SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant /_/
Check the appropriate box:
/_/ Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DONEGAL GROUP INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No Fee Required.
1) Title of each class of securities to which transaction applies:
_____________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
_____________________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
_____________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
_____________________________________________________________________________
/_/ Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
1) Amount previously paid: _________________________________________________
2) Form, Schedule or Registration No. ______________________________________
3) Filing party: ___________________________________________________________
4) Date filed: _____________________________________________________________
<PAGE>
DONEGAL GROUP INC.
---------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 16, 1998
To the Stockholders of
DONEGAL GROUP INC.:
The Annual Meeting of Stockholders of Donegal Group Inc. (the "Company")
will be held at 10:00 a.m., prevailing time, on April 16, 1998, at the Company's
offices, 1195 River Road, Marietta, Pennsylvania 17547, for the following
purposes:
1. To elect two Class C directors to serve until the expiration of
their three-year terms and until their successors are elected;
2. To consider and vote upon a proposal to approve an amendment to the
Company's Certificate of Incorporation to increase the authorized number of
shares of the Company's Common Stock from 10,000,000 shares to 15,000,000
shares;
3. To consider and vote upon a proposal to approve an amendment to the
Company's 1996 Equity Incentive Plan for Directors;
4. To act upon the election of KPMG Peat Marwick LLP as independent
public accountants for the Company for 1998; and
5. To transact such other business as may properly come before the
Annual Meeting and any adjournment, postponement or continuation thereof.
The Board of Directors has fixed the close of business on February 20, 1998
as the record date for the determination of the stockholders entitled to notice
of and to vote at the Annual Meeting.
A copy of the Company's Annual Report for the year ended December 31, 1997
is being mailed to stockholders together with this Notice.
Holders of Common Stock are requested to complete, sign and return the
enclosed form of proxy in the envelope provided whether or not they expect to
attend the Annual Meeting in person.
By Order of the Board of Directors,
/s/ Donald H. Nikolaus
-------------------------------------
Donald H. Nikolaus,
President and Chief Executive Officer
March 23, 1998
Marietta, Pennsylvania
<PAGE>
DONEGAL GROUP INC.
---------------------------
This Proxy Statement and the form of proxy enclosed herewith, which are
first being mailed to stockholders on or about March 23, 1998, are furnished in
connection with the solicitation by the Board of Directors of Donegal Group Inc.
(the "Company") of proxies to be voted at the Annual Meeting of Stockholders
(the "Annual Meeting") to be held at 10:00 a.m., prevailing time, on April 16,
1998, and at any adjournment, postponement or continuation thereof, at the
Company's principal executive offices, which are located at 1195 River Road,
Marietta, Pennsylvania 17547.
Shares represented by proxies in the accompanying form, if properly signed
and returned, will be voted in accordance with the specifications made thereon
by the stockholders. Any proxy not specifying to the contrary will be voted in
favor of the adoption of the proposals referred to in the Notice of Annual
Meeting and for the election of the nominees for director named below. A
stockholder who signs and returns a proxy in the accompanying form may revoke it
at any time before it is voted by giving written notice of revocation or a duly
executed proxy bearing a later date to the Secretary of the Company or by
attending the Annual Meeting and voting in person.
The cost of solicitation of proxies in the accompanying form will be borne
by the Company, including expenses in connection with preparing and mailing this
Proxy Statement. Such solicitation will be made by mail and may also be made on
behalf of the Company in person or by telephone or telegram by the Company's
regular officers and employees, none of whom will receive special compensation
for such services. The Company, upon request therefor, will also reimburse
brokers, nominees, fiduciaries and custodians and persons holding shares in
their names or in the names of nominees for their reasonable expenses in sending
proxies and proxy material to beneficial owners.
Only holders of Common Stock of record at the close of business on February
20, 1998 will be entitled to notice of and to vote at the Annual Meeting. Each
share of Common Stock is entitled to one vote on all matters to come before the
Annual Meeting. Cumulative voting rights do not exist with respect to the
election of directors.
As of the close of business on February 20, 1998, the Company had
outstanding 6,057,732 shares of Common Stock, $1.00 par value. A majority of the
outstanding shares will constitute a quorum at the Annual Meeting. As of
February 20, 1998, Donegal Mutual Insurance Company (the "Mutual Company") owned
3,529,091 shares of the Company's outstanding Common Stock, or approximately
58.3% of the Company's outstanding Common Stock. The Mutual Company has advised
the Company that the Mutual Company will vote its shares for the election of
Thomas J. Finley, Jr. and R. Richard Sherbahn as Class C directors, for the
proposal to approve an amendment to the Company's Certificate of Incorporation
to increase the Company's authorized Common Stock, for the proposal to approve
an amendment to the 1996 Equity Incentive Plan for Directors (the "Director
Plan") and for the election of KPMG Peat Marwick LLP as the Company's
independent public accountants for 1998. Accordingly, Messrs. Finley and
Sherbahn will be elected as Class C directors, the amendment to the Certificate
of Incorporation will be approved, the amendment to the Director Plan will be
approved and KPMG Peat Marwick LLP will be elected as the Company's independent
public accountants for 1998, irrespective of the votes cast by the stockholders
of the Company other than the Mutual Company.
Unless otherwise stated, all information in this Proxy Statement gives
retroactive effect to the four-for-three split of the Company's Common Stock
effected through a stock dividend of one share of Common Stock for each three
shares outstanding, which was paid on July 15, 1997 to stockholders of record on
June 25, 1997.
1
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth as of February 20, 1998 the amount and
percentage of the Company's outstanding Common Stock beneficially owned by (i)
each person who is known by the Company to own beneficially more than 5% of its
outstanding Common Stock, (ii) each director and nominee for director, (iii)
each executive officer named in the Summary Compensation Table and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME OF INDIVIDUAL BENEFICIALLY OUTSTANDING
OR IDENTITY OF GROUP OWNED(1) COMMON STOCK(2)
-------------------- ------------ ---------------
<S> <C> <C>
5% HOLDERS:
Donegal Mutual Insurance Company....................... 3,529,091 58.3%
1195 River Road
Marietta, Pennsylvania 17547
Wellington Management Company, LLP..................... 365,462(3) 6.03%
75 State Street
Boston, MA 02109
DIRECTORS:
C. Edwin Ireland....................................... 12,711(4) --
Donald H. Nikolaus..................................... 107,026(5) 1.7%
Patricia A. Gilmartin.................................. 6,310(4) --
Philip H. Glatfelter, II............................... 6,576(4) --
R. Richard Sherbahn.................................... 4,844(4) --
Robert S. Bolinger..................................... 5,511(4) --
Thomas J. Finley, Jr................................... 5,311(4) --
EXECUTIVE OFFICERS (6):
Ralph G. Spontak....................................... 43,954(7) --
William H. Shupert..................................... 23,177(8) --
Robert G. Shenk........................................ 16,588(9) --
Frank J. Wood.......................................... 14,935(10) --
All directors and executive officers
as a group (14 persons)............................. 288,166(11) 4.6%
</TABLE>
- ------------------
(1) Information furnished by each individual named. This table includes shares
that are owned jointly, in whole or in part, with the person's spouse, or
individually by his or her spouse.
(2) Less than 1% unless otherwise indicated.
(3) As reported by Wellington Management Company, LLP as of December 31, 1997
in a filing made with the Securities and Exchange Commission (the "SEC").
(4) Includes 4,445 shares of Common Stock the director has the option to
purchase under the Director Plan that are currently exercisable or that
become exercisable within 60 days after the date of this Proxy Statement.
(5) Includes 66,667 shares of Common Stock Mr. Nikolaus has the option to
purchase under the Company's 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(6) Excludes Executive Officers listed under "Directors."
2
<PAGE>
(7) Includes 33,333 shares of Common Stock Mr. Spontak has the option to
purchase under the Company's 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(8) Includes 18,667 shares of Common Stock Mr. Shupert has the option to
purchase under the Company's 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(9) Includes 13,333 shares of Common Stock Mr. Shenk has the option to purchase
under the Company's 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(10) Includes 13,333 shares of Common Stock Mr. Wood has the option to purchase
under the Company's 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(11) Includes 180,886 shares of Common Stock purchasable upon the exercise of
options granted under the 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement, and 26,670 shares of Common Stock purchasable upon
the exercise of options granted under the Director Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act")
requires that the officers and directors of a corporation, such as the Company,
which has a class of equity securities registered under Section 12 of the
Exchange Act, as well as persons who own more than 10% of a class of equity
securities of such a corporation, file reports of their ownership of such
securities, as well as monthly statements of changes in such ownership, with the
corporation, the SEC and the Nasdaq Stock Market. Based upon written
representations received by the Company from its officers and directors, and the
Company's review of the monthly statements of ownership changes filed with the
Company by its officers and directors during 1997, the Company believes that all
such filings required during 1997 were made on a timely basis.
RELATIONSHIP WITH THE MUTUAL COMPANY
The Company was formed by the Mutual Company in August 1986 and was a
wholly owned subsidiary of the Mutual Company until November 1986, when the
Company sold 600,000 shares of Common Stock in a public offering, thereby
reducing the Mutual Company's ownership of the Company's outstanding Common
Stock from 100% to approximately 79.5%, which subsequently increased to
approximately 84%. In September 1993, the Company sold 1,150,000 shares of
Common Stock in a public offering. At the same time, the Mutual Company sold
200,000 shares of the Company's Common Stock, reducing the Mutual Company's
ownership of the Company's outstanding Common Stock to approximately 57%.
