Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 of the Securities Exchange Act
of 1934
For the Quarterly Period Ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to ___________________.
Commission File No. 0-15341
-------
Donegal Group Inc.
------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2424711
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, P.O. Box 302, Marietta, PA 17547-0302
------------------------------------------------------
(Address of principal executive offices,
including zip code)
(717) 426-1931
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No.__ .
-
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes __ . No __ .
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,072,043 shares of Common
Stock, $1.00 par value, outstanding on April 30, 1998.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
Donegal Group Inc. And Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
Assets March 31, 1998 December 31, 1997
-------------- -----------------
Investments (Unaudited)
Fixed maturities
<S> <C> <C>
Held to maturity, at amortized cost $114,129,543 $117,246,205
Available for sale, at market value 62,709,150 57,731,251
Equity securities, available for sale at market 12,009,052 7,274,562
Short-term investments, at cost, which
approximate market 12,105,067 22,712,787
------------ ------------
Total Investments 200,952,812 204,964,805
Cash 2,233,830 3,413,315
Accrued investment income 2,542,803 2,741,207
Premiums receivable 11,945,251 11,244,628
Reinsurance receivable 41,750,593 40,953,032
Deferred policy acquisition costs 8,645,012 8,448,060
Federal income tax receivable --- 56,454
Deferred federal income taxes 3,059,607 3,302,043
Prepaid reinsurance premiums 24,380,777 22,882,283
Property and equipment, net 5,096,485 4,938,524
Accounts receivable - securities 1,684,799 456,493
Due from affiliate --- 141,313
Other 1,038,751 562,348
------------ ------------
Total Assets $303,330,720 $304,104,505
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
Losses and loss expenses $119,121,004 $118,112,390
Unearned premiums 73,273,422 71,367,691
Accrued expenses 2,336,400 3,214,767
Reinsurance balances payable 659,639 735,009
Federal income tax payable 1,155,544 ---
Cash dividend declared to stockholders --- 604,054
Line of credit 5,000,000 10,500,000
Accounts payable - securities --- 2,499,059
Other 686,036 283,098
Due to affiliate - Pioneer acquisition 5,191,774 5,191,774
- Other 163,595 ---
------------ ------------
Total Liabilities 207,587,414 212,507,842
------------ ------------
Stockholders' Equity
Preferred stock, $1.00 par value, authorized
1,000,000 shares; none issued
Common stock, $1.00 par value, authorized 10,000,000 shares,
issued 6,149,448 and 6,122,431 shares and outstanding
6,057,732 and 6,030,715 shares 6,149,448 6,122,431
Additional paid-in capital 39,432,923 38,932,117
Accumulated other comprehensive income 1,313,583 1,011,417
Retained earnings 49,739,108 46,422,454
Treasury stock (891,756) (891,756)
------------ ------------
Total Stockholders' Equity 95,743,306 91,596,663
------------ ------------
Total Liabilities and
Stockholders' Equity $303,330,720 $304,104,505
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
For the three months ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
Revenues:
<S> <C> <C>
Premiums earned $40,478,779 $39,041,184
Premiums ceded 13,274,235 12,636,851
----------- -----------
Net premiums earned 27,204,544 26,404,333
Investment income, net of investment
expenses 2,845,267 2,844,983
Realized gain 311,793 37,827
Lease income 183,064 142,452
Service charge income 351,476 393,776
----------- -----------
Total Revenues 30,896,144 29,823,371
----------- -----------
Expenses:
Losses and loss expenses 24,926,996 23,907,647
Reinsurance recoveries 9,125,091 6,995,104
----------- -----------
Net losses and loss expenses 15,801,905 16,912,543
Amortization of deferred policy
acquisition costs 4,700,000 4,479,000
Other underwriting expenses 4,696,951 4,112,816
Policy dividends 477,858 433,699
Interest 183,059 164,987
Other expenses 421,809 397,465
----------- -----------
Total Expenses 26,281,582 26,500,510
----------- -----------
Income before income taxes 4,614,562 3,322,861
Income taxes 1,297,909 760,428
----------- -----------
Net income $3,316,653 $ 2,562,433
=========== ===========
Earnings per common share
Basic $.54 $.43
==== ====
Diluted $.53 $.43
==== ====
</TABLE>
Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net Income $ 3,316,653 $ 2,562,433
