all accumulations of unpaid dividends on shares of the $4.125
Preferred Stock and on such parity Dividend Shares bear to each other.
(e) Liquidation.
(1) Liquidation Value. The liquidation value of shares of the
$4.125 Preferred Stock, in case of the voluntary or involuntary liquidation,
II-6
<PAGE>
dissolution or winding-up of the Corporation, shall be $50.00 per share, plus an
amount equal to accumulations of unpaid dividends thereon to the payment date.
Priority of Liquidation Distributions. In the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, the holders of shares of the $4.125 Preferred Stock shall be
entitled to receive the liquidation value of such shares held by them in
preference to and in priority over any distributions upon the Common Shares and
the Junior Liquidation Shares, but the holders of shares of the $4.125 Preferred
Stock shall not he entitled to receive any distribution in respect of the
liquidation value of such shares until the Corporation has paid in full the
liquidation value to which the holders of all Senior Liquidation Shares are
entitled. Upon payment in full of the liquidation value to which the holders of
shares of the $4.125 Preferred Stock are entitled, the holders of shares of the
$4.125 Preferred Stock will not be entitled to any further participation an any
distribution of assets by the Corporation. If the assets of the Corporation are
nor sufficient to pay in full the liquidation value payable to the holders of
shares of the $4.125 Preferred Stock and the liquidation value payable to the
holders of the Parity Liquidation Shares, the distribution of such assets shall
be made pro rata with respect to all shares of the $4.125 Preferred Stock and
Parity Liquidation Shares then outstanding, so that the amounts of any
distributions paid on each share of $4.125 Preferred Stock and each Parity
Liquidation Share shall in all cases bear to each other the same ratio that, at
the time of such distribution, the liquidation values of the $4.125 Preferred
Stock and the Parity Liquidation Shares bear to each other.
(3) Consolidations Mergers, Etc. Neither a consolidation or
merger of the Corporation with or into any other corporation, nor a merger of
any other corporation with or into the Corporation, nor a reorganization of the
Corporation, nor the purchase or redemption of all or part of the outstanding
shares of any class or classes of the Corporation, nor the sale or transfer of
all or any part of the Corporation's assets for cash or securities or other
property shall be considered a liquidation, dissolution or winding-up of the
Corporation within the meaning of this paragraph (e); provided that, each case,
effective provision is made in the certificate of incorporation of the resulting
or surviving corporation or otherwise for the protection of the rights of the
holders of the $4.125 Preferred Stock.
(f) Redemptions at the Option of the Corporation.
(1) Permitted Redemptions. Subject to paragraph (f)(2) below,
shares of the $4.125 Preferred Stock shall not be redeemable by the Corporation
prior to August 15, 2002. Shares of the $4.125 Preferred Stock may be redeemed
for cash at the option of the Corporation in whole or from time to time in part
on or after August 15, 2002 at the following redemption prices per share if
redeemed during the 12-month period beginning August 15 of the year specified
below:
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<PAGE>
<TABLE>
<CAPTION>
12-Month
Period Beginning Price
August Per Share
------ ---------
<S> <C>
2002 $54.125
2003 $52.750
2004 $51.375
</TABLE>
and if redeemed at any time thereafter as $50.00 per share, plus, in each case,
an amount equal to accumulations of unpaid dividends thereon to the redemption
date.
(2) Redemption in Connection with a Fundamental Transaction.
If any time prior to August 15, 2002 the holders of the outstanding shares of
$4.125 Preferred Stock fail to approve a Fundamental Transaction as required by
paragraph (c)(2)(B) above, such shares may be redeemed in full at the option of
the Corporation for cash at $50.00 per share, plus an amount equal to
accumulations of unpaid dividends thereon to the redemption date. The
Corporation may not exercise the redemption right provided in this paragraph
(f)(2) unless the Corporation proceeds with the Fundamental Transaction which
the holders of $4.125 Preferred Stock failed to approve.
(3) Notice Procedures. Not less than 30 nor more than 60 days
prior to the date fixed for any redemption of shares of the $4.125 Preferred
Stock pursuant to this paragraph (f), a written notice specifying the time and
place of such redemption, the redemption price and the number of shares to be
redeemed shall be given by first class mail, postage prepaid, to the holders of
record of the shares of the $4.125 Preferred Stock to be redeemed at their
respective addresses as the same shall appear on the books of the Corporation,
calling upon each such holder of record to surrender to the Corporation on the
redemption date at the place designated in such notice the holder's certificate
or certificates representing the number of shares specified in such notice of
redemption. Neither a failure to mail such notice, nor any defect therein or in
the mailing thereof, to any particular holder shall affect the sufficiency of
the notice or the validity of the proceedings for redemption with respect to the
other holders. Any notice that is mailed in the manner herein provided shall be
conclusively presumed to have been duly given whether or not the holder receives
the notice. On or after the redemption date each holder of shares of the $4.125
Preferred Stock to be redeemed shall present and surrender the certificate or
certificates for such shares to the Corporation at the place designated in such
notice, and thereupon the redemption price of such shares shall be paid to or to
the order of the Person whose name appears on such certificate or certificates
as the owner thereof and each surrendered certificate shall be cancelled. In
case fewer than all the shares represented by any such certificate are redeemed,
a new certificate shall be issued representing the unredeemed shares.
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<PAGE>
(4) Cessation of Rights as Stockholder. If a notice of
redemption has been given pursuant to subparagraph (f)(3) above and if, on or
before the date fixed for redemption, the funds necessary for such redemption
shall have been deposited by the Corporation, in trust for the pro rata benefit
of the holders of the shares so called for redemption (so as to be and continue
to be available therefor) with a bank or trust company doing business in
Philadelphia, Pennsylvania and having capital, surplus and undivided profits
aggregating at least $100,000,000, then, notwithstanding that any certificates
for such shares have not been surrendered for cancellation, on the redemption
date dividends shall cease to accrue on the shares of the $4.125 Preferred Stock
to be redeemed, and at the close of business on the redemption date the holders
of such shares shall cease to be stockholders with respect to such shares and
shall have no interest in or claims against the Corporation by virtue thereof
and shall have no voting or other rights with respect to such shares (except the
right to receive the moneys payable upon such redemption, without interest
thereon, upon surrender, and endorsement if required by the Corporation, of
their certificates), and the shares evidenced thereby shall not be deemed to be
outstanding shares for the purpose of voting or determining the total number of
shares entitled to vote on any matter. Any moneys so deposited by the
Corporation and unclaimed at the end of two years from the redemption date may
revert to the general funds of the Corporation, and any funds held by any paying
agent may be paid to the Corporation upon request of the Corporation, after
which reversion or payment the holders of such shares so called for redemption
shall look only to the general funds of the Corporation for the payment of the
redemption price. Any interest accrued on funds so deposited shall be paid to
the Corporation from time to time.
(5) Partial Redemption Procedures. If fewer than all of the
outstanding shares of the $4.125 Preferred Stock shall be called for redemption
pursuant to this prargraph (f)(1) above, the shares to be redeemed shall be
selected pro rata, as nearly as practicable, or by lot or by such other manner
as may be prescribed by resolution of the Board of Directors of the Corporation
and shall be consistent with the applicable rules of the National Association of
Securities Dealers.
(g) Sinking Fund. Except as otherwise provided in this paragraph
(g), the shares of the $4.125 Preferred Stock are not subject to mandatory
redemption requirements.
(1) Mandatory Redemption. So long as any share of $4.125
Preferred Stock remains outstanding, on August 15 of each year from 2002 to
2011, inclusive, the Corporation shall redeem 72,000 shares, and on August 15,
2012 shall redeem all shares then outstanding, at a price of $50.00 per share
plus accrued and unpaid cumulative dividends to date of redemption.
On or before each such August 15, the Corporation shall,
deposit all finds necessary for the redemption of shares of $4.125 Preferred
Stocks above provided, in trust for the account of the holders of the shares to
be redeemed, so as to be and continue to be available therefor, with a bank or
trust company doing business in Philadelphia, Pennsylvania, and having capital,
surplus and undivided profits aggregating at least $10,000,000. The particular
shares of $4.125 Preferred Stock so to be redeemed
II-9
<PAGE>
shall be determined, notice of such redemption shall be given and the deposit of
funds shall be made by the Corporation in the manner and with the effect
provided in paragraph (g) hereof.
If the Corporation fails to comply with its sinking fund
obligation as heretofore provided, it shall make good any such deficiency at the
earliest possible time thereafter. The obligation to redeem shares of $4.125
Preferred Stock for the sinking fund as aforesaid shall be cumulative if and to
the extent not satisfied in any year, whether or not there shall be funds
legally available therefor, but without interest on the amount of any
deficiencies.
Against the number of shares required to be redeemed in any
year by the provisions of this paragraph (g), the Corporation may credit shares
of $4.125 Preferred Stock which it has purchased or redeemed at any time during
or prior to such year otherwise than through the operation of the sinking fund
provided that any shares so credited shall not theretofore have been used for
the purpose of such credit.
(2) Notice Procedures. Not less than 30 nor more than 60 days
prior to any redemption date, a written notice specifying the sinking fund
deposit made or to be made, the redemption date, the time and place of such
redemption, the redemption price and the number of shares to be redeemed shall
be given by first class mail, postage prepaid, to the holders of record of
shares of the $4.125 Preferred Stock at their respective addresses as the same
shall appear on the books of the Corporation, calling upon each such holder of
record to surrender to the Corporation on the redemption date at the place
designated in such notice the holder's certificate or certificates representing
the number of shares specified in such notice of redemption. Neither a failure
to mail such notice, nor any defect therein or in the mailing thereof to any
particular holder shall affect the sufficiency of the notice or the validity of
the proceedings for redemption with respect to the other holders. Any notice
that is mailed in the manner herein provided shall be conclusively presumed to
have been duly given whether or not the holder receives the notice. On or after
the redemption date each holder of shares of the $4.125 Preferred Stock to be
redeemed shall present and surrender the certificate or certificates for such
shares to the Corporation at the place designated in such notice, and thereupon
the redemption price of such shares shall be paid to or to the order of the
Person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be cancelled. In case fewer than
all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(3) Cessation of Rights as Stockholder. If a notice of
redemption has been given pursuant to subparagraph (g)(2) above and if, on or
before the date fixed for redemption, the funds necessary for such redemption
shall have been deposited pursuant to subparagraph (g)(1) above, then
notwithstanding that any certificates for such shares have not been surrendered
for cancellation, on the redemption date dividends shall cease to accrue on the
shares of the $4.125 Preferred Stock to be redeemed, and at the close of
business on the redemption date the holders of such shares shall cease to be
stockholders with respect to such shares and shall have no interest in or
II-10
<PAGE>
claims against the Corporation by virtue thereof and shall have no voting or
other rights with respect to such shares (except the right to receive the moneys
payable upon such redemption, without interest thereon, upon surrender, and
endorsement if required by the Corporation, of their certificates), and the
shares evidenced thereby shall not be deemed to be outstanding shares for the
purpose of voting or determining the total number of shares entitled to vote on
any matter. Any moneys so deposited by the Corporation and unclaimed at the end
of two years from the redemption date may revert to the general funds of the
Corporation, and any funds held by any paying agent may be paid to the
Corporation upon request of the Corporation, after which reversion or payment
the holders of such shares so called for redemption shall look only to the
general funds of the Corporation for the payment of the redemption price. Any
interest accrued on funds so deposited shall be paid to the Corporation from
time to time.
(4) Partial Redemption Procedures. Any shares to be redeemed
pursuant to this paragraph (g) shall be selected pro rata, as nearly as
practicable, or by lot as may be prescribed by resolution of the Board of
Directors of the Corporation and shall be consistent with the applicable rules
of the National Association of Securities Dealers.
(5) Default. Unless and until (x) all accumulations of unpaid
dividends on shares of the $4.125 Preferred Stock and any Parity Dividend Shares
at the time outstanding have been paid in full or declared in full and sums set
apart for the payment thereof and (y) the Corporation has fully complied with
all scheduled redemption obligations, sinking fund obligations and all other
redemption obligations relating to the shares of $4.125 Preferred Stock, any
Parity Dividend Shares and any Parity Liquidation Shares at the time
outstanding, the payment of dividends on, and redemptions and purchases of,
shares of the Corporation's capital stock shall be subject to the restrictions
contained in paragraph (h) below.
(h) Dividend and Redemption Default Provisions. Unless and until (x)
all accumulations of unpaid dividends on shares of the $4.125 Preferred Stock
and any Parity Dividend Shares at the time outstanding have been paid in full or
declared in full and sums set apart for the payment thereof and (y) the
Corporation has fully complied with all scheduled redemption obligations,
sinking fund obligations and all other redemption obligations relating to the
shares of $4.125 Preferred Stock, any Parity Dividend Shares and any Parity
Liquidation Shares at the time outstanding:
(1) No dividends may be declared or paid or set aside for
payment and no other distribution may be made in respect of any Common Shares,
Junior Dividend Shares or (except as provided above in subparagraph (d) (4))
Parity Dividend Shares, except dividends or other distributions in Common Shares
or Junior Dividend Shares.
(2) No Common Shares, Junior Dividend Shares or Junior
Liquidation Shares may be redeemed, purchased or otherwise acquired for any
Consideration (or any payment made to or available for a sinking fund for the
redemption of any such shares) by the Corporation or any entity controlled by
the Corporation
II-11
<PAGE>
(except (i) by conversion into or exchange for stock of the Corporation ranking
junior to shares of the $4.125 Preferred Stock as to dividend and liquidation
rights, (ii) in repurchases of Common Shares, Junior Dividend Shares or Junior
Liquidation Shares from employees or directors of or consultants to the
Corporation pursuant to contractual arrangements entered into at the time such
shares were issued giving the Corporation the right to repurchase such shares
upon the occurrence of certain contingencies and (iii) by acquisition of Common
Shares, Junior Dividend Shares or Junior Liquidation Shares issued in connection
with an acquisition pursuant to an escrow, pledge or similar arrangement under
which the Corporation becomes entitled to receive such shares).
(3) No shares of the $4.125 Preferred Stock or any Parity
Dividend Shares or Parity Liquidation Shares may be redeemed unless all
outstanding shares of the $4.125 Preferred Stock are redeemed.
(4) No shares of the $4.125 Preferred Stock or any Parity
Dividend Shares or Parity Liquidation Shares may be purchased or otherwise
acquired by the Corporation for value except in accordance with a purchase or
exchange offer made simultaneously by the Corporation to all holders of record
of shares of the $4.125 Preferred Stock, Parity Dividend Shares and Parity
Liquidation Shares which, considering the annual dividend rates and the other
relative rights and preferences of such shares, in the opinion of the Board of
Directors (whose determination shall be conclusive), will result in fair and
equitable treatment among all such shares.
(i) Status of Redeemed Shares. All shares of the $4.125 Preferred
Stock which are at any time redeemed pursuant to paragraph (f) or (g) above and
all shares of the $4.125 Preferred Stock which are otherwise reacquired by the
Corporation and subsequently cancelled by the Board of Directors shall have the
status of authorized but unissued shares of Preferred Stock, without designation
as to series, subject to reissuance by the Board of Directors as shares of any
one or more other series.
4.3 Series A Preferred Stock. The Corporation is authorized to issue a
series of Preferred Stock, which shall consist of 100,000 shares and is
designated as "Series A Junior Participating Preferred Shares" (the "SERIES A
PREFERRED SHARE"). The powers, preferences, rights, restrictions and other
matters relating to the Series A Preferred Shares are as follows:
(a) Dividends and Distributions.
(1) The rate of dividends payable per share of Series A
Preferred Shares on the first day of January, April, July and October in each
year or such other quarterly payment date as shall be specified by the Board of
Directors (each such data being referred to herein as a "QUARTERLY DIVIDEND
PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of the Series A Preferred
Shares, shall be (rounded to the nearest cent) equal to the greater of (A)
$10.00 or (B) subject to the provision for adjustment hereinafter set forth,
1,000 times the aggregate per share amount of all cash dividends and 1,000 times
the aggregate per share amount (payable in cash, based upon the fair
II-12
<PAGE>
market value at the time the non-cash dividend or other distribution is declared
or paid as determined in good faith by the Board of Directors) of all non-cash
dividends or other distributions other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, $.001 per value
per share, of the Corporation since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of the Series A
Preferred Shares. Dividends on the Series A Preferred Shares shall be paid out
of funds legally available for such purpose. In the event the Corporation shall
at any time after April 14,1995 (the "RIGHTS DECLARATION DATE") (A) declare any
dividend on Common Stock payable in shares of Common Stock, (B) subdivide the
outstanding shares of Common Stock, or (C) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amounts
to which holders of Series A Preferred Shares were entitled immediately prior to
such event under clause (D) of the preceding sentence shall be adjusted by
multiplying each such amount by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(2) Dividends shall begin to accrue and be cumulative on
outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date
next preceding the date of issue of such Series A Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Preferred Shares entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall nor bear
interest. Dividends paid on the Series A Preferred Shares in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding.
(b) Voting Rights. In addition to any other voting rights required
by law, the holders of Series A Preferred Shares shall have the following voting
rights:
(1) Subject to the provision for adjustment hereinafter set
forth, each Series A Preferred Share shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(A) declare any dividend on Common Stock payable in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, or (C) combine the outstanding
shares of Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of Series A Preferred Shares were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the
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<PAGE>
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(2) In the event that dividends upon the Series A Preferred
Shares shall be in arrears to an amount equal to six full quarterly dividends
thereon, the holders of such Series A Preferred Shares shall become entitled to
the extent hereinafter provided to vote noncumulatively at all elections of
directors of the Corporation, and to receive notice of all stockholders'
meetings to be held for such purpose. At such meetings, to the extent that
directors are being elected, the holders of such Series A Preferred Shares
voting as a class shall be entitled solely to elect two members of the Board of
Directors of the Corporation; and all other directors of the Corporation shall
be elected by the other stockholders of the Corporation entitled to vote in the
election of directors. Such voting rights of the holders of such Series A
Preferred Shares shall continue until all accumulated and unpaid dividends
thereon shall have been paid or funds sufficient therefor set side, whereupon
all such voting rights of the holders of shares of such series shall cease,
subject to being again revived from time to time upon the reoccurrence of the
conditions above described as giving rise thereto.
At any time when such right to elect directors separately as a
class shall have so vested, the Corporation may, and upon the written request of
the holders of record of not less than 15% of the then outstanding total number
of shares of all the Series A Preferred Shares having the right to elect
directors in such circumstances shall, call a special meeting of holders of such
Series A Preferred Shares for the election of directors. In the case of such a
written request, such special meeting shall be held within ninety (90) days
after the delivery of such request, and, in either case, at the place and upon
the notice provided by law and in the By-laws of the Corporation; provided, that
the Corporation shall not be required to call such a special meeting if such
request is received less than one hundred twenty (120) days before the date
fixed for the next ensuing annual or special meeting of stockholders of the
Corporation. Upon the mailing of the notice of such special meeting to the
holders of such Series A Preferred Shares, or, if no such meeting be held, then
upon the mailing of the notice of the next annual or special meeting of
stockholders for the election of directors, the number of directors of the
Corporation shall, ipso facto, be increased to the extent, but only to the
extent, necessary to provide sufficient vacancies to enable the holders of such
Series A Preferred Shares to elect the two directors hereinabove provided for,
and all such vacancies shall be filled only by vote of the holders of such
Series A Preferred Shares as hereinabove provided. Whenever the number of
directors of the Corporation shall have been increased, the number as so
increased may thereafter be further increased or decreased in such manner as may
be permitted by the By-laws and without the vote of the holders of Series A
Preferred Shares, provided that no such action shall impair the right of the
holders of Series A Preferred Shares to elect and to be represented by two
directors as herein provided.
So long as the holders of Series A Preferred Shares are
entitled hereunder to voting rights, any vacancy in the Board of Directors
caused by the death or resignation of any director elected by the holders of
Series A Preferred Shares, shall, until the next meeting of stockholders for the
election of directors, in each case be filled
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by the remaining director elected by the holders of Series A Preferred Shares
having the right to elect directors in such circumstances.
Upon termination of the voting rights of the holders of any
series of Series A Preferred Shares the terms of office of all persons who shall
have been elected directors of the Corporation by vote of the holders of Series
A Preferred Shares or by a director elected by such holders shall forthwith
terminate.
(3) Except as otherwise provided herein, in the Certificate of
Incorporation of the Corporation or by law, the holders of Series A Preferred
Shares and the holders of Common Stock (and the holders of shares of any other
series or class entitled to vote thereon) shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
(c) Reacquired Shares. Any Series A Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued Series Preferred Stock and may
be reissued as part of a new series of Series Preferred Stock to be created by
resolution or resolutions of the Board of Directors.
(d) Liquidation, Dissolution or Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (1) $100.00 per share, plus accrued dividends to the date
of distribution, whether or not earned or declared, or (2) an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of Common
Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (A) declare any dividend on Common Stock payable in shares of
Common Stock, (B) subdivide the outstanding shares of Common Stock, or (C)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event pursuant to clause (2) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately alter such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(e) Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the Series A
Preferred Shares shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (1) declare any dividend on
Common Stock payable in shares of Common Stock, (2) subdivide the
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<PAGE>
outstanding shares of Common Stock, or (3) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the Preferred Shares shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(f) No Redemption. The Series A Preferred Shares shall not be
redeemable.
(g) Ranking. The Series A Preferred Shares shall rank junior to all
other series of the Corporation's Series Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
(h) Fractional Shares. Series A Preferred Shares may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and so have the benefit of all other rights of
holders of Series A Preferred Shares.
FIFTH: Board of Directors.
5.1 Number; Classification. The Board of Directors of the Corporation
shall consist of such number of directors, which number shall not be less than 9
or more than 14, as shall be fixed from time so time by resolution of the Board.
The Board of Directors shall be divided into three classes, which shall be as
nearly equal in number as possible. Directors of each class shall serve for a
term of three years and until their successors shall have been elected and
qualified. The three initial classes of directors shall be comprised as follows:
(a) Class I shall be comprised of directors who shall serve until
the annual meeting of stockholders in 1993 and until their successors shall have
been elected and qualified.
(b) Class II shall be comprised of directors who shall serve until
the annual meeting of stockholders in 1994 and until their successors shall have
been elected and qualified.
(c) Class III shall be comprised of directors who shall serve until
the annual meeting of stockholders in 1995 and until their successors shall have
been elected and qualified.
5.2 Qualifications. No person shall be appointed or elected a director of
the Corporation unless;
(a) such person is elected to fill a vacancy in the Board of
Directors (including any vacancy resulting from any increase in the authorized
number of directors) by a vote of the majority of the Board of Directors then in
office, and any
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director so elected shall hold office until the next election of the class for
which such director shall have been elected and until a successor shall have
been elected and qualified; or
(b) the name of such person, together with such consents and
information concerning present and prior occupations, transactions with the
Corporation or its subsidiaries and other matters as may at the time be required
by or pursuant to the By-laws, shall have been filed with the Secretary of the
Corporation no later than a time faced by or pursuant to the By-laws immediately
preceding the annual or special meeting at which such person intends to be a
candidate for director.
5.3 Removal of Directors. Directors of the Corporation may only be removed
for cause by a vote of the holders of shares entitled to cast a majority of the
votes which all stockholders are entitled to cast at an election of directors.
