exv10waa



 



Exhibit 10(AA)



CREDIT AGREEMENT



THIS CREDIT AGREEMENT (this “Agreement”) is made this 25th day of November,
2003, by and between DONEGAL GROUP INC., a Delaware corporation (the
“Borrower”) and MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking
corporation (the “Bank”); Witnesseth:




R E C I T A L S




     WHEREAS, the Borrower has requested the Bank to make loans to the Borrower
for general corporate purposes, including, without limitation, refinancing
certain debt of the Borrower, and financing the costs of acquisitions; and




     WHEREAS, subject to and upon the terms, conditions and provisions of this
Agreement, the Bank agrees to make loans to the Borrower.




     NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the Bank and the Borrower agree as follows:



SECTION 1. Definitions. As used in this Agreement, the terms defined in the
heading and recitals hereto shall have the respective meanings specified
therein, and the following terms shall have the following meanings:



1.1. “Accumulated Funding Deficiency” has the meaning set forth in ERISA.



1.2. “AM Best Rating” means the rating for any Insurance Company published by
the A.M. Best & Company, Inc. from time to time.



1.3. “Board” means the Board of Governors of the Federal Reserve System of the
United States.



1.4. “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in the Commonwealth of Pennsylvania are authorized to
close.



1.5. “Capital Assets” means mixed assets, both tangible (such as land,
buildings, fixtures, machinery and equipment) and intangible (such as patents,
copyrights, trademarks, franchises and good will); provided that Capital Assets
shall not include any item customarily charged directly to expense or
depreciated over a useful life of 12 months or less in accordance with GAAP.



1.6. “Capital Expenditures” means for any period the aggregate of all
expenditures or obligations incurred for the acquisition of Capital Assets,
including, without limitation, the capitalized portion of Capital Lease
Obligations.



1.7. “Capital Lease Obligations” means the obligations of a Person to pay
rent or other amounts under any lease of (or other arrangement conveying the
right to use) real, personal or mixed property, which obligations are required
to be classified and shown as liabilities on a balance sheet of such Person under GAAP.




 








 





1.8. “Change of Control” means the occurrence of any of the following events
that first occurs after the date of this Agreement (a) the acquisition of
ownership, directly or indirectly, beneficially or of record, by any Person or
group (within the meaning of the Securities Exchange Act of 1934, as amended,
and the rules of the Securities and Exchange Commission thereunder as in effect
on the date hereof) of shares representing more than 25% of the aggregate
ordinary voting power represented by the issued and outstanding capital stock
of the Borrower; (b) occupation of a majority of the seats (other than vacant
seats) on the board of directors of the Borrower by Persons who were neither
(i) nominated by the board of directors of the Borrower nor (ii) appointed by
directors so nominated; (c) the acquisition of direct or indirect Control of
the Borrower by any Person or group; or (d) the failure of the Borrower to own,
directly or indirectly, shares representing 100% of the aggregate ordinary
voting power represented by the issued and outstanding Capital Stock of any of
its Insurance Subsidiaries.



1.9. “Code” means Internal Revenue Code of 1986.



1.10. “Combined Statutory Surplus” means at any one time the aggregate
Statutory Surplus of the Insurance Subsidiaries of the Borrower in accordance
with SAP.



1.11. “Consolidated GAAP Net Worth” means the consolidated Net Worth of the
Borrower and its Subsidiaries in accordance with GAAP.



1.12. “Control” means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person,
whether through the ability to exercise voting power, by contract or otherwise.



1.13. “Credit Amount” means the amount of $35,000,000.00.



1.14. “Credit Expiration Date” means November 25, 2007.



1.15. “Credit Facility” means the credit facility described in this Agreement
under which the Bank has agreed to make the Loans to the Borrower.



1.16. “Default” has the meaning set forth in Section 7.



1.17. “EBIT” means, with respect to the Borrower on a rolling eight (8)
quarter basis, the total of the earnings of the Borrower before interest and
tax expense for such period all as determined in accordance with GAAP.



1.18. “Enforcement Costs” means and includes collectively all expenses,
charges, recordation or other taxes, costs and fees (including attorneys’ fees
and expenses) of any nature whatsoever advanced, paid or incurred by or on
behalf of the Bank in connection with enforcement of this Agreement or any of
the other Financing Documents, and the exercise by the Bank of any rights or
remedies available to it under the provisions of this Agreement, or any of the
other Financing Documents.




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1.19. “Environmental Laws” means any federal, state or local law, statute,
rule, regulation or ordinance which relate to Hazardous Materials and/or the
protection of the environment or human health.



1.20. “ERISA” means the Employee Retirement Income Security Act of 1974.



1.21. “Event of Default” has the meaning set forth in Section 7.



1.22. “Financing Documents” means collectively and includes this Agreement,
the Note, and any other instrument, document or agreement both now and
hereafter executed, delivered or furnished by the Borrower or any other Person
evidencing, guaranteeing, securing or in connection with this Agreement or all
or any part of the Obligations.



1.23. “GAAP” means generally accepted accounting principles consistently
applied.



1.24. “Governmental Authority” means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including, without limitation, any department, commission,
board, bureau, agency, administration, service or other instrumentality of the
United States of America, of any state, the District of Columbia, municipality
or any other governmental entity.



1.25. “Hazardous Materials” means and includes hazardous wastes, hazardous
substances, toxic chemicals and substances, oil and petroleum products and
their by-products, radon, asbestos, pollutants or contaminants.



1.26. “Indebtedness” means collectively and includes all Indebtedness,
liabilities and obligations of the Borrower of any nature whatsoever, direct or
contingent, matured or unmatured, joint or several, including, without
limitation, (i) any obligation for borrowed money, (ii) any obligation to pay
rent under any lease that is required to be classified as a liability in
accordance with generally accepted accounting principles, (iii) any obligation
secured by a lien, security interest or other encumbrance on property whether
or not the Borrower has assumed or become liable for the payment of such
obligation, and (iv) any obligation for the deferred purchase price of property
or services.



1.27. “Insurance Commissioner” means with regard to the Borrower or its
Insurance Subsidiaries the highest elected or appointed (as the case may be)
public official in each respective state in which the Borrower or its
Subsidiaries are permitted to sell insurance, with authority to regulate
Insurance Companies.



1.28. “Insurance Company” and “Insurance Companies” means one or more licensed
stock or mutual fire or casualty insurer.



1.29. “Insurance Subsidiary” and “Insurance Subsidiaries” means each and
collectively all of the Subsidiaries of the Borrower that are an Insurance
Company.



1.30. “Interest Coverage Ratio” means, with respect to the Borrower for any
period, the ratio of the


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EBIT to the interest expenses of the Borrower all as determined in accordance
with GAAP.



1.31. “Investment Grade Securities” means Investments with a rating not lower
than Baa3 by Moody’s or BBB- by S&P.



1.32. “Investments” means any common or preferred stock, bond, debt or equity
investment of any kind whether held directly or indirectly, certificated or
uncertificated.



1.33. “Lien” and “Liens” means any mortgage, deed of trust, pledge, security
interest, assignment, encumbrance, judgment, lien, claim or charge of any kind
in, on, of or in respect of, any asset or property or any rights to any asset
or property, including, without limitation, (a) any interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to any such asset or property, and (b) the filing
of, or any agreement to give, any financing statement relating to any such
asset or property under the Uniform Commercial Code of any jurisdiction.



1.34. “Loan” and collectively the “Loans” has the meaning set forth in Section
2.1.



1.35. “Loan Account” has the meaning set forth in Section 2.3.



1.36. “Material Adverse Change” means a material adverse change in the
business, properties, condition (financial or otherwise), operations, or
prospects, of the Borrower or any Subsidiary.



1.37. “Moody’s” means Moody’s Investors Service.



1.38. “Multiemployer Plan” has the meaning set forth for such term in ERISA.



1.39. “Net Worth” means the excess of the assets of the Borrower over the
liabilities of the Borrower.



1.40. “Note” has the meaning set forth in Section 2.3.