----------- -----------
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain arising
during the period 343,502 (634,594)
Less: Reclassification adustment for
gains (losses) included in
Net income (41,336) (3,590)
----------- -----------
Other comprehensive income (loss) 302,166 (638,184)
----------- -----------
Comprehensive income $ 3,618,819 $ 1,924,249
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
<TABLE>
<CAPTION>
Common Stock
---------------------- Accumulated Total
Additional Other Com- Stock-
Paid-In prehensive Retained Treasury holders'
Shares Amount Capital Income Earnings Stock Equity
------ ------ ------- ------ -------- ----- ------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 6,122,431 $6,122,431 $38,932,117 $1,011,417 $46,422,454 $(891,756) $91,596,663
Issuance of
Common Stock 27,017 27,017 500,806 527,823
Net Income 3,316,654 3,316,654
Other Comprehensive
Income 302,166 302,166
--------- ---------- ----------- ---------- ----------- --------- -----------
Balance,
March 31, 1998 6,149,448 $6,149,448 $39,432,923 $1,313,583 $49,739,108 $(891,756) $95,743,306
========= ========== =========== ========== =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the three months ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 3,316,653 $ 2,562,433
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 114,373 78,089
Realized investment gain (311,793) (37,827)
Changes in Assets and Liabilities:
Losses and loss expenses 1,008,614 (466,011)
Unearned premiums 1,905,731 (357,273)
Premiums receivable (700,623) (123,821)
Deferred acquisition costs (196,952) 177,205
Deferred income taxes 86,774 (108,989)
Reinsurance receivable (797,561) 1,729,008
Prepaid reinsurance premiums (1,498,494) (537,452)
Accrued investment income 198,404 59,831
Due from affiliate 141,313 1,117,987
Accounts payable reinsurance (75,370) 39,219
Current income taxes payable 1,212,008 (144,575)
Other, net (788,247) (239,211)
------------ ------------
Net adjustments 298,177 1,186,180
------------ ------------
Net cash provided by operating activities 3,614,830 3,748,613
------------ ------------
Cash flows from investing activities:
Purchase of fixed maturities
Held to maturity (5,391,567) (8,732,818)
Available for sale (11,341,414) (7,473,721)
Purchase of equity securities, available for sale (7,459,192) (1,908,722)
Maturity of fixed maturities
Held to maturity 8,520,875 2,042,049
Available for sale 3,200,000 2,250,000
Sale of fixed maturities - available for sale 535,765 4,010,313
Sale of equity securities, available for sale 2,394,367 460,763
Purchase of property and equipment (284,638) (582,042)
Net sales of short-term investments 10,607,720 5,897,305
------------ ------------
Net cash used in investing activities 781,916 (4,036,873)
------------ ------------
Cash flows from financing activities:
Cash dividends paid (604,054) (492,619)
Issuance of common stock 527,823 121,006
Line of credit, net (5,500,000) --
------------ ------------
Net cash provided by (used in)
financing activities (5,576,231) (371,613)
------------ ------------
Net decrease in cash (1,179,485) (659,873)
Cash at beginning of year 3,413,315 3,700,163
------------ ------------
Cash at end of quarter $ 2,233,830 $ 3,040,290
============ ============
Cash paid during period - Interest $ 2,711 $ 164,975
- Income taxes $ 112,045 $ 724,842
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Donegal Group Inc. ("DGI" or the "Company") is a regional insurance
holding company doing business in Pennsylvania, Maryland, Delaware, Virginia and
Ohio through its four wholly owned property-casualty insurance subsidiaries,
Atlantic States Insurance Company ("Atlantic"), Southern Insurance Company of
Virginia ("Southern"), Pioneer Insurance Company ("Pioneer") and Delaware
Atlantic Insurance Company ("Delaware"). The Company's major lines of business
in 1997 and their percentage of total net earned premiums were Automobile
Liability (27.8%), Workers' Compensation (15.9%), Automobile Physical Damage
(17.1%), Homeowners (17.6%), and Commercial Multiple Peril (15.6%). The
subsidiaries are subject to regulation by Insurance Departments in those states
in which they operate and undergo periodic examination by those departments. The
subsidiaries are also subject to competition from other insurance carriers in
their operating areas. DGI was formed in September 1986 by Donegal Mutual
Insurance Company (the "Mutual Company"), which owns 58% of the outstanding
common shares of the Company as of March 31, 1998.