No decrease or increase in the size of the Board of Directors shall shorten or
otherwise affect the term of any incumbent director.
5.4 Elections of Directors. Elections of directors need not be by written
ballot unless the By-laws of the Corporation shall so provide.
SIXTH: Unanimous Consent of Stockholders in Lieu of Meeting. Any action required
to be taken at any annual or special meeting of stockholders of the Corporation,
or any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of all of the outstanding stock entitled to vote
to take such action at any annual or special meeting of stockholders of the
Corporation and shall be delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the books in which proceedings of
meetings of stockholders are recorded. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to therein unless,
within 60 days of the earliest dated consent delivered in the manner required in
this section to the Corporation, written consents signed by the holders of all
of the outstanding stock entitled to vote to take such action are delivered to
the Corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested.
SEVENTH: By-laws. The Board of Directors shall have the power, in addition to
the stockholders, to make, alter, or repeal the By-laws of the Corporation.
EIGHTH: Liability of Directors. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which
II-17
<PAGE>
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, as the same exists or
hereafter may be amended, or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware General Corporation Law is
hereafter amended to authorize corporate action further limiting or eliminating
the personal liability of directors, then the liability of a director to the
corporation shall be limited or eliminated to the fullest extent permitted by
the Delaware General Corporation Law, as so amended from time to time. Any
repeal or modification of this Article EIGHTH shall be by prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification.
NINTH: Indemnification. The Corporation shall, to the fullest extent permitted
by the Delaware General Corporation Law, as the same may be amended and
supplemented, indemnify any and all past, present and future directors and
officers of the Corporation from and against any and all costs, expenses
(including attorneys' fees), damages, judgments, penalties, fines, punitive
damages, excise taxes assessed with respect to an employee benefit plan and
amounts paid in settlement in connection with any action, suit or proceeding,
whether by or in the right of the Corporation, a class of its security holders
or otherwise, in which the director or officer may be involved as a party of
otherwise, by reason of the fact that such person was serving as a director,
officer, employee or agent of the Corporation.
TENTH. Fundamental Transactions.
10.1 Stockholder Authorization of Fundamental Transactions Recommended by
Management. Whenever any corporate action which constitutes a Fundamental
Transaction is to be taken by vote of the stockholders and such Fundamental
Transaction has been approved by at least two-thirds of the entire Board of
Directors, the proposed Fundamental Transaction shall be authorized upon
receiving the minimum vote required for the authorization of such action by
statute, after taking into account the express terms of any class or any series
of any class of shares of the Corporation with respect to such vote.
10.2 Stockholder Authorization of Fundamental Transactions Not Recommended
by Management. Except as provided in Section (1) of this Article TENTH, whenever
any corporate action than constitutes a Fundamental Transaction is to be taken
by vote of the stockholders, the proposed Fundamental Transaction shall be
authorized only upon receiving at least two-thirds of the vote which all voting
stockholders, voting as a single class, are entitled to cast thereon and, in
addition, the affirmative vote of the number or proportion of shares of any
class or any series of any class of shares of the Corporation, if any, as shall
at the time be required by statute or the express terms of any such class or
series of any class of shares of the Corporation.
10.3 Fundamental Transaction Defined. For the purposes of this Article
TENTH, the term "Fundamental Transaction" shall mean:
II-18
<PAGE>
(a) any of the following, if such action is effected by vote of the
stockholders: amendment of this Certificate of Incorporation; adoption,
amendment or repeal of the By-laws; a change in the number of directors
constituting the entire Board of Directors; or removal of one or more directors;
or
(b) any of the following, if any such transaction requires the
approval of the Stockholders under this Certificate of Incorporation of the
Corporation as then in effect or the Delaware General Corporation Law as then in
effect with respect to the Corporation: the sale, lease, exchange or other
disposition of all or substantially all of the assets of the Corporation; or the
merger, consolidation, division, reorganization, recapitalization, dissolution,
liquidation, or winding up of the Corporation.
ELEVENTH: Amendments. The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders are granted subject to this reservation.
II-19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>4
<FILENAME>w56746ex3-2.txt
<DESCRIPTION>AMENDED AND RESTATED CERTIFICATE OF INC.
<TEXT>
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
RADIAN GROUP INC.
----------------------------------------
Under Section 242 of the General Corporation Law of the State of Delaware
----------------------------------------
RADIAN GROUP INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "GCL"), for the purpose of amending its Restated Certificate of
Incorporation pursuant to Section 242 of the GCL does hereby certify as follows:
1. The first sentence of ARTICLE FOURTH of the Restated Certificate of
Incorporation of the Corporation is hereby amended and restated in its entirety
as follows:
"FOURTH: Capital Stock. The Corporation shall be authorized to issue two
hundred twenty million (220,000,000) shares of capital stock, of which two
hundred million (200,000,000) shares shall be Common Stock, par value
$.001 per share, and twenty million (20,000,000) shares shall be Preferred
Stock, par value $.001 per share."
2. The amendment set forth above has been duly adopted in accordance with
Section 242 of the GCL.
3. This Certificate of Amendment of the Restated Certificate of Incorporation of
the Corporation shall be effective at 5:00p.m. as of the 14th day of June, 2001.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be duly adopted and executed in its corporate name and on its
behalf by its duly authorized officer as of the 14th day of June, 2001.
RADIAN GROUP INC.
By: /s/ Howard S. Yaruss
---------------------------------------
Name: Howard S. Yaruss
Title: Secretary & S.V.P.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>5
<FILENAME>w56746ex4-2.txt
<DESCRIPTION>CERTIFICATE OF DESIGNATIONS PREFERRED STOCK
<TEXT>
<PAGE>
EXHIBIT 4.2
CERTIFICATE OF DESIGNATIONS
OF
CMAC INVESTMENT CORPORATION
Pursuant to Section 151(g) of
The Delaware General Corporation Law
1. CMAC Investment Corporation, a Delaware corporation (the "Corporation"),
is authorized to issue two classes of shares known as Common Stock and
Preferred Stock.
2. The Board of Directors of the Corporation is authorized by the Certificate
of Incorporation of the Corporation, as amended (the "Restated
Certificate") to establish and designate one or more series of the
Preferred Stock and to fix full, limited, multiple or fractional, or no
voting rights, and the designations, preferences, qualifications,
privileges, limitations, restrictions, options, conversion rights and
other special or relative rights thereof.
3. The Restated Certificate does not set forth any such powers, designations,
preferences or rights or qualifications, limitations or restrictions of
any shares or series of the Preferred Stock.
4. Exhibit A is a copy of the resolution adopted on the 26th day of October,
1992, by the Board of Directors of the Corporation designating the $4.125
Preferred Stock as a series of the Preferred Stock.
5. The number of shares constituting the $4.125 Preferred Stock shall be
800,000.
IN WITNESS WHEREOF, the Corportion has caused this Certificate of Designations
to be duly adopted in accordance with the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware and the Restated Certificate
and to be executed in its corporate name on the 26th day of October, 1992.
CMAC INVESTMENT CORPORATION
By: /s/ C. Robert Quint
-------------------
Senior Vice President
Attest:
/s/ Thomas J. Shelly
- --------------------
Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.4
<SEQUENCE>6
<FILENAME>w56746ex4-4.txt
<DESCRIPTION>STANDSTILL AND VOTING AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 4.4
STANDSTILL AND VOTING AGREEMENT
THIS STANDSTILL AND VOTING AGREEMENT, dated as of October ___, 1992 (the
"Agreement"), among CMAC INVESTMENT CORPORATION, a Delaware corporation
("Investment"), and the Reliance Group Holdings, Inc., a Delaware corporation
("Reliance").
WINESSETH:
WHEREAS, upon the completion of Investment's initial public offering
(assuming no exercise of the underwriters' over-allotment options) Reliance will
be the beneficial owner of 1,300,000 shares of the Common Stock of Investment,
par value $.001 per share (such class of Common Stock) is referred to herein as
the "Investment Common Stock"); and
WHEREAS, Reliance and Investment wish to provide for a constructive and
mutually beneficial relationship.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
Section 1. Certain Definitions. As used in this Agreement, the following
terms shall have the following meanings:
1.1. "Investment Voting Securities" shall mean Investment Common Stock,
any other class of Investment securities entitled to vote generally for the
election of directors, and any other securities, warrants or options or rights
of any nature (whether or not issued by Investment) which are convertible into,
exchangeable for, or exercisable for the purchase of, or which give the holder
thereof any rights in respect of Investment Common Stock or any other class of
Investment securities entitled to vote generally for the election of directors.
"investment Voting Securities" shall not include shares of Investment's $4.125
Preferred Stock.
1.2. "Reliance Entity" shall mean Reliance or any person directly or
indirectly controlling, controlled by or under common control with Reliance.
1.3. "Stockholder Issue" shall mean the election of Investment's
directors, or any charter or by-law amendment acquisition or disposition of
substantial assets (by way of merger, consolidation or otherwise), change in
<PAGE>
capitalization, liquidation, or other action (whether or not arising in the
ordinary course of business of Investment) which, in accordance with the
Delaware General Corporation Law or applicable rules of the New York Stock
Exchange, is submitted to a vote of the holders of the Investment Common Stock.
1.4. "Commencement Date" shall mean the closing date for the initial
public offering of the Investment Common Stock.
1.5. "Termination Date" shall mean the tenth anniversary of the
Commencement Date.
1.6. The concept of "beneficial ownership" and the terms "person" and
"group" shall have the meanings defined in Regulation 13D/G adopted by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
Section 2. Representations and Warranties of Investment. Investment
represents and warrants that:
(a) Investment is a corporation duly organized, validly existing and in
good standing under the laws of the state of Delaware, with corporate power to
own its properties and to conduct its business as now conducted. (b) Investment
has full right, power and authority to enter into this Agreement and perform its
obligations hereunder. This Agreement has been duly authorized, executed and
delivered by Investment and constitutes a valid and binding agreement of
Investment enforceable in accordance with its terms.
(c) Neither the execution and delivery of this Agreement nor the
performance by Investment of its obligations hereunder will conflict with or
result in a breach of or constitute a default under any law, rule, regulation,
judgment, order or decree of any court, arbitrator or governmental agency or
instrumentality or of Investment's corporate charter or by-laws or of any
agreement or instrument to which it is a party or subject or by which its
property is bound or affected.
Section 3. Representations and Warranties of Reliance. Reliance represents
and warrants to Investment as follows:
(a) Reliance is a corporation duly organized validly existing and in good
standing under the laws of the State of Delaware.
<PAGE>
(b) Reliance has full right, power and authority to enter into this
Agreement and perform its obligations hereunder. This Agreement has been duly
authorized, executed and delivered by Reliance and constitutes a valid and
binding agreement of Reliance enforceable in accordance with its terms hereof.
(c) Neither the execution and delivery of this Agreement nor the
performance by Reliance of its obligations hereunder will conflict with or
conflict with or result in a breach of or constitute a default under any law,
rule, regulation, judgment, order or decree of any court, arbitrator or
governmental agency or instrumentality or of any agreement or instrument to
which it is a party or subject or by which its property is bound or affected, or
of the corporate charter, by-laws or other governing document of Reliance.
Section 4. Covenants of Reliance with Respect to Investment Voting
Securities and Other Matters. After the Commencement Date and prior to the
Termination Date and subject to the further provisions hereof:
4.1. Covenant With Respect to Acquisition of Investment Securities.
Subject to the further provisions of this Section 4.1, no Reliance Entity shall,
directly or indirectly, acquire, offer to acquire, agree to acquire, become the
beneficial owner of or obtain any rights in respect of any securities issued by
Investment or take any action in furtherance thereof except for (i) shares of
Investment Common Stock and Investment $4.125 Preferred Stock beneficially owned
on the Commencement Date, or (ii) securities distributed by Investment by means
of stock dividends or other distributions made available to holders of
Investment's securities. Notwithstanding the foregoing sentence, any Reliance
Entity may acquire additional shares of Common Stock of Investment if, after
effect to such acquisition, offer or agreement or other action, the aggregate
voting power in the election of directors of all Investment Voting Securities
then beneficially owned by all Reliance Entities would not be greater than 20%
(such percentage herein called the "Maximum Percentage") of such total combined
voting power of all Investment Voting Securities then outstanding. For purposes
of calculating compliance with the Maximum Percentage, all Investment Voting
Securities which are subject of an offer, agreement, arrangement or
understanding pursuant to which any Reliance Entity may obtain beneficial
ownership of such securities shall be deemed to be beneficially owned by such
Reliance Entity.
<PAGE>
4.2. Covenant With Respect to Voting of Investment Voting Securities. Each
Reliance Entity shall take such action as may be required so that all Investment
Voting Securities beneficially owned by it are voted in the identical
percentages as are all Investment Voting Securities which are beneficially owned
by Reliance Entity and which are voted with respect to any particular
Stockholder Issue. Each Reliance Entity which beneficially owns Investment
Voting Securities, shall be present or cause the holder of record to be present,
in person or by proxy, at all meetings of stockholders of Investment so that all
Investment Voting Securities beneficially owned by such Reliance Entity may be
counted for the purpose of determining the presence of a quorum at such
meetings.
4.3. Stock Pooling. No Reliance Entity shall join a partnership, limited
partnership, syndicate or other group, or otherwise act in concert with any
other person, for the purpose of acquiring Investment Voting Securities, or
otherwise become a member of a "group" within the meaning of Section 13 (d) (3)
of the Exchange Act having such purpose (in each case other than solely with
Reliance Entities).
Section 5. Terms of Agreement; Certain Provisions Regarding Termination.
5.1. Term of Agreement. Except as otherwise provided in Section 5.2 the
respective covenants and agreements of Reliance contained in this Agreement will
continue in full force and effect until the Termination Date and all of the
respective representations and warranties of the parties set forth herein shall
be continuing representations and warranties.
5.2 Certain Provisions Regarding Temporary Termination. If the Reliance
Entities shall, at any time, beneficially own in the aggregate shares
representing less than 5% of the voting power of all Investment Voting
Securities, the agreements and obligations of Reliance contained in Section 4.2
hereof shall cease until such time as any Reliance Entity shall purchase or
otherwise acquire beneficial ownership of Investment Voting Securities so that
the Reliance Entities shall in the aggregate beneficially own Investment Voting
Securities representing 5% or more of the voting power of all Investment Voting
Securities. From and after such times as the Reliance Entities own in the
aggregate Investment Voting Securities representing 5% or more of the voting
<PAGE>
power of the Investment Voting Securities, all such restrictions upon and
covenants of Reliance set forth Section in 4.2 of this Agreement shall again be
applicable. All percentages in this Section shall be calculated in accordance
with the provisions of Section 4.1 hereof.
Section 6. Specific Enforcement. Reliance acknowledges and agrees that (i)
the provisions of this Agreement are reasonable and necessary to protect the
proper and legitimate interest of Investment, and (ii) Investment would be
irreparably damaged in the event any of the provisions of this Agreement were
not performed by Reliance in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that Investment shall be entitled
to preliminary and permanent injunctive relief to prevent breaches of the
provisions of this Agreement, without the necessity of proving actual damages,
and to enforce specifically the terms and provisions hereof and thereof in any
court of the United States or any state thereof having jurisdiction, which
rights shall be cumulative and in addition to any other remedy to which
Investment may be entitled hereunder or at law or equity.
7. General Provisions.
7.1. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of Delaware without giving effect to any conflicts
of laws provisions.
7.2. Notices. All notices, consents, requests, instructions, approvals and
other communications provided for herein and all legal process in regard hereto
shall be validly given, made or served, if in writing and delivered personally,
by facsimile or sent by registered mail, postage prepaid, if to:
Investment:
CMAC Investment Corporation
8 Penn Center
Philadelphia, PA 19103-2197
Facsimile: (215) 496-0346
Attention: Chairman
Reliance:
Reliance Group Holdings, Inc.
Park Avenue Plaza
55 East 52nd Street, 29th Floor
<PAGE>
New York, NY 10055
Facsimile: (212) 909-1864
Attention: General Counsel
or such other address or facsimile number as Investment or Reliance may, from
time to time, designate in a written notice given in a like manner. Notice given
by facsimile shall be deemed delivered on the day the sender receives facsimile
confirmation that such notice was received at the facsimile number of the
addressee. Notice given by registered mail as set out above shall be deemed
delivered when the same is received by the addressee thereof.
7.3. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
7.4. Amendments. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto.
7.5 Descriptive Readings. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
7.6 Counterparts. For the convenience of the parties, any number of
counterparts of this Agreement may be executed by any party hereto and each such
executed counterpart shall be, and shall be deemed to be, an original
instrument.
7.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the successors and
assigns of the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto intending to be legally bound have caused
this Standstill and Voting Agreement to be duly executed as of the date first
above written.
CMAC INVESTMENT CORPORATION
By: _____________________________________
Title
RELIANCE GROUP HOLIDNGS, INC.
By: _____________________________________
Title
JOINDER
Commonwealth Land Title Insurance Company, a "Reliance Entity" as defined
in the foregoing agreement, hereby acknowledges, and agrees so long as it is a
Reliance Entity to be bound as if it were a party to, the foregoing Standstill
and Voting Agreement.
COMMONWEALTH LAND TITLE INSURANCE COMPANY
By: _____________________________________
Title
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.10
<SEQUENCE>7
<FILENAME>w56746ex4-10.txt
<DESCRIPTION>INDENTURE DATED JANUARY 11,2002
<TEXT>
<PAGE>
EXHIBIT 4.10
EXHIBIT 4.11
CONFORMED COPY
RADIAN GROUP INC.
2.25% SENIOR CONVERTIBLE DEBENTURES
DUE 2022
INDENTURE
DATED JANUARY 11, 2002
THE BANK OF NEW YORK,
TRUSTEE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE........................................ 1
Section 1.1 Definitions................................................................... 1
Section 1.2 Other Definitions............................................................. 4
Section 1.3 Incorporation by Reference of TIA............................................. 5
Section 1.4 Rules of Construction......................................................... 5
Section 1.5 Acts of Holders............................................................... 6
ARTICLE II THE SECURITIES................................................................... 7
Section 2.1 Form and Dating............................................................... 7
Section 2.2 Execution and Authentication.................................................. 7
Section 2.3 Registrar, Paying Agent, Conversion Agent and Calculation Agent............... 8
Section 2.4 Paying Agent to Hold Money and Securities in Trust............................ 8
Section 2.5 Securityholder Lists.......................................................... 9
Section 2.6 Transfer and Exchange......................................................... 9
Section 2.7 Replacement Securities........................................................ 10
Section 2.8 Outstanding Securities; Determinations of Holders' Action..................... 11
Section 2.9 Temporary Securities.......................................................... 11
Section 2.10 Cancellation................................................................. 12
Section 2.11 Persons Deemed Owners........................................................ 12
Section 2.12 Global Securities............................................................ 12
Section 2.13 CUSIP Numbers................................................................ 16
Section 2.14 Ranking...................................................................... 16
ARTICLE III REDEMPTION AND PURCHASES........................................................ 17
Section 3.1 Company's Right to Redeem; Notices to Trustee................................. 17
Section 3.2 Selection of Securities to Be Redeemed........................................ 17
Section 3.3 Notice of Redemption.......................................................... 17
Section 3.4 Effect of Notice of Redemption................................................ 18
Section 3.5 Deposit of Redemption Price................................................... 18
Section 3.6 Securities Redeemed in Part................................................... 18
Section 3.7 Purchase of Securities by the Company at Option of the Holder................. 18
Section 3.8 Purchase of Securities at Option of the Holder upon Change of Control......... 20
Section 3.9 Company's Right to Elect Manner of Payment of Purchase Price and Change of
Control Purchase Price for Payment........................................ 24
Section 3.10 Effect of Purchase Notice or Change of Control Purchase Notice............... 28
Section 3.11 Deposit of Purchase Price or Change of Control Purchase Price................ 29
Section 3.12 Securities Purchased in Part................................................. 29
Section 3.13 Covenant to Comply With Securities Laws Upon Purchase of Securities.......... 30
Section 3.14 Repayment to the Company..................................................... 30
ARTICLE IV COVENANTS........................................................................ 30
Section 4.1 Payment of Securities......................................................... 30
Section 4.2 SEC and Other Reports......................................................... 30
Section 4.3 Compliance Certificate........................................................ 31
Section 4.4 Further Instruments and Acts.................................................. 31
Section 4.5 Maintenance of Office or Agency............................................... 31
Section 4.6 Delivery of Certain Information............................................... 31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 4.7 Payment of Taxes and Other Claims............................................. 32
Section 4.8 Registration Rights........................................................... 32
Section 4.9 Tax Treatment of Securities................................................... 32
ARTICLE V SUCCESSOR CORPORATION............................................................. 32
Section 5.1 When Company May Merge or Transfer Assets..................................... 32
ARTICLE VI DEFAULTS AND REMEDIES............................................................ 33
Section 6.1 Events of Default............................................................. 33
Section 6.2 Acceleration.................................................................. 35
Section 6.3 Other Remedies................................................................ 35
Section 6.4 Waiver of Past Defaults....................................................... 35
Section 6.5 Control by Majority........................................................... 36
Section 6.6 Limitation on Suits........................................................... 36
Section 6.7 Rights of Holders to Receive Payment.......................................... 36
Section 6.8 Collection Suit by Trustee.................................................... 36
Section 6.9 Trustee May File Proofs of Claim.............................................. 36
Section 6.10 Priorities................................................................... 37
Section 6.11 Undertaking for Costs........................................................ 37
Section 6.12 Waiver of Stay, Extension or Usury Laws...................................... 38
ARTICLE VII TRUSTEE......................................................................... 38
Section 7.1 Duties of Trustee............................................................. 38
Section 7.2 Rights of Trustee............................................................. 39
Section 7.3 Individual Rights of Trustee.................................................. 40
Section 7.4 Trustee's Disclaimer.......................................................... 40
Section 7.5 Notice of Defaults............................................................ 41
Section 7.6 Reports by Trustee to Holders................................................. 41
Section 7.7 Compensation and Indemnity.................................................... 41
Section 7.8 Replacement of Trustee........................................................ 42
Section 7.9 Successor Trustee by Merger................................................... 42
Section 7.10 Eligibility; Disqualification................................................ 43
Section 7.11 Preferential Collection of Claims Against Company............................ 43
ARTICLE VIII DISCHARGE OF INDENTURE......................................................... 43
Section 8.1 Discharge of Liability on Securities.......................................... 43
Section 8.2 Repayment to the Company...................................................... 43
ARTICLE IX AMENDMENTS....................................................................... 43
Section 9.1 Without Consent of Holders.................................................... 43
Section 9.2 With Consent of Holders....................................................... 44
Section 9.3 Compliance with TIA........................................................... 45
Section 9.4 Revocation and Effect of Consents, Waivers and Actions........................ 45
Section 9.5 Notation on or Exchange of Securities......................................... 46
Section 9.6 Trustee to Sign Supplemental Indentures....................................... 46
Section 9.7 Effect of Supplemental Indentures............................................. 46
ARTICLE X CONVERSIONS....................................................................... 46
Section 10.1 Conversion Privilege......................................................... 46
Section 10.2 Conversion Procedure; Conversion Price; Fractional Shares.................... 48
Section 10.3 Adjustment of Conversion Price for Common Stock.............................. 49
Section 10.4 Consolidation or Merger of the Company....................................... 57
Section 10.5 Notice of Adjustment......................................................... 58
Section 10.6 Notice in Certain Events..................................................... 59
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 10.7 Company To Reserve Stock: Registration; Listing.............................. 59
Section 10.8 Taxes on Conversion.......................................................... 60
Section 10.9 Conversion After Record Date................................................. 60
Section 10.10 Company Determination Final................................................. 60
Section 10.11 Responsibility of Trustee for Conversion Provisions......................... 60
Section 10.12 Unconditional Right of Holders to Convert................................... 61
ARTICLE XI MISCELLANEOUS.................................................................... 61
Section 11.1 Trust Indenture Act Controls................................................. 61
Section 11.2 Notices...................................................................... 61
Section 11.3 Communication by Holders with Other Holders.................................. 62
Section 11.4 Certificate and Opinion as to Conditions Precedent........................... 62
Section 11.5 Statements Required in Certificate or Opinion................................ 62
Section 11.6 Separability Clause.......................................................... 62
Section 11.7 Rules by Trustee, Paying Agent, Conversion Agent and Registrar.............. 62
Section 11.8 Legal Holidays............................................................... 63
Section 11.9 Governing Law................................................................ 63
Section 11.10 No Recourse Against Others.................................................. 63
Section 11.11 Successors.................................................................. 63
Section 11.12 Multiple Originals.......................................................... 63
</TABLE>
EXHIBIT A Form of Global Security
EXHIBIT B Form of Certificated Security
EXHIBIT C Transfer Certificate
iii
<PAGE>
INDENTURE dated as of January 11, 2002 between RADIAN GROUP, INC., a
Delaware corporation ("Company"), and THE BANK OF NEW YORK, a New York banking
corporation ("Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Company's 2.25% Senior
Convertible Debentures due 2022:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1 Definitions.