1.41. “Obligations” means collectively and includes all present and future
Indebtedness, liabilities and obligations of any kind and nature whatsoever of
the Borrower to the Bank both now existing and hereafter arising under, as a
result of, on account of, or in connection with, (a) this Agreement and any and
all amendments thereto, restatements thereof, supplements thereto and
modifications thereof made at any time and from time to time hereafter, (b) the
Note, or (c) the other Financing Documents, including, without limitation,
future advances, principal, interest, indemnities, other fees, late charges,
Enforcement Costs and other costs and expenses whether direct, contingent,
joint, several, matured or unmatured.



1.42. “Operating Lease Rentals” means the rentals payable under any lease of
real or personal property that would not be capitalized on a balance sheet of
the Borrower prepared in accordance with GAAP.



1.43. “PBGC” means the Pension Benefit Guaranty Corporation.




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1.44 “Person” means and includes any natural person, individual, corporation,
partnership, joint venture, unincorporated association, government or political
subdivision or agency thereof, or any other entity of whatever nature,
including, without limitation, the Borrower.



1.45. “Plan” and “Plans” means any employee pension benefit plans described in
Section 3(2) of ERISA.



1.46. “Positive GAAP Net Income” means the consolidated net income of the
Borrower and its Subsidiaries in accordance with GAAP not reduced for losses.



1.47. “Positive Combined Statutory Net Income “ means the combined net income
of the Insurance Subsidiaries in accordance with SAP not reduced for losses.



1.48. “Prohibited Transaction” has the meaning set forth for such term in
ERISA.



1.49. “Reportable Event” has the meaning set forth for such term in ERISA.



1.50. “S&P” means Standard & Poor’s Ratings Services.



1.51. “SAP” means statutory accounting principles consistently applied.



1.52. “Senior Officer” means the Chief Executive Officer of the Borrower or
the Chief Financial Officer of the Borrower or such other individual as may be
designated by such Chief Executive Officer or such Chief Financial Officer.



1.53. “Solvent” means, with respect to any Person on a particular date, the
condition that on such date, (a) the fair value of the property of such Person
is greater than the total amount of liabilities, including, without limitation,
contingent liabilities, of such Person, (b) the present fair salable value of
the assets of such Person is not less than the amount that will be required to
pay the probable liability of such Person on its debts as they become absolute
and mature, (c) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person’s ability to pay as such
debts and liabilities mature, and (d) in the case of the Insurance
Subsidiaries, such Person’s capital and surplus exceeds 150% of the Company
Action risk-based capital level as prescribed by the risk-based capital rules
employed by the Insurance Department of its state of domicile.



1.54. “Statutory Surplus” means the surplus of an insurance company determined
by the accounting treatment of both assets and liabilities as prescribed or
permitted by state insurance regulatory authorities.



1.55 “Subordinated Debt” means Indebtedness of the Borrower subordinated to
the Borrower’s payment of the Obligations to the Bank by a means (by
inter-creditor agreement or in accordance with its terms) acceptable to the
Bank in its discretion, including, without limitation, the Indebtedness,
described on Schedule 1, attached hereto, and made part hereof by this
reference.



1.56. “Subsidiary” means any corporation, association or other business entity
of which more than


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50% of the total voting power of shares of stock entitled to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more of the other
Subsidiaries of that Person or a combination thereof.



1.57. “Total Capitalization” means the Total Funded Debt of the Borrower and
its Subsidiaries plus the consolidated Net Worth of the Borrower.



1.58. “Total Funded Debt” means the all of the funded Indebtedness of the
Borrower and its Subsidiaries at any on time.



1.59. “Total Invested Assets” means all of Investments of the Borrower and its
Subsidiaries not including Indebtedness of any Insurance Subsidiary evidenced
by surplus notes held by the Borrower.



SECTION 2. The Credit Facility.



2.1. Loans. Subject to and upon the provisions of this Agreement and relying
upon the representations and warranties of the Borrower herein set forth, the
Bank agrees at any time and from time to time to make loans (each a “Loan” and
collectively the “Loans”) to the Borrower from the date hereof until the
earlier of the Credit Expiration Date or the date on which the Credit Facility
is terminated pursuant to Section 8.1 hereof in an aggregate principal amount
at any time outstanding not to exceed the Credit Amount. No Loans shall be
made hereunder if after giving effect thereto the sum of the aggregate
principal amount of all outstanding Loans would exceed the Credit Amount. In
no event shall the Bank be obligated to make a Loan hereunder if an Event of
Default shall have occurred and be continuing. Unless sooner terminated
pursuant to the provisions of this Agreement, the Credit Facility and the
obligation of the Bank to make Loans hereunder shall automatically terminate on
the Credit Expiration Date without further action by, or notice of any kind
from, the Bank. Within the limitations set forth herein and subject to the
provisions of this Agreement, the Borrower may borrow, repay and reborrow under
the Credit Facility. The fact that there may be no Loans outstanding at any
particular time shall not affect the continuing validity of this Agreement.



2.2. Minimum Amount and Use of Proceeds. Each Loan shall be in an amount not
less than One Million Dollars ($1,000,000.00) and will be advanced by the
Bank not later than the Business Day following the day (which shall be a
Business Day) of the Borrower’s request therefor. The proceeds of each Loan
will be deposited by the Bank in the Borrower’s demand deposit account with the
Bank and shall be used by the Borrower for the Borrower’s general corporate
purposes, including without limitation, refinancing certain debt of the
Borrower and for financing the cost of acquisitions.



2.3. Note. The Borrower’s obligation to pay the Loans with interest shall be
evidenced by a single Libor Grid Note (which Libor Grid Note, as the same may
from time to time be extended, replaced, substituted for, amended, restated or
otherwise modified, is herein called the “Note”) dated the date hereof in the
Credit Amount and executed and delivered by the Borrower on the date hereof.
The Bank will maintain on its books a loan account (the “Loan Account”) with
respect to advances, repayments and prepayments of Loans, the accrual and
payment of interest on Loans and


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all other amounts and charges owing to the Bank in connection with Loans.
Except for manifest error, the Loan Account shall be rebuttably presumptive
evidence as to all amounts owing by the Borrower to the Bank in connection with
and on account of Loans.



2.4. Facility Fee. During the period from the date hereof until the earlier of
the Credit Expiration Date or the date on which the Credit Facility is
terminated pursuant to the provisions of Section 8.1. hereof, the Borrower
shall pay to the Bank an availability fee in the amount of .15% per annum of
the Credit Amount. Such availability fee shall commence to accrue on the date
hereof and shall be due and payable by the Borrower in arrears on the first day
of each calendar quarter and on the earlier of the Credit Expiration Date or on
the date on which the Credit Facility is terminated pursuant to Section 8.1
hereof.



SECTION 3. Conditions Precedent.



3.1. Initial Loan. The Bank may not make the initial Loan hereunder unless the
following conditions precedent have been satisfied in a manner acceptable to
the Bank:




     3.1.1. Borrower’s Corporate Documents. The Bank shall have received (i) a
copy, certified as of a recent date by the Secretary of State of Delaware the
Certificate of Incorporation of the Borrower, (ii) a long form Certificate of
Good Standing for the Borrower issued by the Secretary of State of Delaware,
and (iii) a copy, certified to the Bank as true and correct as of the date
hereof by the Secretary of the Borrower, of the by-laws of the Borrower and the
resolutions of the Borrower’s board of directors authorizing the execution and
delivery of this Agreement and the other Financing Documents to which the
Borrower is a party and designating by name and title the officer or officers
of the Borrower who are authorized to sign this Agreement and such other
Financing Documents for and on behalf of the Borrower and to make the
borrowings hereunder.




     3.1.2. Financing Documents. The execution and delivery of each of the
Financing Documents required by the Bank to be executed and delivered prior to
the making of the initial Loan.




     3.1.3. Additional Documents. The furnishing in form and content
acceptable to the Bank of any additional documents, agreements, certifications,
record searches, insurance policies or opinions which the Bank may deem
necessary or desirable.




     3.1.4. Fee. The Bank shall have received from the Borrower payment of a
closing fee in the amount of .25% of the Credit Amount.