Between December 22, 1994 and December 31, 1995, the Mutual Company purchased an
aggregate of 172,000 shares of the Company's Common Stock in the open market in
exempt transactions under SEC Rule 10b-18 and in private transactions. Between
December 31, 1995 and December 31, 1996, the Mutual Company purchased an
aggregate of 114,000 shares of the Company's Common Stock in private
transactions. On November 14, 1997 and February 17, 1998, the Mutual Company
purchased 16,846 shares and 16,735 shares, respectively, of the Company's Common
Stock pursuant to the Company's Dividend Reinvestment Plan, which was adopted in
July 1997. These purchases increased the Mutual Company's ownership of the
Company's
3
<PAGE>
Common Stock to 3,529,091 shares, or approximately 58.3% of the Company's
outstanding Common Stock as of February 20, 1998.
The Company's operations are interrelated with the operations of the Mutual
Company, and various reinsurance arrangements exist between the Company and the
Mutual Company. The Company believes that its various transactions with the
Mutual Company have been on terms no less favorable to the Company than the
terms that could have been negotiated with an independent third party.
The Mutual Company provides all personnel for the Company and its principal
insurance subsidiaries, Atlantic States Insurance Company ("Atlantic States"),
Delaware Atlantic Insurance Company ("Delaware Atlantic"), Southern Insurance
Company of Virginia ("Southern") and Pioneer Insurance Company ("Pioneer").
Expenses are allocated to the Company, Delaware Atlantic, Southern and Pioneer
according to a time allocation and estimated usage agreement, and to Atlantic
States in relation to the relative participation of the Mutual Company and
Atlantic States in the pooling agreement described herein. Expenses allocated to
the Company were $21,739,911 in 1997.
Atlantic States participates in an underwriting pool with the Mutual
Company whereby Atlantic States cedes premiums, losses and loss adjustment
expenses on all of its business to the Mutual Company and assumes from the
Mutual Company a specified portion of the premiums, losses and loss adjustment
expenses of the Mutual Company and Atlantic States. Under the pooling agreement,
which became effective on October 1, 1986, Atlantic States cedes to the Mutual
Company all of its insurance business written on or after October 1, 1986.
Substantially all of the Mutual Company's property and casualty insurance
business written or in force on or after October 1, 1986 is also included in the
pooled business, including the business reinsured from Southern. Pursuant to
amendments to the pooling agreement subsequent to October 1, 1986, the Mutual
Company, which is solely responsible for any losses in the pooled business with
dates of loss on or before the close of business on September 30, 1986, has
increased the percentage of retrocessions of the pooled business to Atlantic
States. Since January 1, 1996, 65% of the pooled business has been retroceded to
Atlantic States. All premiums, losses, loss adjustment expenses and other
underwriting expenses are prorated among the parties on the basis of their
participation in the pool. The pooling agreement may be amended or terminated at
the end of any calendar year by agreement of the parties. The allocations of
pool participation percentages between the Mutual Company and Atlantic States
are based on the pool participants' relative amounts of capital and surplus,
expectations of future relative amounts of capital and surplus and the ability
of the Company to raise capital for Atlantic States. The Company does not
currently anticipate a further increase in Atlantic States' percentage of
participation in the pool, nor does the Company intend to terminate the
participation of Atlantic States in the pooling agreement. Additional
information describing the pooling agreement is contained in the Company's 1997
Annual Report to Stockholders, a copy of which is enclosed with this Proxy
Statement and to which reference is hereby made.
On December 29, 1988, the Company acquired all of the outstanding common
stock of Southern, which converted from a mutual insurance company known as
Southern Mutual Insurance Company to a stock insurance company on the same date.
Since January 1, 1991, the Mutual Company has reinsured 50% of Southern's
business. Because the Mutual Company places substantially all of the business
assumed from Southern in the pool, from which the Company has an allocation of
65% from and after January 1, 1996, the Company's operations include
approximately 80% of the business written by Southern. Southern and the Mutual
Company settle the balances resulting from this reinsurance arrangement on a
monthly basis.
4
<PAGE>
As of December 31, 1995, the Company acquired all of the outstanding
capital stock of Delaware Atlantic pursuant to a Stock Purchase Agreement dated
as of December 21, 1995 between the Company and the Mutual Company. As part of
this transaction, the Mutual Company entered into an aggregate excess of loss
reinsurance agreement with Delaware Atlantic whereby the Mutual Company assumed
the risk of any loss from an adverse development in Delaware Atlantic's loss and
loss adjustment expense reserve at the end of 1995 compared to the end of 1996
and losses and loss adjustment expenses incurred by Delaware Atlantic during the
month of December 1995 and for the 1996 year by reason of the fact that Delaware
Atlantic's loss and loss adjustment expense ratio for those periods exceeded the
lesser of the loss and loss expense ratios of immediately preceding periods or
60%. This reinsurance agreement did not result in any additional payment from
the Mutual Company to Delaware Atlantic.
Effective July 1, 1996, the Mutual Company entered into retrocessional
reinsurance contracts with each of Southern, Delaware Atlantic and Pioneer,
which was then a wholly owned subsidiary of the Mutual Company, (individually,
an "Affiliate"), whereby the Mutual Company agreed to reinsure each Affiliate in
respect of 100% of the net liability that may accrue to such Affiliate from its
insurance operations and retrocede 100% of the net liability back to each
Affiliate, which the Affiliate assumes.
As of March 31, 1997, the Company acquired all of the outstanding capital
stock of Pioneer pursuant to a Stock Purchase Agreement dated as of April 7,
1997 between the Company and the Mutual Company. As part of this transaction,
the Mutual Company entered into an aggregate excess of loss reinsurance
agreement with Pioneer whereby the Mutual Company assumed the risk of any loss
from an adverse development in Pioneer's loss and loss adjustment expense
reserve at the end of 1996 compared to the end of 1998 and losses and loss
adjustment expenses incurred by Pioneer during the years ending December 31,
1997 and December 31, 1998 by reason of the fact that Pioneer's loss and loss
adjustment expense ratio for those periods exceeded the lesser of the loss and
loss expense ratios of immediately preceding periods or 60%. This reinsurance
agreement resulted in additional payments of $186,800 from the Mutual Company to
Pioneer in 1997.
All of the Company's officers are officers of the Mutual Company, five of
the Company's seven directors are directors of the Mutual Company and three of
the Company's executive officers are directors of the Mutual Company. The
Company and the Mutual Company maintain a Coordinating Committee, which consists
of two outside directors from each of the Company and the Mutual Company, none
of whom holds seats on both Boards, to review and evaluate the pooling agreement
between the Company and the Mutual Company and to be responsible for matters
involving actual or potential conflicts of interest between the Company and the
Mutual Company. The decisions of the Coordinating Committee are binding on the
Company and the Mutual Company. The Company's Coordinating Committee members
must conclude that intercompany transactions are fair and equitable to the
Company. The purpose of this provision is to protect the interests of the
stockholders of the Company other than the Mutual Company. The Coordinating
Committee met one time in 1997. The Company's members on the Coordinating
Committee are Messrs. Bolinger and Finley. See "Election of Directors." The
Mutual Company's members on the Coordinating Committee are John E. Hiestand and
Dr. Charles A. Heisterkamp, III.
Mr. Hiestand, age 60, has been a director of the Mutual Company since 1983
and has been President of Hiestand Memorials, Inc., a manufacturer of cemetery
monuments, since 1977.
Dr. Heisterkamp, age 65, has been a director of the Mutual Company since
1979 and has practiced as a surgeon in Lancaster, Pennsylvania for more than the
past five years.
5
<PAGE>
ELECTION OF DIRECTORS
The Company's Board of Directors consists of seven members. Each director
is elected for a three-year term and until his successor has been duly elected.
The current three-year terms of the Company's directors expire in the years
1998, 1999 and 2000, respectively.
Two Class C directors are to be elected at the Annual Meeting. Unless
otherwise instructed, the proxies solicited by the Board of Directors will be
voted for the election of the nominees named below, both of whom are currently
directors of the Company. If a nominee becomes unavailable for any reason, it is
intended that the proxies will be voted for a substitute nominee designated by
the Board of Directors. The Board of Directors has no reason to believe the
nominees named will be unable to serve if elected. Any vacancy occurring on the
Board of Directors for any reason may be filled by a majority of the directors
then in office until the expiration of the term of the class of directors in
which the vacancy exists. The two nominees for Class C director receiving the
highest number of votes cast at the Annual Meeting will be elected as directors.
Shares held by brokers or nominees as to which voting instructions have not been
received from the beneficial owner or person otherwise entitled to vote and as
to which the broker or nominee does not have discretionary voting power, i.e.,
broker non-votes, will be treated as not present and not entitled to vote for
nominees for election as Class C directors. Votes withheld and broker non-votes
will have no effect on the election of directors because they will not represent
votes cast at the Annual Meeting for the purpose of electing directors.