Atlantic States participates in an intercompany pooling arrangement with
the Mutual Company and assumes 65% of the pooled business, 60% prior to January
1, 1996. Southern cedes 50% of its business to the Mutual Company and Delaware
cedes 70% of its Workers' Compensation business to the Mutual Company. Because
the Mutual Company places substantially all of the business assumed from
Southern and Delaware into the pool, from which the Company has a 65%
allocation, the Company's results of operations include approximately 80% of the
business written by Southern and approximately 75% of the Workers' Compensation
business written by Delaware.
In addition to the Company's insurance subsidiaries, it also owns all of
the outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance
services organization currently providing inspection and policy auditing
information on a fee for service basis to its affiliates and the insurance
industry.
-5-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Summary Notes to Consolidated Financial Statements
1 - Organization
The Company was organized as a regional insurance holding company by
Donegal Mutual Insurance Company (the "Mutual Company") on August 26, 1986 and
operates in Pennsylvania, Maryland, Delaware, Virginia and Ohio through its
wholly owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States"), Southern Insurance Company of Virginia ("Southern"),
Delaware Atlantic Insurance Company ("Delaware"), Pioneer Insurance Company
("Pioneer") and Atlantic Insurance Services, Inc. ("AIS"). The Company's major
lines of business are Automobile Liability, Automobile Physical Damage,
Homeowners, Commercial Multiple Peril and Workers' Compensation. Atlantic,
Southern and Delaware are subject to regulation by Insurance Departments in
those states in which they operate and undergo periodic examination by those
departments. They are also subject to competition from other insurance carriers
in their operating areas. Atlantic States engages in the insurance business
primarily through an intercompany pooling arrangement with the Mutual Company.
Southern was acquired by the Company on December 31, 1988 pursuant to a plan of
conversion from a mutual to a stock company and cedes 50% of its business to the
Mutual Company, 80% prior to 1991. On December 29, 1995, the Company acquired
all of the outstanding stock of Delaware. This transaction was accounted for as
if it were a "Pooling of Interest," and as such, the Company's financial
statements have been restated to include Delaware as a consolidated subsidiary
from January 1, 1994 to the present. On March 31, 1997, the Company acquired all
of the outstanding stock of Pioneer. This transaction was accounted for as if it
were a "Pooling of Interest", and as such the Company's financial statements
have been restated to include Pioneer as a consolidated subsidiary from January
1, 1994 to the present. At March 31, 1998 the Mutual Company held 58% of the
outstanding common stock of the Company.
2 - Basis of Presentation
The financial information for the interim period included herein is
unaudited; however, such information reflects all adjustments, consisting only
of normal recurring adjustments, which, in the opinion of management of
Registrant, are necessary to a fair presentation of Registrant's financial
position, results of operations and changes in financial position for the
interim period included herein. The results of operations for the three months
ended March 31, 1998, are not necessarily indicative of results of operations to
be expected for the twelve months ended December 31, 1998.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
-6-
<PAGE>
Results of Operations - Three Months Ended March 31, 1998
to Three Months Ended March 31, 1997
Revenues for the three months ended March 31, 1998 were $30,896,144 an
increase of $1,072,773 or 3.6%, over the same period of 1997. An increase in net
premiums earned of $800,211 or 3.0%, represented most of this change. Investment
income for the first quarter of 1998 was $2,845,267, an increase of $284 over
the first quarter of 1997. An increase in the average invested assets of
$10,034,140 or 5.2%, to $202,958,808 and a decrease in the average return on
investments to an annualized rate of 5.6% for the first quarter of 1998 compared
to 5.9% for the first quarter of 1997, accounted for the change. Realized
investment gains, which resulted from the normal turnover of the Company's
investment portfolio, increased $273,966 for the three months ended March 31,
1998 compared to the same period in 1997, to $311,793.
The GAAP combined ratio of insurance operations in the first quarter of
1998 was 94.4% compared to 98.2% for the same period in 1997. The GAAP combined
ratio is the sum of the ratios of incurred losses and loss adjusting expenses to
premiums earned (loss ratio), policyholders dividends to premiums earned
(dividend ratio), and underwriting expenses to premiums earned (expense ratio).