3.2. All Loans. The Bank may not make any Loan hereunder if:




     3.2.1. Representations and Warranties. Any representation or warranty of
the Borrower made in or in connection with this Agreement and the other
Financing Documents is not true, correct and complete in all material respects
on and as of the date of any Loan as if made on such date;


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     3.2.2. Credit Amount Exceeded. The total of the aggregate amount of all
outstanding Loans exceeds the Credit Amount;




     3.2.3. Covenants and Conditions. The Borrower is not then in compliance
with all of the terms, covenants and conditions of this Agreement that are
binding upon it;




     3.2.4. Event of Default or Default. Any Event of Default or Default shall
have occurred and be continuing.; or




     3.2.5. Material Adverse Change. A Material Adverse Change has occurred
since the date of the last financial statements of the Borrower received by the
Bank.



SECTION 4. Representations and Warranties. The Borrower represents and
warrants to the Bank that the following statements are true, correct and
complete as of the date hereof and as of each date a Loan is or is to be made
hereunder:



4.1. Organization, Good Standing, etc. The Borrower and its Subsidiaries are
corporations each duly organized and existing, in good standing, under the laws
of the jurisdiction of its incorporation, and each has the corporate power to
own its property and to carry on its business as now being conducted and is
duly qualified to do business and is in good standing in each jurisdiction in
which the character of the properties owned or leased by it therein or in which
the transaction of its business makes such qualification necessary, except
where such failure to qualify would not lead to a Material Adverse Change and
would not have any effect on the enforceability of this Agreement or any of the
other Financing Documents.



4.2. Authorization. The Borrower has full corporate power and authority to
enter into this Agreement, to make the borrowings hereunder, to execute and
deliver the Note and the other Financing Documents to which it is a party and
to incur the Obligations and perform the other obligations provided for herein,
in the Note and in the other Financing Documents to which it is a party, all of
which have been duly authorized by all proper and necessary corporate action.
No consent or approval, filing or registration with or notice to any
Governmental Authority is required as a condition to the validity of this
Agreement or the Note or the other Financing Documents or the performance by
the Borrower of its obligations hereunder or thereunder.



4.3. Subsidiaries. The names of the only Subsidiaries of the Borrower are set
forth on Exhibit A, attached hereto and made part hereof by this reference.



4.4. Binding Agreements. This Agreement constitutes, and the Note and each of
the other Financing Documents, when issued and delivered pursuant hereto and
assuming due execution and delivery of this Agreement by the Bank will
constitute, the valid and legally binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective terms,
subject, however, to applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws affecting creditors’ rights generally from
time to time in effect and that equitable proceedings are subject to the
discretion of the court before which such proceedings are brought.



4.5. Litigation. There is no litigation or proceeding pending or, to the
knowledge of any Senior


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Officer of the Borrower signing this Agreement on behalf of the Borrower,
threatened against or affecting the Borrower or any of its Subsidiaries that
could reasonably be expected to result in a Material Adverse Change or
materially adversely affect the ability of the Borrower to perform and comply
with this Agreement or the other Financing Documents to which the Borrower is a
party.



4.6. Proceedings. There are no proceedings or investigations pending or, so
far as the Senior Officer of the Borrower executing this Agreement knows,
threatened before any court or arbitrator or before or by any Governmental
Authority that, in any one case or in the aggregate, if determined adversely to
the interests of the Borrower or any Subsidiary, could reasonably be expected
to result in a Material Adverse Change.



4.7. No Conflicts. There is no statute, regulation, rule, order or judgment,
no charter or by-law, and no provision of any mortgage, indenture, contract or
other agreement binding on the Borrower or affecting its properties, that would
prohibit, conflict with or in any way prevent the execution, delivery, or
carrying out of the terms of this Agreement or of the Note or of the other
Financing Documents to which the Borrower is a party.



4.8. Financial Condition. All financial statements and all other financial
information furnished or to be furnished to the Bank hereunder has been
prepared in accordance with GAAP or, in the case of the Insurance Subsidiaries,
SAP and fairly present the financial condition of the Borrower and its
Subsidiaries as of the dates thereof and the results of the Borrower’s and its
Subsidiaries operations for the periods covered thereby. No Material Adverse
Change has occurred since the date of such financial statements. The Borrower
has no Indebtedness or liabilities other than that reflected on such financial
statements or expressly permitted by the provisions of this Agreement.



4.9. Taxes. The Borrower and its Subsidiaries have each filed, or have
obtained effective extensions for the filing of, all federal, state and other
tax returns that are required to be filed, and have paid all taxes shown as due
on said returns and all assessments, fees and other amounts due. All tax
liabilities of the Borrower and its Subsidiaries were as of the date of
financial statements referred to in Section 4.8 above, and are now adequately
provided for on the books of the Borrower and its Subsidiaries. No tax
liability has been asserted by the Internal Revenue Service or any other
Governmental Authority against the Borrower or its Subsidiaries for taxes in
excess of those already paid or that are adequately provided for on the books
of the Borrower and that are being contested in good faith by appropriate
proceedings.



4.10. Title to Properties. The Borrower and each of its Subsidiaries has good
and marketable title to its Properties and assets except for such as are no
longer useful in the conduct of its business or have been disposed of in the
ordinary course of business.



4.11. Compliance with Laws. Neither the Borrower nor any of its Subsidiaries
is in violation of any laws of any Governmental Authority (including, without
limitation, any statute, rule or regulation relating to employment practices or
to Environmental Laws, occupational and health standards and controls) or order
of any court or arbitrator, the violation of which, considered in the
aggregate, could reasonably be expected to result in a Material Adverse Change.



4.12. Material Agreements. Neither the Borrower nor any of its Subsidiaries is
in default or


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breach in the performance, observance or fulfillment of any of the terms,
conditions or provisions of any material instrument, agreement or document to
which the Borrower or any of its Subsidiaries is a party (including, without
limitation, any instrument or agreement evidencing or made in connection with
any Indebtedness or liabilities) which default or breach considered in the
aggregate, could reasonably be expected to result in a Material Adverse Change.



4.13. Board Regulations. Neither the Borrower nor its Subsidiaries is engaged
principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board. No part of the proceeds of the Loans
hereunder will be used to purchase or carry any margin stock or to extend
credit to others for such purpose if as a result there would be a violation of
said Regulations U, G, T or X of the Board.



4.14. Investment Company Act. Neither the Borrower nor its Subsidiaries is an
investment company within the meaning of the Investment Company Act of 1940, as
amended, nor is it, directly or indirectly, controlled by or acting on behalf
of any Person that is an investment company within the meaning of such Act.



4.15. ERISA. The Borrower and each of its Subsidiaries is in compliance in all
material respects with the provisions of ERISA, and the Code applicable to
Plans of the Borrower, and the regulations and published interpretations
thereunder, if any, that are applicable to it and the applicable laws, rules
and regulations of any jurisdiction applicable to such Plans; (a) the Borrower
and each of its Subsidiaries has not, with respect to any Plan established or
maintained by it, engaged in a prohibited transaction that would subject it to
a material tax or penalty on prohibited transactions imposed by ERISA or
Section 4975 of the Code; (b) no liability to the PBGC or any successor thereto
that is material to the Borrower and its Subsidiaries taken as a whole has
been, or to the Borrower’s knowledge is reasonably expected to be, incurred
with respect to the Plans and there has been no Reportable Event and no other
event or condition that presents a material risk of termination of a Plan by
the PBGC; (c) neither the Borrower nor any of its Subsidiaries has engaged in
a transaction that would result in the incurrence of a material liability under
Section 4069 of ERISA; (d) as of the date hereof, neither the Borrower nor
any of its Subsidiaries has incurred any liability that would be material to
the Borrower and its Subsidiaries taken as a whole on account of a partial or
complete withdrawal (as defined in Sections 4203 and 4205 of ERISA,
respectively) with respect to any Multiemployer Plan.



4.16. Licenses, etc. The Borrower and each of its Subsidiaries has obtained
and now holds all material licenses, permits, franchises, patents, trademarks,
copyrights and trade names that are necessary to the conduct of the business of
the Borrower and each of its Subsidiaries as now conducted free of any conflict
with the rights of any other Person.