The names of the nominees for Class C directors and the Class A and Class B
directors who will continue in office after the Annual Meeting until the
expiration of their respective terms, together with certain information
regarding them, are as follows:
NOMINEES FOR CLASS C DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE*
- ---- --- -------- ------------
<S> <C> <C> <C>
Thomas J. Finley, Jr..................................... 77 1986 2001
R. Richard Sherbahn...................................... 69 1986 2001
</TABLE>
DIRECTORS CONTINUING IN OFFICE
CLASS A DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ---- --- -------- ------------
<S> <C> <C> <C>
Robert S. Bolinger....................................... 61 1986 1999
Patricia A. Gilmartin.................................... 58 1986 1999
Philip H. Glatfelter, II................................. 68 1986 1999
</TABLE>
CLASS B DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ---- --- -------- ------------
<S> <C> <C> <C>
C. Edwin Ireland......................................... 88 1986 2000
Donald H. Nikolaus....................................... 55 1986 2000
</TABLE>
- ------------------
*If elected at the Annual Meeting
6
<PAGE>
Mr. Bolinger has been President and Chief Executive Officer of Susquehanna
Bancshares, Inc. since 1982 and of Farmers First Bank since 1976. Mr. Bolinger
is also a director of Susquehanna Bancshares, Inc.
Mr. Finley retired in 1985 as President and Chief Executive Officer of the
Insurance Federation of Pennsylvania, a position he held for 18 years prior to
his retirement.
Mrs. Gilmartin has been an employee since 1969 of Donegal Insurance Agency,
which has no affiliation with the Company, except that Donegal Insurance Agency
receives insurance commissions in the ordinary course of business from the
Company's subsidiaries and affiliates in accordance with such subsidiaries' and
affiliates' standard commission schedules and agency contracts. Mrs. Gilmartin
has been a director of the Mutual Company since 1979.
Mr. Glatfelter retired in 1989 as a Vice President of Meridian Bank, a
position he held for more than five years prior to his retirement. Mr.
Glatfelter has been a director of the Mutual Company since 1981 and has been
Vice Chairman of the Mutual Company since 1991.
Mr. Ireland is former Chairman of the Lancaster Industrial Development
Authority. He retired from Hamilton Watch Company in 1970. Prior thereto, he was
Vice President, Secretary and Treasurer of Hamilton Watch Company. Mr. Ireland
has been a director of the Mutual Company since 1972 and Chairman of its Board
of Directors since 1985. He has been Chairman of the Company's Board of
Directors since 1986.
Mr. Nikolaus has been President of the Mutual Company since 1981 and a
director of the Mutual Company since 1972. He has been President of the Company
since 1986. Mr. Nikolaus has been a partner in the law firm of Nikolaus &
Hohenadel since 1972.
Mr. Sherbahn has owned and operated Sherbahn Associates, Inc., a life
insurance and financial planning firm, since 1974. Mr. Sherbahn has been a
director of the Mutual Company since 1967.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors met seven times in 1997. The Board of Directors has
an Executive Committee, an Audit Committee, a Nominating Committee, a
Compensation Committee and, together with the Mutual Company, a four-member
Coordinating Committee.
The Company's Executive Committee met 22 times in 1997. Messrs. Nikolaus,
Ireland and Glatfelter are the members of the Executive Committee. The Executive
Committee has the authority to take all action that can be taken by the full
Board of Directors, consistent with Delaware law, between meetings of the Board
of Directors.
The Audit Committee of the Company consists of Messrs. Bolinger, Glatfelter
and Ireland. The Audit Committee, which met one time in 1997, reviews audit
reports and management recommendations made by the Company's independent
auditing firm.
The Nominating Committee of the Company consists of Messrs. Finley, Ireland
and Glatfelter. The Nominating Committee, which did not meet in 1997, is
responsible for the nomination of candidates to stand for election to the Board
of Directors at the Annual Meeting and the nomination of candidates to fill
vacancies on the Board of Directors between meetings of stockholders. The
Nominating Committee will consider written nominations for directors from
stockholders to the extent
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<PAGE>
such nominations are made in accordance with the Company's By-laws. The
Company's By-laws require that any such nominations must be sent to the Company
at its principal executive offices, attention: Secretary, not less than 30 days
prior to the date of the stockholders meeting at which directors are to be
elected. Such written nomination must set forth the name, age, address and
principal occupation for the past five years of such nominee, the number of
shares of the Company's Common Stock beneficially owned by such nominee and such
other information about such nominee as would be required under the proxy
solicitation rules of the SEC if proxies were solicited for the election of such
nominee.
The Compensation Committee of the Company consists of Messrs. Ireland,
Sherbahn and Glatfelter. The Compensation Committee met one time in 1997 to
review and recommend compensation plans, approve certain compensation changes
and grant options under and determine participants in the 1996 Equity Incentive
Plan.
COMPENSATION OF DIRECTORS
Directors of the Company were paid an annual retainer of $15,000 in 1997
and were paid $500 for each meeting attended in excess of five per year.
Directors who are members of committees of the Board of Directors receive $250
for each committee meeting attended. If a director serves on the Board of
Directors of both the Mutual Company and the Company, the director receives only
one annual retainer. If the Boards of Directors of both companies meet on the
same day, directors receive only one meeting fee. In such event, the retainer
and meeting fees are allocated 35% to the Mutual Company and 65% to the Company.
Pursuant to the Director Plan, each director of the Company and the Mutual
Company receives an annual restricted stock award ("Restricted Stock Award") of
133 shares of the Company's Common Stock, provided that the director served as a
member of the Board of Directors of the Company or the Mutual Company during any
portion of the preceding calendar year. Pursuant to the Director Plan, each
outside director of the Company and the Mutual Company is also eligible to
receive non-qualified options to purchase shares of Common Stock in an amount
determined by the Company's Board of Directors from time to time. See "Amendment
of the 1996 Equity Incentive Plan for Directors."
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company and the
Mutual Company during each of the three fiscal years ended December 31, 1997 for
services rendered in all capacities to the chief executive officer of the
Company and the four other most highly compensated executive officers of the
Company whose compensation exceeded $100,000 in the fiscal year ended December
31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION (1) ------------------------
------------------------------------------------ RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#) COMPENSATION ($)
- ------------------ ---- ---------- --------- ---------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald H. Nikolaus, 1997 $356,000 $137,807 $7,725 2,050 -- $ 95,010(2)
President and Chief 1996 336,000 -- 7,327 -- -- 81,531
Executive Officer 1995 311,000 100,369 -- -- -- 85,430
Ralph G. Spontak, 1997 235,000 78,444 2,943 2,050 -- 50,636(2)
Senior Vice President, 1996 220,000 -- 2,747 -- -- 44,495
Chief Financial 1995 204,000 57,133 -- -- -- 46,205
Officer and
Secretary
William H. Shupert, 1997 160,000 65,723 -- -- -- 49,075(2)
Senior Vice President, 1996 149,000 -- -- -- -- 28,669
Underwriting 1995 137,000 47,868 -- -- -- 22,791
Robert G. Shenk 1997 130,000 19,417 -- -- -- 15,153(2)
Senior Vice President, 1996 118,000 -- -- -- -- 13,614
Claims 1995 107,000 15,966 -- -- -- 13,001
Frank J. Wood 1997 110,500 25,441 -- -- -- 21,064(2)
Senior Vice President, 1996 102,500 -- -- -- -- 15,713
Marketing 1995 95,000 18,530 -- -- -- 13,576
</TABLE>
- ------------------
(1) All compensation of officers of the Company is paid by the Mutual Company.
Pursuant to the terms of an intercompany allocation agreement between the
Company and the Mutual Company, the Company is charged for its proportionate
share of all such compensation.
(2) Represents contributions made by the Company under its defined contribution
pension plan of $15,140 for Mr. Nikolaus, $15,140 for Mr. Spontak, $15,089
for Mr. Shupert, $12,085 for Mr. Shenk and $10,147 for Mr. Wood and
contributions made by the Company under its profit-sharing plan of $3,200
for Mr. Nikolaus, $3,200 for Mr. Spontak, $3,190 for Mr. Shupert, $2,589 for
Mr. Shenk and $2,201 for Mr. Wood. In the case of Mr. Nikolaus, the total
shown for 1997 also includes premiums paid under split-dollar life insurance
policies of $25,535, premiums paid under a term life insurance policy of
$3,825, directors and committee meeting fees of $23,900 and contributions
made by the Company of $23,410 under the Company's Executive Restoration
Plan, which is designed to restore certain retirement benefits to those
individuals for whom contributions to the Company's pension and
profit-sharing plans are restricted as a result of the application of
Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended
(the "Code"). In the case of Mr. Spontak, the total shown for 1997 includes
premiums paid under a split-dollar life insurance policy of $4,700, premiums
paid under a term life insurance policy of $1,479, directors and committee
meeting fees of $17,200 and contributions made by the Company of $8,917
under the Company's Executive Restoration Plan. In the case of Messrs.
Shupert, Shenk and Wood, the totals shown for 1997 also include term life
insurance premiums of $12,746, $479 and $2,752, respectively.