The Company posted a loss ratio of 58.1% for the first quarter 1998 compared to
the 64.1% loss ratio it posted for the first quarter 1997. The expense ratio
increased from 32.5% to 34.5% for the three months ended March 31, 1998 due
primarily to increases in incentive expenses for employees and agents related to
the lower claims activity for the first three months of the year. The dividend
ratio increased slightly from 1.6% for the first quarter of 1997 to 1.8% for the
first quarter of 1998.
Federal income taxes for the first quarter of 1998 represented 28.1% of
income before income taxes, compared to 22.9% for the same period of 1997.
Higher levels of underwriting profits in 1998 representing a larger portion of
overall taxable income than in 1997 accounted for the increase.
-7-
<PAGE>
Liquidity and Capital Resources
The Company generates sufficient funds from its operations and maintains a
high degree of liquidity in its investment portfolio. The primary source of
funds to meet the demands of claim settlements and operating expenses are
premium collections, investment earnings and maturing investments. As of March
31, 1998, the Company had no material commitment for capital expenditures.
In investing funds made available from operations, the Company maintains
securities maturities consistent with its projected cash needs for the payment
of claims and expenses. The Company maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds.
As of March 31, 1998, pursuant to a credit agreement dated December 29,
1995, with Fleet National Bank of Connecticut, the Company had unsecured
borrowings of $5.0 million. Per the terms of the credit agreement, the Company
may borrow up to $20 million at interest rates equal to the bank's then current
prime rate or the then current London interbank Eurodollar bank rate plus 1.70%.
At March 31, 1998, the interest rate on the outstanding balance was 7.60625%. In
addition, the Company will pay a non-use fee at a rate of 3/10 of 1% per annum
on the average daily unused portion of the Bank's commitment. On each December
29, commencing December 29, 1999, the credit line will be reduced by $4 million.
Any outstanding loan in excess of the remaining credit line, after such
reduction, will then be payable.
The Company's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States, Southern, Pioneer and Delaware,
which are required by law to maintain certain minimum surplus on a statutory
basis and are subject to regulations under which payment of dividends from
statutory surplus is restricted and may require prior approval of their
domiciliary insurance regulatory authorities. Atlantic States, Southern, Pioneer
and Delaware are subject to Risk Based Capital (RBC) requirements effective for
1994. At December 31, 1997, all four Companies' capital was substantially above
the RBC requirements. At December 31, 1997, amounts available for distribution
as dividends to Donegal Group without prior approval of the insurance regulatory
authorities are $7,349,284 from Atlantic States, $703,688 from Southern,
$542,799 from Pioneer and $1,070,463 from Delaware.
-8-
<PAGE>
Credit Risk
The company provides property and liability coverages through its
subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured although a
portion of Donegal Group's commercial business is billed through its agents who
are extended credit in the normal course of business.
The Company's subsidiaries have reinsurance agreements in place with the
Mutual Company and with a number of other major authorized reinsurers.
Impact of Inflation
Property and casualty insurance premiums are established before the amount
of losses and loss settlement expenses, or the extent to which inflation may
impact such expenses, are known. Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.
Impact of New Accounting Standards
Insurance Related Assessments
In December 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments. The accounting guidance of this SOP focuses
on the timing of recognition and measurement of liabilities for
insurance-related assessments. The SOP is effective for fiscal years beginning
after December 15, 1998. The Company believes that they are in compliance with
the provisions of this SOP and no impact on the Company's financial reporting is
expected.
Computer Software Development Costs
On March 4, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This SOP requires that certain costs
related to the development or purchase of internal-use software be capitalized
and amortized over the estimated useful life of the software. This SOP also
requires that costs related to the preliminary project stage and the
post-implementation/operations stage in an internal-use computer software
development project be expensed as incurred. SOP 98-1 is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
Company believes that they are in compliance with the provisions of this SOP and
no material impact of the Company's financial reporting is expected.
-9-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Amendment of Certificate of Incorporation
Exhibit 3(i)
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Stockholders meeting held April 16, 1998
Directors elected at meeting
Thomas J. Finley, Jr.