"144A Global Security" means a permanent Global Security in the form
of the Security attached hereto as Exhibit A, and that is deposited with and
registered in the name of the Depositary, representing Securities sold in
reliance on Rule 144A under the Securities Act.
"Affiliate" of any specified person means any other person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any specified person means the power to
direct or cause the direction of the management and policies of such person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Amerin Guaranty" shall mean Amerin Guaranty Corporation, an
Illinois Corporation.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Security or beneficial interest therein, the
rules and procedures of the Depositary for such Security, in each case to the
extent applicable to such transaction and as in effect from time to time.
"Asset Guaranty" shall mean Asset Guaranty Insurance Company, a New
York company.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of such board.
"Board Resolution" means a resolution of the Board of Directors.
"Business Day" means, with respect to any Security, a day that in
the City of New York, is not a day on which banking institutions are authorized
by law or regulation to close.
"Calculation Agent" shall mean initially The Bank of New York and
its successors and assigns.
"Capital Stock" for any corporation means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) stock issued by that
corporation.
"Certificated Securities" means Securities that are in the form of
the Securities attached hereto as Exhibit B.
<PAGE>
2
"Common Stock" shall mean the Common Stock, $0.001 par value per
share, of the Company existing on the date of this Indenture or any other shares
of Capital Stock of the Company into which such Common Stock shall be
reclassified or changed.
"Company" means the party named as the "Company" in the first
Section of this Indenture until a successor replaces it pursuant to the
applicable provisions of this Indenture and, thereafter, shall mean such
successor. The foregoing sentence shall likewise apply to any subsequent such
successor or successors.
"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by any two Officers.
"Conversion Price" means initially $57.75, subject to adjustment as
set forth herein.
"Corporate Trust Office" means the principal office of the Trustee
at which at any time its corporate trust business shall be administered, which
office at the date hereof is located at 101 Barclay Street, Floor 21 West, New
York, NY 10286, Attention: Corporate Trust Administration, or such other address
as the Trustee may designate from time to time by notice to the Holders and the
Company, or the principal corporate trust office of any successor Trustee (or
such other address as a successor Trustee may designate from time to time by
notice to the Holders and the Company).
"Default" means an Event of Default.
"Enhance Reinsurance" shall mean Enhance Reinsurance Company, a New
York company.
"Global Securities" means Securities that are in the form of the
Securities attached hereto as Exhibit A, and that are registered in the register
of Securities in the name of a Depositary or a nominee thereof, and to the
extent that such Securities are required to bear the Legend required by Section
2.6, such Securities will be in the form of a 144A Global Security.
"Holder" or "Securityholder" means a person in whose name a Security
is registered on the Registrar's books.
"Indenture" means this Indenture, as amended or supplemented from
time to time in accordance with the terms hereof, including the provisions of
the TIA that are deemed to be a part hereof.
"Issue Date" of any Security means the date on which the Security
was originally issued or deemed issued as set forth on the face of the Security.
"Non-Recourse Debt" means indebtedness of the Company or any
Designated Subsidiary for borrowed money as to which the lenders have recourse
only to specified assets of the Company or any Designated Subsidiary, other than
the capital stock of a Designated Subsidiary.
"NYSE" means The New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, any Vice Chairman, the
President, any Vice President, the Treasurer, the Secretary or any Assistant
Treasurer or Assistant Secretary of the Company.
"Officers' Certificate" means a written certificate containing the
information specified in Sections 11.4 and 11.5, signed in the name of the
Company by any two Officers, and delivered to the
<PAGE>
3
Trustee. An Officers' Certificate given pursuant to Section 4.3 shall be signed
by the principal executive officer, principal financial officer or principal
accounting officer of the Company but need not contain the information specified
in Sections 11.4 and 11.5.
"Opinion of Counsel" means a written opinion containing the
information specified in Sections 11.4 and 11.5, from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of, or
counsel to, the Company or the Trustee.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.
"Radian Group" shall mean Radian Group Inc. and its subsidiaries.
"Radian Guaranty" shall mean Radian Guaranty Inc., a Pennsylvania
company.
"Redemption Date" or "redemption date" shall mean the date specified
in a notice of redemption on which the Securities may be redeemed in accordance
with the terms of the Securities and this Indenture.
"Redemption Price" or "redemption price" shall have the meaning set
forth in Section 5 of the Securities.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date hereof, among the Company, Banc of America
Securities LLC and Lehman Brothers Inc.
"Responsible Officer" shall mean, when used with respect to the
Trustee, any officer within the corporate trust department of the Trustee,
including any vice president, assistant vice president, assistant secretary,
assistant treasurer, trust officer or any other officer of the Trustee who
customarily performs functions similar to those performed by the persons who at
the time shall be such officers, respectively, or to whom any corporate trust
matter is referred because of such person's knowledge of and familiarity with
the particular subject and who shall have direct responsibility for the
administration of this Indenture.
"Restricted Security" means a Security required to bear the
restrictive legend set forth in the form of Security set forth in Exhibits A and
B of this Indenture.
"Rule 144A" means Rule 144A under the Securities Act (or any
successor provision), as it may be amended from time to time.
"SEC" means the Securities and Exchange Commission.
"Securities" means any of the Company's 2.25% Senior Convertible
Debentures due 2022, as amended or supplemented from time to time, issued under
this Indenture.
"Securityholder" or "Holder" means a person in whose name a Security
is registered on the Registrar's books.
"Stated Maturity", when used with respect to any Security, means
January 1, 2022.
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4
"Subsidiary" means any person of which at least a majority of the
outstanding Voting Stock shall at the time directly or indirectly be owned or
controlled by the Company or by one or more Subsidiaries or by the Company and
one or more Subsidiaries.
"TIA" means the Trust Indenture Act of 1939 as in effect on the date
of this Indenture, provided, however, that in the event the TIA is amended after
such date, TIA means, to the extent required by any such amendment, the TIA as
so amended.
"Trading Day" means a day during which trading in securities
generally occurs on the NYSE or, if the Common Stock is not listed on the NYSE,
on the principal other national or regional securities exchange on which the
Common Stock then is listed or, if the Common Stock is not listed on a national
or regional securities exchange, on the National Association of Securities
Dealers Automated Quotation System or, if the Common Stock is not quoted on the
National Association of Securities Dealers Automated Quotation System, on the
principal other market on which the Common Stock is then traded.
"Trustee" means the party named as the "Trustee" in the first
paragraph of this Indenture until a successor replaces it pursuant to the
applicable provisions of this Indenture and, thereafter, shall mean such
successor. The foregoing sentence shall likewise apply to any subsequent such
successor or successors.
"Voting Stock" of a person means Capital Stock of such person of the
class or classes pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
Section 1.2 Other Definitions
<TABLE>
<CAPTION>
Term Section: Defined in:
<S> <C>
"Agent Members"............................ 2.12(e)
"Applicable Stock.......................... 3.8(c)
"beneficial owner"......................... 3.8(a)
"cash"..................................... 3.9(a)
"Change of Control"........................ 3.8(a)
"Change of Control Purchase Date".......... 3.8(a)
"Change of Control Purchase Notice"........ 3.8(c)
"Change of Control Purchase Price"......... 3.8(a)
"Company Notice"........................... 3.9(d)
"Company Notice Date"...................... 3.9(b)
"Continuing Director"...................... 3.8(a)
"Conversion Agent"......................... 2.3
"Conversion Period"........................ 10.1(b)
"Conversion Rate".......................... 10.1(b)
"Conversion Value"......................... 10.1(b)
"Depositary"............................... 2.1(a)
"Designated Subsidiary" ................... 6.1
"Event of Default"......................... 6.1
"Ex-Dividend Time"......................... 10.1(b)
"Excess Amount" ........................... 10.3(f)
</TABLE>
<PAGE>
5
<TABLE>
<S> <C>
"Exchange Act"............................. 2.12(e)
"Expiration Time" ......................... 10.3(f)
"Institutional Accredited Investors"....... 2.12(a)(iv)
"Legal Holiday"............................ 11.8
"Legend"................................... 2.6(f)
"Market Price"............................. 3.9(c)
"Non-Electing Share" ...................... 10.4
"Notice of Default"........................ 6.1
"Paying Agent"............................. 2.3
"Purchase Date"............................ 3.7(a)
"Purchase Notice".......................... 3.7(a)
"Purchase Price"........................... 3.7(a)
"QIB"...................................... 2.1(a)
"Reference Period" ........................ 10.3(d)(2)
"Registrar"................................ 2.3
"Rule 144A Information".................... 4.6
"Sale Price"............................... 3.9(c)
"Securities Act"........................... 2.6(f)
"Spin-Off" ................................ 10.3(d)(2)
"Trading Price"............................ 10.1(b)
"Trigger Event" ........................... 10.3(d)(3)
</TABLE>
Section 1.3 Incorporation by Reference of TIA. Whenever this
Indenture refers to a provision of the TIA, the provision is incorporated by
reference in and made a part of this Indenture. The following TIA terms used in
this Indenture have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
Section 1.4 Rules of Construction. Unless the context otherwise
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to
it in accordance with generally accepted accounting principles as in effect from
time to time;
(3) "or" is not exclusive;
<PAGE>
6
(4) "including" means including, without limitation; and
(5) words in the singular include the plural, and words in the plural
include the singular.
Section 1.5 Acts of Holders. (a) Any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this Indenture to
be given or taken by Holders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, where it is hereby expressly required, to the
Company, as described in Section 11.2. Such instrument or instruments (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the "Act" of Holders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and conclusive in favor of the
Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to such officer the execution thereof.
Where such execution is by a signer acting in a capacity other than such
signer's individual capacity, such certificate or affidavit shall also
constitute sufficient proof of such signer's authority. The fact and date of the
execution of any such instrument or writing, or the authority of the person
executing the same, may also be proved in any other manner which the Trustee
deems sufficient.
(c) The principal amount and serial number of any Security and the
ownership of Securities shall be proved by the register for the Securities.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Security.
(e) If the Company shall solicit from the Holders any request,
demand, authorization, direction, notice, consent, waiver or other Act, the
Company may, at its option, by or pursuant to a Board Resolution, fix in advance
a record date for the determination of Holders entitled to give such request,
demand, authorization, direction, notice, consent, waiver or other Act, but the
Company shall have no obligation to do so. If such a record date is fixed, such
request, demand, authorization, direction, notice, consent, waiver or other Act
may be given before or after such record date, but only the Holders of record at
the close of business on such record date shall be deemed to be Holders for the
purposes of determining whether Holders of the requisite proportion of
outstanding Securities have authorized or agreed or consented to such request,
demand, authorization, direction, notice, consent, waiver or other Act, and for
that purpose the outstanding Securities shall be computed as of such record
date; provided that no such authorization, agreement or consent by the Holders
on such record date shall be deemed effective unless it shall become effective
pursuant to the provisions of this Indenture not later than six months after the
record date.
<PAGE>
7
ARTICLE II
THE SECURITIES
Section 2.1 Form and Dating The Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibits A
and B, which are a part of this Indenture. The Securities may have notations,
legends or endorsements required by law, stock exchange rule or usage (provided
that any such notation, legend or endorsement required by usage is in a form
acceptable to the Company). The Company shall provide any such notations,
legends or endorsements to the Trustee in writing. Each Security shall be dated
the date of its authentication.
(a) 144A Global Securities. Securities offered and sold within the
United States to qualified institutional buyers as defined in Rule 144A ("QIBs")
in reliance on Rule 144A shall be issued, initially in the form of a 144A Global
Security, which shall be deposited with the Trustee at its Corporate Trust
Office, as custodian for the Depositary (as defined below) and registered in the
name of The Depository Trust Company ("DTC") or the nominee thereof (DTC, or any
successor thereto, and any such nominee being hereinafter referred to as the
"Depositary"), duly executed by the Company and authenticated by the Trustee as
hereinafter provided. The aggregate principal amount of the 144A Global
Securities may from time to time be increased or decreased by adjustments made
on the records of the Trustee and the Depositary as hereinafter provided.
(b) Global Securities in General. Each Global Security shall
represent such of the outstanding Securities as shall be specified therein and
each shall provide that it shall represent the aggregate amount of outstanding
Securities from time to time endorsed thereon and that the aggregate amount of
outstanding Securities represented thereby may from time to time be reduced or
increased, as appropriate, to reflect exchanges, redemptions, repurchases and
conversions.
Any adjustment of the aggregate principal amount of a Global
Security to reflect the amount of any increase or decrease in the amount of
outstanding Securities represented thereby shall be made by the Trustee in
accordance with instructions given by the Holder thereof as required by Section
2.12 hereof and shall be made on the records of the Trustee and the Depositary.
(c) Book-Entry Provisions. This Section 2.1(c) shall apply only to
Global Securities deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.1(c), authenticate and deliver initially one or more Global
Securities that (a) shall be registered in the name of the Depositary, (b) shall
be delivered by the Trustee to the Depositary or pursuant to the Depositary's
instructions and (c) shall be substantially in the form of Exhibit A attached
hereto.
(d) Certificated Securities. Securities not issued as interests in
the Global Securities will be issued in certificated form substantially in the
form of Exhibit B attached hereto.
Section 2.2 Execution and Authentication. The Securities shall be
executed on behalf of the Company by any Officer. The signature of the Officer
on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at the time of the execution of the Securities Officers shall bind the
Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of authentication of such Securities.
<PAGE>
8
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature of an authorized signatory, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder.
The Trustee shall authenticate and deliver the Securities for
original issue in an aggregate principal amount of up to $220,000,000 upon one
or more Company Orders without any further action by the Company (other than as
contemplated in Section 11.4 and Section 11.5 hereof). The aggregate principal
amount of the Securities due at the Stated Maturity thereof outstanding at any
time may not exceed the amount set forth in the foregoing sentence, except upon
the accrual of contingent interest as contemplated in the form of Security
attached hereto as Exhibit A.
The Securities shall be issued only in registered form without
coupons and only in denominations of $1,000 of principal amount and any integral
multiple of $1,000.
Section 2.3 Registrar, Paying Agent, Conversion Agent and
Calculation Agent The Company shall maintain an office or agency where
Securities may be presented for registration of transfer or for exchange
("Registrar"), an office or agency where Securities may be presented for
purchase or payment ("Paying Agent") and an office or agency where Securities
may be presented for conversion ("Conversion Agent"). The Registrar shall keep a
register of the Securities and of their transfer and exchange. The Company may
have one or more co-registrars, one or more additional paying agents and one or
more additional conversion agents. The term Paying Agent includes any additional
paying agent, including any named pursuant to Section 4.5. The term Conversion
Agent includes any additional conversion agent, including any named pursuant to
Section 4.5.
The Company shall enter into an appropriate agency agreement with
any Registrar, Paying Agent, Conversion Agent, Calculation Agent or co-registrar
(in each case, if such Registrar, agent or co-registrar is a Person other than
the Trustee). The agreement shall implement the provisions of this Indenture
that relate to such agent. The Company shall notify the Trustee of the name and
address of any such agent. If the Company fails to maintain a Registrar, Paying
Agent or Conversion Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation therefor pursuant to Section 7.7. The Company or any
Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar,
Conversion Agent or co-registrar.
The Company initially appoints the Trustee as Registrar, Conversion
Agent, Calculation Agent and Paying Agent in connection with the Securities.
Section 2.4 Paying Agent to Hold Money and Securities in Trust.
Except as otherwise provided herein, on or prior to each due date of payments in
respect of any Security, the Company shall deposit with the Paying Agent a sum
of money (in immediately available funds if deposited on the due date) or shares
of Common Stock sufficient to make such payments when so becoming due. The
Company shall require each Paying Agent (other than the Trustee) to agree in
writing that the Paying Agent shall hold in trust for the benefit of
Securityholders or the Trustee all money and shares of Common Stock held by the
Paying Agent for the making of payments in respect of the Securities and shall
promptly notify a Responsible Officer of the Trustee of any default by the
Company in making any such payment. At any time during the continuance of any
such default, the Paying Agent shall, upon the written request of the Trustee,
forthwith pay to the Trustee all money and shares of Common Stock so held in
trust. If the Company, a Subsidiary or an Affiliate of either of them acts as
Paying Agent, it shall segregate the money and shares of Common Stock held by it
as Paying Agent and hold it as a separate trust fund. The Company at any time
may require a Paying Agent to pay all money and shares of
<PAGE>
9
Common Stock held by it to the Trustee and to account for any funds and Common
Stock disbursed by it. Upon doing so, the Paying Agent shall have no further
liability for the money or shares of Common Stock.
Section 2.5 Securityholder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall cause to be furnished to the Trustee at least
semiannually on January 1 and July 1 a listing of Securityholders dated within
15 days of the date on which the list is furnished and at such other times as
the Trustee may request in writing a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of
Securityholders.
Section 2.6 Transfer and Exchange. (a) Subject to Section 2.12
hereof, upon surrender for registration of transfer of any Security, together
with a written instrument of transfer satisfactory to the Registrar duly
executed by the Securityholder or such Securityholder's attorney duly authorized
in writing, at the office or agency of the Company designated as Registrar or
co-registrar pursuant to Section 2.3, the Company shall execute, and the Trustee
shall authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Securities of any authorized denomination or
denominations, of a like aggregate principal amount. The Company shall not
charge a service charge for any registration of transfer or exchange, but the
Company may require payment of a sum sufficient to pay all taxes, assessments or
other governmental charges that may be imposed in connection with the transfer
or exchange of the Securities from the Securityholder requesting such transfer
or exchange.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denomination or denominations, of a like aggregate
principal amount upon surrender of the Securities to be exchanged, together with
a written instrument of transfer satisfactory to the Registrar duly executed by
the Securityholder or such Securityholder's attorney duly authorized in writing,
at such office or agency. Whenever any Securities are so surrendered for
exchange, the Company shall execute, and the Trustee shall authenticate and
deliver, the Securities which the Holder making the exchange is entitled to
receive.
The Company shall not be required to make, and the Registrar need
not register, transfers or exchanges of Securities selected for redemption
(except, in the case of Securities to be redeemed in part, the portion thereof
not to be redeemed) or any Securities in respect of which a Purchase Notice or
Change of Control Purchase Notice has been given and not withdrawn by the Holder
thereof in accordance with the terms of this Indenture (except, in the case of
Securities to be purchased in part, the portion thereof not to be purchased) or
any Securities for a period of 15 days before the mailing of a notice of
redemption of Securities to be redeemed.
(b) Notwithstanding any provision to the contrary herein, so long as
a Global Security remains outstanding and is held by or on behalf of the
Depositary, transfers of a Global Security, in whole or in part, shall be made
only in accordance with Section 2.12 and this Section 2.6(b). Transfers of a
Global Security shall be limited to transfers of such Global Security in whole
or in part, to the Depositary, to nominees of the Depositary or to a successor
of the Depositary or such successor's nominee.
(c) Successive registrations and registrations of transfers and
exchanges as aforesaid may be made from time to time as desired, and each such
registration shall be noted on the register for the Securities.
(d) Any Registrar appointed pursuant to Section 2.3 hereof shall
provide to the Trustee such information as the Trustee may reasonably require in
connection with the delivery by such Registrar of Securities upon transfer or
exchange of Securities.
<PAGE>
10
(e) No Registrar shall be required to make registrations of transfer
or exchange of Securities during any periods designated in the text of the
Securities or in this Indenture as periods during which such registration of
transfers and exchanges need not be made.
(f) If Securities are issued upon the transfer, exchange or
replacement of Securities subject to restrictions on transfer and bearing the
legends set forth on the forms of Security attached hereto as Exhibits A and B
setting forth such restrictions (collectively, the "Legend"), or if a request is
made to remove the Legend on a Security, the Securities so issued shall bear the
Legend, or the Legend shall not be removed, as the case may be, unless there is
delivered to the Company and the Registrar such satisfactory evidence, which
shall include an opinion of counsel, as may be reasonably required by the
Company and the Registrar and the Trustee (if not the same Person as the
Trustee), that neither the Legend nor the restrictions on transfer set forth
therein are required to ensure that transfers thereof comply with the provisions
of Rule 144A or Rule 144 under the Securities Act of 1933, as amended
("Securities Act") or that such Securities are not "restricted" within the
meaning of Rule 144 under the Securities Act. Upon (i) provision of such
satisfactory evidence, or (ii) notification by the Company to the Trustee and
Registrar of the sale of such Security pursuant to a registration statement that
is effective at the time of such sale, the Trustee, at the written direction of
the Company, shall authenticate and deliver a Security that does not bear the
Legend. If the Legend is removed from the face of a Security and the Security is
subsequently held by the Company or an Affiliate of the Company, the Legend
shall be reinstated.
(g) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer imposed
under this Indenture or under applicable law with respect to any transfer of any
interest in any Security (including any transfers between or among Agent Members
or beneficial owners of interests in any Global Security) other than to require
delivery of such certificates and other documentation or evidence as are
expressly required by, and to do so if and when expressly required by the terms
of, this Indenture, and to examine the same to determine substantial compliance
as to form with the express requirements hereof.
Section 2.7 Replacement Securities. If (a) any mutilated Security is
surrendered to the Trustee, or (b) the Company and the Trustee receive evidence
to their satisfaction of the destruction, loss or theft of any Security, and
there is delivered to the Company and the Trustee such security or indemnity as
may be required by them to save each of them harmless, then, in the absence of
notice to the Company or the Trustee that such Security has been acquired by a
bona fide purchaser, the Company shall execute and upon its written request the
Trustee shall authenticate and deliver, in exchange for any such mutilated
Security or in lieu of any such destroyed, lost or stolen Security, a new
Security of like tenor and principal amount, bearing a certificate number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, or is about to be purchased by the
Company pursuant to Article 3 hereof, the Company in its discretion may, instead
of issuing a new Security, pay or purchase such Security, as the case may be.