4.17. Labor Matters. Neither the Borrower nor any of its Subsidiaries is
subject to any collective bargaining agreements or any agreements, contracts,
decrees or orders requiring the Borrower and each of its Subsidiaries to
recognize, deal with or employ any persons organized as a collective bargaining
unit or other form of organized labor. There are no strikes or other material
labor disputes pending or threatened against the Borrower or any of its
Subsidiaries. The Borrower and its Subsidiaries have complied in all material
respects with the Fair Labor Standards Act.


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4.18. Patents, Trademarks, etc. The Borrower and its Subsidiaries own and
possess all such patents, patent rights, trademarks, trade rights, trade names,
trade name rights, service marks, service mark rights, copyrights, and
governmental licenses and permits as the Borrower considers necessary for the
conduct of the businesses of the Borrower and its Subsidiaries as now conducted
without, to the knowledge of the Borrower individually or in the aggregate, any
infringement upon rights of other Persons that could reasonably be expected to
result in a Material Adverse Change, and there is no individual patent or
patent license or governmental license or permit the loss of which would have a
materially adverse effect on the business, properties, condition (financial or
otherwise) or operations, present or prospective, of the Borrower and its
Subsidiaries.



4.19. Solvent. The Borrower and all of its Subsidiaries are, and after giving
effect to the incurrence of all Indebtedness and obligations being incurred in
connection herewith will be, and will continue to be, Solvent.



4.20. Insurance. The Borrower and each of its Subsidiaries maintains with
financially sound and reputable insurers insurance with respect to its
properties and business and against at least such liabilities, casualties and
contingencies and in at least such types and amounts as is customary in the
case of companies engaged in the same or a similar business or having similar
properties similarly situated.



4.21. Accuracy of Information. No information, exhibit, report, statement,
certificate or document furnished by the Borrower to the Bank in connection
with the Loans, this Agreement or the other Financing Documents or the
negotiation thereof contains any misstatement of a material fact or omits to
state a material fact or any fact necessary to make the statements contained
herein or therein not misleading.



SECTION 5 Affirmative Covenants. The Borrower covenants and agrees with the
Bank that so long as any of the Obligations or commitments therefor shall be
outstanding it shall, and shall cause each of its Subsidiaries (except the
covenant set forth in Section 5.1) to:



5.1. Payment of Obligations. Punctually pay the principal of and interest on
the Loans and the other Obligations, at the times and places, in the manner and
in accordance with the terms of this Agreement, the Note and the other
Financing Documents.



5.2. Maintenance of Existence and Domicile of Insurance Subsidiaries. Preserve
and maintain its corporate existence in good standing in the jurisdiction of
its incorporation, and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is required from time to time,
except where the failure to be so qualified would not cause a Material Adverse
Change; and preserve and maintain the domicile of each of its Insurance
Subsidiaries as in effect on the date hereof:



5.3. Conduct of Business. Continue to engage in a business of the same general
type as conducted by it on the date of this Agreement.



5.4. Maintenance of Properties. Maintain, keep and preserve all of its
material Properties


11








 




(tangible and intangible), necessary or useful in the conduct of its business,
in good working order and condition, ordinary wear and tear excepted, except
that the failure to maintain, preserve and protect a particular item of
depreciable property that is not of significant value, either intrinsically or
to the operations of the Borrower and its Subsidiaries, taken as a whole, shall
not constitute a violation of this covenant.



5.5. Maintenance of Records. Keep accurate and complete records and books of
account, in which complete entries will be made in accordance with GAAP in the
case of the Borrower and SAP in the case of the Insurance Subsidiaries,
reflecting all financial transactions of the Borrower and its Subsidiaries.



5.6. Maintenance of Insurance. Maintain insurance (subject to customary
deductibles and retentions) with financially sound and reputable insurance
companies, in such amounts and with such coverages (including without
limitation public liability insurance, fire, hazard and extended coverage
insurance on all of its assets, necessary workers’ compensation insurance and
all other coverages as are consistent with industry practice) as are maintained
by companies of established reputation engaged in similar businesses and
similarly situated.



5.7. Compliance with Laws. Comply in all respects with all applicable laws,
rules, regulations, Environmental Laws and orders, except where the failure to
so comply would not cause a Material Adverse Change. Such compliance shall
include, without limitation, paying when due all taxes, assessments and
government charges imposed upon it or upon its property (and all penalties and
other costs, if any, related thereto), unless contested in good faith by
appropriate proceedings and for which adequate reserves have been set aside.



5.8. Reporting Requirements. The Borrower shall, and shall cause each of its
Subsidiaries, as applicable, to, furnish to the Bank:




     5.8.1. Annual GAAP Statements of the Borrower. Within one hundred twenty
(120) days following the end of the Borrower’s fiscal year (or such earlier
date as the Borrower’s Form 10-K is filed with the Securities and Exchange
Commission) copies of:




(i) the consolidated (including the Borrower on a parent-only basis)
balance sheets of the Borrower and its Subsidiaries as at the close of
such fiscal
year, and




(ii) the consolidated (including the Borrower on a parent-only basis)
statements of operations and statements of stockholders’ equity and cash
flows, in each case of the Borrower and its Subsidiaries for such fiscal
year,



in each case setting forth in comparative form the figures for the preceding
fiscal year and prepared in accordance with GAAP, all in reasonable detail and
accompanied by an opinion thereon of KPMG, LLP or other firm of independent
public accountants of recognized national standing selected by the Borrower and
reasonably acceptable to the Bank, to the effect that the financial statements
have been prepared in accordance with GAAP (except for changes in application
in which such accountants concur) and present fairly in all material respects
in


12








 




accordance with GAAP the financial condition of the Borrower and its
Subsidiaries as of the end of such fiscal year and the results of their
operations for the fiscal year then ended and that the examination of such
accountants in connection with such financial statements has been made in
accordance with generally accepted auditing standards and, accordingly,
included such tests of the accounting records and such other auditing
procedures as were considered necessary under the circumstances.




     5.8.2. Annual SAP Financial Statements. As soon as available, and in any
event within one hundred twenty (120) days following the end of the fiscal year
of each Insurance Subsidiary (or such earlier date as such are filed with the
applicable insurance regulatory authority), copies of audited SAP financial
statements for each such Insurance Subsidiary, in each case setting forth in
comparative form the figures for the preceding fiscal year and prepared in
accordance with SAP, all in reasonable detail and accompanied by an opinion
thereon of KPMG, LLP or other firm of independent public accountants of
recognized national standing selected by the Borrower and reasonably acceptable
to the Bank, to the effect that the financial statements have been prepared in
accordance with SAP (except for changes in application in which such
accountants concur) and present fairly in all material respects in accordance
with SAP the financial condition of such Insurance Subsidiary as of the end of
such fiscal year and the results of its operations for the fiscal year then
ended and that the examination of such accountants in connection with such
financial statements has been made in accordance with generally accepted
statutory auditing standards and, accordingly, included such tests of the
accounting records and such other statutory auditing procedures as were
considered necessary under the circumstances.




     5.8.3. Quarterly GAAP Statements of the Borrower. As soon as available,
and in any event within sixty (60) days after the end of each quarterly fiscal
period of the Borrower (other than the fourth fiscal quarter of any fiscal
year), copies of:




(a) the consolidated (including the Borrower on a parent-only basis)
balance sheets of the Borrower and its Subsidiaries as at the end of such
fiscal quarter, and




(b) the consolidated (including the Borrower on a parent-only basis)
statements of operations and consolidated statements of stockholders’
equity and cash flows, in each case of the Borrower and its Subsidiaries
for such fiscal quarter and the portion of such fiscal year ended with
such fiscal quarter,



in each case setting forth in comparative form the figures for the preceding
fiscal year and prepared in accordance with GAAP all in reasonable detail and
certified as presenting fairly in accordance with GAAP the financial condition
of the Borrower and its Subsidiaries as of the end of such period and the
results of their operations for such period by a Senior Officer of the
Borrower, subject only to normal year-end accruals and audit adjustments and
the absence of footnotes.