Votes for 5,241,462
Votes withheld 150,417
R. Richard Sherbahn
Votes for 5,242,226
Votes withheld 149,653
Directors Continuing
Robert S. Bolinger
Patricia A. Gilmartin
Philip H. Glatfelter
C. Edwin Ireland
Donald H. Nikolaus
Authorized Shares of Common Stock
Increased from 10,000,000 to 15,000,000
Votes for 5,358,934
Votes against 28,348
Abstained 4,597
Amendment approved to increase Common Shares available in the 1996
Equity Incentive Plan for Directors from 119,600 shares to 200,000
shares.
Votes for 5,179,351
Votes against 195,182
Abstained 4,532
Non-votes 12,814
Approve KPMG Peat Marwick LLP as Auditors for 1998.
Votes for 5,361,789
Votes against 23,933
Abstained 6,157
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) EX-27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1998 - None
-10-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Donegal Group Inc.
Date: March 13, 1998 By:
----------------------------
Donald H. Nikolaus,
President and
Chief Executive Officer
Date: March 13, 1998 By:
----------------------------
Ralph G. Spontak,
Corporate Secretary,
Senior Vice President and
Chief Financial Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 62,709,150
<DEBT-CARRYING-VALUE> 114,129,543
<DEBT-MARKET-VALUE> 117,589,193
<EQUITIES> 12,009,052
<MORTGAGE> 0
<REAL-ESTATE> 2,504,567
<TOTAL-INVEST> 200,952,812
<CASH> 2,233,830
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 8,645,012
<TOTAL-ASSETS> 303,330,720
<POLICY-LOSSES> 119,121,004
<UNEARNED-PREMIUMS> 73,273,422
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,000,000
0
0
<COMMON> 6,149,448
<OTHER-SE> 95,743,306
<TOTAL-LIABILITY-AND-EQUITY> 303,330,720
27,204,544
<INVESTMENT-INCOME> 2,845,267
<INVESTMENT-GAINS> 311,793
<OTHER-INCOME> 534,540
<BENEFITS> 15,801,905
<UNDERWRITING-AMORTIZATION> 4,700,000
<UNDERWRITING-OTHER> 4,696,951
<INCOME-PRETAX> 4,614,562
<INCOME-TAX> 1,297,909
<INCOME-CONTINUING> 3,316,653
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,316,653
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
<RESERVE-OPEN> 77,474
<PROVISION-CURRENT> 18,485
<PROVISION-PRIOR> (2,683)
<PAYMENTS-CURRENT> 8,992
<PAYMENTS-PRIOR> 6,914
<RESERVE-CLOSE> 77,370
<CUMULATIVE-DEFICIENCY> (2,683)
</TABLE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DONEGAL GROUP INC.
UNDER SECTION 242 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
Donegal Group Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of Donegal Group Inc. (the
"Corporation"), at a meeting of the Board of Directors held on March 16, 1998
pursuant to notice duly given, duly adopted the following resolution setting
forth a proposed amendment of the Certificate of Incorporation of the
Corporation, declaring such amendment to be advisable and calling for a meeting
of the stockholders of said Corporation for consideration thereof. The
resolution setting forth the proposed amendment is as follows:
RESOLVED, that Article 4(a) of the Certificate of
Incorporation of Donegal Group Inc. is hereby amended and
restated to provide in full as follows:
"4.(a) The aggregate number of shares which the
Corporation shall have authority to issue is: Fifteen
Million 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")."
SECOND: Thereafter, pursuant to a resolution of the Board of Directors,
at the annual meeting of the stockholders of the Corporation held on April 16,
1998, the holders of a majority of the outstanding shares entitled to vote
thereon voted in favor of the approval and adoption of the amendment.
THIRD: Such amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this Certificate of
Amendment to be signed by Donegal H. Nikolaus, its President and Chief Executive
Officer, and Ralph G. Spontak, its Senior Vice President, Chief Financial
Officer and Secretary, this 20th day of April, 1998.
(SEAL) DONEGAL GROUP INC.
By:_____________________________
Donald H. Nikolaus
President and Chief Executive Officer
ATTEST:
By:_____________________________
Ralph G. Spontak,
Senior Vice President,
Chief Financial Officer and Secretary
2
<PAGE>
CERTIFICATE OF INCORPORATION
OF
DONEGAL GROUP INC.