9
<PAGE>
The following tables sets forth information with respect to options granted
during the fiscal year ended December 31, 1997 to the persons named in the
Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ------------------------------------------------------------------------------------------- VALUE AT
% OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATE OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Donald H. Nikolaus....................... 100,000(1) 25 18.00 1/2/2002 163,000 677,000
Ralph G. Spontak......................... 50,000(1) 13 18.00 1/2/2002 81,500 338,500
William H. Shupert....................... 28,000(1) 7 18.00 1/2/2002 45,640 189,560
Robert G. Shenk.......................... 20,000(1) 5 18.00 1/2/2002 32,600 135,400
Frank J. Wood............................ 20,000(1) 5 18.00 1/2/2002 32,600 135,400
</TABLE>
------------------
(1) These options vest in three substantially equal cumulative annual
installments on April 30, 1997, April 30, 1998 and April 30, 1999,
respectively.
The following table sets forth information with respect to options
exercised during the year ended December 31, 1997 and held on December 31, 1997
by the persons named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY
SHARES FISCAL YEAR END OPTIONS AT FISCAL YEAR END
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald H. Nikolaus.................. -- -- 33,333 66,667 $137,499 $275,001
Ralph G. Spontak.................... -- -- 16,667 33,333 68,751 137,499
William H. Shupert.................. -- -- 9,333 18,667 38,499 77,001
Robert G. Shenk..................... -- -- 6,667 13,333 27,501 54,999
Frank J. Wood....................... -- -- 6,667 13,333 27,501 54,999
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE OF DONEGAL GROUP INC.
THE FOLLOWING REPORT OF THE COMPANY'S COMPENSATION COMMITTEE AND THE
PERFORMANCE GRAPH THAT IMMEDIATELY FOLLOWS SUCH REPORT SHALL NOT BE DEEMED PROXY
SOLICITATION MATERIAL, SHALL NOT BE DEEMED FILED WITH THE SEC UNDER THE EXCHANGE
ACT OR INCORPORATED BY REFERENCE IN ANY DOCUMENT SO FILED AND SHALL NOT
OTHERWISE BE SUBJECT TO THE LIABILITIES OF SECTION 18 OF THE EXCHANGE ACT.
Under the rules established by the SEC, the Company is required to provide
certain information about the compensation and benefits provided to the
Company's President and Chief Executive Officer and the other executive officers
listed in the Summary Compensation Table. The disclosure requirements as to
these officers include the use of specified tables and a report of the Company's
10
<PAGE>
Compensation Committee reviewing the factors that resulted in compensation
decisions affecting these officers and the Company's other executive officers.
The Compensation Committee of the Board of Directors has furnished the following
report in fulfillment of the SEC's requirements.
The Compensation Committee reviews the general compensation policies of the
Company, including the compensation plans and compensation levels for executive
officers, and administers the Company's 1996 Equity Incentive Plan and the cash
incentive compensation program in which the Company's executive officers
participate. No members of the Compensation Committee are former or current
officers of the Company, or have other interlocking relationships as defined by
the SEC.
Compensation of the Company's executive officers has two principal
elements: (i) an annual portion, consisting of a base salary that is reviewed
annually and cash bonuses based on the Company's underwriting results, and (ii)
a long-term portion, consisting of stock options. In general, the executive
compensation program of the Company has been designed to:
(i) Attract and retain executive officers who contribute to the
long-term success of the Company;
(ii) Motivate key senior executive officers to achieve strategic
business objectives and reward them for the achievement of these
objectives; and
(iii) Support a compensation policy that differentiates in
compensation amounts based on corporate and individual
performance and responsibilities.
A major component of the Company's compensation policy, which has been
approved by the Compensation Committee, is that a significant portion of the
aggregate annual compensation of the Company's executive officers should be
based upon the Company's underwriting results as well as the contribution of the
individual officer. For a number of years, the Company has maintained a cash
incentive compensation program for the Company's executive officers. This
program provides a formula pursuant to which a fixed percentage of the Company's
underwriting results for the year is computed, as specified in the program, and
then allocated among the executive officers selected to participate in the
program for the particular year. The identity of the executive officers selected
to participate in the program for the particular year as well as their
participation in the amount determined by application of the fixed formula is
based upon recommendations submitted by the Company's senior executive officers
to the Compensation Committee. The Compensation Committee reviews those
recommendations and fixes the percentage participation of the Company's
executive officers in the program. The portion of the total compensation of the
executive officers named in the Summary Compensation Table arising from the cash
incentive compensation program formula was $326,832 in 1997 compared to zero in
1996 because the Company's underwriting income in 1997 was substantially greater
than its underwriting income in 1996, as a result of losses caused by the severe
winter storms during the first quarter of 1996. The Compensation Committee
therefore believes that the amount of the incentive payments are tied directly
to the Company's performance.
The principal factors considered by the Company when it established the
cash incentive compensation program were:
(i) achievement of the Company's long-term underwriting objectives;
and
(ii) the Company's long-term underwriting results compared to the
long-term underwriting results of other property and casualty
insurance companies.
11
<PAGE>
Such factors as the Company's improved underwriting results, continued cost
control and reductions in the Company's expense ratio, enhancement of the skills
of the Company's workforce, the development of opportunities to expand the
geographic reach of the Company's service area on a profitable basis, oversight
of the reinspection of all properties covered by the Company's homeowners'
business and the completion of a construction program to increase the efficiency
of the Company's operations, as well as a subjective analysis of Mr. Nikolaus'
performance, were considered by the Compensation Committee in approving Mr.
Nikolaus' participation percentage under the Company's cash incentive program
for 1997.
The Company's executive officers participate in the Company's 1996 Equity
Incentive Plan, under which stock options are granted from time to time at the
fair market value of the Company's Common Stock on the date of grant. The
options typically vest over three years. The primary purpose of the 1996 Equity
Incentive Plan is to provide an incentive for the Company's long-term
performance. Such stock options provide an incentive for the creation of
stockholder value over the long-term because the full benefit of the options can
be realized only if the price of the Company's Common Stock appreciates over
time. Stock options exercisable for the purchase of 100,000 shares and 251,333
shares of the Company's Common Stock, respectively, were granted to Mr. Nikolaus
and to all of the Company's executive officers as a group under the 1996 Equity
Incentive Plan during 1997.
The Compensation Committee believes the compensation of Mr. Nikolaus and
the other executive officers of the Company is reasonable in view of the
Company's performance and the contribution of those officers to that performance
in 1997, as well as the performance of the Company in 1997 compared to the
performance of other property and casualty insurance companies in 1997.
Section 162(m) of the Code generally disallows a tax deduction to publicly
held companies for compensation of more than $1 million paid to a company's
chief executive officer or any executive officer named in its Summary
Compensation Table. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. The policy of the
Compensation Committee is to structure the compensation of the Company's
executive officers, including Mr. Nikolaus, to avoid the loss of the
deductibility of any compensation, although Section 162(m) will not preclude the
Compensation Committee from awarding compensation in excess of $1 million, if it
should be warranted in the future. The Company believes that Section 162(m) will
not have any effect on the deductibility of the compensation of Mr. Nikolaus and
the other executive officers named in the Summary Compensation Table for 1997.
DONEGAL GROUP INC. COMPENSATION COMMITTEE
C. Edwin Ireland
R. Richard Sherbahn
Philip H. Glatfelter, II
12
<PAGE>
COMPARISON OF TOTAL RETURN ON THE COMPANY'S COMMON STOCK WITH CERTAIN AVERAGES
The following graph provides an indicator of cumulative total stockholder
returns on the Company's Common Stock compared to the Russell 2000 Index and a
peer group of property and casualty insurance companies selected by Value Line,
Inc. The members of the peer group are as follows: 20th Century Industries, ACE
Limited, Allmerica Financial Corporation, Allstate Corporation, American
Financial Group Inc., W.R. Berkley Corporation, The Chubb Corporation,
Cincinnati Financial Corporation, USF&G Corporation, Fremont General
Corporation, Frontier Insurance Group, Inc., Gainsco Inc., General Reinsurance
Corporation, Hartford Financial Services Group, Markel Corporation, Mercury
General Corporation, NAC Re Corporation, Old Republic International Corporation,
Orion Capital Corporation, Ohio Casualty Corporation, The Progressive
Corporation, SAFECO Corporation, Selective Insurance Group, Inc., The St. Paul
Companies, Inc. and Transatlantic Holdings, Inc.
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
<TABLE>
<CAPTION>
Comparison of Five-Year Cumulative Total Return*
------------------------------------------------------
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Donegal Group, Inc. $100.00 $160.76 $140.40 $186.11 $208.36 $306.04
Russel 2000 Index $100.00 $118.91 $116.55 $149.70 $174.30 $213.00
Insurance (Prop/Casualty) $100.00 $102.18 $101.16 $142.15 $181.74 $280.29
Assumes $100 invested at the close of trading on 12/92 in Donegal Group, Inc.
common stock, Russell 2000 index and insurance (Prop/Casualty).
*Cumulative total return assumes reinvestment of dividends.