     5.8.4. Quarterly SAP Statements. As soon as available, and in any event
within sixty (60) days following the end of each fiscal quarter other than the
fourth fiscal quarter of any fiscal



13








 





year of each Insurance Subsidiary (or such earlier date as such are filed with
the applicable insurance regulatory authority), copies of the unaudited SAP
financial statements for each quarterly fiscal period of each such Insurance
Subsidiary, in each case setting forth in comparative form the figures for the
preceding fiscal year and prepared in accordance with SAP, all in reasonable
detail and certified as presenting fairly in accordance with SAP the financial
condition of such Insurance Subsidiary, as of the end of such period and
results of operations for such period by a Senior Officer of such Insurance
Subsidiary, subject to normal year-end accruals and audit adjustments and the
absence of footnotes.




     5.8.5. Annual/Quarterly Reports. Concurrently with the delivery of the
financial statements required pursuant to Sections 5.8.2. and 5.8.4., copies of
all reports required to be filed with the Insurance Commissioner of each state
in which an Insurance Subsidiary is domiciled in connection with the filing of
such financial statements.




     5.8.6. SEC Filings. Promptly after the same are available, copies of
each annual report, proxy or financial statement or other report or
communication sent to the stockholders of the Borrower and copies of all
annual, periodic and special reports and registration statements that the
Borrower may file or be required to file with the Securities and Exchange
Commission under Sections 13 and 15(d) of the Securities Exchange Act of 1934.




     5.8.7. Notice of Litigation. Promptly after the commencement thereof,
notice of any action, suit and proceeding before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, against the Borrower or any of its Subsidiaries (A) not arising out of
an insurance policy issued by the Borrower or any of its Subsidiaries, that, if
determined adversely to the Borrower or such Subsidiary, would cause a Material
Adverse Change, or (B) commenced by any creditor or lessor under any written
credit agreement with respect to borrowed money in excess of $500,000 or
material lease that asserts a default thereunder on the part of the Borrower or
any of its Subsidiaries.




     5.8.8. Notices of Default As soon as practicable and in any event within
fifteen (15) days after the occurrence of each Default or Event of Default, a
written notice setting forth the details of such Default or Event of Default
and the action that is proposed to be taken by the Borrower with respect
thereto.




     5.8.9. Actuarial Report Confirming Reserves. As soon as available, and
in any event within one hundred twenty (120) days after the close of each
fiscal year of the Borrower, a report confirming the adequacy of the SAP
reserves of each Insurance Subsidiary from KPMG, LLP or an actuarial firm of
recognized national standing or the actuarial division of any other accounting
firm of recognized national standing acceptable to the Bank.




     5.8.10. Other Filings. Promptly upon the filing thereof and at any time
upon the reasonable request of the Bank, permit the Bank the opportunity to
review copies of all reports, including annual reports, and notices that the
Borrower or any Subsidiary files with or receives from the PBGC or the U.S.
Department of Labor under ERISA; and as soon as practicable and in any event
within fifteen (15) days after the Borrower or any of its Subsidiaries knows or
has reason to know that any Reportable Event or Prohibited Transaction has
occurred with respect to



14








 





any Plan of the Borrower or any of its Subsidiaries or that the PBGC, the
Borrower or any such Subsidiary has instituted or will institute proceedings
under Title IV of ERISA to terminate any Plan, the Borrower will deliver to the
Bank a certificate of a Senior Officer of the Borrower setting forth details as
to such Reportable Event or Prohibited Transaction or Plan termination and the
action the Borrower proposes to take with respect thereto.




     5.8.11. Certificates. Simultaneously with each delivery of financial
statements pursuant to Sections 5.8.1. and 5.8.3., the Borrower shall deliver
to the Bank a certificate of its Chief Financial Officer that will




(a) certify on behalf of the Borrower that such officer has reviewed this
Agreement and the condition and transactions of the Borrower and its
Subsidiaries for the period covered by such financial statements, and
state that to the best of his/her knowledge the Borrower has observed or
performed all of its covenants and other agreements, and satisfied every
condition, contained in this Agreement and the Note, and no Default or
Event of Default has occurred and is continuing or, if a Default or Event
of’ Default has occurred and is continuing, a statement as to the nature
thereof and the action that is proposed to be taken with respect thereto,
and




(ii) include information required to establish whether the Borrower was
in compliance with the covenants set forth in this Agreement during the
period covered by the financial statements then being delivered.




     5.8.12. Notice of Acquisition and Continued Compliance. (a) Prior to the
closing of any transaction in which the Borrower will acquire an Insurance
Company for a total cash consideration (including assumed indebtedness) in
excess of $25,000,000, pro-forma calculations reasonably acceptable to the Bank
establishing that the Borrower shall remain in compliance with the covenants
set forth in this Agreement following the closing of such transaction;




(b) Prior to the closing of any transaction in which the Borrower will
acquire an entity other than an Insurance Company for a total cash
consideration (including assumed indebtedness) in excess of $10,000,000,
pro-forma calculations reasonably acceptable to the Bank establishing
that the Borrower shall remain in compliance with the covenants set forth
in this Agreement following the closing of such transaction; and




(c) Prior to the closing of any transaction, which when taken into
account, the cash consideration (including assumed indebtedness) in the
aggregate for all of the Borrower’s acquisitions during the prior twelve
(12) month period would be an amount in excess of $35,000,000, pro-forma
calculations reasonably acceptable to the Bank establishing that the
Borrower shall remain in compliance with the covenants set forth in this
Agreement following the closing of such transaction.




     5.8.13. Additional Information. Such additional information as the Bank
may reasonably request concerning the Borrower and its Subsidiaries and for the
purpose all pertinent books, documents and vouchers relating to its business,
affairs and Properties, including Investments as shall from time to time be
designated by the Bank.



15








 



5.9. Compliance with Agreements. Promptly and fully comply with all
contractual obligations under all agreements, mortgages, indentures, leases
and/or instruments to which any one or more of the Borrower and its
Subsidiaries is a party, whether such agreements, mortgages, indentures, leases
or instruments are with the Bank or another Person, except where such failure
to so comply would not cause a Material Adverse Change.



SECTION 6. Negative Covenants. The Borrower covenants and agrees with the Bank
that so long as any of the Obligations or commitments therefor shall be
outstanding, the Borrower shall not, and shall not permit its Subsidiaries to:



6.1. Indebtedness. Create, incur, assume or suffer to exist any Indebtedness,
except: (a) Indebtedness of the Borrower under this Agreement and the Note; (b)
Capital Lease Obligations in an amount not to exceed $5,000,000; (c)
Indebtedness of the Borrower or its Subsidiaries existing as of the date of
this Agreement, as the same may be refinanced or extended from time to time, so
long as there is no increase in the principal amount outstanding thereunder;
and (d) Subordinated Debt of the Borrower, provided the aggregate principal
amount of such Subordinated Debt does not exceed $50,000,000.



6.2. Guaranties, Etc. Assume, guarantee, endorse or otherwise be or become
directly or contingently responsible for the obligations of any Person, except
for Subsidiaries or guaranties by indorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business.



6.3. Liens. Create, incur, assume or suffer to exist any Lien, upon or with,
respect to any of its Properties, now owned or hereafter acquired, except: (a)
Liens for taxes or assessments or other government charges or levies if not yet
due and payable or if due and payable, if they are being contested in good
faith by appropriate proceedings and for which appropriate reserves are
maintained; (b) Liens imposed by law, such as mechanic’s materialmen’s,
landlord’s, warehousemen’s and carrier’s Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business that are not
past due for more than forty-five (45) days, or that are being contested in
good faith by appropriate proceedings and for which appropriate reserves have
been established; (c) Liens under workers’ compensation, unemployment
insurance, social security or similar legislation (other than ERISA); (d)
judgments and other similar Liens arising in connection with court proceedings;
provided that the execution or other enforcement of such Liens is effectively
stayed and the claims secured thereby are being actively contested in good
faith and by appropriate proceedings; (e) easements, rights-of-way,
restrictions and other similar encumbrances that, in the aggregate, do not
materially interfere with the occupation, use and enjoyment by the Borrower or
any of its Subsidiaries of the property or assets encumbered thereby in the
normal course of its business or materially impair the value of the property
subject thereto; (f) Liens consisting of pledges or deposits of property to
secure performance in connection with operating leases made in the ordinary
course of business to which the Borrower or a Subsidiary is a party as lessee,
provided the aggregate value of all such pledges and deposits in connection
with any such lease does not at any time exceed fifteen percent (15%) of the
annual fixed rentals payable under such lease, and (g) deposits the Insurance
Subsidiaries are


16








 




required to maintain with state insurance departments in the states in which
they do business.