1. The name of the Corporation is Donegal Group Inc.
2. The address of its registered office is 1220 Market Street
Building, Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is Wilmington
Corporate Services, Inc.
3. The nature of the business to be conducted or promoted is to
engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the
State of Delaware.
4. (a) The aggregate number of shares which the
Corporation shall have authority to issue is: Ten
Million (10,000,000) shares of Common Stock of the
par value of One Dollar ($1.00) per share (the
"Common Stock") and One Million (1,000,000) shares of
Series Preferred Stock of the par value of One Dollar
($1.00) per share (the "Preferred Stock").
(b) The Preferred Stock may be issued from time to time
by the Board of Directors as herein provided in one
or more series. The designations, relative rights,
preferences and limitations of the Preferred Stock,
and particularly of the shares of each series
thereof, may, to the extent permitted by law, be
similar to or may differ from those of any other
series. The Board of Directors of the Corporation is
hereby expressly granted authority, subject to the
provisions of this Article Four, to issue from time
to time Preferred Stock in one or more series and to
fix from time to time before issuance thereof, by
filing a certificate pursuant to the General
Corporation Law, the number of shares in each such
series and all designations, relative rights
(including the right, to the extent permitted by law,
to convert into shares of any class or into shares of
any series of any class), preferences and limitations
of the shares in each such series, including, but
without limiting the generality of the foregoing, the
following:
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(i) The number of shares to constitute such
series (which number may at any time, or
from time to time, be increased or decreased
by the Board of Directors, notwithstanding
that shares of the series may be outstanding
at the time of such increase or decrease,
unless the Board of Directors shall have
otherwise provided in creating such series)
and the distinctive designation thereof;
(ii) The dividend rate on the shares of such
series, whether or not dividends on the
shares of such series shall be cumulative
and the date or dates, if any, from which
dividends thereon shall be cumulative;
(iii) Whether or not the shares of such series
shall be redeemable, and, if redeemable, the
date or dates upon or after which they shall
be redeemable and the amount or amounts per
share (which shall be, in the case of each
share, not less than its preference upon
involuntary liquidation, plus an amount
equal to all dividends thereon accrued and
unpaid, whether or not earned or declared)
payable thereon in the case of the
redemption thereof, which amount may vary at
different redemption dates or otherwise as
permitted by law;
(iv) The right, if any, of holders of shares of
such series to convert the same into, or
exchange the same for, Common Stock or other
stock as permitted by law, and the terms and
conditions of such conversion or exchange,
as well as provisions for adjustment of the
conversion rate in such events as the Board
of Directors shall determine;
(v) The amount per share payable on the shares
of such series upon the voluntary and
involuntary liquidation, dissolution or
winding up of the Corporation;
(vi) Whether the holders of shares of such series
shall have voting power, full or limited, in
addition to the voting powers provided by
law, and, in case additional voting powers
are accorded, to fix the extent thereof; and
(vii) Generally to fix the other rights and
privileges and any qualifications,
limitations or restrictions of such rights
and
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privileges of such series, provided,
however, that no such rights, privileges,
qualifications, limitations or restrictions
shall be in conflict with the Certificate of
Incorporation of the Corporation or with the
resolution or resolutions adopted by the
Board of Directors providing for the issue
of any series of which there are shares then
outstanding.
(c) All shares of Preferred Stock of the same
Series shall be identical in all respects,
except that shares of any one series issued
at different times may differ as to the
dates, if any, from which dividends thereon
may accumulate. All shares of Preferred
Stock of all series shall be of equal rank
and shall be identical in all respects,
except that to the extent not otherwise
limited in this Article Four any series may
differ from any other series with respect to
any one or more of the designations,
relative rights, preferences and limitations
described or referred to in subparagraphs
(b) (i) to (vii) inclusive of this Article
Four.
(d) Dividends on the outstanding Preferred Stock
of each series shall be declared and paid or
set apart for payment before any dividends
shall be declared and paid or set apart for
payment on the Common Stock with respect to
the same quarterly dividend period.
Dividends on any shares of Preferred Stock
shall be cumulative only if and to the
extent set forth in a certificate filed
pursuant to law. After dividends on all
shares of Preferred Stock (including
cumulative dividends if and to the extent
any such shares shall be entitled thereto)
shall have been declared and paid or set
apart for payment with respect to any
quarterly dividend period, then and not
otherwise as long as any shares of Preferred
Stock shall remain outstanding, dividends
may be declared and paid or set apart for
payment with respect to the same quarterly
dividend period on the Common Stock out of
the assets or funds of the Corporation
legally available therefor.