</TABLE>
13
<PAGE>
CERTAIN TRANSACTIONS
Donald H. Nikolaus, President and a director of the Company and the Mutual
Company, is also a partner in the law firm of Nikolaus & Hohenadel. Such firm
has served as general counsel to the Mutual Company since 1970 and to the
Company since 1986, principally in connection with the defense of claims
litigation arising in Lancaster, Dauphin and York counties. Such firm is paid
its customary fees for such services.
Patricia A. Gilmartin, a director of the Company and the Mutual Company, is
an employee of Donegal Insurance Agency, which has no affiliation with the
Company except that Donegal Insurance Agency receives insurance commissions in
the ordinary course of business from the Company's subsidiaries and affiliates
in accordance with such subsidiaries' and affiliates' standard commission
schedules and agency contracts.
Frederick W. Dreher, a director of the Mutual Company, is a partner in the
law firm of Duane, Morris & Heckscher LLP, which represents the Company and the
Mutual Company in certain legal matters. Such firm is paid its customary fees
for such services.
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
At the Annual Meeting, the stockholders will be asked to vote on a proposal
to approve an amendment to Article 4(a) of the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
10,000,000 shares to 15,000,000 shares. As of February 20, 1998, 6,057,732
shares of Common Stock were outstanding, 91,716 shares of Common Stock were held
in treasury and 2,245,538 shares of Common Stock were reserved for issuance upon
the exercise of options granted and to be granted under the Company's 1996
Equity Incentive Plan, Director Plan, 1996 Employee Stock Purchase Plan and the
Agency Stock Purchase Plan, leaving 1,605,014 shares of Common Stock available
for issuance.
The increase in the authorized number of shares of the Company's Common
Stock is being proposed because the Board of Directors believes that it is
advisable to have a greater number of authorized but unissued shares of Common
Stock available for various corporate programs and purposes. The Company may
from time to time consider acquisitions, stock dividends or stock splits, and
public or private financings to provide the Company and its subsidiaries with
capital, all of which may involve the issuance of additional shares of Common
Stock or securities convertible into Common Stock. Also, additional shares of
Common Stock may be necessary to meet anticipated future obligations under the
Company's employee and agent benefit plans. The Board of Directors believes that
having authority to issue additional shares of Common Stock will avoid the
possible delay of calling and holding a special meeting of stockholders to
increase its authorized capital stock at the time a transaction may be proposed,
so as to enhance the Company's ability to take prompt advantage of market
conditions and to respond promptly to any future acquisition opportunities.
The Company has no present plan, understanding or arrangement to issue any
of the additional shares of Common Stock that will be authorized if the
amendment is approved.
If the proposal is approved, the Board of Directors will not solicit
stockholder approval to issue the additional authorized shares except to the
extent that such approval may be required by law or the rules of The Nasdaq
Stock Market, and such shares may be issued for such consideration, cash or
14
<PAGE>
otherwise, at such times and in such amounts as the Board of Directors in its
discretion may determine, without further action by the stockholders. The future
issuance by the Company of shares of Common Stock may dilute the equity
ownership position of current holders of Common Stock. Under the Nasdaq rules
applicable to the Company, stockholder approval must be obtained prior to the
issuance of shares for certain purposes, including the issuance of shares in an
amount equal to or in excess of 20% of the Company's then outstanding shares in
connection with a future acquisition by the Company.
Although the Board of Directors currently intends to utilize the additional
shares of Common Stock solely for the purposes set forth above, such shares
could also be used by the Board of Directors to dilute the stock ownership of
persons seeking to obtain control of the Company, thereby possibly discouraging
or deterring a non-negotiated attempt to obtain control of the Company and
making removal of incumbent management more difficult. The proposal, however, is
not a result of, nor does the Board of Directors have knowledge of, any effort
to accumulate the Company's capital stock or to obtain control of the Company by
means of a merger, tender offer, solicitation in opposition to the Board of
Directors or otherwise.
The holders of Common Stock have no preemptive rights.
The Company's Certificate of Incorporation also authorizes the issuance of
1,000,000 shares of Series Preferred Stock, which the Board of Directors has the
power to issue in one or more series and to fix the number of shares of each
series and all designations, relative rights, preferences, qualifications,
limitations and restrictions of the shares in each series. The proposed
amendment does not increase or otherwise affect the Company's authorized Series
Preferred Stock.
The text of Article 4(a) of the Company's Certificate of Incorporation, as
proposed to be amended, is as follows:
"4.(a) The aggregate number of shares which the Corporation shall have
authority to issue is: Fifteen Million (15,000,000) shares of Common Stock
of the par value of One Dollar ($1.00) per share (the "Common Stock") and
One Million shares of Series Preferred Stock of the par value of One Dollar
($1.00) per share (the "Preferred Stock")."
Approval of the proposed amendment to the Certificate of Incorporation will
require the affirmative vote of the holders of a majority of the shares of the
Company's Common Stock outstanding and entitled to vote. Abstentions and broker
non-votes are considered shares of stock outstanding and entitled to vote and
are counted in determining the number of votes necessary for such majority. An
abstention or broker non-vote will therefore have the practical effect of voting
against approval of the amendment because it represents one fewer vote for
approval of the amendment.
AMENDMENT OF THE
1996 EQUITY INCENTIVE PLAN FOR DIRECTORS
AMENDMENT OF THE DIRECTOR PLAN
The Director Plan provides for: (i) the grant of non-qualified options
("Director Options") to outside directors ("Outside Directors") of the Company
and the Mutual Company at the discretion of the Board of Directors and (ii) an
annual grant to each director of the Company and the Mutual Company
("Directors") of a Restricted Stock Award of 133 shares of Common Stock to be
issued on
15
<PAGE>
the first business day of January in each year, commencing January 2, 1997,
provided that the Director served as a member of the Board or the Board of
Directors of the Mutual Company during any portion of the prior year. Director
Options and Restricted Stock Awards collectively are hereinafter referred to as
"Stock Rights."
The total number of shares of Common Stock that may be the subject of
grants of Stock Rights under the Director Plan may not exceed 119,600 shares in
the aggregate. As of March 1, 1998, Director Options to purchase 60,003 shares
of Common Stock, in the aggregate, have been granted to Outside Directors under
the Director Plan, and Restricted Stock Awards of 2,796 shares, in the
aggregate, have been granted to the Directors under the Director Plan, leaving
56,801 shares of Common Stock available for future awards under the Director
Plan.
The purpose of the Director Plan is to enhance the ability of the Company
and the Mutual Company to attract and retain highly qualified directors, to
compensate them for their services to the Company and the Mutual Company, as the
case may be, and, in so doing, to strengthen the alignment of the interests of
the Directors with the interests of the stockholders by ensuring ongoing
ownership of the Company's Common Stock. In order to continue to provide these
benefits, on March 16, 1998, the Board of Directors of the Company approved an
amendment to the Director Plan to increase the number of shares of Common Stock
available for awards thereunder from 119,600 shares to 200,000 shares.
The Director Plan is administered by the Board. The Board has the power to
interpret the Director Plan, the Director Options and the Restricted Stock
Awards, and, subject to the terms of the Director Plan, to determine who will be
granted Director Options, the number of Director Options to be granted to any
Outside Director, the timing of such grant and the terms of exercise. The Board
also has the power to adopt rules for the administration, interpretation and
application of the Director Plan. The Board does not have any discretion to
determine who will be granted Restricted Stock Awards under the Director Plan,
to determine the number of Restricted Stock Awards to be granted to each
Director or to determine the timing of such grants.
RESTRICTED STOCK AWARDS
Restricted Stock Awards consist of shares of Common Stock that are issued
in the name of the Director but that may not be sold or otherwise transferred by
the grantee until one year after the date of grant. Upon the issuance of shares
under a Restricted Stock Award, the Director has all rights of a stockholder
with respect to the shares, except that such shares may not be sold, transferred
or otherwise disposed of until one year after the date of grant.
Restricted Stock Awards are evidenced by written agreements in such form
not inconsistent with the Director Plan as the Board shall approve from time to
time. Each agreement contains such restrictions, terms and conditions as are
required by the Director Plan. Although the Common Stock comprising each
Restricted Stock Award is registered in the name of the grantee, a restrictive
legend is placed on the stock certificate.
NON-QUALIFIED STOCK OPTIONS
The exercise price of Director Options granted under the Director Plan will
be set by the Board and may not be less than 100% of the fair market value per
share of the Common Stock on the date that the Director Option is granted.
16
<PAGE>
Director Options are evidenced by written agreements in such form not
inconsistent with the Director Plan as the Board shall approve from time to
time. Each agreement will state the period or periods of time within which the
Director Option may be exercised. The Board may accelerate the exercisability of
any Director Options upon such circumstances and subject to such terms and
conditions as the Board deems appropriate. Unless the Board accelerates
exercisability, no Director Option that is unexercisable at the time of the
optionee's termination of service as a Director may thereafter become
exercisable. No Director Option may be exercised after ten years from the date
of grant. If a Director Option expires or is canceled for any reason without
having been fully exercised or vested, the number of shares subject to such
Director Option that had not been purchased or become vested may again be made
subject to a Director Option under the Director Plan.