6.4 Investments. Permit total consolidated Investments of the Borrower and its
Insurance Subsidiaries in Investment Grade Securities, as of the end of any
fiscal quarter, to be less than ninety percent (90%) of the aggregate amount of
Total Invested Assets.



6.5. Mergers and Consolidations and Acquisitions of Assets. Merge or
consolidate with any Person (whether or not the Borrower or any Subsidiary is
the surviving entity); except that for as long as no Event of Default exists or
would be caused by consummation of such merger or acquisition, and any such
acquisition is permitted by all applicable laws and regulations the Borrower
may (a) acquire an Insurance Company, or (b) acquire an entity that is not in
a similar line of business as the Borrower provided that the acquired entities
assets do not exceed $20,000,000.



6.6. Sale of Assets. Sell, lease or otherwise dispose of all or substantially
all of its assets, including through any reinsurance arrangements, except in
the ordinary course of business.



6.7. Stock of Subsidiaries, Etc. Pledge, assign, hypothecate, transfer,
convey, sell or otherwise dispose of, encumber or grant any security interest
in, or deliver to any other Person, any shares of capital stock of its
Subsidiaries, or permit any such Subsidiaries to issue any additional shares of
its capital stock to any Person other than the Borrower or any of its
Subsidiaries, except directors’ qualifying shares; provided, however, the
Borrower may sell some or all of the shares of capital stock of any of its
Subsidiaries or permit any such Subsidiaries to issue and sell additional
shares of its capital stock to any Person other than the Borrower or any
Subsidiaries, so long as such sale of stock is made in exchange for cash or,
with respect to any Subsidiary with a book value of less than $20,000,000,
other consideration, in an amount equal to the fair market value of such
shares.



6.8. Capital Expenditures. Make or permit to be made any Capital Expenditure
in any fiscal year, or commit to make any Capital Expenditure in any fiscal
year, that when added to the aggregate Capital Expenditures of the Borrower and
its Subsidiaries theretofore made or committed to be made in that fiscal year,
would exceed $15,000,000.



6.9. Minimum A.M. Best Rating. At any time, permit the A.M. Best Rating of
(a) Atlantic States Insurance Company or Southern Insurance Company of
Virginia, to be less than “A-”.



6.10. Limitations on Debt and Negative Pledges. Enter into any agreement with
any other Person (other than any agreement existing on the date hereof and
other than this Agreement) restricting its ability to create or incur
Indebtedness hereunder or to secure Indebtedness hereunder, other than those
transactions described on Schedule 2, attached hereto, and made part hereof by
this reference.



6.11. Transactions with Affiliates. Enter into or participate in any
transaction with any Affiliate of the Borrower or any Subsidiary except on
terms and at rates no more favorable than those that would have prevailed in an
arm’s-length transaction between unrelated third parties.


17








 





6.12. Minimum Consolidated GAAP Net Worth. As of the end of any fiscal
quarter, permit the Consolidated GAAP Net Worth to be less than an amount equal
to the sum of (a) $110,000,000, (b) 90% of the net proceeds of any subsequent
equity offering, plus (c) 50% of any cumulative Positive GAAP Net Income for
each fiscal quarter following the fiscal quarter ended June 30, 2003.



6.13. Minimum Statutory Surplus of Insurance Subsidiaries. As of the end of
any fiscal quarter, permit the Combined Statutory Surplus to be less than an
amount equal to the sum of (a) $105,000,000 plus (b) 50% of any cumulative
Positive Combined Statutory Net Income for each fiscal quarter following the
fiscal quarter ended June 30, 2003.



6.14. Debt to Capitalization. Permit at any time the ratio of Total Funded
Debt to Total Capitalization to exceed forty percent (40%).



6.15. Minimum Interest Coverage Ratio. Calculated on a rolling eight (8)
quarter basis, permit at any time the ratio of EBIT to Interest Expense to be
less than 3 to 1.



SECTION 7. Default. The occurrence of any one or more of the following events
shall constitute a default under the provisions of this Agreement, and the term
“Default” shall mean, whenever it is used in this Agreement, any one or more of
the following events (and the term “Event of Default” as used herein means one
or more of the following events, prior to (a) the lapse of time for cure (if
any), and (b) delivery of notice by the Bank to the Borrower if such notice is
stipulated.



7.1. Payment of Obligations. The failure of the Borrower to pay any of the
Obligations as and when due and payable in accordance with the provisions of
this Agreement, the Note and/or any of the other Financing Documents, whether
at the due date thereof or at a date fixed for prepayment thereof or by
acceleration thereof or otherwise, and such failure shall continue uncured for
a period of five (5) days after the date of written notice thereof by the Bank
to the Borrower;



7.2. Perform, etc. Certain Provisions of This Agreement. The failure of the
Borrower to perform, observe or comply with any of the provisions of Section
5.8 of this Agreement or any of the provisions set forth in Sections 6.1
through 6.15 of this Agreement;



7.3. Perform, etc. Other Provisions of This Agreement. The failure of the
Borrower to perform, observe or comply with any of the provisions of this
Agreement other than those covered by Sections 7.1. and 7.2 above, and such
failure is not cured to the satisfaction of the Bank within a period of thirty
(30) days after the date of written notice thereof by the Bank to the
Borrower;



7.4. Representations and Warranties. If any representation and warranty
contained herein or any statement or representation made in any certificate or
any other information at any time given by or on behalf of the Borrower or
furnished in connection with this Agreement or any of the other Financing
Documents shall prove to be false, incorrect or misleading in any material
respect on the date as of which made;



7.5. Default under other Financing Documents. The occurrence of a default (as
defined and described therein) under the provisions of the Note or any of the
other Financing Documents that is not cured within applicable cure periods, if any;




18








 





7.6. Liquidation, Termination, Dissolution, etc. If the Borrower shall
liquidate, dissolve or terminate its existence;



7.7. Default under Other Indebtedness. If the Borrower shall default in any
payment of any Indebtedness owing to the Bank (other than the Obligations) or
to any other Person beyond the period of grace, if any, provided in the
instrument or agreement under which such Indebtedness was created, or default
in the observance or performance of any other agreement or condition relating
to any such Indebtedness, or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur, the
effect of which default or other event is to cause or to permit the holder or
holders of such Indebtedness or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause, with the giving of notice, if required,
such Indebtedness to become due prior to its stated maturity;



7.8. Attachment. The issuance of any attachment or garnishment against
property or credits of the Borrower for an amount in excess, singly or in the
aggregate, of $1,000,000 that shall not have been vacated, discharged, stayed
or bonded pending appeal within thirty (30) days after the issuance thereof;



7.9. Judgments. One or more judgments or decrees shall be entered against the
Borrower involving in the aggregate a liability in excess of $1,000,000, and
all such judgments or decrees shall not have been vacated, discharged, stayed
or bonded pending appeal within thirty (30) days after the entry thereof.



7.10. Insolvent, etc. If the Borrower shall become insolvent and/or admit its
inability to pay its debts as they mature or shall make any assignment for the
benefit of any of its creditors;



7.11. Bankruptcy. If proceedings in bankruptcy, or for reorganization of the
Borrower, or for the readjustment of any of the Borrower’s debts, under the
United States Bankruptcy Code (as amended) or any part thereof, or under any
other applicable laws, whether state or federal, for the relief of debtors, now
or hereafter existing, shall be commenced against or by the Borrower and,
except with respect to any such proceedings instituted by the Borrower, shall
not be discharged within sixty (60) days of their commencement;



7.12. Receiver, etc. A receiver or trustee shall be appointed for the
Borrower or for any substantial part of the Borrower’s assets, or any
proceedings shall be instituted for the dissolution or the full or partial
liquidation of the Borrower and, except with respect to any such appointments
requested or instituted by the Borrower, such receiver or trustee shall not be
discharged within sixty (60) days of his or her appointment, and, except with
respect to any such proceedings instituted by the Borrower, such proceedings
shall not be discharged within sixty (60) days of their commencement;



7.13. Change of Control. The occurrence of a Change of Control.



7.14. Invalidity. The invalidity or unenforceability of any term or provision
of this Agreement, the Note or any other Financing Documents.