Upon the issuance of any new Securities under this Section 2.7, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section 2.7 in lieu of
any mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Security shall be at any time enforceable by
<PAGE>
11
anyone, and shall be entitled to all benefits of this Indenture equally and
proportionately with any and all other Securities duly issued hereunder.
The provisions of this Section 2.7 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
Section 2.8 Outstanding Securities; Determinations of Holders'
Action. Securities outstanding at any time are all the Securities authenticated
by the Trustee except for those cancelled by it, those paid pursuant to Section
2.7, those delivered to it for cancellation and those described in this Section
2.8 as not outstanding. A Security does not cease to be outstanding because the
Company or an Affiliate thereof holds the Security; provided, however, that in
determining whether the Holders of the requisite principal amount of Securities
have given or concurred in any request, demand, authorization, direction,
notice, consent, waiver, or other Act hereunder, Securities owned by the Company
or any other obligor upon the Securities or any Affiliate of the Company or such
other obligor shall be disregarded and deemed not to be outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent, waiver or other
Act, only Securities which a Responsible Officer of the Trustee actually knows
to be so owned shall be so disregarded. Subject to the foregoing, only
Securities outstanding at the time of such determination shall be considered in
any such determination (including, without limitation, determinations pursuant
to Articles 6 and 9).
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding.
If the Paying Agent holds, in accordance with this Indenture, on a
Redemption Date, or on the Business Day following a Purchase Date or a Change of
Control Purchase Date, or on Stated Maturity, money or securities, if permitted
hereunder, sufficient to pay Securities payable on that date, then immediately
after such Redemption Date, Purchase Date, Change of Control Purchase Date or
Stated Maturity, as the case may be, such Securities shall cease to be
outstanding and interest, including contingent interest and additional interest,
if any, on such Securities shall cease to accrue; provided, that if such
Securities are to be redeemed, notice of such redemption has been duly given
pursuant to this Indenture or provision therefor satisfactory to the Trustee has
been made.
If a Security is converted in accordance with Article 10, then from
and after the time of conversion on the date of conversion, such Security shall
cease to be outstanding and interest, including contingent interest and
additional interest, if any, shall cease to accrue on such Security.
Section 2.9 Temporary Securities. Pending the preparation of
definitive Securities, the Company may execute, and upon Company Order the
Trustee shall authenticate and deliver, temporary Securities which are printed,
lithographed, typewritten, mimeographed or otherwise produced, in any authorized
denomination, substantially of the tenor of the definitive Securities in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Securities may
determine, as conclusively evidenced by their execution of such Securities.
If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities, the temporary Securities shall be
exchangeable for definitive Securities upon surrender of the temporary
Securities at the office or agency of the Company designated for such purpose
pursuant to Section 2.3, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Securities the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a like
principal amount of
<PAGE>
12
definitive Securities of authorized denominations. Until so exchanged the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
Section 2.10 Cancellation. All Securities surrendered for payment,
purchase by the Company pursuant to Article 3, conversion, redemption or
registration of transfer or exchange shall, if surrendered to any person other
than the Trustee, be delivered to the Trustee and shall be promptly cancelled by
it. The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Securities so delivered
shall be promptly cancelled by the Trustee. The Company may not issue new
Securities to replace Securities it has paid or delivered to the Trustee for
cancellation or that any Holder has converted pursuant to Article 10. No
Securities shall be authenticated in lieu of or in exchange for any Securities
cancelled as provided in this Section, except as expressly permitted by this
Indenture. All cancelled Securities held by the Trustee shall be disposed of by
the Trustee in accordance with the Trustee's customary procedure.
Section 2.11 Persons Deemed Owners. Prior to due presentment of a
Security for registration of transfer, the Company, the Trustee and any agent of
the Company or the Trustee may treat the person in whose name such Security is
registered as the owner of such Security for the purpose of receiving payment of
principal of the Security or the payment of any Redemption Price, Purchase Price
or Change of Control Purchase Price in respect thereof, and interest thereon,
for the purpose of conversion and for all other purposes whatsoever, whether or
not such Security be overdue, and neither the Company, the Trustee nor any agent
of the Company or the Trustee shall be affected by notice to the contrary.
Section 2.12 Global Securities. (a) Notwithstanding any other
provisions of this Indenture or the Securities, (A) transfers of a Global
Security, in whole or in part, shall be made only in accordance with Section 2.6
and Section 2.12(a)(i), (B) transfers of a beneficial interest in a Global
Security for a Certificated Security shall comply with Section 2.6, Section
2.12(a)(ii) below and Section 2.12(e)(1) below, and (C) transfers of a
Certificated Security shall comply with Section 2.6 and Sections 2.12(a)(iii)
and (iv) below.
(i) Transfer of Global Security. A Global Security may not be
transferred, in whole or in part, to any person other than the Depositary
or a nominee or any successor thereof, and no such transfer to any such
other person may be registered; provided that this clause (i) shall not
prohibit any transfer of a Security that is issued in exchange for a
Global Security but is not itself a Global Security. No transfer of a
Security to any person shall be effective under this Indenture or the
Securities unless and until such Security has been registered in the name
of such person. Nothing in this Section 2.12(a)(i) shall prohibit or
render ineffective any transfer of a beneficial interest in a Global
Security effected in accordance with the other provisions of this Section
2.12(a).
(ii) Restrictions on Transfer of a Beneficial Interest in a
Global Security for a Certificated Security. A beneficial interest in a
Global Security may not be exchanged for a Certificated Security except
upon satisfaction of the requirements set forth below and in Section
2.12(e)(1) below. Upon receipt by the Trustee of a transfer of a
beneficial interest in a Global Security in accordance with Applicable
Procedures for a Certificated Security in the form satisfactory to the
Trustee, together with:
(A) so long as the Securities are Restricted Securities,
certification in the form set forth in Exhibit C;
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13
(B) written instructions to the Trustee to make, or direct the
Registrar to make, an adjustment on its books and records with
respect to such Global Security to reflect a decrease in the
aggregate principal amount of the Securities represented by
the Global Security, such instructions to contain information
regarding the Depositary account to be credited with such
decrease; and
(C) if the Company so requests, an opinion of counsel or other
evidence reasonably satisfactory to it as to the compliance
with the restrictions set forth in the Legend, then the
Trustee shall cause, or direct the Registrar to cause, in
accordance with the standing instructions and procedures
existing between the Depositary and the Registrar, the
aggregate principal amount of the Securities represented by
the Global Security to be decreased by the aggregate principal
amount of the Certificated Security to be issued, shall issue
such Certificated Security and shall debit or cause to be
debited to the account of the person specified in such
instructions a beneficial interest in the Global Security
equal to the principal amount of the Certificated Security so
issued.
(iii) Transfer and Exchange of Certificated Securities. When
Certificated Securities are presented to the Registrar with a request:
(y) to register the transfer of such Certificated Securities; or
(z) to exchange such Certificated Securities for an equal principal
amount of Certificated Securities of other authorized denominations,
the Registrar shall register the transfer or make the exchange as
requested if its reasonable requirements for such transaction are
met; provided, however, that the Certificated Securities surrendered
for transfer or exchange:
(1) shall be duly endorsed or accompanied by a written instrument
of transfer in form reasonably satisfactory to the Company and
the Registrar, duly executed by the Holder thereof or his
attorney duly authorized in writing; and
(2) so long as such Securities are Restricted Securities, such
Securities are being transferred or exchanged pursuant to an
effective registration statement under the Securities Act or
pursuant to clause (A), (B) or (C) below, and are accompanied
by the following additional information and documents, as
applicable:
(A) if such Certificated Securities are being delivered to the
Registrar by a Holder for registration in the name of such
Holder, without transfer, a certification from such Holder to
that effect; or
(B) if such Certificated Securities are being transferred to
the Company, a certification to that effect; or
(C) if such Certificated Securities are being transferred
pursuant to an exemption from registration, (i) a
certification to that effect (in the form set forth in Exhibit
C, if applicable) and (ii) if the Company so requests, an
opinion of counsel or other evidence reasonably satisfactory
to it as to the compliance with the restrictions set forth in
the Legend.
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14
(iv) Restrictions on Transfer of a Certificated Security for a
Beneficial Interest in a Global Security. A Certificated Security may not be
exchanged for a beneficial interest in a Global Security except upon
satisfaction of the requirements set forth below.
Upon receipt by the Trustee of a Certificated Security, duly
endorsed or accompanied by appropriate instruments of transfer, in
form satisfactory to the Trustee, together with:
(A) so long as the Securities are Restricted Securities,
certification, in the form set forth in Exhibit C, that such
Certificated Security is being transferred to a QIB in accordance
with Rule 144A, or to an institutional accredited investor within
the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D of
the Securities Act; and
(B) written instructions directing the Trustee to make, or to direct
the Registrar to make, an adjustment on its books and records with
respect to such Global Security to reflect an increase in the
aggregate principal amount of the Securities represented by the
Global Security, such instructions to contain information regarding
the Depositary account to be credited with such increase, then the
Trustee shall cancel such Certificated Security and cause, or direct
the Registrar to cause, in accordance with the standing instructions
and procedures existing between the Depositary and the Registrar,
the aggregate principal amount of Securities represented by the
Global Security to be increased by the aggregate principal amount of
the Certificated Security to be exchanged, and shall credit or cause
to be credited to the account of the person specified in such
instructions a beneficial interest in the Global Security equal to
the principal amount of the Certificated Security so cancelled. If
no Global Securities are then outstanding, the Company shall issue
and the Trustee shall authenticate, upon written order of the
Company in the form of an Officers' Certificate, a new Global
Security in the appropriate principal amount.
(b) Subject to the following subsection (c), every Security shall be
subject to the restrictions on transfer provided in the Legend including the
delivery of an opinion of counsel, if so provided. Whenever any Restricted
Security is presented or surrendered for registration of transfer or for
exchange for a Security registered in a name other than that of the Holder, such
Security must be accompanied by a certificate in substantially the form set
forth in Exhibit C, dated the date of such surrender and signed by the Holder of
such Security, as to compliance with such restrictions on transfer. The
Registrar shall not be required to accept for such registration of transfer or
exchange any Security not so accompanied by a properly completed certificate.
(c) The restrictions imposed by the Legend upon the transferability
of any Security shall cease and terminate when such Security has been sold
pursuant to an effective registration statement under the Securities Act or
transferred in compliance with Rule 144 under the Securities Act (or any
successor provision thereto) or, if earlier, upon the expiration of the holding
period applicable to sales thereof under Rule 144(k) under the Securities Act
(or any successor provision). Any Security as to which such restrictions on
transfer shall have expired in accordance with their terms or shall have
terminated may, upon a surrender of such Security for exchange to the Registrar
in accordance with the provisions of this Section 2.12 (accompanied, in the
event that such restrictions on transfer have terminated by reason of a transfer
in compliance with Rule 144 or any successor provision, by an opinion
<PAGE>
15
of counsel having substantial experience in practice under the Securities Act
and otherwise reasonably acceptable to the Company, addressed to the Company and
in form acceptable to the Company, to the effect that the transfer of such
Security has been made in compliance with Rule 144 or such successor provision),
be exchanged for a new Security, of like tenor and aggregate principal amount,
which shall not bear the restrictive Legend. The Company shall inform the
Trustee of the effective date of any registration statement registering the
Securities under the Securities Act. The Trustee shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
aforementioned opinion of counsel or registration statement.
(d) As used in the preceding two paragraphs of this Section 2.12,
the term "transfer" encompasses any sale, pledge, transfer, loan, hypothecation,
or other disposition of any Security.
(e) The provisions of clauses (1), (2), (3) and (4) below shall
apply only to Global Securities:
(1) Notwithstanding any other provisions of this Indenture or the
Securities, a Global Security shall not be exchanged in whole
or in part for a Security registered in the name of any person
other than the Depositary or one or more nominees thereof,
provided that a Global Security may be exchanged for
Securities registered in the names of any person designated by
the Depositary in the event that (i) the Depositary has
notified the Company that it is unwilling or unable to
continue as Depositary for such Global Security or such
Depositary has ceased to be a "clearing agency" registered
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and a successor Depositary is not appointed
by the Company within 90 days or (ii) an Event of Default has
occurred and is continuing with respect to the Securities. Any
Global Security exchanged pursuant to clause (i) above shall
be so exchanged in whole and not in part, and any Global
Security exchanged pursuant to clause (ii) above may be
exchanged in whole or from time to time in part as directed by
the Depositary. Any Security issued in exchange for a Global
Security or any portion thereof shall be a Global Security;
provided that any such Security so issued that is registered
in the name of a person other than the Depositary or a nominee
thereof shall not be a Global Security.
(2) Securities issued in exchange for a Global Security or any
portion thereof shall be issued in definitive, fully
registered form, without interest coupons, shall have an
aggregate principal amount equal to that of such Global
Security or portion thereof to be so exchanged, shall be
registered in such names and be in such authorized
denominations as the Depositary shall designate and shall bear
the applicable legends provided for herein. Any Global
Security to be exchanged in whole shall be surrendered by the
Depositary to the Trustee, as Registrar. With regard to any
Global Security to be exchanged in part, either such Global
Security shall be so surrendered for exchange or, if the
Trustee is acting as custodian for the Depositary or its
nominee with respect to such Global Security, the principal
amount thereof shall be reduced, by an amount equal to the
portion thereof to be so exchanged, by means of an appropriate
adjustment made on the records of the Trustee. Upon any such
surrender or adjustment, the Trustee shall authenticate and
deliver the Security issuable on such exchange to or upon the
order of the Depositary or an authorized representative
thereof.
(3) Subject to the provisions of clause (5) below, the registered
Holder may grant proxies and otherwise authorize any person,
including Agent Members (as defined
<PAGE>
16
below) and persons that may hold interests through Agent
Members, to take any action which a holder is entitled to take
under this Indenture or the Securities.
(4) In the event of the occurrence of any of the events specified
in clause (1) above, the Company will promptly make available
to the Trustee a reasonable supply of Certificated Securities
in definitive, fully registered form, without interest
coupons.
(5) Neither any members of, or participants in, the Depositary
(collectively, the "Agent Members") nor any other persons on
whose behalf Agent Members may act shall have any rights under
this Indenture with respect to any Global Security registered
in the name of the Depositary or any nominee thereof, or under
any such Global Security, and the Depositary or such nominee,
as the case may be, may be treated by the Company, the Trustee
and any agent of the Company or the Trustee as the absolute
owner and holder of such Global Security for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the
Company or the Trustee from giving effect to any written
certification, proxy or other authorization furnished by the
Depositary or such nominee, as the case may be, or impair, as
between the Depositary, its Agent Members and any other person
on whose behalf an Agent Member may act, the operation of
customary practices of such Persons governing the exercise of
the rights of a holder of any Security.
Section 2.13 CUSIP Numbers. The Company may issue the Securities
with one or more "CUSIP" numbers (if then generally in use), and, if so, the
Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; provided that any such notice may state that no representation is made
as to the correctness of such numbers either as printed on the Securities or as
contained in any notice of a redemption and that reliance may be placed only on
the other identification numbers printed on the Securities, and any such
redemption shall not be affected by any defect in or omission of such numbers.
The Company will promptly notify the Trustee of any change in the CUSIP numbers.
Section 2.14 Ranking. The indebtedness of the Company arising under
or in connection with this Indenture and every outstanding Security issued under
this Indenture from time to time constitutes and will constitute a senior
unsecured general obligation of the Company, ranking equally with other existing
and future senior unsecured Indebtedness of the Company and ranking senior in
right of payment to any future Indebtedness of the Company that is expressly
made subordinate to any unsecured and unsubordinated Indebtedness of the Company
by the terms of such subordinated Indebtedness. For purposes of this Section
2.14 only, "Indebtedness" means, without duplication, the principal or face
amount of (i) all obligations for borrowed money, (ii) all obligations evidenced
by debentures, notes or other similar instruments, (iii) all obligations in
respect of letters of credit or bankers acceptances or similar instruments (or
reimbursement obligations with respect thereto), (iv) all obligations to pay the
deferred purchase price of property or services, except trade accounts payable
arising in the ordinary course of business, (v) all obligations as lessee which
are capitalized in accordance with generally accepted accounting principles, and
(vi) all Indebtedness of others guaranteed by the Company or any of its
Subsidiaries or for which the Company or any of its Subsidiaries is legally
responsible or liable (whether by agreement to purchase indebtedness of, or to
supply funds or to invest in, others).
<PAGE>
17
ARTICLE III
REDEMPTION AND PURCHASES
Section 3.1 Company's Right to Redeem; Notices to Trustee. Prior to
January 1, 2005, the Securities will not be redeemable at the Company's option.
Beginning on January 1, 2005, the Company, at its option, may redeem the
Securities in accordance with the provisions of Section 5 of the Securities for
cash at any time as a whole, or from time to time in part, at a redemption price
equal to the principal amount of those Securities plus any accrued and unpaid
interest, including contingent interest and additional interest, if any, on
those Securities to the Redemption Date. If the Company elects to redeem
Securities pursuant to Section 5 of the Securities, it shall notify the Trustee
in writing of the Redemption Date, the principal amount of Securities to be
redeemed and the Redemption Price.
The Company shall give the notice to the Trustee provided for in
this Section 3.1 by a Company Order, at least 40 days before the Redemption Date
(unless a shorter notice shall be satisfactory to the Trustee).
Section 3.2 Selection of Securities to Be Redeemed. If less than all
the Securities are to be redeemed, unless the procedures of the Depositary
provide otherwise, the Trustee shall select the Securities to be redeemed by
lot, on a pro rata basis or by another method the Trustee considers fair and
appropriate (so long as such method is not prohibited by the rules of any stock
exchange on which the Securities are then listed). The Trustee shall make the
selection within five Business Days after it receives the notice provided for in
Section 3.1 from outstanding Securities not previously called for redemption.
The Trustee may select for redemption portions of the principal amount of
Securities that have denominations larger than $1,000.
Securities and portions of Securities that the Trustee selects shall
be in principal amounts of $1,000 or an integral multiple of $1,000. Provisions
of this Indenture that apply to Securities called for redemption also apply to
portions of Securities called for redemption. The Trustee shall notify the
Company promptly of the Securities or portions of the Securities to be redeemed.
Securities and portions of Securities called for redemption will be
convertible by the Holder until the close of business on the second Business Day
prior to the Redemption Date. If any Security selected for partial redemption is
converted in part before termination of the conversion right with respect to the
portion of the Security so selected, the converted portion of such Security
shall be deemed (so far as may be) to be taken from the portion selected for
redemption. Securities which have been converted during a selection of
Securities to be redeemed may be treated by the Trustee as outstanding for the
purpose of such selection.
Section 3.3 Notice of Redemption. At least 30 days but not more than
60 days before a Redemption Date, the Company shall mail a notice of redemption
by first-class mail, postage prepaid, to each Holder of Securities to be
redeemed.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) the Conversion Price;
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18
(4) the name and address of the Paying Agent and Conversion Agent;
(5) that Securities called for redemption may be converted at any
time before the close of business on the second Business Day
prior to the Redemption Date;
(6) that Holders who want to convert their Securities must satisfy
the requirements set forth in Section 8 of the Securities;
(7) that Securities called for redemption must be surrendered to
the Paying Agent to collect the Redemption Price;
(8) if fewer than all of the outstanding Securities are to be
redeemed, the certificate numbers, if any, and principal
amounts of the particular Securities to be redeemed;
(9) that, unless the Company defaults in making payment of such
Redemption Price, interest, including contingent interest and
additional interest, if any, on Securities called for
redemption will cease to accrue interest on and after the
Redemption Date; and
(10) the CUSIP number(s) of the Securities.
At the Company's written request, the Trustee shall give the notice
of redemption in the Company's name and at the Company's expense, provided that
the Company makes such request at least ten days prior to the date by which such
notice of redemption must be given to Holders in accordance with this Section
3.3.
Section 3.4 Effect of Notice of Redemption. Once notice of
redemption is given, Securities called for redemption become due and payable on
the Redemption Date and at the Redemption Price stated in the notice except for
Securities which are converted in accordance with the terms of this Indenture.
Upon surrender to the Paying Agent, such Securities shall be paid at the
Redemption Price stated in the notice.
Section 3.5 Deposit of Redemption Price. Prior to 10:00 a.m. (New
York City time), on the Redemption Date, the Company shall deposit with the
Paying Agent (or if the Company or a Subsidiary or an Affiliate of either of
them is the Paying Agent, shall segregate and hold in trust) money sufficient to
pay the Redemption Price of all Securities to be redeemed on that date other
than Securities or portions of Securities called for redemption which on or
prior thereto have been delivered by the Company to the Trustee for cancellation
or have been converted. The Paying Agent shall as promptly as practicable return
to the Company any money not required for that purpose because of conversion of
Securities pursuant to Article 10. If such money is then held by the Company in
trust and is not required for such purpose it shall be discharged from such
trust.
Section 3.6 Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder a new Security in an authorized
denomination equal in principal amount to the unredeemed portion of the Security
surrendered.
Section 3.7 Purchase of Securities by the Company at Option of the
Holder. (a) General. Securities shall be purchased by the Company pursuant to
Section 6 of the Securities at the option of the Holder on January 1, 2005,
2007, 2009, 2012 and 2017 (each, a "Purchase Date"), at a purchase price equal
to the principal amount of those Securities plus accrued and unpaid interest,
<PAGE>
19
including contingent interest and additional interest, if any, to such Purchase
Date (the "Purchase Price"), subject to the provisions of Section 3.9. Purchases
of Securities hereunder shall be made, at the option of the Holder thereof,
upon:
(1) delivery to the Paying Agent by the Holder of a written notice
of purchase (a "Purchase Notice") during the period beginning
at any time from the opening of business on the date that is
20 Business Days prior to the relevant Purchase Date until the
close of business on the third Business Day prior to such
Purchase Date stating:
(A) the certificate number of the Security which the Holder
will deliver to be purchased or the appropriate Depositary
procedures if Certificated Securities have not been issued,
(B) the portion of the principal amount of the Security which
the Holder will deliver to be purchased, which portion must be
in principal amounts of $1,000 or an integral multiple of
$1,000,
(C) that such Security shall be purchased by the Company as of
the Purchase Date pursuant to the terms and conditions
specified in Section 6 of the Securities and in this
Indenture,
(D) in the event the Company elects, pursuant to Section
3.9(c), to pay the Purchase Price, in whole or in part, in
shares of Common Stock, but such portion of the Purchase Price
shall ultimately be paid to such Holder entirely in cash
because any of the conditions to payment of the Purchase Price
in shares of Common Stock is not satisfied prior to the close
of business on the relevant Purchase Date, as set forth in
Section 3.9, whether such Holder elects (i) to withdraw such
Purchase Notice as to some or all of the Securities to which
such Purchase Notice relates (stating the principal amount and
certificate numbers, if any, of the Securities as to which
such withdrawal shall relate), or (ii) to receive cash in
respect of the entire Purchase Price for all Securities (or
portions thereof) to which such Purchase Notice relates; and
(2) delivery of such Security to the Paying Agent at any time
after delivery of the Purchase Notice (together with all
necessary endorsements) at the offices of the Paying Agent,
such delivery being a condition to receipt by the Holder of
the Purchase Price therefor; provided, however, that such
Purchase Price shall be so paid pursuant to this Section 3.7
only if the Security so delivered to the Paying Agent shall
conform in all respects to the description thereof in the
related Purchase Notice.