The option price must be paid in full at the time of exercise unless
otherwise determined by the Board. Payment must be made in cash, in shares of
Common Stock valued at their then fair market value, or a combination thereof,
as determined in the discretion of the Board. It is the policy of the Board that
any taxes required to be withheld must also be paid at the time of exercise. The
Board may, in its discretion, allow an optionee to enter into an agreement with
the Company's transfer agent or a brokerage firm of national standing whereby
the optionee will simultaneously exercise the Director Option and sell the
shares acquired thereby and either the Company's transfer agent or the brokerage
firm executing the sale will remit to the Company from the proceeds of sale the
exercise price of the shares as to which the Director Option has been exercised
as well as the required amount of withholding.
An outstanding Director Option that has become exercisable generally
terminates one year after termination of a Director's service as a Director due
to death and three months after termination of a Director's service as a
Director for any reason other than death. A Director Option granted under the
Director Plan may be exercised during the lifetime of the optionee only by the
optionee.
Appropriate adjustments to outstanding Options and to the number or kind of
shares subject to the Director Plan are provided for in the event of a stock
split, reverse stock split, stock dividend, share combination or
reclassification and certain other types of corporate transactions involving the
Company, including a merger or a sale of substantially all of the assets of the
Company.
AMENDMENT OR TERMINATION
The Director Plan will remain in effect until all Director Options granted
under the Director Plan have been satisfied by the issuance of shares, except
that no Stock Rights may be granted under the Director Plan after December 19,
2006. The Board may terminate, modify, suspend or amend the Director Plan at any
time, subject to any required stockholder approval or any stockholder approval
that the Board may deem to be advisable for any reason, such as for the purpose
of obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying any applicable stock exchange listing
requirements. No modification, amendment or termination of the Director Plan
will alter or impair any rights or obligations under any outstanding Stock Right
without the consent of the grantee. No Stock Right may be granted during any
period of suspension nor after termination of the Director Plan.
17
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The Director Plan is not a qualified plan under Section 401(a) of the Code.
The following description, which is based on existing laws, sets forth generally
certain of the federal income tax consequences of Stock Rights granted under the
Director Plan. This description may differ from the actual tax consequences of
participation in the Director Plan.
An optionee will not recognize income for federal income tax purposes upon
the receipt of a Director Option, nor will the Company be entitled to any
deduction on account of such grant. Such optionee will recognize ordinary
taxable income for federal income tax purposes at the time of exercise in the
amount by which the fair market value of such shares then exceeds the option
price. When the optionee disposes of the shares acquired upon exercise of the
Director Option, the optionee will generally recognize capital gain or loss
equal to the difference between (i) the amount received upon disposition of the
shares, and (ii) the sum of the option price and the amount included in the
optionee's income when the Director Option was exercised. Such gain will be
long-term or short-term depending upon whether the shares were held for at least
one year after the date of exercise.
A grantee of shares of restricted stock pursuant to a Restricted Stock
Award will recognize ordinary income for federal income tax purposes in the year
of receipt, measured by the value of the shares received determined without
regard to the transfer restriction or other restrictions relating to such issue.
Any gain or loss recognized upon the sale of the shares will generally be
treated as capital gain or loss and will be long-term or short-term depending
upon the holding period of the shares.
Under current law, any gain realized by an optionee or a grantee, as the
case may be, other than long-term capital gain, is taxable at a maximum federal
income tax rate of 39.6%. Long-term capital gain is taxable at a maximum federal
income tax rate of 28% (20% if the holding period is at least 18 months).
The Company will be entitled to a tax deduction in connection with Stock
Rights under the Director Plan in an amount equal to the ordinary income
realized by the grantee at the time he or she recognizes such income.
VOTE REQUIRED
Approval of the amendment to the Director Plan will require the affirmative
vote of the holders of a majority of the outstanding shares of the Company's
Common Stock present in person or represented by proxy at the Annual Meeting and
entitled to vote. Abstentions are considered shares of stock present in person
or represented by proxy at the meeting and entitled to vote and are counted in
determining the number of votes necessary for such majority. An abstention will
therefore have the practical effect of voting against adoption of the Director
Plan because it represents one fewer vote for adoption of the Director Plan.
Broker non-votes are not considered shares present in person or represented by
proxy and entitled to vote on the Director Plan and will have no effect on the
vote. The Board of Directors recommends that the stockholders vote FOR the
approval of the amendment to the Director Plan.
18
<PAGE>
ELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Unless instructed to the contrary, it is intended that votes will be cast
pursuant to the proxies for the election of KPMG Peat Marwick LLP as the
Company's independent public accountants for 1998. The Company has been advised
by KPMG Peat Marwick LLP that none of its members has any financial interest in
the Company. Election of KPMG Peat Marwick LLP will require the affirmative vote
of the holders of a majority of the shares of the Company's Common Stock present
in person or represented by proxy at the Annual Meeting.
A representative of KPMG Peat Marwick LLP will attend the Annual Meeting,
will have the opportunity to make a statement, if he desires to do so, and will
be available to respond to any appropriate questions presented by stockholders
at the Annual Meeting.
ANNUAL REPORT
A copy of the Company's Annual Report for 1997 is being mailed to the
Company's stockholders with this Proxy Statement.
STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the provisions
of the proxy rules of the SEC, wishes to submit a proposal for inclusion in the
Company's proxy statement for its 1999 Annual Meeting of Stockholders must
deliver such proposal in writing to the Company's Secretary at the Company's
principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547,
not later than November 23, 1998.
OTHER PROPOSALS
The Board of Directors does not know of any matters to be presented for
consideration at the Annual Meeting other than the matters described in the
Notice of Annual Meeting, but if any matters are properly presented, it is
the intention of the persons named in the accompanying proxy to vote on such
matters in accordance with their judgment.
By Order of the Board of Directors
/s/ Donald H. Nikolaus
------------------------------------------
Donald H. Nikolaus
President and Chief Executive Officer
March 23, 1998
19
<PAGE>
PROXY DONEGAL GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 16, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Daniel J. Wagner and Ralph
G. Spontak, and each or any of them, proxies of the undersigned, with full power
of substitution, to vote all of the shares of Common Stock of Donegal Group Inc.
(the "Company") which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of the Company to be held at the Company's offices, 1195
River Road, Marietta, Pennsylvania 17547, on April 16, 1998 at 10:00 a.m., and
at any adjournment, postponement or continuation thereof, as follows:
/ / Please mark your |
/ / votes as in this | 6149
/ / example. |____
This proxy will be voted as specified. If a choice is not specified, the
proxy will be voted FOR the nominees for Director and FOR Proposals 2, 3 and 4.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR proposals 2, 3 and 4.
- --------------------------------------------------------------------------------
FOR WITHHELD
1. Election of / / / /
Class C
Directors
For, except vote withheld from the following nominee(s):
________________________________________________________
FOR AGAINST ABSTAIN
2. Amendment of the / / / / / /
Company's Certificate
of Incorporation.
FOR AGAINST ABSTAIN
3. Amendment of the / / / / / /
Company's 1996 Equity
Incentive Plan.
FOR AGAINST ABSTAIN
4. Election of KPMG / / / / / /
Peat Marwick LLP as
independent public
accountants for 1998.
5. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment,
postponement or continuation thereof.
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This proxy should be dated, signed by the stockholder exactly as his name
appears below and returned promptly to First Chicago Trust Company of New York
in the enclosed envelope. Persons signing in a fiduciary capacity should so
indicate.
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SIGNATURE(S) DATE
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Appendix A
DONEGAL GROUP INC.
AMENDED & RESTATED
1996 EQUITY INCENTIVE PLAN
FOR DIRECTORS
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DONEGAL GROUP INC., a corporation organized under the laws of the State
of Delaware, hereby sets forth the 1996 Equity Incentive Plan for Directors. The
Plan provides for the grant of (i) Options to Outside Directors of the Company
and the Mutual Company and (ii) Restricted Stock Awards to Directors of the
Company and the Mutual Company, as each of such capitalized terms is hereinafter
defined.
1. DEFINITIONS. Whenever the following terms are used in the Plan they
shall have the meanings specified below unless the context clearly indicates to
the contrary:
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code shall include such section, any
valid regulation promulgated thereunder and any comparable provision of any
future legislation amending, supplementing or superseding such section.
"Common Stock" shall mean the Common Stock, $1.00 par value, of the
Company.
"Company" shall mean Donegal Group Inc., a Delaware corporation.
"Director" shall mean a member of the Board of Directors of the Company
and/or the Mutual Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" of the Common Stock on any date shall mean the
closing price of the Common Stock for such date, as reported in The Wall Street
Journal, or if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation ("Nasdaq") System, or if
the Common Stock is not reported by Nasdaq, the fair market value shall be as
determined by the Board. If no closing price is reported quoted for such date,
the next preceding date for which such sale prices are quoted shall be used.
"Grantee" shall mean a Director to whom a Restricted Stock Award is
granted.
"Mutual Company" shall mean Donegal Mutual Insurance Company.
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"Option" shall mean a nonqualified stock option granted under the
provisions of Section 4 of the Plan to purchase Common Stock of the Company.
"Optionee" shall mean an Outside Director to whom an Option is granted.
"Outside Director" shall mean a Director who is not also an employee of
the Company, the Mutual Company or any affiliate of the Company or the Mutual
Company.
"Plan" shall mean this 1996 Equity Incentive Plan for Directors.