19








 





7.15. Material Adverse Change. The occurrence of any Material Adverse Change.



SECTION 8. Rights and Remedies.



8.1. Termination, Acceleration, Etc. If any Default shall occur and be
continuing, the Bank may (a) declare the Credit Facility and any obligation or
commitment of the Bank hereunder to make Loans to the Borrower for the account
of the Borrower to be terminated, whereupon the same shall forthwith terminate,
and (b) declare the unpaid principal amount of the Note, together with accrued
and unpaid interest thereon, and all other Obligations then outstanding to be
immediately due and payable, whereupon the same shall become and be forthwith
due and payable by the Borrower to the Bank, without presentment, demand,
protest or notice of any kind, all of which are expressly waived by the
Borrower; provided, that, in the case of any Default referred to in Sections
7.10, 7.11, and 7.12 above, the Credit Facility and any obligation or
commitment of the Bank hereunder to make Loans to the Borrower shall
immediately and automatically terminate and the unpaid principal amount of the
Note, together with accrued and unpaid interest thereon, and all other
Obligations then outstanding shall be automatically and immediately due and
payable by the Borrower to the Bank without notice, presentment, demand,
protest or other action of any kind, all of which are expressly waived by the
Borrower. Upon the occurrence and during the continuation of any Default, then
in each and every case, the Bank shall be entitled to exercise in any
jurisdiction in which enforcement thereof is sought, the rights and remedies
available to the Bank under the other provisions of this Agreement and the
other Financing Documents, together with the rights and remedies available to
the Bank under applicable law, all such rights and remedies being cumulative
and enforceable alternatively, successively or concurrently.



8.2. Liens, Set-Off. As security for the payment of the Obligations and the
performance of the Financing Documents, the Borrower hereby grants to the Bank
a continuing security interest and lien on, in and upon all Indebtedness owing
to, and all deposits (general or special), credits, balances, monies,
securities and other property of, the Borrower and all proceeds thereof, both
now and hereafter held or received by, in transit to, or due by, the Bank. In
addition to, and without limitation of, any rights of the Bank under applicable
laws, if the Borrower becomes insolvent, however evidenced, or any Default
occurs, the Bank may at any time and from time to time thereafter, without
notice to the Borrower, set-off, hold, segregate, appropriate and apply at any
time and from time to time thereafter all such Indebtedness, deposits, credits,
balances (whether provisional or final and whether or not collected or
available), monies, securities and other property toward the payment of all or
any part of the Obligations in such order and manner as the Bank in its sole
discretion may determine and whether or not the Obligations or any part thereof
shall then be due or demand for payment thereof made by the Bank.



8.3. Enforcement Costs. The Borrower agrees to pay to the Bank on demand (a)
all Enforcement Costs paid, incurred or advanced by or on behalf of the Bank
and (b) interest on such Enforcement Costs from the date paid, incurred or
advanced until paid in full at a per annum rate of interest equal at all times
to the Default Rate. All Enforcement Costs, with interest as above provided,
shall be a part of the Obligations hereunder.




20








 





8.4. Remedies Cumulative. Each right, power and remedy of the Bank as provided
for in this Agreement or in the other Financing Documents or now or hereafter
existing under applicable laws or otherwise shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for in
this Agreement or in the other Financing Documents or now or hereafter existing
under applicable laws or otherwise, and the exercise or beginning of the
exercise by the Bank of any one or more of such rights, powers or remedies
shall not preclude the simultaneous or later exercise by the Bank of any or all
such other rights, powers or remedies. The Borrower hereby waives any and all
notices whatsoever with respect to the Bank’s acceptance hereof or the Bank’s
intention to act, or the Bank’s action, in reliance hereon.



8.5. No Waiver, Etc. No failure or delay by the Bank to insist upon the strict
performance of any term, condition, covenant or agreement of this Agreement or
of the other Financing Documents, or to exercise any right, power or remedy
consequent upon a breach thereof, shall constitute a waiver of any such term,
condition, covenant or agreement or of any such breach, or preclude the Bank
from exercising any such right, power or remedy at any later time or times. By
accepting payment after the due date of any amount payable under this Agreement
or under any of the other Financing Documents, the Bank shall not be deemed to
waive the right either to require prompt payment when due of all other amounts
payable under this Agreement or under any of the other Financing Documents, or
to declare a Default for failure to effect such prompt payment of any such
other amount. The payment by the Borrower or any other Person and the
acceptance by the Bank of any amount due and payable under the provisions of
this Agreement or the other Financing Documents at any time during which a
Default exists shall not in any way or manner be construed as a waiver of such
Default by the Bank or preclude the Bank from exercising any right of power or
remedy consequent upon such Default.



SECTION 9. Miscellaneous.



9.1. Course of Dealing; Amendment. No course of dealing between the Bank and
the Borrower shall be effective to amend, modify or change any provision of
this Agreement or the other Financing Documents. The Bank shall have the right
at all times to enforce the provisions of this Agreement and the other
Financing Documents in strict accordance with the provisions hereof and
thereof, notwithstanding any conduct or custom on the part of the Bank in
refraining from so doing at any time or times. The failure of the Bank at any
time or times to enforce its rights under such provisions, strictly in
accordance with the same, shall not be construed as having created a custom in
any way or manner contrary to specific provisions of this Agreement or the
other Financing Documents or as having in any way or manner modified or waived
the same. This Agreement constitutes the complete and exclusive expression of
the terms of the agreement between the parties, and supersedes all prior and or
contemporaneous communications between the parties relating to the subject
matter of this Agreement. This Agreement and the other Financing Documents to
which the Borrower is a party may not be amended, modified, or changed in any
respect except by an agreement in writing signed by the Bank and the Borrower.



9.2. Waiver of Default. The Bank may, at any time and from time to time,
execute and deliver to the Borrower a written instrument waiving, on such terms
and conditions as the Bank may


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specify in such written instrument, any of the requirements of this Agreement
or of the other Financing Documents or any Event of Default or Default and its
consequences, provided, that any such waiver shall be for such period and
subject to such conditions as shall be specified in any such instrument. In
the case of any such waiver, the Borrower and the Bank shall be restored to
their former positions prior to such Event of Default or Default and shall have
the same rights as they had hereunder. No such waiver shall extend to any
subsequent or other Event of Default or Default, or impair any right consequent
thereto and shall be effective only in the specific instance and for the
specific purpose for which given.



9.3. Notices. All notices, requests and demands to or upon the parties to this
Agreement shall be deemed to have been given or made when delivered by hand, or
when deposited in the mail, postage prepaid by registered or certified mail,
return receipt requested, or, in the case of notice by telegraph, telex or
facsimile transmission, when properly transmitted, addressed as follows or to
such other address as may be hereafter designated in writing by one party to
the other:




	 	Borrower:	 	 Donegal Group Inc.

1195 River Road

Marietta, Pennsylvania 17547

Attention: Donald H. Nikolaus

Fax No.: (717) 426-7009


	 		 	 
	 	Bank:	 	 Manufacturers and Traders Trust Company

2055 South Queen Street

York, Pennsylvania 17403

Attention: Theodore K. Oswald

Fax No.: (717) 771-4914





except in cases where it is expressly herein provided that such notice, request
or demand is not effective until received by the party to whom it is addressed.