If a Holder, in such Holder's Purchase Notice and in any written
notice of withdrawal delivered by such Holder pursuant to the terms of Section
3.9, fails to indicate such Holder's choice with respect to the election set
forth in clause (D) of Section 3.7(a)(1), such Holder shall be deemed to have
elected to receive cash in respect of the entire Purchase Price for all
Securities subject to such Purchase Notice in the circumstances set forth in
such clause (D).
The Company shall purchase from the Holder thereof, pursuant to this
Section 3.7, a portion of a Security, if the principal amount of such portion is
$1,000 or an integral multiple of $1,000.
<PAGE>
20
Provisions of this Indenture that apply to the purchase of all of a Security
also apply to the purchase of such portion of such Security.
Any purchase by the Company contemplated pursuant to the provisions
of this Section 3.7 shall be consummated by the delivery of the consideration to
be received by the Holder as promptly as practicable following the later of the
Purchase Date and the time of delivery of the Security.
Notwithstanding anything herein to the contrary, any Holder
delivering to the Paying Agent the Purchase Notice contemplated by this Section
3.7(a) shall have the right to withdraw such Purchase Notice at any time prior
to the close of business on the Purchase Date by delivery of a written notice of
withdrawal to the Paying Agent in accordance with Section 3.10.
The Paying Agent shall promptly notify the Company of the receipt by
it of any Purchase Notice or written notice of withdrawal thereof.
Section 3.8 Purchase of Securities at Option of the Holder upon
Change of Control. (a) (1) If a Change of Control occurs (subject to certain
exceptions set forth below), the Securities not previously purchased by the
Company shall be purchased by the Company, at the option of the Holder thereof,
at a purchase price specified in Section 6 of the Securities (the "Change of
Control Purchase Price"), as of the date that is 30 days after the date of a
notice of Change of Control delivered by the Company (the "Change of Control
Purchase Date"), subject to satisfaction by or on behalf of the Holder of the
requirements set forth in Section 3.8(c).
A "Change of Control" will be deemed to have occurred at such time
after the Securities are originally issued when any of the following events
shall occur:
(i) the acquisition by any person, including any syndicate or
group deemed to be a "person" under Section 13(d) (3) of the Exchange Act
of beneficial ownership, directly or indirectly through a purchase, merger
or other acquisition transaction or series of purchase, merger or other
acquisition transactions, of shares of the Capital Stock of the Company
entitling that person to exercise 50% or more of the total voting power of
all shares of the Capital Stock of the Company entitled to vote generally
in elections of directors, other than any acquisition by the Company, any
of its subsidiaries or any of its employee benefit plans (except that any
of those persons shall be deemed to have beneficial ownership of all
securities it has the right to acquire, whether the right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition); or
(ii) the first day on which a majority of the members of the
board of directors of the Company are not Continuing Directors; or
(iii) the Company consolidates or merges with or into any
other person, any merger of another person into the Company, or any
conveyance, transfer, sale, lease or other disposition of all or
substantially all of the Company's properties and assets to another
person, other than: (A) any transaction: (1) that does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of the Company's Capital Stock; and (2) pursuant to which holders
of the Company's Capital Stock immediately prior to the transaction have
the entitlement to exercise, directly or indirectly 50% or more of the
total voting power of all shares of Capital Stock entitled to vote
generally in elections of directors of the continuing or surviving Person
immediately after giving effect to such issuance; and (B) any merger,
share exchange, transfer of assets or similar transaction solely for the
purpose of changing the Company's jurisdiction of incorporation and
resulting in a reclassification, conversion or exchange of
<PAGE>
21
outstanding shares of Common Stock, if at all, solely into shares of
common stock, ordinary shares or American Depositary Shares of the
surviving Person or a direct or indirect parent of the surviving
corporation.
A "Continuing Director" shall mean:
(i) An individual who was a member of the Board of Directors
of the Company first elected by the stockholders or by the Board of
Directors prior to the date hereof or prior to the time that any person
becomes after the date hereof the holder of record of in excess of 20% of
the Capital Stock of the Company entitled to vote in the election of
directors; or
(ii) An individual designated (before such individual's
initial election as a director) as a Continuing Director by a majority of
the then Continuing Directors.
(2) Notwithstanding the provisions of Section 3.8(a)(1), the Company shall not
be required to purchase the Securities of the Holders upon a Change of Control
pursuant to this Section 3.8 if:
(i) the Sale Price per share of Common Stock for any five trading
days within (1) the period of 10 consecutive trading days
ending immediately after the later of the Change of Control or
the public announcement of the Change of Control, in the case
of a Change of Control under clause (i) or (ii) above, or (2)
the period of 10 consecutive trading days ending immediately
before the Change of Control, in the case of a Change of
Control under clause (iii) above, equals or exceeds 110% of
the Conversion Price of the Securities in effect on each of
those five trading days; or
(ii) 100% of the consideration in the transaction or transactions
(other than cash payments for fractional shares and cash
payments made in respect of dissenters' appraisal rights)
constituting a Change of Control consists of shares of common
stock, ordinary shares or American Depositary Shares traded or
to be traded immediately following a Change of Control on a
national securities exchange or the Nasdaq National Market,
and, as a result of the transaction or transactions, the
Securities become convertible into that common stock, ordinary
shares or American Depositary Shares (and any rights attached
thereto).
For the purposes of this Section 3.8, (x) whether a person is a "beneficial
owner" shall be determined in accordance with Rule 13d-3 under the Exchange Act
and (y) the term "person" includes any syndicate or group that would be deemed
to be a "person" under Section 13(d)(3) of the Exchange Act.
(b) No later than 30 days after the occurrence of a Change of
Control, the Company shall mail a written notice of the Change of Control by
first class mail to the Trustee and to each Holder (and to beneficial owners as
required by applicable law). The notice shall include a form of Change of
Control Purchase Notice to be completed by the Holder and shall state:
(1) briefly, the events causing a Change of Control and the date
of such Change of Control;
(2) the date by which the Change of Control Purchase Notice
pursuant to this Section 3.8 must be delivered to the Paying
Agent in order for a Holder to exercise the repurchase rights;
<PAGE>
22
(3) the Change of Control Purchase Date;
(4) the Change of Control Purchase Price;
(5) whether the Change of Control Purchase Price will be paid in
cash or Applicable Stock, or a combination thereof;
(6) the name and address of the Paying Agent and the Conversion
Agent;
(7) the Conversion Rate and any adjustments thereto;
(8) that the Securities as to which a Change of Control Purchase
Notice has been given may be converted if they are otherwise
convertible pursuant to Article 10 hereof only if the Change
of Control Purchase Notice has been withdrawn in accordance
with the terms of this Indenture;
(9) that the Securities must be surrendered to the Paying Agent to
collect payment;
(10) that the Change of Control Purchase Price for any Security as
to which a Change of Control Purchase Notice has been duly
given and not withdrawn will be paid as promptly as
practicable following the later of the Change of Control
Purchase Date and the time of surrender of such Security as
described in (8);
(11) briefly, the procedures the Holder must follow to exercise
rights under this Section 3.8;
(12) briefly, the conversion rights, if any, of the Securities;
(13) the procedures for withdrawing a Change of Control Purchase
Notice;
(14) that, unless the Company defaults in making payment of such
Change of Control Purchase Price, interest, if any, on
Securities surrendered for purchase by the Company will cease
to accrue on and after the Change of Control Purchase Date;
and
(15) the CUSIP number(s) of the Securities.
(c) A Holder may exercise its rights specified in Section 3.8(a)
upon delivery of a written notice of purchase (a "Change of Control Purchase
Notice") to the Trustee at any time on or prior to the close of business on the
Business Day immediately preceding the Change of Control Purchase Date:
(1) the certificate number of the Security which the Holder will
deliver to be purchased or the appropriate depositary
procedures if Certificated Securities have not been issued;
(2) the portion of the principal amount of the Security which the
Holder will deliver to be purchased, which portion must be
$1,000 or an integral multiple of $1,000;
(3) that such Security shall be purchased pursuant to the terms
and conditions specified in Section 6 of the Securities and in
this Indenture; and
<PAGE>
23
(4) in the event the Company elects, pursuant to Section 3.9, to
pay the Change of Control Purchase Price, in whole or in part,
in shares of Applicable Stock but such portion of the Change
of Control Purchase Price shall ultimately be paid to such
Holder entirely in cash because any of the conditions to
payment of the Change of Control Purchase Price in shares of
Applicable Stock is not satisfied prior to the close of
business on the third Business Day prior to the relevant
Change of Control Purchase Date, as set forth in Section 3.9,
whether such Holder elects (i) to withdraw such Change of
Control Purchase Notice as to some or all of the Securities to
which such Change of Control Purchase Notice relates (stating
the principal amount and certificate numbers, if any, of the
Securities as to which such withdrawal shall relate), or (ii)
to receive cash in respect of the entire Change of Control
Purchase Price for all Securities (or portions thereof) to
which such Change of Control Purchase Notice relates.
"Applicable Stock" means (i) the Common Stock and (ii) in the event
of a merger, consolidation or other similar transaction involving the Company
that is otherwise permitted hereunder in which the Company is not the surviving
corporation, the common stock, ordinary shares or American Depositary Shares of
such surviving corporation or its direct or indirect parent corporation.
The delivery of such Security to the Paying Agent with the Change of
Control Purchase Notice (together with all necessary endorsements) at the
offices of the Paying Agent shall be a condition to the receipt by the Holder of
the Change of Control Purchase Price therefor; provided, however, that such
Change of Control Purchase Price shall be so paid pursuant to this Section 3.8
and Section 3.9 only if the Security so delivered to the Paying Agent shall
conform in all respects to the description thereof set forth in the related
Change of Control Purchase Notice.
If a Holder, in such Holder's Change of Control Purchase Notice and
in any written notice of withdrawal delivered by such Holder pursuant to the
terms of Section 3.10, fails to indicate such Holder's choice with respect to
the election set forth in Section 3.8(c)(4), such Holder shall be deemed to have
elected to receive cash in respect of the entire Change of Control Purchase
Price for all Securities subject to such Change of Control Purchase Notice in
the circumstances set forth in such Section 3.8(c)(4).
The Company shall purchase from the Holder thereof, pursuant to this
Section 3.8 and Section 3.9, a portion of a Security if the principal amount of
such portion is $1,000 or an integral multiple of $1,000. Provisions of this
Indenture that apply to the purchase of all of a Security also apply to the
purchase of such portion of such Security.
Any purchase by the Company contemplated pursuant to the provisions
of this Section 3.8 and Section 3.9 shall be consummated by the delivery of the
consideration to be received by the Holder on the Change of Control Purchase
Date.
Notwithstanding anything herein to the contrary, any Holder
delivering to the Paying Agent the Change of Control Purchase Notice
contemplated by this Section 3.8(c) shall have the right to withdraw such Change
of Control Purchase Notice at any time prior to the close of business on the
last Business Day immediately preceding the Change of Control Purchase Date by
delivery of a written notice of withdrawal to the Paying Agent in accordance
with Section 3.10.
The Paying Agent shall promptly notify the Company of the receipt by
it of any Change of Control Purchase Notice or written withdrawal thereof.
<PAGE>
24
Section 3.9 Company's Right to Elect Manner of Payment of Purchase
Price and Change of Control Purchase Price for Payment. (a) The Securities to be
purchased on any Purchase Date or Change of Control Purchase Date, as the case
may be, pursuant to Section 3.7(a) and 3.8(a), respectively, may be paid for, in
whole or in part, at the election of the Company, in U.S. legal tender ("cash")
or shares of Applicable Stock, or in any combination of cash and shares of
Applicable Stock, subject to the conditions set forth in Sections 3.9(c) and
(d). The Company shall designate, in the Company Notice delivered pursuant to
Section 3.9(d), whether the Company will purchase the Securities for cash or
shares of Applicable Stock, or, if a combination thereof, the percentages of the
Purchase Price or Change of Control Purchase Price, as the case may be, of
Securities in respect of which it will pay in cash or shares of Applicable
Stock; provided that the Company will pay cash for fractional interests in
shares of Applicable Stock. For purposes of determining the existence of
potential fractional interests, all Securities subject to purchase by the
Company held by a Holder shall be considered together (no matter how many
separate certificates are to be presented). Each Holder whose Securities are
purchased pursuant to Section 3.7 or 3.8, as the case may be, shall receive the
same percentage of cash or shares of Applicable Stock in payment of the Purchase
Price for such Securities, except (i) as provided in this Section 3.9(a) with
regard to the payment of cash in lieu of fractional shares of Applicable Stock
and (ii) in the event that the Company is unable to purchase the Securities of a
Holder or Holders for shares of Applicable Stock because any necessary
qualifications or registrations of the shares of Applicable Stock under
applicable state securities laws cannot be obtained, the Company may purchase
the Securities of such Holder or Holders for cash. The Company may not change
its election with respect to the consideration (or components or percentages of
components thereof) to be paid once the Company has given its Company Notice to
Holders except pursuant to Section 3.9(b) or pursuant to Section 3.9(d) in the
event of a failure to satisfy, prior to the close of business on the Business
Day immediately preceding the Purchase Date or Change of Control Purchase Date,
as the case may be, any condition to the payment of the Purchase Price or Change
of Control Purchase Price, as the case may be, in whole or in part, in shares of
Applicable Stock.
At least three Business Days before each Company Notice Date (as
defined below), the Company shall deliver an Officers' Certificate to the
Trustee specifying:
(i) the manner of payment selected by the Company,
(ii) the information required by Section 3.9(d) in the Company
Notice,
(iii) if the Company elects to pay the Purchase Price or
Change of Control Purchase Price, as the case may be, or a specified
percentage thereof, in shares of Applicable Stock, that the conditions to
such manner of payment set forth in Section 3.9(c) have been or will be
complied with, and
(iv) whether the Company desires the Trustee to give the
Company Notice required by Section 3.9(d).
(b) Purchase with Cash. At the option of the Company, the Purchase
Price or Change of Control Purchase Price, as the case may be, of
Securities in respect of which a Purchase Notice pursuant to Section
3.7(a) or Change of Control Purchase Notice pursuant to Section 3.8(c), as
the case may be, has been given, or a specified percentage thereof, may be
paid by the Company with cash equal to the aggregate Purchase Price or
Change of Control Purchase Price, as the case may be, of such Securities.
The Purchase Price or Change of Control Purchase Price, as the case may
be, of Securities in respect of which a Purchase Notice pursuant to
Section 3.7(a) or Change of Control Purchase Notice pursuant to Section
3.8(c), as the case may be, has been given shall, for all other Purchase
Dates or Change of Control Purchase Dates, as the case may be, be paid in
cash. The Company Notice, as provided in Section 3.9(d),
<PAGE>
25
shall be sent to Holders (and to beneficial owners as required by
applicable law) not less than 20 Business Days prior to such Purchase Date
or Change of Control Purchase Date, as the case may be (the "Company
Notice Date").
(c) Payment by Issuance of Shares of Common Stock. At the option of
the Company, the Purchase Price or Change of Control Purchase Price, as the case
may be, of Securities in respect of which a Purchase Notice pursuant to Section
3.7(a) or Change of Control Purchase Notice pursuant to Section 3.8(c), as the
case may be, has been given, or a specified percentage thereof, may be paid by
the Company by the issuance of a number of shares of Applicable Stock equal to
the quotient obtained by dividing (i) the portion of the Purchase Price or
Change of Control Purchase Price, as the case may be, to be paid in shares of
Applicable Stock by (ii) 97.5% of the Market Price determined by the Company in
the Company Notice, subject to the next succeeding paragraph.
The Company will not issue fractional shares of Applicable Stock in
payment of the Purchase Price or Change of Control Purchase Price, as the case
may be. Instead, the Company will pay cash based on the current market price for
all fractional shares. It is understood that if a Holder elects to have more
than one Security purchased, the number of shares of Applicable Stock shall be
based on the aggregate amount of Securities to be purchased.
If the Company elects to purchase the Securities by the issuance of
shares of Applicable Stock or in any combination of cash and Applicable Stock,
the Company Notice, as provided in Section 3.9(d), shall be sent to the Holders
(and to beneficial owners as required by applicable law) not later than the
Company Notice Date.
The Company's right to exercise its election to purchase Securities
through the issuance of shares of Applicable Stock shall be conditioned upon:
(i) the Company's not having given its Company Notice of an
election to pay entirely in cash and its giving of timely Company Notice
of an election to purchase all or a specified percentage of the Securities
with shares of Common Stock as provided herein;
(ii) the registration of such shares of Applicable Stock under
the Securities Act and the Exchange Act, in each case, if required;
(iii) the listing of such shares of Applicable Stock on a
United States national securities exchange or the quotation of such shares
of Applicable Stock in an inter-dealer quotation system of any registered
United States national securities association;
(iv) any necessary qualification or registration of such
shares of Applicable Stock under applicable state securities laws or the
availability of an exemption from such qualification and registration; and
(v) the receipt by the Trustee of an Officers' Certificate and
an Opinion of Counsel each stating that (A) the terms of the issuance of
the shares of Applicable Stock are in conformity with this Indenture and
(B) the shares of Applicable Stock to be issued by the Company in payment
of the Purchase Price or Change of Control Purchase Price, as the case may
be, in respect of Securities have been duly authorized and, when issued
and delivered pursuant to the terms of this Indenture in payment of the
Purchase Price or Change of Control Purchase Price, as the case may be, in
respect of the Securities, will be validly issued, fully paid and
non-assessable and, to the best of such counsel's knowledge, free from
preemptive rights, and, in the case of such Officers' Certificate, stating
that the conditions above and the condition set forth
<PAGE>
26
in the second succeeding sentence have been satisfied and, in the case of
such Opinion of Counsel, stating that the conditions in clauses (i)
through (iv) above have been satisfied.
Such Officers' Certificate shall also set forth the number of shares
of Applicable Stock to be issued for each $1,000 principal amount of Securities
and the Sale Price of a share of Applicable Stock on each trading day during the
period commencing on the first trading day of the period during which the Market
Price is calculated and ending on the third day prior to the applicable Purchase
Date or Change of Control Purchase Date, as the case may be. If the foregoing
conditions are not satisfied with respect to a Holder or Holders prior to the
close of business on the last day prior to the Purchase Date or Change of
Control Purchase Date, as the case may be, and the Company has elected to
purchase the Securities pursuant to this Section 3.9 through the issuance of
shares of Applicable Stock, the Company shall pay the entire Purchase Price or
Change of Control Purchase Price, as the case may be, of the Securities of such
Holder or Holders in cash.
The "Market Price" means the average of the Sale Prices of the
shares of Applicable Stock for the 20-trading day period immediately preceding
and including the third day prior to the applicable Purchase Date or Change of
Control Purchase Date, as the case may be (if the third Business Day prior to
the applicable Purchase Date is a trading day, or if not, then on the last
trading day prior to the third Business Day), appropriately adjusted to take
into account the occurrence, during the period commencing on the first of the
trading days during the 20-trading day period and ending on the Purchase Date or
Change of Control Purchase Date, as the case may be, of any event described in
Sections 10.3 or 10.4.
The "Sale Price" of the shares of Applicable Stock on any date means
the closing per share sale price (or, if no closing sale price is reported, the
average of the bid and ask prices or, if more than one in either case, the
average of the average bid and the average ask prices) on such date as reported
on the NYSE or, if the shares of Applicable Stock are not listed on the NYSE, as
reported on a national securities exchange, or if not reported on a national
securities exchange, as reported by the Nasdaq system. In the absence of such
quotations, the Company shall be entitled to determine the sales price on the
basis of such quotations as it considers appropriate.
Upon determination of the actual number of shares of Applicable
Stock to be issued upon redemption or repurchase of Securities, the Company
shall be required to disseminate a press release through Dow Jones & Company,
Inc. or Bloomberg Business News containing this information or publish the
information on the Company's web site or through such other public medium as the
Company may use at that time.
(d) Notice of Election. In connection with any purchase of
Securities pursuant to Section 6 of the Securities, the Company shall give
notice to Holders setting forth information specified in this Section 3.9(d)
(the "Company Notice").
In the event the Company has elected to pay the Purchase Price or
Change of Control Purchase Price, as the case may be (or a specified percentage
thereof), with shares of Applicable Stock, the Company Notice shall:
(1) state that each Holder will receive a number of shares of
Applicable Stock with a value equal to 97.5% of the Market
Price determined as of a specified date prior to the Purchase
Date or Change of Control Purchase Date, as the case may be,
equal to such specified percentage of the Purchase Price or
Change of Control Purchase Price, as the case may be, of the
Securities held by such Holder (except any cash amount to be
paid in lieu of fractional shares);
<PAGE>
27
(2) set forth the method of calculating the Market Price of the
shares of Applicable Stock; and
(3) state that because the Market Price of shares of Applicable
Stock will be determined prior to the Purchase Date or Change
of Control Purchase Date, as the case may be, Holders of the
Securities will bear the market risk with respect to the value
of the shares of Applicable Stock to be received from the date
such Market Price is calculated to the Purchase Date or Change
of Control Purchase Date, as the case may be.
In any case, each Company Notice shall include a form of Purchase
Notice or Change of Control Purchase Notice, as the case may be, to be completed
by a Holder and shall state:
(i) the Purchase Price or Change of Control Purchase Price, as
the case may be, and the Conversion Rate;
(ii) the name and address of the Paying Agent and the
Conversion Agent;
(iii) that Securities as to which a Purchase Notice or Change
of Control Purchase Notice, as the case may be, has been given may be
converted if they are otherwise convertible only in accordance with
Article 10 hereof and Section 8 of the Securities if the applicable
Purchase Notice or Change of Control Purchase Notice, as the case may be,
has been withdrawn in accordance with the terms of this Indenture;
(iv) that Securities must be surrendered to the Paying Agent
to collect payment;
(v) that the Purchase Price or Change of Control Purchase
Price, as the case may be, for any security as to which a Purchase Notice
or Change of Control Purchase Notice, as the case may be, has been given
and not withdrawn will be paid as promptly as practicable following the
later of the Purchase Date or Change of Control Purchase Date, as the case
may be, and the time of surrender of such Security as described in (iv);
(vi) the procedures the Holder must follow to exercise its put
rights under Section 3.7 or 3.8, as the case may be, and a brief
description of those rights;
(vii) briefly, the conversion rights of the Securities;
(viii) the procedures for withdrawing a Purchase Notice or
Change of Control Purchase Notice, as the case may be (including, without
limitation, for a conditional withdrawal pursuant to the terms of Section
3.7(a)(1)(D), Section 3.8(c)(4)or Section 3.10);
(ix) that, unless the Company defaults in making payment on
Securities for which a Purchase Notice or Change of Control Purchase
Notice, as the case may be, has been submitted, interest, if any, on such
Securities will cease to accrue on the Purchase Date or Change of Control
Purchase Date, as the case may be; and
(x) the CUSIP number of the Securities.