"Restricted Stock Award" shall mean a restricted stock award granted
under the provisions of Section 5 of the Plan.
"Secretary" shall mean the Secretary of the Company.
"Termination of Service" shall mean such time as a Director shall cease
to serve as a member of the Board of Directors of the Company or the Mutual
Company, whether as a result of resignation, failure to be reelected, removal
for cause, death or any other reason.
2. ADMINISTRATION.
(a) ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board.
(b) DUTY AND POWERS OF THE BOARD. It shall be the duty of the Board to
conduct the general administration of the Plan in accordance with its
provisions. The Board shall have the power to interpret the Plan, the Options
and the Restricted Stock Awards and to adopt rules for the administration,
interpretation and application of the Plan as are consistent therewith and to
interpret, amend or revoke any such rules. The Board shall have the discretion
to determine who will be granted Options and to determine the number of Options
to be granted to any Outside Director, the timing of such grant and the terms of
exercise. The Board shall not have any discretion to determine who will be
granted Restricted Stock Awards under the Plan.
(c) BOARD ACTIONS. The Board may act either by vote of a majority of
its members present at a meeting of the Board at which a quorum is present or by
a memorandum or other written instrument signed by all members of the Board.
(d) COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members
of the Board shall not receive any compensation for their services in admin-
istering the Plan, but all expenses and liabilities they incur in connection
with the administration of the Plan shall be borne by the Company. The Board may
employ attorneys, consultants, accountants or other persons. The Board, the
Company and
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the officers and directors of the Company shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Board in good faith shall be
final and binding upon all Optionees and Grantees, the Company and all other
interested persons. No member of the Board shall be personally liable for any
action, determination or interpretation made in good faith with respect to the
Plan, and all members of the Board shall be fully protected and indemnified by
the Company in respect to any such action, determination or interpretation.
3. SHARES SUBJECT TO THE PLAN.
(a) LIMITATIONS. The shares of stock issuable pursuant to Options or
Restricted Stock Awards shall be shares of the Common Stock. The total number
of such shares that may be issued pursuant to Options or Restricted Stock Awards
granted under the Plan shall not exceed 200,000 in the aggregate.
(b) EFFECT OF UNEXERCISED OR CANCELLED OPTIONS. If an Option expires or
is cancelled for any reason without having been fully exercised or vested, the
number of shares subject to such Option that were not purchased or did not vest
prior to such expiration or cancellation may again be made subject to an Option
or Restricted Stock Award granted hereunder.
(c) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Restricted Stock Award and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Restricted Stock Awards have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option, as well
as the price per share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Restricted Stock Award.
(d) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, all outstanding Options will
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the
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Board. The Board may, in the exercise of its discretion in such instances,
declare that any Option shall terminate as of a date fixed by the Board and give
each Option holder the right to exercise his Option as to all or any part of the
shares of Common Stock covered by the Option, including shares as to which the
Option would not otherwise be exercisable.
(e) SALE OR MERGER. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Board, in the exercise of its sole
discretion, may take such action as it deems desirable, including, but not
limited to: (i) causing an Option to be assumed or an equivalent option to be
substituted by the successor corporation or a parent or subsidiary of such
successor corporation, (ii) providing that each Option holder shall have the
right to exercise his Option as to all of the shares of Common Stock covered by
the Option, including shares as to which the Option would not otherwise be
exercisable, or (iii) declaring that an Option shall terminate at a date fixed
by the Board, provided that the Option holder is given notice and opportunity to
exercise the then exercisable portion of his Option prior to such date.
4. STOCK OPTIONS.
(a) GRANTING OF OPTIONS.
(i) ELIGIBILITY. Each Outside Director shall be eligible to be
granted Options.
(ii) GRANTING OF OPTIONS. Options may be granted by the Board at
any time and from time to time while the Plan shall be in effect. The Board
shall have the authority to determine the Outside Directors to whom Options are
granted, the number of Options to be granted to each and the timing and vesting
of each grant. The Board's determinations with respect to Options granted under
the Plan need not be uniform and may be made selectively among Outside Directors
as the Board, in its discretion, shall determine.
(iii) TYPE OF OPTIONS. All Options granted under the Plan shall be
options not intended to qualify as incentive stock options under Section 422 of
the Code.
(b) TERMS OF OPTIONS.
(i) OPTION AGREEMENT. Each Option shall be evidenced by a written
stock option agreement that shall be executed by the Optionee and on behalf of
the Company and that shall contain such terms and conditions as the Board
determines are required or appropriate under the Plan.
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(ii) OPTION PRICE. The exercise price of the shares subject to each
Option shall be not less than 100% of the Fair Market Value for such shares on
the date the Option is granted.
(iii) DATE OF GRANT. The date on which an Option shall be deemed to
have been granted under the Plan shall be the date of the Board's authorization
of the Option or such later date as may be determined by the Board at the time
the Option is authorized.
(iv) EXERCISE TERM. Each stock option agreement shall state the
period or periods of time within which the Option may be exercised, in whole or
in part, as determined by the Board, provided that no Option shall be
exercisable after ten years from the date of grant thereof. The Board shall have
the power to permit an acceleration of previously established exercise terms,
subject to the requirements set forth herein, upon such circumstances and
subject to such terms and conditions as the Board deems appropriate.
(v) RIGHTS UPON TERMINATION OF SERVICE. Upon an Optionee's
Termination of Service, for any reason other than death, the Optionee shall have
the right to exercise the Option during its term within a period of three months
after such termination to the extent that the Option was exercisable at the time
of termination, or within such other period, and subject to such terms and
conditions, as may be specified by the Board. In the event that an Optionee dies
prior to the expiration of his Option and without having fully exercised his
Option, the Optionee's representative or successor shall have the right to
exercise the Option during its term within a period of one year after
Termination of Service due to death to the extent that the Option was
exercisable at the time of Termination of Service, or within such other period,
and subject to such terms and conditions, as may be specified by the Board.
(c) EXERCISE OF OPTIONS.
(i) PERSON ELIGIBLE TO EXERCISE. During the lifetime of the
Optionee, only the Optionee may exercise an Option or any portion thereof. After
the death of the Optionee, any exercisable portion of an Option may be exercised
by the Optionee's personal representative or by any person empowered to do so
under the deceased Optionee's will or under the then applicable laws of descent
and distribution. The Company may require appropriate proof from any such person
of such person's right to exercise the Option or any portion thereof.
(ii) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares on exercise of an Option.
(iii) MANNER OF EXERCISE. Options may be exercised in whole or in
part, from time to time, by giving written notice of exercise to the Secretary,
specifying the number of shares to be purchased. The purchase price of the
shares with respect to
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<PAGE>
which an Option is exercised shall be payable in full with the notice of
exercise in cash, Common Stock at Fair Market Value, or a combination thereof,
as the Board may determine from time to time and subject to such terms and
conditions as may be prescribed by the Board for such purpose. The Board may
also, in its discretion and subject to prior notification to the Company by an
Optionee, permit an Optionee to enter into an agreement with the Company's
transfer agent or a brokerage firm of national standing whereby the Optionee
will simultaneously exercise the Option and sell the shares acquired thereby
through the Company's transfer agent or such a brokerage firm and either the
Company's transfer agent or the brokerage firm executing the sale will remit to
the Company from the proceeds of sale the exercise price of the shares as to
which the Option has been exercised.
(iv) RIGHTS OF STOCKHOLDERS. An Optionee shall not be, nor have any
of the rights of, a stockholder of the Company in respect to any shares that may
be purchased upon the exercise of any Option or portion thereof unless and until
certificates representing such shares have been issued by the Company to such
Optionee.
(v) GENERAL RESTRICTIONS. Each Option granted under the Plan shall
be subject to the requirement that, if at any time the Board shall determine
that (i) the listing, registration or qualification of the shares of Common
Stock subject or related thereto upon any securities exchange or under any state
or federal law, or (ii) the consent or approval of any government regulatory
body, or (iii) the satisfaction of any tax payment or withholding obligation, or
(iv) an agreement by the Optionee with respect to the disposition of shares of
Common Stock, is necessary or desirable as a condition of or in connection with
the granting of such Option or the issuance or purchase of shares of Common
Stock thereunder, such Option shall not be consummated in whole or in part
unless such listing, registration, qualification, consent, approval, payment,
withholding or agreement shall have been effected or obtained free of any
conditions not acceptable to the Board.
5. RESTRICTED STOCK AWARDS.
(a) GRANTING OF AWARDS.
(i) ELIGIBILITY. Each Director shall be eligible to be granted
Restricted Stock Awards.
(ii) GRANTING OF AWARDS. Each Director shall be granted annual
Restricted Stock Awards consisting of 100 shares of Common Stock, such
Restricted Stock Awards to be made on the first business day of January in each
year, commencing January 2, 1997, provided that the Director served as a member
of the Board or of the Board of Directors of the Mutual Company during any
portion of the preceding calendar year.
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(b) TERMS OF RESTRICTED STOCK AWARDS.
(i) RESTRICTED STOCK AGREEMENT. Each Restricted Stock Award shall
be evidenced by a written restricted stock agreement that shall be executed by
the Grantee and the Company and that shall contain such restrictions, terms and
conditions as are required by the Plan.