9.4. Right to Perform. If the Borrower shall fail to make any payment or to
otherwise perform, observe or comply with the provisions of this Agreement or
any of the other Financing Documents, then and in each such case, the Bank may
(but shall be under no obligation whatsoever to) without notice to or demand
upon the Borrower remedy any such failure by advancing funds or taking such
action as it deems appropriate for the account and at the expense of the
Borrower. The advance of any such funds or the taking of any such action by
the Bank shall not be deemed or construed to cure a Default or waive
performance by the Borrower of any provisions of this Agreement. The Borrower
shall pay to the Bank on demand, together with interest thereon from the date
advanced or incurred until paid in full at a per annum rate of interest equal
at all times to the Default Rate, any such funds so advanced by the Bank and
any costs and expenses advanced or incurred by or on behalf of the Bank in
taking any such action, all of which shall be a part of the Obligations
hereunder.



9.5. Costs and Expenses. The Borrower agrees to pay to the Bank on demand all
fees, recordation and other taxes, costs and expenses of whatever kind and
nature, including attorney’s


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fees and disbursements, that the Bank may incur or which are payable in
connection with the closing and the administration of the Loans, including,
without limitation, the preparation of this Agreement and the other Financing
Documents, the recording or filing of any and all of the Financing Documents
and obtaining lien searches. The Borrower hereby releases the Bank from any
claim or liability the Borrower may have or bring, becoming due, arising under,
out of, as a result of, in connection with, or related to, this Agreement, the
Loans or the Credit Facility, provided such claim or liability has not directly
resulted from the Bank’s negligence or willful misconduct. The Borrower agrees
to indemnify the Bank against and hold it harmless from any and all (a) losses,
liabilities, or expenses (including attorneys’ fees) incurred by the Bank, and
(b) any and all actions, claims, demands or suits made or brought by any Person
(including, without limitation, the Borrower), becoming due, arising under, out
of, as a result of, in connection with or related to, this Agreement, the Loans
or the Credit Facility, provided the same has not directly resulted from the
Bank’s negligence or willful misconduct. All such fees, costs, recordation
and other taxes shall be a part of the Obligations hereunder.



9.6. Consent to Jurisdiction. The Borrower irrevocably (a) consents and
submits to the jurisdiction and venue of any state or federal court sitting in
the Commonwealth of Pennsylvania over any suit, action or proceeding arising
out of or relating to this Agreement or any of the other Financing Documents,
(b) waives, to the fullest extent permitted by law, any objection that the
Borrower may now or hereafter have to the laying of the venue of any such suit,
action or proceeding brought in any such court and any claim that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum, and (c) consents to the service of process in any such
suit, action or proceeding in any such court by the mailing of copies of such
process to the Borrower by certified or registered mail at the Borrower’s
address set forth herein for the purpose of giving notice.



9.7. Assignment and Participations. The Bank may, without notice to or consent
of the Borrower, sell, dispose of, assign or transfer to any Person, all or any
part of the Obligations or all or any part of the Financing Documents and each
such Person shall have the right to enforce the provisions of the Financing
Documents and any of the Obligations as fully as the Bank, provided that the
Bank shall continue to have the unimpaired right to enforce the provisions of
the Financing Documents and any of the Obligations as to so much of the
Financing Documents and/or the Obligations that it has not sold, assigned or
transferred. Additionally, the Bank may sell or grant to any other Person
participations in all or any part of the Obligations or all or any part of the
Financing Documents. In connection with and prior to and after any such sale,
transfer, assignment or participation, the Bank may disclose and furnish to any
prospective or actual purchaser, transferee, assignee or participant, any and
all reports, financial statements and other information obtained by the Bank at
any time and from time to time in connection with the Obligations, any of the
Financing Documents or otherwise. The Borrower will cooperate with the Bank to
a commercially reasonable extent in connection with any such assignment and
will execute and deliver such consents and acceptances to any such assignment,
amendments to this Agreement in order to effect any such assignment (including,
without limitation, the appointment of the Bank as agent for itself and all
assignees) and a new or replacement promissory note for the Note in conjunction
with any such assignment; provided, that the Borrower’s Indebtedness,
obligations and liabilities under this Agreement and the other Financing
Documents will not be increased by reason of any such assignment.




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9.8. Severability. The invalidity, illegality or unenforceability of any
provision of this Agreement shall not affect the validity, legality or
enforceability of any of the other provisions of this Agreement which shall
remain effective.



9.9. Survival. All representations, warranties and covenants contained among
the provisions of this Agreement shall survive the execution and delivery of
this Agreement and all other Financing Documents.



9.10. Binding Effect. This Agreement and all other Financing Documents shall
be binding upon and inure to the benefit of the Borrower and the Bank and their
respective successors and assigns, except that the Borrower shall not have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the Bank.



9.11. Applicable Law and Time of Essence. This Agreement and the rights and
obligations of the parties hereunder shall be construed and interpreted in
accordance with the laws of the Commonwealth of Pennsylvania, both in
interpretation and performance. Time is of the essence in connection with all
obligations of the Borrower hereunder and under any of the other Financing
Documents.



9.12. Duplicate Originals and Counterparts. This Agreement may be executed in
any number of duplicate originals or counterparts, each of such duplicate
originals or counterparts shall be deemed to be an original and all taken
together shall constitute but one and the same instrument.



9.13. Headings, Construction. Paragraph headings in this Agreement are
included herein for convenience of reference only, shall not constitute a part
of this Agreement for any other purpose and shall not be deemed to affect the
meaning or construction of any of the provisions hereof. The words “hereof”,
“herein” and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. As used herein, the singular number shall include
the plural, the plural, the singular and the use of the masculine, feminine or
neuter gender shall include all genders, as the context may require.




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9.14. Waiver of Jury Trial. THE BORROWER AND THE BANK HEREBY VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE LOANS, THIS AGREEMENT OR ANY OF THE OTHER FINANCING
DOCUMENTS.




     IN WITNESS WHEREOF, each of the parties hereto have executed and delivered
this Agreement under their respective seals as of the day and year first
written above.




	 	 	 	 	 	 	 	 	 
	WITNESS/ATTEST:	 	 	 	DONEGAL GROUP INC.

 
	/s/ Ralph G. Spontak
	 	 	 	By:
	 	 	 	/s/ Donald H. Nikolaus (Seal)

	
	 	 	 	 	 	 	 	

	Ralph G. Spontak

Senior Vice President,

Chief Financial Officer

and Secretary	 	 	 	 	 	 	 	Donald H. Nikolaus

President and Chief Executive Officer

	 
	WITNESS:	 	MANUFACTURERS AND TRADERS TRUST COMPANY

 
	/s/ Frederick W. Dreher	 	 	 	By:
	 	 	 	/s/ Theodore K. Oswald (Seal)
	
	 	 	 	 	 	 	 	

	
	 	 	 	 	 	 	 	Theodore K. Oswald, Vice President
	 
	COMMONWEALTH OF PENNSYLVANIA)

COUNTY OF LANCASTER)
	 	 	 	 	 	 	 	: SS.






     On the 25th day of November, in the year 2003, before me, the undersigned,
a Notary Public in and for said Commonwealth, personally appeared Donald H.
Nikolaus, personally known to me or proved to me on the basis of satisfactory
evidence to be the individual(s) whose name(s) is (are) subscribed to the
within instrument and acknowledged to me that he/she/they executed the same in
his/her/their capacity(ies), and that by his/her/their signature(s) on the
instrument, the individual(s), or the person upon behalf of which the
individual(s) acted, executed the instrument.




	 	 	 
	 	 	
/s/ Judy A. Tangert
	 	 	


	 	 	
Notary Public






25








 




	 	 	 	 	 	 	 	 	 
	COMMONWEALTH OF PENNSYLVANIA)

COUNTY OF LANCASTER)
	 	 	 	 	 	 	 	: SS.





     On the 25th day of November, in the year 2003, before me, the undersigned,
a Notary Public in and for said Commonwealth, personally appeared Theodore K.
Oswald, personally known to me or proved to me on the basis of satisfactory
evidence to be the individual(s) whose name(s) is (are) subscribed to the
within instrument and acknowledged to me that he/she/they executed the same in
his/her/their capacity(ies), and that by his/her/their signature(s) on the
instrument, the individual(s), or the person upon behalf of which the
individual(s) acted, executed the instrument.




	 	 	 
	 	 	
/s/ Judy A. Tangert
	 	 	


	 	 	
Notary Public








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