<PAGE>
28
At the Company's written request, the Trustee shall give such
Company Notice in the Company's name and at the Company's expense;
provided, however, that, in all cases, the text of such Company Notice
shall be prepared by the Company.
(e) Covenants of the Company. All shares of Common Stock delivered
upon purchase of the Securities shall be newly issued shares or treasury shares,
shall be duly authorized, validly issued, fully paid and nonassessable, and
shall be free from preemptive rights and free of any lien or adverse claim.
(f) Taxes. If a Holder of a purchased Security is paid in shares of
Applicable Stock, the Company shall pay any documentary, stamp or similar issue
or transfer tax due on such issue of Applicable Stock. However, the Holder shall
pay any such tax which is due because the Holder requests the Applicable Stock
to be issued in a name other than the Holder's name. The Paying Agent may refuse
to deliver the certificates representing the shares of Applicable Stock being
issued in a name other than the Holder's name until the Paying Agent receives a
sum sufficient to pay any tax which will be due because the shares of Applicable
Stock are to be issued in a name other than the Holder's name. Nothing herein
shall preclude any income tax withholding required by law or regulations.
Section 3.10 Effect of Purchase Notice or Change of Control Purchase
Notice. Upon receipt by the Paying Agent of the Purchase Notice or Change of
Control Purchase Notice specified in Section 3.7(a) or Section 3.8(c), as
applicable, the Holder of the Security in respect of which such Purchase Notice
or Change of Control Purchase Notice, as the case may be, was given shall
(unless such Purchase Notice or Change of Control Purchase Notice, as the case
may be, is withdrawn as specified in the following two paragraphs) thereafter be
entitled to receive solely the Purchase Price or Change of Control Purchase
Price, as the case may be, with respect to such Security. Such Purchase Price or
Change of Control Purchase Price shall be paid to such Holder, subject to
receipts of funds and/or securities by the Paying Agent, as promptly as
practicable following the later of (x) the Purchase Date or the Change of
Control Purchase Date, as the case may be, with respect to such Security
(provided the conditions in Section 3.7(a) or Section 3.8(c), as applicable,
have been satisfied) and (y) the time of delivery of such Security to the Paying
Agent by the Holder thereof in the manner required by Section 3.7(a) or Section
3.8(c), as applicable. Securities in respect of which a Purchase Notice or
Change of Control Purchase Notice has been given by the Holder thereof may not
be converted pursuant to Article 10 hereof on or after the date of the delivery
of such Purchase Notice or Change of Control Purchase Notice unless such
Purchase Notice or Change of Control Purchase Notice has first been validly
withdrawn as specified in the following two paragraphs.
A Purchase Notice or Change of Control Purchase Notice may be
withdrawn by means of a written notice of withdrawal delivered to the office of
the Paying Agent in accordance with the Purchase Notice or Change of Control
Purchase Notice, as the case may be, at any time prior to the close of business
on the third Business Day prior to the Purchase Date or the close of business on
the Business Day immediately preceding the Change of Control Purchase Date, as
the case may be, specifying:
(1) the certificate number, if any, of the Security in respect of
which such notice of withdrawal is being submitted,
(2) the principal amount of the Security with respect to which
such notice of withdrawal is being submitted, and
(3) the principal amount, if any, of such Security which remains
subject to the original Purchase Notice or Change of Control
Purchase Notice, as the case may be, and which has been or
will be delivered for purchase by the Company.
<PAGE>
29
A written notice of withdrawal of a Purchase Notice may be in the
form set forth in the preceding Section or may be in the form of (i) a
conditional withdrawal contained in a Purchase Notice pursuant to the terms of
Section 3.7(a)(1)(D) or (ii) a conditional withdrawal containing the information
set forth in Section 3.7(a)(1)(D) and the preceding Section and contained in a
written notice of withdrawal delivered to the Paying Agent as set forth in the
preceding paragraph.
A written notice of withdrawal of a Change of Control Purchase
Notice may be in the form set forth in the preceding Section or may be in the
form of (i) a conditional withdrawal contained in a Purchase Notice pursuant to
the terms of Section 3.8(c)(4) or (ii) a conditional withdrawal containing the
information set forth in Section 3.8(c)(4) and the preceding Section and
contained in a written notice of withdrawal delivered to the Paying Agent as set
forth in the preceding paragraph.
There shall be no purchase of any Securities pursuant to Section 3.7
or 3.8 if there has occurred (prior to, on or after, as the case may be, the
giving, by the Holders of such Securities, of the required Purchase Notice or
Change of Control Purchase Notice, as the case may be) and is continuing an
Event of Default (other than a default in the payment of the Purchase Price or
Change of Control Purchase Price, as the case may be, with respect to such
Securities). The Paying Agent will promptly return to the respective Holders
thereof any Securities (x) with respect to which a Purchase Notice or Change of
Control Purchase Notice, as the case may be, has been withdrawn in compliance
with this Indenture, or (y) held by it during the continuance of an Event of
Default (other than a default in the payment of the Purchase Price or Change of
Control Purchase Price, as the case may be, with respect to such Securities) in
which case, upon such return, the Purchase Notice or Change of Control Purchase
Notice with respect thereto shall be deemed to have been withdrawn.
Section 3.11 Deposit of Purchase Price or Change of Control Purchase
Price. Prior to 10:00 a.m. (New York City time) on the Business Day preceding
the Purchase Date or the Change of Control Purchase Date, as the case may be,
the Company shall deposit with the Trustee or with the Paying Agent (or, if the
Company or a Subsidiary or an Affiliate of either of them is acting as the
Paying Agent, shall segregate and hold in trust as provided in Section 2.4) an
amount of cash (in immediately available funds if deposited on such Business
Day) or Applicable Stock, if permitted hereunder, sufficient to pay the
aggregate Purchase Price or Change of Control Purchase Price, as the case may
be, of all the Securities or portions thereof which are to be purchased as of
the Purchase Date or Change of Control Purchase Date, as the case may be.
As soon as practicable after the Purchase Date or Change of Control
Purchase Date, as the case may be, the Company shall deliver to each Holder
entitled to receive shares of Applicable Stock through the Paying Agent, a
certificate for the number of full shares of Applicable Stock issuable in
payment of the Purchase Price or Change of Control Purchase Price, as the case
may be, and cash in lieu of any fractional interests. The person in whose name
the certificate for the shares of Applicable Stock is registered shall be
treated as a holder of record of Applicable Stock on the Business Day following
the Purchase Date or Change of Control Purchase Date, as the case may be.
Subject to Section 3.9(c), no payment or adjustment will be made for dividends
on the shares of Applicable Stock the record date for which occurred on or prior
to the Purchase Date or Change of Control Purchase Date, as the case may be.
Section 3.12 Securities Purchased in Part. Any Certificated Security
which is to be purchased only in part shall be surrendered at the office of the
Paying Agent (with, if the Company or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing) and the Company shall execute and the Trustee shall
authenticate and deliver to the Holder of such Security, without service charge,
a new Security or Securities, of any authorized denomination as
<PAGE>
30
requested by such Holder in aggregate principal amount equal to, and in exchange
for, the portion of the principal amount of the Security so surrendered which is
not purchased.
Section 3.13 Covenant to Comply With Securities Laws Upon Purchase
of Securities. When complying with the provisions of Section 3.7 or 3.8 hereof
(provided that such offer or purchase constitutes an "issuer tender offer" for
purposes of Rule 13e-4 (which term, as used herein, includes any successor
provision thereto) under the Exchange Act at the time of such offer or
purchase), and subject to any exemptions available under applicable law, the
Company shall (i) comply with Rule 13e- 4 and Rule 14e-1 (or any successor
provision) under the Exchange Act, (ii) file the related Schedule TO (or any
successor schedule, form or report) under the Exchange Act, and (iii) otherwise
comply with all federal and state securities laws so as to permit the rights and
obligations under Sections 3.7 and 3.8 to be exercised in the time and in the
manner specified in Sections 3.7 and 3.8.
Section 3.14 Repayment to the Company. The Trustee and the Paying
Agent shall return to the Company any cash or shares of Common Stock that remain
unclaimed as provided in Section 12 of the Securities, together with interest or
dividends, if any, thereon (subject to the provisions of Section 7.1(f)), held
by them for the payment of the Purchase Price or Change of Control Purchase
Price, as the case may be; provided, however, that to the extent that the
aggregate amount of cash or shares of Common Stock deposited by the Company
pursuant to Section 3.11 exceeds the aggregate Purchase Price or Change of
Control Purchase Price, as the case may be, of the Securities or portions
thereof which the Company is obligated to purchase as of the Purchase Date or
Change of Control Purchase Date, as the case may be, then, unless otherwise
agreed in writing with the Company, promptly after the Business Day following
the Purchase Date or Change of Control Purchase Date, as the case may be, the
Trustee shall return any such excess to the Company together with interest or
dividends, if any, thereon (subject to the provisions of Section 7.1(f)).
ARTICLE IV
COVENANTS
Section 4.1 Payment of Securities. The Company shall promptly make
all payments in respect of the Securities on the dates and in the manner
provided in the Securities or pursuant to this Indenture. Any amounts of cash or
shares of Applicable Stock to be given to the Trustee or Paying Agent, shall be
deposited with the Trustee or Paying Agent by 10:00 a.m. (New York City time),
by the Company. Principal amount plus accrued interest, if any, including
contingent interest and additional interest, if any, Redemption Price, Purchase
Price, Change of Control Purchase Price and cash interest, if any, shall be
considered paid on the applicable date due if on such date (or, in the case of a
Purchase Price or Change of Control Purchase Price, on the Business Day
following the applicable Purchase Date or Change of Control Purchase Date, as
the case may be) the Trustee or the Paying Agent holds, in accordance with this
Indenture, cash or securities, if permitted hereunder, sufficient to pay all
such amounts then due.
Section 4.2 SEC and Other Reports. The Company shall file with the
Trustee, within 15 days after it files such annual and quarterly reports,
information, documents and other reports with the SEC, copies of its annual
report and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act. The Company shall be deemed to have
complied with the previous sentence to the extent the Company shall have filed
or furnished such reports, information or documents to the SEC via EDGAR (or any
successor electronic delivery procedure). In the event the Company is at any
time no longer subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, it shall continue to provide the Trustee with
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31
reports containing substantially the same information as would have been
required to be filed with the SEC had the Company continued to have been subject
to such reporting requirements. In such event, such reports shall be provided at
the times the Company would have been required to provide reports had it
continued to have been subject to such reporting requirements. The Company also
shall comply with the other provisions of TIA Section 314(a). Delivery of such
reports, information and documents to the Trustee is for informational purposes
only and the Trustee's receipt of such shall not constitute constructive notice
of any information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely conclusively on Officers'
Certificates).
Section 4.3 Compliance Certificate. The Company shall deliver to the
Trustee within 120 days after the end of each fiscal year of the Company
(beginning with the fiscal year ending on December 31, 2001) an Officers'
Certificate, stating whether or not to the knowledge of the signers thereof, the
Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder) and if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
Section 4.4 Further Instruments and Acts. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
Section 4.5 Maintenance of Office or Agency. The Company will
maintain in the Borough of Manhattan, the City of New York, an office or agency
of the Trustee, Registrar, Paying Agent and Conversion Agent where Securities
may be presented or surrendered for payment, where Securities may be surrendered
for registration of transfer, exchange, purchase, redemption or conversion and
where notices and demands to or upon the Company in respect of the Securities
and this Indenture may be served. The office of the Trustee (Attention:
Corporate Trust Administration) shall initially be such office or agency for all
of the aforesaid purposes. The Company shall give prompt written notice to the
Trustee of the location, and of any change in the location, of any such office
or agency (other than a change in the location of the office of the Trustee). If
at any time the Company shall fail to maintain any such required office or
agency or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
address of the Trustee set forth in Section 11.2.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, the City of New York, for such purposes.
Section 4.6 Delivery of Certain Information. At any time when the
Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the
request of a Holder or any beneficial owner of Securities or holder or
beneficial owner of shares of Common Stock issued upon conversion thereof, or in
accordance with Section 3.8(c), the Company will promptly furnish or cause to be
furnished Rule 144A Information (as defined below) to such Holder or any
beneficial owner of Securities or holder or beneficial owner of shares of Common
Stock, or to a prospective purchaser of any such security designated by any such
holder, as the case may be, to the extent required to permit compliance by such
Holder or holder with Rule 144A under the Securities Act in connection with the
resale of any such security. "Rule 144A Information" shall be such information
as is specified pursuant to Rule 144A(d)(4)
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32
under the Securities Act. Whether a person is a beneficial owner shall be
determined by the Company to the Company's reasonable satisfaction.
Section 4.7 Payment of Taxes and Other Claims. The Company will pay
or discharge or cause to be paid or discharged, before the same shall become
delinquent, (1) all taxes, assessments and governmental charges levied or
imposed upon the Company or any Subsidiary or upon the income, profits or
property of the Company or any Subsidiary, and (2) all lawful claims for labor,
materials and supplies, which, if unpaid, might by law become a lien upon the
property of the Company or any Subsidiary; provided, however, that the Company
shall not be required to pay or discharge or cause to be paid or discharged any
such tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
Section 4.8 Registration Rights. The Company agrees that the
Securityholders are entitled to the benefits of the Registration Rights
Agreement (including the payment of Special Interest on a Registration Default,
as those terms are defined in the Registration Rights Agreement) and the Company
covenants that it will perform or cause to be performed all duties and
obligations arising thereunder. Other than the payment of additional interest as
set forth in the Security, the rights and remedies of the Holders for a breach
of this Section 4.8 are exclusively set forth in the Registration Rights
Agreement.
Section 4.9 Tax Treatment of Securities. The Company agrees, and by
acceptance of a beneficial ownership interest in the Debentures, each beneficial
holder of Debentures will be deemed to have agreed, for United States federal
income tax purposes, to treat the Debentures as indebtedness that is subject to
Section 1.1275-4 of the United States Treasury Regulations (the "Contingent Debt
Regulations"). A holder of Debentures may obtain the comparable yield and
projected payment schedule by telephoning Radian Group Inc. Investor Relations
Department at (215) 564-6600 or submitting a written request for it to the
Company at the following address: Radian Group Inc., 1601 Market Street,
Philadelphia, PA 19103, Attention: Investor Relations Department.
ARTICLE V
SUCCESSOR CORPORATION
Section 5.1 When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into any other person or convey,
transfer, sell, lease or otherwise dispose of all or substantially all of its
properties and assets to another person, unless:
(a) either (1) the Company shall be the continuing corporation or
(2) the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which acquires by conveyance, transfer
or lease all or substantially all of the properties and assets of the Company
substantially as an entirety (i) shall be organized and validly existing under
the laws of the United States or any State thereof or the District of Columbia
and (ii) shall expressly assume, by an indenture supplemental hereto, executed
and delivered to the Trustee, in form reasonably satisfactory to the Trustee,
all of the obligations of the Company under the Securities and this Indenture;
(b) immediately after giving effect to such transaction, no Event of
Default, and no event that, after notice or lapse of time or both, would become
an Event of Default, shall have occurred and be continuing; and
(c) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
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33
comply with this Article 5 and that all conditions precedent herein provided for
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise) of the properties and assets of one or more Subsidiaries
(other than to the Company or another Subsidiary), which, if such assets were
owned by the Company, would constitute all or substantially all of the
properties and assets of the Company, shall be deemed to be the transfer of all
or substantially all of the properties and assets of the Company.
The successor Person formed by such consolidation or into which the
Company is merged or the successor Person to which such conveyance, transfer or
lease is made shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under this Indenture with the same effect as if
such successor had been named as the Company herein; and thereafter, except in
the case of a lease and obligations the Company may have under a supplemental
indenture, the Company shall be discharged from all obligations and covenants
under this Indenture and the Securities. Subject to Section 9.6, the Company,
the Trustee and the successor Person shall enter into a supplemental indenture
to evidence the succession and substitution of such successor Person and such
discharge and release of the Company.
ARTICLE VI
DEFAULTS AND REMEDIES
Section 6.1 Events of Default. So long as any Securities are
outstanding, each of the following shall be an "Event of Default":
(1) the Company fails to convert any portion of the principal amount of
any Security upon the exercise by the Holder of the right to convert such
Security into Common Stock pursuant to and in accordance with Article X hereof;
(2) the Company defaults in its obligation to repurchase any Security, or
any portion thereof, upon the exercise by the Holder of such Holder's right to
require the Company to purchase such Securities pursuant to and in accordance
with Sections 3.7 and 3.8 hereof;
(3) the Company defaults in its obligation to redeem any Security, or any
portion thereof, called for redemption by the Company pursuant to and in
accordance with Section 3.1 hereof.
(4) the Company defaults in the payment of the principal amount on any
Security when the same becomes due and payable at its Stated Maturity;
(5) the Company defaults in the payment of any accrued and unpaid
interest, including contingent interest or additional interest, if any, in each
case when due and payable, and continuance of such default for a period of 30
days;
(6) the Company fails to comply with any other terms, agreements or
covenants in the Securities or this Indenture (other than those referred to in
clause (1) through (5) above and other than those set forth in Section 4.8) and
such failure continues for 60 days after receipt by the Company of a Notice of
Default;
(7) a default under any bond, debenture, note or other evidence of
indebtedness for money borrowed (other than Non-Recourse Debt) by the Company or
any Designated Subsidiary having an
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34
aggregate principal amount outstanding of at least $15,000,000, whether such
indebtedness now exists or shall hereafter be created, which default (A) shall
constitute a failure to pay any portion of the principal of such indebtedness
when due and payable after the expiration of any applicable grace period with
respect thereto or (B) shall have resulted in such indebtedness becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable, without, in the case of Clause (A), such
indebtedness having been discharged or without, in the case of Clause (B), such
indebtedness having been discharged or such acceleration having been rescinded
or annulled, in each such case within a period of 15 days after there shall have
been given to the Company by the Trustee or to the Company and the Trustee by
the Holders of at least 10% in principal amount of the Securities then
outstanding a written notice specifying such default and stating that such
notice is a "Notice of Default" under this Indenture;
(8) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any of its Subsidiaries
that is a Designated Subsidiary or any group of two or more Subsidiaries that,
taken as a whole, would constitute a Designated Subsidiary, in an involuntary
case or proceeding under any applicable bankruptcy, insolvency, receivership,
rehabilitation, reorganization or other similar law or (ii) a decree or order
adjudging the Company or any of its Subsidiaries that is a Designated Subsidiary
or any group of two or more Subsidiaries that, taken as a whole, would
constitute a Designated Subsidiary, a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, receivership, rehabilitation,
arrangement, adjustment or composition of or in respect of the Company or any of
its Subsidiaries that is a Designated Subsidiary or any group of two or more
Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary,
under any applicable law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company or of
any substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree or order for relief or
any such other decree or order unstayed and in effect for a period of 60
consecutive days; or
(9) the commencement by the Company or any of its Subsidiaries that is a
Designated Subsidiary or any group of two or more Subsidiaries that, taken as a
whole, would constitute a Designated Subsidiary, of a voluntary case or
proceeding under any applicable bankruptcy, insolvency, receivership,
rehabilitation, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by the
Company or any of its Subsidiaries that is a Designated Subsidiary or any group
of two or more Subsidiaries that, taken as a whole, would constitute a
Designated Subsidiary, to the entry of a decree or order for relief in respect
of the Company or any of its Subsidiaries that is a Designated Subsidiary or any
group of two or more Subsidiaries that, taken as a whole, would constitute a
Designated Subsidiary, in an involuntary case or proceeding under any applicable
bankruptcy, receivership, rehabilitation, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against the Company, or the filing by the Company or any of its
Subsidiaries that is a Designated Subsidiary or any group of two or more
Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary,
of a petition or answer or consent seeking reorganization or relief under any
applicable law, or the consent by the Company to the filing of such petition or
to the appointment of or the taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of the
Company or of any substantial part of its property, or the making by the Company
or any of its Subsidiaries that is a Designated Subsidiary or any group of two
or more Subsidiaries that, taken as a whole, would constitute a Designated
Subsidiary, of an assignment for the benefit of creditors, or the admission by
the Company or any of its Subsidiaries that is a Designated Subsidiary or any
group of two or more Subsidiaries that, taken as a whole, would constitute a
Designated Subsidiary, in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by the Company or any of its
Subsidiaries that is a Designated Subsidiary or any group of two or more
Subsidiaries that, taken as a whole, would constitute a Designated Subsidiary,
expressly in furtherance of any such action.
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35
A Default under clause (6) above is not an Event of Default until
the Trustee notifies the Company, or the Holders of at least 25% in aggregate
principal amount of the Securities then outstanding notify or shall notify in
writing the Company and the Trustee, of the Default and the Company does not
cure such Default (and such Default is not waived) within the time specified in
clause (6) above after such notice. Any such notice must specify the Default,
demand that it be remedied and state that such notice is a "Notice of Default."
"Designated Subsidiary" shall mean each of Radian Guaranty, Amerin
Guaranty, Enhance Reinsurance, Asset Guaranty and any other existing or future,
direct or indirect, Subsidiary of the Company whose assets constitute 15% or
more of the total assets of the Company on a consolidated basis.
Section 6.2 Acceleration. If an Event of Default (other than an
Event of Default specified in Section 6.1(8) or (9)) occurs and is continuing,
the Trustee by notice to the Company, or the Holders of at least 25% in
aggregate principal amount of the Securities then outstanding by notice to the
Company and the Trustee, may declare the principal amount plus accrued and
unpaid interest, including contingent interest and additional interest, if any,
on all the Securities to be immediately due and payable. Upon such a
declaration, such accelerated amount shall be due and payable immediately. If an
Event of Default specified in Section 6.1(8) or (9) occurs and is continuing,
the principal amount plus accrued and unpaid interest, including contingent
interest and additional interest, if any, on all the Securities shall become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Securityholders. The Holders of a majority in aggregate
principal amount of the Securities at the time outstanding, by notice to the
Trustee (and without notice to any other Securityholder) may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of the principal amount plus accrued and unpaid
interest, including contingent interest and additional interest, if any, that
have become due solely as a result of acceleration and if all amounts due to the
Trustee under Section 7.7 have been paid. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
Section 6.3 Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of the principal amount plus accrued and unpaid interest, including contingent
interest and additional interest, if any, on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if the Trustee does not
possess any of the Securities or does not produce any of the Securities in the
proceeding. A delay or omission by the Trustee or any Securityholder in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of, or acquiescence in, the
Event of Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative.
Section 6.4 Waiver of Past Defaults. The Holders of a majority in
aggregate principal amount of the Securities then outstanding, by notice to the
Trustee (and without notice to any other Securityholder), may waive an existing
Default and its consequences except (1) an Event of Default described in Section
6.1(1) or (2), (2) a Default in respect of a provision that under Section 9.2
cannot be amended without the consent of each Securityholder affected or (3) a
Default which constitutes a failure to convert any Security in accordance with
the terms of Article 10. When a Default is waived, it is deemed cured, but no
such waiver shall extend to any subsequent or other Default or impair any
consequent right. This Section 6.4 shall be in lieu of Section 316(a)1(B) of the
TIA and such Section 316(a)1(B) is hereby expressly excluded from this
Indenture, as permitted by the TIA.