(ii) RESTRICTIONS ON TRANSFER. The shares of Common Stock compris-
ing the Restricted Stock Awards may not be sold or otherwise transferred by the
Grantee until one year after the date of grant. Although the shares of Common
Stock comprising each Restricted Stock Award shall be registered in the name of
the Grantee, the Company reserves the right to place a restrictive legend on the
stock certificate. None of such shares of Common Stock shall be subject to
forfeiture.
(iii) RIGHTS AS STOCKHOLDER.
(a) Subject to the restrictions on transfer set forth in
Section 5(b)(ii) hereof, a Grantee shall have all the rights of a stockholder
with respect to the shares of Common Stock issued pursuant to Restricted Stock
Awards made hereunder, including the right to vote the shares and receive all
dividends and other distributions paid or made with respect to the shares.
(b) In the event of changes in the capital stock of the
Company by reason of stock dividends, split-ups or combinations of shares,
reclassifications, mergers, consolidations, reorganizations or liquidations
while the shares comprising a Restricted Stock Award shall be subject to
restrictions on transfer, any and all new, substituted or additional securities
to which the Grantee shall be entitled by reason of the ownership of a
Restricted Stock Award shall be subject immediately to the terms, conditions and
restrictions of the Plan.
(c) If a Grantee receives rights or warrants with respect to
any shares comprising a Restricted Stock Award, such rights or warrants or any
shares or other securities acquired by the exercise of such rights or warrants
may be held, exercised, sold or otherwise disposed of by the Grantee free and
clear of the restrictions and obligations set forth in the Plan.
(iv) GENERAL RESTRICTIONS. Each Restricted Stock Award granted
under the Plan shall be subject to the requirement that if, at any time the
Board shall determine that (i) the listing, registration or qualification of the
shares of Common Stock subject or related thereto upon any securities exchange
or under any state or federal law, or (ii) the consent or approval of any
government regulatory body, or (iii) the satisfaction of any tax payment or
withholding obligation, or (iv) an agreement by the Grantee with respect to the
disposition of shares of Common Stock, is necessary or desirable as a condition
of or in connection with the granting of such Restricted Stock Award, such
Restricted Stock Award shall not be consummated in whole or in
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part unless such listing, registration, qualification, consent, approval or
agreement shall have been effected or obtained free of any conditions not
acceptable to the Board.
6. MISCELLANEOUS PROVISIONS.
(a) NO ASSIGNMENT OR TRANSFER. No Option or interest or right therein
or part thereof, and, for a period of one year after the date of grant, no
Restricted Stock Award or any interest therein or part thereof, shall be liable
for the debts, contracts, or engagements of the Optionee or Grantee or his
successors in interest nor shall they be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means,
whether such disposition is voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect; provided, however, that nothing in this
Section 6(a) shall prevent transfers by will or by the applicable laws of
descent and distribution.
(b) AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board, subject to any required stockholder
approval or any stockholder approval that the Board may deem advisable for any
reason, such as for the purpose of obtaining or retaining any statutory or
regulatory benefits under tax, securities or other laws or satisfying any
applicable stock exchange listing requirements. Neither the amendment,
suspension nor termination of the Plan shall, without the consent of the
Optionee or Grantee, alter or impair any rights or obligations under any
outstanding Option or Restricted Stock Award. No Option or Restricted Stock
Award may be granted during any period of suspension nor after termination of
the Plan.
(c) WITHHOLDING. Whenever the Company proposes or is required to issue
or transfer shares of Common Stock under the Plan, the Company shall have the
right to require the recipient to remit to the Company an amount sufficient to
satisfy any federal, state or local withholding tax requirements prior to the
delivery of any certificate for such shares. If and to the extent authorized by
the Board, in its sole discretion, an Optionee may make an election, by means of
a form of election to be prescribed by the Board, to have shares of Common Stock
that are acquired upon exercise of an Option withheld by the Company or to
tender other shares of Common Stock or other securities of the Company owned by
the Optionee to the Company at the time of exercise of an Option to pay the
amount of tax that would otherwise be required by law to be withheld by the
Company as a result of any exercise of an Option. Any such election shall be
irrevocable and shall be subject to termination by the Board, in its sole
discretion, at any time. Any securities so withheld or tendered will be valued
by the Board as of the date of exercise.
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(d) RESERVATION OF SHARES. The Company, during the term of the Plan,
will at all times reserve and keep available such number of shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any shares hereunder, shall relieve the Company of any liability for the
failure to issue or sell such shares as to which such requisite authority shall
not have been obtained.
(e) DURATION OF THE PLAN. The Plan shall remain in effect until all
Options granted under the Plan have been satisfied by the issuance of shares,
but no Option or Restricted Stock Award shall be granted more than ten years
after the earlier of the date the Plan is adopted by the Company or is approved
by the Company's stockholders.
(f) NO PROHIBITION ON CORPORATE ACTION. No provision of the Plan shall
be construed to prevent the Company or any officer or director thereof from
taking any action deemed by the Company or such officer or director to be
appropriate or in the Company's best interest, whether or not such action could
have an adverse effect on the Plan or any Options or Restricted Stock Awards
granted hereunder, and no Director or Director's estate, personal representative
or beneficiary shall have any claim against the Company or any officer or
director thereof as a result of the taking of such action.
(g) INDEMNIFICATION. With respect to the administration of the Plan,
the Company shall indemnify each present and future member of the Board against,
and each member of the Board shall be entitled without further action on his
part to indemnity from the Company for, all expenses (including the amount of
judgments and the amount of approved settlements made with a view to the
curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of, any
action, suit or proceeding in which he may be involved by reason of his being or
having been a member of the Board, whether or not he continues to be such member
at the time of incurring such expenses; provided, however, that such indemnity
shall not include any expenses incurred by any such member of the Board (i) in
respect of matters as to which he shall be finally adjudged in any such action,
suit or proceeding to have been guilty of gross negligence or willful misconduct
in the performance of his duty as such member of the Board; or (ii) in respect
of any matter in which any settlement is effected for an amount in excess of the
amount approved by the Company on the advice of its legal counsel; and provided
further that no right of indemnification under the provisions set forth herein
shall be available to or enforceable by any such member of the Board unless,
within 60 days after institution of any such action, suit or proceeding, he
shall have offered the Company in writing the opportunity to handle and defend
same at its own expense. The foregoing right of indemnification shall inure to
the benefit of the heirs, executors or administrators of each such member of the
Board and shall be in addition
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to all other rights to which such member may be entitled as a matter of law,
contract or otherwise.
(h) COMPLIANCE WITH PLAN PROVISIONS. No Optionee or Grantee shall have
any right with respect to the Plan, the Common Stock reserved for issuance under
the Plan or in any Option or Restricted Stock Award until a written stock option
agreement or a written restricted stock agreement, as the case may be, shall
have been executed on behalf of the Company and by the Optionee or Grantee, and
all the terms, conditions and provisions of the Plan and the Option or
Restricted Stock Award applicable to such Optionee or Grantee (and each person
claiming under or through him) have been met.
(i) APPROVAL OF COUNSEL. In the discretion of the Board, no shares of
Common Stock, other securities or property of the Company or other forms of
payment shall be issued hereunder with respect to any Option or Restricted Stock
Award unless counsel for the Company shall be satisfied that such issuance will
be in compliance with applicable federal, state, local and foreign legal,
securities exchange and other applicable requirements.
(j) EFFECTS OF ACCEPTANCE. By accepting any Option or Restricted Stock
Award or other benefit under the Plan, each Optionee and Grantee and each person
claiming under or through him shall be conclusively deemed to have indicated his
acceptance and ratification of, and consent to, any action taken under the Plan
by the Company, the Board or its delegates.
(k) CONSTRUCTION. The masculine pronoun shall include the feminine and
neuter, and the singular shall include the plural, where the context so
indicates.
(l) COMPLIANCE WITH RULE 16b-3. To the extent that Rule 16b-3 under the
Exchange Act applies to Options or Restricted Stock Awards granted under the
Plan, it is the intention of the Company that the Plan comply in all respects
with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in
construction of the Plan be interpreted to give effect to such intention and
that if the Plan shall not so comply, whether on the date of adoption or by
reason of any later amendment to or interpretation of Rule 16b-3, the provisions
of the Plan shall be deemed to be automatically amended so as to bring them into
full compliance with such rule.
(m) STOCKHOLDER APPROVAL. Except with respect to the Restricted Stock
Awards to be granted on January 2, 1997, no Option may be exercised and no Re-
stricted Stock Award may be granted until the Plan shall have been approved by
the affirmative vote of the holders of a majority of the shares of the Company's
outstanding Common Stock present or represented and entitled to vote at a duly
convened meeting of stockholders held on or before December 31, 1997. The
failure of the stockholders of the Company to approve the Plan shall in no way
terminate or
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otherwise impair the Restricted Stock Awards granted to Directors hereunder on
January 2, 1997.
(n) TITLES. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of the Plan.
Adopted by the Board of Directors on December 19, 1996.
Approved by the Stockholders on April 17, 1997.
Amended by the Board of Directors on March 16, 1998.
Amended by the Stockholders on April ___, 1998.
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