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36
Section 6.5 Control by Majority. The Holders of a majority in
aggregate principal amount of the Securities then outstanding may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture or that the Trustee determines in good faith is unduly
prejudicial to the rights of other Securityholders or would involve the Trustee
in personal liability unless the Trustee is offered indemnity satisfactory to
it. This Section 6.5 shall be in lieu of Section 316(a)1(A) of the TIA and such
Section 316(a)1(A) is hereby expressly excluded from this Indenture, as
permitted by the TIA.
Section 6.6 Limitation on Suits. A Securityholder may not pursue any
remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an
Event of Default is continuing;
(2) the Holders of at least 25% in aggregate principal amount of
the Securities then outstanding make a written request to the
Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee security or
indemnity satisfactory to the Trustee against any loss,
liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of such notice, request and offer of security or
indemnity; and
(5) the Holders of a majority in aggregate principal amount of the
Securities then outstanding do not give the Trustee a
direction inconsistent with the request during such 60-day
period.
A Securityholder may not use this Indenture to prejudice the rights
of any other Securityholder or to obtain a preference or priority over any other
Securityholder.
Section 6.7 Rights of Holders to Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder to receive
payment of the principal amount, Redemption Price, Purchase Price, Change of
Control Purchase Price or interest, including contingent interest and additional
interest, if any, in respect of the Securities held by such Holder, on or after
the respective due dates expressed in the Securities or any Redemption Date, and
to convert the Securities in accordance with Article 10, or to bring suit for
the enforcement of any such payment on or after such respective dates or the
right to convert, shall not be impaired or affected adversely without the
consent of such Holder.
Section 6.8 Collection Suit by Trustee. If an Event of Default
described in Section 6.1(2), (3) or (4) occurs and is continuing, the Trustee
may recover judgment in its own name and as trustee of an express trust against
the Company for the whole amount owing with respect to the Securities and the
amounts provided for in Section 7.7.
Section 6.9 Trustee May File Proofs of Claim. In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to the Company or any other obligor upon the Securities or
the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal amount, Redemption Price,
Purchase Price, Change of Control Purchase Price or interest, including
contingent interest and additional interest, if any, in respect of the
Securities shall then be due
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37
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company for the payment
of any such amount) shall be entitled and empowered, by intervention in such
proceeding or otherwise,
(a) to file and prove a claim for the whole amount of the principal
amount, Redemption Price, Purchase Price, Change of Control Purchase Price, or
interest, including contingent interest and additional interest, if any, and to
file such other papers or documents as may be necessary or advisable in order to
have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel or any other amounts due the Trustee under Section 7.7) and of the
Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or similar official in any
such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
Section 6.10 Priorities. If the Trustee collects any money pursuant
to this Article 6, it shall pay out the money in the following order:
FIRST: to the Trustee for amounts due under Section 7.7;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for the principal amount, Redemption Price, Purchase Price, Change of
Control Purchase Price or interest, including contingent interest and additional
interest, if any, as the case may be, ratably, without preference or priority of
any kind, according to such amounts due and payable on the Securities; and
THIRD: the balance, if any, to the Company.
The Trustee may fix a record date and payment date for any payment
to Securityholders pursuant to this Section 6.10. At least 15 days before such
record date, the Trustee shall mail to each Securityholder and the Company a
notice that states the record date, the payment date and the amount to be paid.
Section 6.11 Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant (other than the Trustee) in the suit of
an undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees and expenses,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section 6.11
does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section
6.7 or a suit by Holders of more than 10% in aggregate principal amount of the
Securities then outstanding. This Section 6.11 shall be in lieu of Section
315(e) of the TIA and such Section 315(e) is hereby expressly excluded from this
Indenture, as permitted by the TIA.
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Section 6.12 Waiver of Stay, Extension or Usury Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury or other law
wherever enacted, now or at any time hereafter in force, which would prohibit or
forgive the Company from paying all or any portion of the principal amount,
Redemption Price, Purchase Price or Change of Control Purchase Price in respect
of Securities, or any interest, including contingent interest and additional
interest, if any, on such amounts, as contemplated herein, or which may affect
the covenants or the performance of this Indenture; and the Company (to the
extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not hinder, delay or
impede the execution of any power herein granted to the Trustee, but will suffer
and permit the execution of every such power as though no such law had been
enacted.
ARTICLE VII
TRUSTEE
Section 7.1 Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties that are
specifically set forth in this Indenture and no others; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture, but in the
case of any such certificates or opinions which by any
provision hereof are specifically required to be furnished to
the Trustee, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the
requirements of this Indenture, but need not confirm or
investigate the accuracy of mathematical calculations or other
facts stated therein. This Section 7.1(b) shall be in lieu of
Section 315(a) of the TIA and such Section 315(a) is hereby
expressly excluded from this Indenture, as permitted by the
TIA.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(1) this Section (c) does not limit the effect of Section (b) of
this Section 7.1;
(2) the Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer unless it is proved
that the Trustee was negligent in ascertaining the pertinent
facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5.
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39
Subparagraphs (c)(1), (2) and (3) shall be in lieu of Sections 315(d)(1),
315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1), 315(d)(2) and
315(d)(3) are hereby expressly excluded from this Indenture, as permitted by the
TIA.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section 7.1.
(e) The Trustee may refuse to perform any duty or exercise any right
or power or extend or risk its own funds or otherwise incur any financial
liability unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
(acting in any capacity hereunder) shall be under no liability for interest on
any money received by it hereunder unless otherwise agreed in writing with the
Company.
Section 7.2 Rights of Trustee. Subject to its duties and
responsibilities under the TIA,
(a) the Trustee may conclusively rely and shall be protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;
(b) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
conclusively rely upon an Officers' Certificate;
(c) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder;
(d) the Trustee shall not be liable for any action taken, suffered,
or omitted to be taken by it in good faith which it believes to be authorized or
within its rights or powers conferred under this Indenture;
(e) the Trustee may consult with counsel selected by it and any
advice or Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered or omitted by it hereunder
in good faith and in accordance with such advice or Opinion of Counsel;
(f) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders, pursuant to the provisions of this Indenture,
unless such Holders shall have offered to the Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities which may be
incurred therein or thereby;
(g) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a Board
Resolution;
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(h) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company, personally or by agent
or attorney at the sole cost of the Company and shall incur no liability or
additional liability of any kind by reason of such inquiry or investigation;
(i) the Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Responsible Officer of the Trustee has actual
knowledge thereof or unless written notice of any event which is in fact such a
default is received by the Trustee at the Corporate Trust Office of the Trustee,
and such notice references the Securities and this Indenture;
(j) the rights, privileges, protections, immunities and benefits
given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other person
employed to act hereunder; and
(k) the Trustee may request that the Company deliver an Officers'
Certificate setting forth the names of individuals and/or titles of officers
authorized at such time to take specified actions pursuant to this Indenture,
which Officers' Certificate may be signed by any person authorized to sign an
Officers' Certificate, including any person specified as so authorized in any
such certificate previously delivered and not superseded.
Section 7.3 Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, Conversion
Agent or co-registrar may do the same with like rights. However, the Trustee
must comply with Sections 7.10 and 7.11.
Section 7.4 Trustee's Disclaimer. The Trustee makes no
representation as to the validity or adequacy of this Indenture or the
Securities, it shall not be accountable for the Company's use or application of
the proceeds from the Securities, it shall not be responsible for any statement
in the registration statement for the Securities under the Securities Act or in
any offering document for the Securities, the Indenture or the Securities (other
than its certificate of authentication), or the determination as to which
beneficial owners are entitled to receive any notices hereunder.
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Section 7.5 Notice of Defaults. The Trustee shall, within 90 days of
the occurrence of a Default, give to the Holders of the Securities notice of all
uncured Defaults known to it and written notice of any event which with the
giving of notice or the lapse of time, or both, would become an Event of
Default, its status and what action the Company is taking or proposes to take
with respect thereto. Notwithstanding the preceding sentence, except in the case
of a Default described in Section 6.1(1) through (5) inclusive, the Trustee may
withhold the notice if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interest of the
Securityholders. The preceding sentence shall be in lieu of the proviso to
Section 315(b) of the TIA and such proviso is hereby expressly excluded from
this Indenture, as permitted by the TIA. The Trustee shall not be deemed to have
knowledge of a Default unless a Responsible Officer of the Trustee has received
written notice of such Default, which notice specifically references this
Indenture and the Securities.
Section 7.6 Reports by Trustee to Holders. Within 60 days after each
November 15 beginning with the November 15 following the date of this Indenture,
the Trustee shall mail to each Securityholder a brief report dated as of such
November 15 that complies with TIA Section 313(a), if required by such Section
313(a). The Trustee also shall comply with TIA Section 313(b).
A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each securities exchange, if any, on which the
Securities are listed. The Company agrees to notify the Trustee promptly
whenever the Securities become listed on any securities exchange and of any
delisting thereof.
Section 7.7 Compensation and Indemnity. The Company agrees:
(a) to pay to the Trustee from time to time such compensation as the
Company and the Trustee shall from time to time agree in writing for all
services rendered by it hereunder (which compensation shall not be limited (to
the extent permitted by law) by any provision of law in regard to the
compensation of a trustee of an express trust);
(b) to reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the reasonable
compensation and the expenses, advances and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and
(c) to indemnify the Trustee or any predecessor Trustee and their
agents for, and to hold them harmless against, any loss, damage, claim,
liability, cost or expense (including attorney's fees and expenses, and taxes
(other than taxes based upon, measured by or determined by the income of the
Trustee)) incurred without negligence or bad faith on its part, arising out of
or in connection with the acceptance or administration of this trust, including
the costs and expenses of defending itself against any claim (whether asserted
by the Company or any Holder or any other person) or liability in connection
with the exercise or performance of any of its powers or duties hereunder.
To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay the principal
amount, Redemption Price, Purchase Price, Change of Control Purchase Price or
interest, including contingent interest and additional interest, if any, as the
case may be, on particular Securities.
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The Company's payment obligations pursuant to this Section 7.7 shall
survive the discharge of this Indenture and the resignation or removal of the
Trustee. When the Trustee incurs expenses after the occurrence of a Default
specified in Section 6.1(8) or (9), the expenses including the reasonable
charges and expenses of its counsel, are intended to constitute expenses of
administration under any bankruptcy law.
Section 7.8 Replacement of Trustee. The Trustee may resign by so
notifying the Company; provided, however, no such resignation shall be effective
until a successor Trustee has accepted its appointment pursuant to this Section
7.8. The Holders of a majority in aggregate principal amount of the Securities
at the time outstanding may remove the Trustee by so notifying the Trustee and
the Company. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or public officer takes charge of the Trustee or its
property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint, by
resolution of its Board of Directors, a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company satisfactory in form and
substance to the retiring Trustee and the Company. Thereupon the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Securityholders. The retiring Trustee shall promptly transfer all property held
by it as Trustee to the successor Trustee, subject to the lien provided for in
Section 7.7.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of a majority in aggregate principal amount of the Securities at the
time outstanding may petition any court of competent jurisdiction at the expense
of the Company for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Section 7.9 Successor Trustee by Merger. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation, the resulting,
surviving or transferee corporation without any further act shall be the
successor Trustee.
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Section 7.10 Eligibility; Disqualification. The Trustee shall at all
times satisfy the requirements of TIA Sections 310(a)(1) and 310(b). The Trustee
(or its parent holding company) shall have a combined capital and surplus of at
least $50,000,000 as set forth in its most recent published annual report of
condition. Nothing herein contained shall prevent the Trustee from filing with
the Commission the application referred to in the penultimate paragraph of TIA
Section 310(b).
Section 7.11 Preferential Collection of Claims Against Company. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE VIII
DISCHARGE OF INDENTURE
Section 8.1 Discharge of Liability on Securities. When (i) the
Company delivers to the Trustee all outstanding Securities (other than
Securities replaced or repaid pursuant to Section 2.7) for cancellation or (ii)
all outstanding Securities have become due and payable and the Company deposits
with the Trustee cash sufficient to pay all amounts due and owing on all
outstanding Securities (other than Securities replaced pursuant to Section 2.7),
and if in either case the Company pays all other sums payable hereunder by the
Company, then this Indenture shall, subject to Section 7.7, cease to be of
further effect. The Trustee shall join in the execution of a document prepared
by the Company acknowledging satisfaction and discharge of this Indenture on
demand of the Company accompanied by an Officers' Certificate and Opinion of
Counsel and at the cost and expense of the Company.
Section 8.2 Repayment to the Company. The Trustee and the Paying
Agent shall return to the Company upon written request any money or securities
held by them for the payment of any amount with respect to the Securities that
remains unclaimed for two years, subject to applicable unclaimed property law.
After return to the Company, Holders entitled to the money or securities must
look to the Company for payment as general creditors unless an applicable
abandoned property law designates another person and the Trustee and the Paying
Agent shall have no further liability to the Securityholders with respect to
such money or securities for that period commencing after the return thereof.
ARTICLE IX
AMENDMENTS
Section 9.1 Without Consent of Holders. The Company and the Trustee
may amend this Indenture or the Securities without the consent of any
Securityholder to:
(a) add to the covenants of the Company for the benefit of the
Holders of Securities;
(b) surrender any right or power herein conferred upon the Company;
(c) provide for conversion rights of Holders of Securities if any
reclassification or change of the Common Stock or any consolidation, merger or
sale of all or substantially all of the Company's assets occurs;
(d) provide for the assumption of the Company's obligations to the
Holders of Securities in the case of a merger, consolidation, conveyance,
transfer or lease pursuant to Article V hereof;
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(e) reduce the Conversion Price; provided, however, that such
reduction in the Conversion Price shall not adversely affect the interests of
the Holders of Securities (after taking into account tax and other consequences
of such reduction);
(f) comply with the requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA;
(g) make any changes or modifications necessary in connection with
the registration of the Securities under the Securities Act as contemplated in
the Registration Rights Agreement; provided, however, that such action pursuant
to this clause (g) does not, in the good faith opinion of the Board of Directors
of the Company (as evidenced by a Board Resolution) and the Trustee, adversely
affect the interests of the Holders of Securities in any material respect;
(h) cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein or which is
otherwise defective, or to make any other provisions with respect to matters or
questions arising under this Indenture which the Company may deem necessary or
desirable and which shall not be inconsistent with the provisions of this
Indenture; provided, however, that such action pursuant to this clause (h) does
not, in the good faith opinion of the Board of Directors of the Company (as
evidenced by a Board Resolution) and the Trustee, adversely affect the interests
of the Holders of Securities in any material respect; and
(i) add or modify any other provisions herein with respect to
matters or questions arising hereunder which the Company and the Trustee may
deem necessary or desirable and which will not adversely affect the interests of
the Holders of Securities.
Section 9.2 With Consent of Holders. Except as provided below in
this Section 9.2, this Indenture or the Securities may be amended, modified or
supplemented, and noncompliance in any particular instance with any provision of
this Indenture or the Securities may be waived, in each case with the written
consent of the Holders of at least a majority of the principal amount of the
Securities at the time outstanding.
Without the written consent or the affirmative vote of each Holder
of Securities affected thereby, an amendment or waiver under this Section 9.2
may not:
(a) change the maturity of the principal amount of, or any
installment of interest, including contingent interest or additional interest,
on, any Security;
(b) reduce the principal amount of, or interest, including
contingent interest or additional interest, payable on, or the Redemption Price,
Purchase Price or Change of Control Purchase Price of any Security;
(c) impair or adversely affect the conversion rights of any Holder
of Securities;
(d) reduce the value of the Common Stock to which reference is made
in determining whether an interest adjustment will be made on the Securities, or
change the method by which this value is calculated;
(e) change the currency of any amount owed or owing under the
Security or any interest thereon from U.S. Dollars;
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45
(f) alter or otherwise modify the rate of interest, including
contingent interest or additional interest, on any Security, or the manner of
calculation thereof, or extend time for payment of any amounts due and payable
to the Holders of the Securities;
(g) impair the right of any Holder to institute suit for the
enforcement of any payment or with respect to, or conversion of, any Security;
(h) modify the obligation of the Company to maintain an office or
agency pursuant to Section 4.5;
(i) adversely affect the purchase right of the Holders of the
Securities as provided in Article III or the right of the Holders of the
Securities to convert any Security as provided in Article X;
(j) modify the provisions of Article III in a manner adverse to the
Holders of the Securities;
(k) modify any of the provisions of this Section, or reduce the
principal amount of outstanding Securities required to waive a default, except
to provide that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each outstanding Security affected
thereby; or
(l) reduce the percentage of the principal amount of the outstanding
Securities the consent of whose Holders is required for any such supplemental
indenture or the consent of whose Holders is required for any waiver provided
for in this Indenture.
It shall not be necessary for the consent of the Holders under this
Section 9.2 to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent approves the substance thereof.
After an amendment under this Section 9.2 becomes effective, the
Company shall mail to each Holder a notice briefly describing the amendment.
Nothing in this Section 9.2 shall impair the ability of the Company
and the Trustee to amend this Indenture or the Securities without the consent of
any Securityholder to provide for the assumption of the Company's obligations to
the Holders of Securities in the case of a merger, consolidation, conveyance,
transfer or lease pursuant to Article V hereof.
Section 9.3 Compliance with TIA. Every supplemental indenture
executed pursuant to this Article shall comply with the TIA.
Section 9.4 Revocation and Effect of Consents, Waivers and Actions.
Until an amendment, waiver or other action by Holders becomes effective, a
consent thereto by a Holder of a Security hereunder is a continuing consent by
the Holder and every subsequent Holder of that Security or portion of the
Security that evidences the same obligation as the consenting Holder's Security,
even if notation of the consent, waiver or action is not made on the Security.
However, any such Holder or subsequent Holder may revoke the consent, waiver or
action as to such Holder's Security or portion of the Security if the Trustee
receives the notice of revocation before the date the amendment, waiver or
action becomes effective. After an amendment, waiver or action becomes
effective, it shall bind every Securityholder.
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46
Section 9.5 Notation on or Exchange of Securities. Securities
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article may, and shall, if required by the Trustee, bear a
notation in form approved by the Trustee as to any matter provided for in such
supplemental indenture. If the Company shall so determine, new Securities so
modified as to conform, in the opinion of the Trustee and the Board of
Directors, to any such supplemental indenture may be prepared and executed by
the Company and authenticated and delivered by the Trustee in exchange for
outstanding Securities.
Section 9.6 Trustee to Sign Supplemental Indentures. The Trustee
shall sign any supplemental indenture authorized pursuant to this Article 9 if
the amendment contained therein does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but need
not, sign such supplemental indenture. In signing such supplemental indenture
the Trustee shall receive, and (subject to the provisions of Section 7.1) shall
be fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel stating that such amendment is authorized or permitted by this
Indenture.
Section 9.7 Effect of Supplemental Indentures. Upon the execution of
any supplemental indenture under this Article, this Indenture shall be modified
in accordance therewith, and such supplemental indenture shall form a part of
this Indenture for all purposes; and every Holder of Securities theretofore or
thereafter authenticated and delivered hereunder shall be bound thereby.
ARTICLE X
CONVERSIONS
Section 10.1 Conversion Privilege. (a) Subject to and upon
compliance with the provisions of this Article X, a Holder of a Security shall
have the right, at such Holder's option, to convert all or any portion (if the
portion to be converted is $1,000 or an integral multiple of $1,000) of such
Security into shares of Common Stock at the Conversion Price in effect on the
date of conversion:
(1) during any Conversion Period, if the Sale Price of the Common
Stock for at least 20 Trading Days in the 30 Trading Day period ending on
the first day of such Conversion Period exceeds 120% of the Conversion
Price in effect on such thirtieth Trading Day (in the event that the
Conversion Price on such thirtieth Trading Day is not the same as the
Conversion Price in effect for each of such thirty Trading Days, the
Conversion Agent shall make such adjustments as it, in its discretion,
deems appropriate in determining whether the foregoing condition has been
met);
(2) during the five Business Day period following any 10 consecutive
Trading Day period in which the average of the Trading Prices of the
Securities for such 10 Trading Day period was less than 105% of the
average of the Conversion Values of the Securities during the same period;
(3) at any time prior to the close of business on the second
Business Day preceding the date fixed for redemption, if such Security has
been called for redemption pursuant to Article III hereof;
(4) during any period after the 30th day following the original
issuance of the Securities in which (A) the credit ratings assigned to the
Securities by both Moody's Investor Services, Inc. and Standard & Poor's
Rating Services are below Baa3 or BBB-, respectively, (B)
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47
the credit ratings assigned to the Securities are suspended or withdrawn
by both such voting agencies or (C) neither of such rating agencies is
then rating the Securities; or
(5) as provided in Section (b) of this Section 10.1.
The Conversion Agent shall, on behalf of the Company, determine on a
daily basis whether the Securities shall be convertible as a result of the
occurrence of an event specified in clause (1) or clause (2) above and, if the
Securities shall be so convertible, the Conversion Agent shall promptly deliver
to the Company and the Trustee written notice thereof. Whenever the Securities
shall become convertible pursuant to Section 10.1, the Company or, at the
Company's request, the Trustee in the name and at the expense of the Company,
shall notify the Holders of the event triggering such convertibility in the
manner provided in Section 11.2, and the Company shall also publicly announce
such information and publish it on the Company's web site. Any notice so given
shall be conclusively presumed to have been duly given, whether or not the
Holder receives such notice.
(b) In addition, in the event that:
(1) (A) the Company distributes to all holders of its shares of
Common Stock rights or warrants entitling them (for a period expiring
within 60 days of the Record Date for such distribution) to subscribe for
or purchase shares of Common Stock, at a price per share less than the
Sale Price of the Common Stock on the Business Day immediately preceding
the announcement of such distribution, (B) the Company distributes to all
holders of its shares of Common Stock, cash or other assets, debt
securities or rights or warrants to purchase its securities, where the
Fair Market Value (as determined by the Board of Directors) of such
distribution per share of Common Stock exceeds 10% of the Sale Price of a
share of Common Stock on the Business Day immediately preceding the date
of declaration of such distribution, or (C) a Change of Control occurs but
Holders of Securities do not have the right to require the Company to
purchase their Securities as a result of such Change of Control, because
of the provisions set forth in Section 3.8(a)(2), then, in each case, the
Securities may be surrendered for conversion at any time on and after the
date that the Company gives notice to the Holders of such right, which
shall be not less than 20 days prior to the Ex-Dividend Time for such
distribution, in the case of (A) or (B), or within 30 days after the
occurrence of the Change of Control, in the case of (C), until the earlier
of the close of business on the Business Day immediately preceding the
Ex-Dividend Time or the date the Company announces that such distribution
will not take place, in the case of (A) or (B), or the earlier of 30 days
after the Company's delivery of the Change of Control Purchase Notice or
the date the Company announces that the Change of Control will not take
place, in the case of (C).
(2) the Company consolidates with or merges into another
corporation, or is a party to a binding share exchange pursuant to which
the shares of Common Stock would be converted into cash, securities or
other property as set forth in Section 10.4 hereof, then the Securities
may be surrendered for conversion at any time from and after the date
which is 15 days prior to the date announced by the Company as the
anticipated effective time of such transaction until 15 days after the
actual date of such transaction.
"Conversion Period" means the period from and including the
thirtieth trading day in a fiscal quarter to, but not including, the thirtieth
trading day in the immediately following fiscal quarter.
"Conversion Value", on any day, means the product of the Sale Price
for the Common Stock multiplied by the then-current Conversion Rate.
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48
"Ex-Dividend Time" means, with respect to any issuance or
distribution on shares of Common Stock, the first date on which the shares of
Common Stock trade regular way on the principal securities market on which the
shares of Common Stock are then traded without the right to receive such
issuance or distribution.
The "Trading Price" of the Securities, on any date of determination,
means the average of the secondary market bid quotations per Security obtained
by the Company or the Calculation Agent for $10,000,000 principal amount at
maturity of Securities at approximately 3:30 p.m., New York City time, on such
determination date from three independent nationally recognized securities
dealers selected by the Company, provided that if at least three such bids
cannot reasonably be obtained by the Company or the Calculation Agent, but two
such bids are obtained, then the average of the two bids shall be used, and if
only one such bid can reasonably be obtained by the Company or the Calculation
Agent, this one bid shall be used. If either the Company or the Calculation
Agent cannot reasonably obtain at least one bid for $10,000,000 principal amount
at maturity of Securities from a nationally recognized securities dealer or in
the reasonable judgment of the Company, the bid quotations are not indicative of
the secondary market value of the Securities, then the trading price of the
Securities will equal (a) the then-applicable Conversion Rate multiplied by (b)
the Sale Price of the Common Stock on such determination date.
The Conversion Rate, at any time, shall equal (A) $1,000 divided by
the Conversion Price at such time, rounded to three decimal places (rounded up
if the fourth decimal place thereof is 5 or more and otherwise rounded down).
Section 10.2 Conversion Procedure; Conversion Price; Fractional
Shares.
(a) Each Security shall be convertible at the office of the
Conversion Agent into fully paid and nonassessable shares (calculated to the
nearest 1/100th of a share) of Common Stock. The Security will be converted into
shares of Common Stock at the Conversion Price therefor. No payment or
adjustment shall be made in respect of dividends on the Common Stock or accrued
interest on a converted Security, except as described in Section 10.9 hereof.
The Company shall not issue any fraction of a share of Common Stock in
connection with any conversion of Securities, but instead shall, subject to
Section 10.3(h) hereof, make a cash payment (calculated to the nearest cent)
equal to such fraction multiplied by the Sale Price of the Common Stock on the
last Trading Day prior to the date of conversion. Notwithstanding the foregoing,
a Security in respect of which a Holder has delivered a Purchase Notice or
Change of Control Purchase Notice exercising such Holder's option to require the
Company to repurchase such Security may be converted only if such notice of
exercise is withdrawn in accordance with the Section 3.10 hereof.
(b) Before any Holder of a Security shall be entitled to convert the
same into Common Stock, such Holder shall, in the case of Securities issued in
global form, comply with the procedures of the Depositary in effect at that
time, and in the case of definitive Securities, surrender such Securities, duly
endorsed to the Company or in blank, at the office of the Conversion Agent, and
shall give written notice to the Company at said office or place that such
Holder elects to convert the same and shall state in writing therein the
principal amount of Securities to be converted and the name or names (with
addresses) in which such Holder wishes the certificate or certificates for
Common Stock to be issued.
Before any such conversion, a Holder also shall pay all funds
required, if any, relating to interest on the Securities, as provided in Section
10.9, and all taxes or duties, if any, as provided in Section 10.8.
If more than one Security shall be surrendered for conversion at one
time by the same Holder, the number of full shares of Common Stock which shall
be deliverable upon conversion shall be
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49
computed on the basis of the aggregate principal amount of the Securities (or
specified portions thereof to the extent permitted thereby) so surrendered.
Subject to the next sentence, the Company will, as soon as practicable
thereafter, issue and deliver at said office or place to such Holder of a
Security, or to such Holder's nominee or nominees, certificates for the number
of full shares of Common Stock to which such Holder shall be entitled as
aforesaid, together, subject to the last sentence of Section (a) above, with
cash in lieu of any fraction of a share to which such Holder would otherwise be
entitled. The Company shall not be required to deliver certificates for shares
of Common Stock while the stock transfer books for such stock or the security
register are duly closed for any purpose, but certificates for shares of Common
Stock shall be issued and delivered as soon as practicable after the opening of
such books or security register.
(c) A Security shall be deemed to have been converted as of the
close of business on the date of the surrender of such Securities for conversion
as provided above, and the person or persons entitled to receive the Common
Stock issuable upon such conversion shall be treated for all purposes as the
record Holder or Holders of such Common Stock as of the close of business on
such date.
(d) In case any Security shall be surrendered for partial
conversion, the Company shall execute and the Trustee shall authenticate and
deliver to or upon the written order of the Holder of the Security so
surrendered, without charge to such Holder (subject to the provisions of Section
10.8 hereof), a new Security or Securities in authorized denominations in an
aggregate principal amount equal to the unconverted portion of the surrendered
Securities.
Section 10.3 Adjustment of Conversion Price for Common Stock.
The Conversion Price shall be adjusted from time to time as follows:
(a) In case the Company shall, at any time or from time to time
while any of the Securities are outstanding, pay a dividend or make a
distribution in shares of Common Stock to all holders of its outstanding shares
of Common Stock, then the Conversion Price in effect at the opening of business
on the date following the record date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction:
(1) the numerator of which shall be the number of shares of Common
Stock outstanding at the close of business on the Record Date fixed for
such determination; and
(2) the denominator of which shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution.
Such reduction shall become effective immediately after the opening
of business on the day following the Record Date fixed for such determination.
If any dividend or distribution of the type described in this Section 10.3(a) is
declared but not so paid or made, the Conversion Price shall again be adjusted
to the Conversion Price which would then be in effect if such dividend or
distribution had not been declared.
(b) In case the Company shall, at any time or from time to time
while any of the Securities are outstanding, subdivide its outstanding shares of
Common Stock into a greater number of shares of Common Stock, then the
Conversion Price in effect at the opening of business on the day following the
day upon which such subdivision becomes effective shall be proportionately
reduced, and conversely, in case the Company shall, at any time or from time to
time while any of the Securities are outstanding, combine its outstanding shares
of Common Stock into a smaller number of shares of
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Common Stock, then the Conversion Price in effect at the opening of business on
the day following the day upon which such combination becomes effective shall be
proportionately increased.
Such reduction or increase, as the case may be, shall become
effective immediately after the opening of business on the day following the day
upon which such subdivision or combination becomes effective.
(c) In case the Company shall, at any time or from time to time
while any of the Securities are outstanding, issue rights or warrants (other
than any rights or warrants referred to in Section 10.3(d)) to all holders of
its shares of Common Stock entitling them to subscribe for or purchase shares of
Common Stock (or securities convertible into shares of Common Stock) at a price
per share (or having a conversion price per share) less than the Sale Price on
the Business Day immediately preceding the date of the announcement of such
issuance (treating the conversion price per share of the securities convertible
into Common Stock as equal to (x) the sum of (i) the price for a unit of the
security convertible into Common Stock and (ii) any additional consideration
initially payable upon the conversion of such security into Common Stock divided
by (y) the number of shares of Common Stock initially underlying such
convertible security), then the Conversion Price shall be adjusted so that the
same shall equal the price determined by multiplying the Conversion Price in
effect at the opening of business on the date after such date of announcement by
a fraction:
(1) the numerator of which shall be the number of shares of Common
Stock outstanding on the close of business on the date of announcement,
plus the number of shares or securities which the aggregate offering price
of the total number of shares or securities so offered for subscription or
purchase (or the aggregate conversion price of the convertible securities
so offered) would purchase at such Sale Price of the Common Stock; and
(2) the denominator of which shall be the number of shares of Common
Stock outstanding at the close of business on the date of announcement,
plus the total number of additional shares of Common Stock so offered for
subscription or purchase (or into which the convertible securities so
offered are convertible).
Such adjustment shall become effective immediately after the opening
of business on the day following the date of announcement of such issuance. To
the extent that shares of Common Stock (or securities convertible into shares of
Common Stock) are not delivered pursuant to such rights or warrants, upon the
expiration or termination of such rights or warrants, the Conversion Price shall
be readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made on the
basis of the delivery of only the number of shares of Common Stock (or
securities convertible into shares of Common Stock) actually delivered. In the
event that such rights or warrants are not so issued, the Conversion Price shall
again be adjusted to be the Conversion Price which would then be in effect if
the date fixed for the determination of stockholders entitled to receive such
rights or warrants had not been fixed. In determining whether any rights or
warrants entitle the holders to subscribe for or purchase shares of Common Stock
at less than such Sale Price, and in determining the aggregate offering price of
such shares of Common Stock, there shall be taken into account any consideration
received for such rights or warrants, the value of such consideration if other
than cash, to be determined by the Board of Directors.
(d) In case the Company shall, at any time or from time to time
while any of the Securities are outstanding, by dividend or otherwise,
distribute to all holders of its shares of Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation and the Common Stock is not changed or
exchanged), cash, shares of its capital stock (other than any dividends or
distributions to which Section 10.3(a) applies),
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51
evidences of its Indebtedness or other assets, including securities, but
excluding (i) any rights or warrants referred to in Section 10.3(c), (ii)
dividends or distributions of stock, securities or other property or assets
(including cash) in connection with a reclassification, change, merger,
consolidation, statutory share exchange, combination, sale or conveyance to
which Section 10.4 applies and (iii) dividends and distributions paid
exclusively in cash (such capital stock, evidence of its indebtedness, cash,
other assets or securities being distributed hereinafter in this Section 10.3(d)
called the "distributed assets"), then, in each such case, subject to the third
and fourth succeeding paragraphs and the last Section of this Section 10.3(d),
the Conversion Price shall be reduced so that the same shall be equal to the
price determined by multiplying the Conversion Price in effect immediately prior
to the close of business on the Record Date with respect to such distribution by
a fraction:
(1) the numerator of which shall be the Current Market Price of the
Common Stock, less the Fair Market Value on such date of the portion of
the distributed assets so distributed applicable to one share of Common
Stock (determined on the basis of the number of shares of Common Stock
outstanding on the record date)(determined as provided in Section 10.3(g))
on such date; and
(2) the denominator of which shall be such Current Market Price.
Such reduction shall become effective immediately prior to the opening of
business on the day following the Record Date for such distribution. In the
event that such dividend or distribution is not so paid or made, the Conversion
Price shall again be adjusted to be the Conversion Price which would then be in
effect if such dividend or distribution had not been declared.
If the Board of Directors determines the Fair Market Value of any
distribution for purposes of this Section 10.3(d) by reference to the actual or
when issued trading market for any distributed assets comprising all or part of
such distribution, it must in doing so consider the prices in such market over
the same period (the "Reference Period") used in computing the Current Market
Price pursuant to Section 10.3(g) to the extent possible, unless the Board of
Directors determines in good faith that determining the Fair Market Value during
the Reference Period would not be in the best interest of the Holders.
In the event any such distribution consists of shares of capital
stock of, or similar equity interests in, one or more of the Company's
Subsidiaries (a "Spin-Off"), the Fair Market Value of the securities to be
distributed shall equal the average of the closing sale prices of such
securities on the principal securities market on which such securities are
traded for the five consecutive Trading Days commencing on and including the
sixth day of trading of those securities after the effectiveness of the
Spin-Off, and the Current Market Price shall be measured for the same period. In
the event, however, that an underwritten initial public offering of the
securities in the Spin-Off occurs simultaneously with the Spin-Off, Fair Market
Value of the securities distributed in the Spin-Off shall mean the initial
public offering price of such securities and the Current Market Price shall mean
the Sale Price for the Common Stock on the same Trading Day.
Rights or warrants distributed by the Company to all holders of its
shares of Common Stock entitling them to subscribe for or purchase shares of the
Company's capital stock (either initially or under certain circumstances), which
rights or warrants, until the occurrence of a specified event or events
("Trigger Event"), (i) are deemed to be transferred with such shares of Common
Stock, (ii) are not exercisable and (iii) are also issued in respect of future
issuances of shares of Common Stock shall be deemed not to have been distributed
for purposes of this Section 10.3(d) (and no adjustment to the Conversion Price
under this Section 10.3(d) will be required) until the occurrence of the
earliest Trigger Event. If such right or warrant is subject to subsequent
events, upon the occurrence of which such right
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52
or warrant shall become exercisable to purchase different distributed assets,
evidences of indebtedness or other assets, or entitle the holder to purchase a
different number or amount of the foregoing or to purchase any of the foregoing
at a different purchase price, then the occurrence of each such event shall be
deemed to be the date of issuance and record date with respect to a new right or
warrant (and a termination or expiration of the existing right or warrant
without exercise by the holder thereof). In addition, in the event of any
distribution (or deemed distribution) of rights or warrants, or any Trigger
Event or other event (of the type described in the preceding sentence) with
respect thereto, that resulted in an adjustment to the Conversion Price under
this Section 10.3(d):
(1) in the case of any such rights or warrants which shall all have
been redeemed or repurchased without exercise by any holders thereof, the
Conversion Price shall be readjusted upon such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the
case may be, as though it were a cash distribution, equal to the per share
redemption or repurchase price received by a holder of shares of Common
Stock with respect to such rights or warrants (assuming such holder had
retained such rights or warrants), made to all holders of shares of Common
Stock as of the date of such redemption or repurchase; and
(2) in the case of such rights or warrants which shall have expired
or been terminated without exercise, the Conversion Price shall be
readjusted as if such rights and warrants had never been issued.
For purposes of this Section 10.3(d) and Sections 10.3(a), 10.3(b)
and 10.3(c), any dividend or distribution to which this Section 10.3(d) is
applicable that also includes (i) shares of Common Stock, (ii) a subdivision or
combination of shares of Common Stock to which Section 10.3(b) applies or (iii)
rights or warrants to subscribe for or purchase shares of Common Stock to which
Section 10.3(c) applies (or any combination thereof), shall be deemed instead to
be:
(1) a dividend or distribution of the evidences of indebtedness,
assets, shares of capital stock, rights or warrants, other than such
shares of Common Stock, such subdivision or combination or such rights or
warrants to which Sections 10.3(a), 10.3(b) and 10.3(c) apply,
respectively (and any Conversion Price reduction required by this Section
10.3(d) with respect to such dividend or distribution shall then be made),
immediately followed by
(2) a dividend or distribution of such shares of Common Stock, such
subdivision or combination or such rights or warrants (and any further
Conversion Price reduction required by Sections 10.3(a), 10.3(b) and
10.3(c) with respect to such dividend or distribution shall then be made),
except:
(A) the Record Date of such dividend or distribution shall be
substituted for (i) "the date fixed for the determination of
stockholders entitled to receive such dividend or other
distribution," "Record Date fixed for such determinations" and
"Record Date" within the meaning of Section 10.3(a), (ii) "the day
upon which such subdivision becomes effective" and "the day upon
which such combination becomes effective" within the meaning of
Section 10.3(b), and (iii) "the date fixed for the determination of
stockholders entitled to receive such rights or warrants," "the
Record Date fixed for the determination of the stockholders entitled
to receive such rights or warrants" and such "Record Date" within
the meaning of Section 10.3(c); and
(B) any shares of Common Stock included in such dividend or
distribution shall not be deemed "outstanding at the close of
business on the date fixed for such determination" within the
meaning of Section 10.3(a) and any reduction or increase in the
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53
number of shares of Common Stock resulting from such subdivision or
combination shall be disregarded in connection with such dividend or
distribution.
In the event of any distribution referred to in this Section 10.3(d)
in which (1) the Fair Market Value (as determined by the Board of Directors) of
such distribution applicable to one share of Common Stock (determined as
provided above) equals or exceeds the average of the Sale Prices of the Common
Stock over the ten consecutive Trading Day period ending on the Record Date for
such distribution or (2) the average of the Sale Prices of the Common Stock over
the ten consecutive Trading Day period ending on the Record Date for such
distribution exceeds the Fair Market Value of such distribution by less than
$1.00, then, in each such case, in lieu of an adjustment to the Conversion
Price, adequate provision shall be made so that each Holder shall have the right
to receive upon conversion of a Security, in addition to shares of Common Stock,
the kind and amount of such distribution such Holder would have received had
such Holder converted such Security immediately prior to the Record Date for
determining the shareholders entitled to receive the distribution.
In the event of any distribution referred to in Section 10.3(c) or
10.3(d), where, in the case of a distribution described in Section 10.3(d), the
Fair Market Value of such distribution per share of Common Stock (as determined
by the Board of Directors) exceeds 10% of the Sale Price of a share of Common
Stock on the Business Day immediately preceding the declaration date for such
distribution, then, if such distribution would also trigger a conversion right
under Section 10.1(b) or the Securities are otherwise convertible pursuant to
this Article X, the Company will be required to give notice to the Holders of
Securities at least 20 days prior to the Ex-Dividend Time for the distribution
and, upon the giving of notice, the Securities may be surrendered for conversion
at any time on and after the date that the Company gives notice to the Holders
of such conversion right, until the close of business on the Business Day prior
to the Ex-Dividend Time or the Company announces that such distribution will not
take place. No adjustment to the Conversion Price or the ability of a Holder of
a Security to convert will be made if the Holder will otherwise participate in
such distribution without conversion.
(e) In case the Company shall, at any time or from time to time
while any of the Securities are outstanding, by dividend or otherwise,
distribute to all holders of its shares of Common Stock, cash (excluding any
cash that is distributed upon a reclassification, change, merger, consolidation,
statutory share exchange, combination, sale or conveyance to which Section 10.4
applies or as part of a distribution referred to in Section 10.3(d)), in an
aggregate amount that, combined together with:
(1) the aggregate amount of any other such distributions to all
holders of shares of Common Stock made exclusively in cash within the 12
months preceding the date of payment of such distribution, and in respect
of which no adjustment pursuant to this Section 10.3(e) has been made; and
(2) the aggregate amount of any cash, plus the Fair Market Value (as
determined by the Board of Directors) of consideration payable in respect
of any tender offer by the Company or any of its Subsidiaries for all or
any portion of the shares of Common Stock concluded within the 12 months
preceding the date of such distribution, and in respect of which no
adjustment pursuant to Section 10.3(f) has been made;
exceeds 10% of the product of the Current Market Price of the Common Stock on
the Record Date with respect to such distribution, times the number of shares of
Common Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date, the Conversion Price shall be reduced
so that the same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the close of business on such Record Date
by a fraction:
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54
(1) the numerator of which shall be equal to the Current Market
Price on the Record Date, less an amount equal to the quotient of (x) the
excess of such combined amount over such 10% and (y) the number of shares
of Common Stock outstanding on the Record Date; and
(2) the denominator of which shall be equal to the Current Market
Price on such date.
However, in the event that the then Fair Market Value (as so
determined) of the portion of cash and other securities, if any, so distributed
applicable to one share of Common Stock is equal to or greater than the Current
Market Price on the Record Date, in lieu of the foregoing adjustment, adequate
provision shall be made so that each Holder shall have the right to receive upon
conversion of a Security (or any portion thereof) the amount of cash in excess
of such 10% such Holder would have received had such Holder converted such
Security (or portion thereof) immediately prior to such Record Date. In the
event that such dividend or distribution is not so paid or made, the Conversion
Price shall again be adjusted to be the Conversion Price which would then be in
effect if such dividend or distribution had not been declared.
(f) In case a tender offer made by the Company or any of its
Subsidiaries for all or any portion of the shares of Common Stock shall expire
and such tender offer (as amended upon the expiration thereof) shall require the
payment to stockholders (based on the acceptance (up to any maximum specified in
the terms of the tender offer) of shares tendered) of an aggregate consideration
having a Fair Market Value (as determined by the Board of Directors) that
combined together with:
(1) the aggregate amount of the cash, plus the Fair Market Value (as
determined by the Board of Directors), as of the expiration of such tender
offer, of consideration payable in respect of any other tender offers, by
the Company or any of its Subsidiaries for all or any portion of the
shares of Common Stock expiring within the 12 months preceding the
expiration of such tender offer and in respect of which no adjustment
pursuant to this Section 10.3(f) has been made; and
(2) the aggregate amount of any distributions to all holders of
shares of Common Stock made exclusively in cash within 12 months preceding
the expiration of such tender offer and in respect of which no adjustment
pursuant to Section 10.3(e) has been made;
exceeds 10% of the product of the Current Market Price of the Common Stock as of
the last time (the "Expiration Time") tenders could have been made pursuant to
such tender offer (as it may be amended), times the number of shares of Common
Stock outstanding (including any tendered shares) on the Expiration Time (such
excess, the "Excess Amount"), then, and in each such case, immediately prior to
the opening of business on the day after the date of the Expiration Time, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on the date of the Expiration Time by a fraction:
(1) the numerator of which shall be the (x) the product of (i) the
number of shares of Common Stock outstanding (including any tendered
shares) at the Expiration Time and (ii) the Current Market Price of the
Common Stock at the Expiration Time, less (y) the Excess Amount; and
(2) the denominator shall be the product of the number of shares of
Common Stock outstanding (including any tendered shares) at the Expiration
Time and the Current Market Price of the Common Stock at the Expiration
Time.
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55
Such reduction (if any) shall become effective immediately prior to
the opening of business on the day following the Expiration Time. In the event
that the Company is obligated to purchase shares pursuant to any such tender
offer, but the Company is permanently prevented by applicable law from effecting
any such purchases or all or a portion of such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such (or such portion of the) tender offer had not been
made. If the application of this Section 10.3(f) to any tender offer would
result in an increase in the Conversion Price, no adjustment shall be made for
such tender offer under this Section 10.3(f).
Pursuant to rights issued under the Company's preferred share
purchase rights plan, if holders of the Securities exercising the right of
conversion attaching after the date the rights separate from the underlying
Common Stock are not entitled to receive the rights that would otherwise be
attributable to the shares of Common Stock received upon conversion, the
Conversion Price will be adjusted as though the rights were being distributed to
holders of Common Stock on the date of such separation. If such an adjustment is
made and the rights are later redeemed, invalidated or terminated, then a
corresponding reversing adjustment will be made to the conversion price on an
equitable basis.
(g) For purposes of this Article X, the following terms shall have
the meanings indicated:
"Current Market Price" on any date means the average of the daily
Sale Prices per share of Common Stock for the ten consecutive Trading Days
immediately prior to such date; provided, however, that if:
(1) the "ex" date (as hereinafter defined) for any event (other than
the issuance or distribution requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Section 10.3(a), (b), (c),
(d), (e) or (f) occurs during such ten consecutive Trading Days, the Sale
Price for each Trading Day prior to the "ex" date for such other event
shall be adjusted by dividing such Sale Price by the same fraction by
which the Conversion Price is so required to be adjusted as a result of
such other event;
(2) the "ex" date for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to
the Conversion Price pursuant to Section 10.3(a), (b), (c), (d), (e) or
(f) occurs on or after the "ex" date for the issuance or distribution
requiring such computation and prior to the day in question, the Sale
Price for each Trading Day on and after the "ex" date for such other event
shall be adjusted by dividing such Sale Price by the reciprocal of the
fraction by which the Conversion Price is so required to be adjusted as a
result of such other event; and
(3) the "ex" date for the issuance or distribution requiring such
computation is prior to the day in question, after taking into account any
adjustment required pursuant to clause (1) or (2) of this proviso, the
Sale Price for each Trading Day on or after such "ex" date shall be
adjusted by adding thereto the amount of any cash and the Fair Market
Value (as determined by the Board of Directors in a manner consistent with
any determination o