(e) All shares of Preferred Stock of all series
shall be of equal rank, preference and
priority as to dividends irrespective of
whether or not the rates of dividends to
which the particular series of Preferred
Stock shall be entitled shall be the same
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and when the stated dividends are not paid
in full, the shares of all series of
Preferred Stock shall share ratably in the
payment thereof in accordance with the sums
which would be payable on such shares if all
dividends were paid in full, provided,
however, that any two or more series of
Preferred Stock may differ from each other
as to the existence and extent of the right
to cumulative dividends, as aforesaid.
(f) Except as otherwise specifically provided in
the certificate filed pursuant to law with
respect to any series of Preferred Stock or
as otherwise provided by law, the Preferred
Stock shall not have any right to vote for
the election of directors or for any other
purpose and the Common Stock shall have the
exclusive right to vote for the election of
directors and for all other purposes. Each
holder of Common Stock shall be entitled to
one vote for each share thereof held. In all
instances in which voting rights are granted
to Preferred Stock or any series thereof,
such Preferred Stock or series shall vote
with the Common Stock as a single class,
except with respect to any vote for the
approval of any merger, consolidation,
liquidation or dissolution of the
Corporation and except as otherwise provided
in the certificate filed pursuant to law
with respect to any series of Preferred
Stock or as otherwise provided by law.
(g) In the event of any liquidation,
dissolution or winding up of the
Corporation, whether voluntary or
involuntary, each series of Preferred Stock
shall have preference and priority over the
Common Stock for payment of the amount to
which each outstanding series of Preferred
Stock shall be entitled in accordance with
the provisions thereof and each holder of
Preferred Stock shall be entitled to be paid
in full such amount, or have a sum
sufficient for the payment in full set
aside, before any payments shall be made to
the holders of the Common Stock. If, upon
liquidation, dissolution or winding up of
the Corporation, the assets of the
Corporation or the proceeds thereof,
distributable among the holders of the
shares of all series of Preferred Stock
shall be insufficient to pay in full the
preferential amount aforesaid, then such
assets, or the proceeds thereof, shall be
distributed
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among such holders ratably in accordance
with the respective amounts which would be
payable if all amounts payable thereon were
paid in full. After the holders of the
Preferred Stock of each series shall have
been paid in full the amounts to which they
respectively shall be entitled, or a sum
sufficient for the payment in full set
aside, the remaining net assets of the
Corporation shall be distributed pro rata to
the holders of the Common Stock in
accordance with their respective rights and
interests, to the exclusion of the holders
of Preferred Stock. A consolidation or
merger of the Corporation with or into
another corporation or corporations, or a
sale, whether for cash, shares of stock,
securities or properties, of all or
substantially all of the assets of the
Corporation, shall not be deemed or
construed to be a liquidation, dissolution
or winding up of the Corporation within the
meaning of this Article Four.
(h) In the event that Preferred Stock of any
series shall be made redeemable as provided
in subparagraph (b)(iii) of this Article
Four, the Corporation, at the option of the
Board of Directors, may redeem at any time
or times, and from time to time, all or any
part of any one or more series of Preferred
Stock outstanding by paying for each share
the then applicable redemption price fixed
by the Board of Directors as provided
herein, plus an amount equal to accrued and
unpaid dividends to the date fixed for
redemption, upon such notice and terms as
may be specifically provided in the
certificate filed pursuant to law with
respect to such series of Preferred Stock.
5. The Corporation shall have the power to indemnify any
person who was or is a party or is threatened to be
made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action
by or in the right of the Corporation) by reason of
the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a
director, officer, employee or agent of another
corporation, partnership, joint venture, trust or
other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him
in
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connection with such action, suit or proceeding if he
acted in good faith and in a manner reasonably
believed to be in or not opposed to the best
interests of the Corporation, and, with respect to
any criminal action or proceedings, had no reasonable
cause to believe his conduct was unlawful. The
termination of any action, upon a plea of nolo
contendere or equivalent, shall not, of itself,
create a presumption that the person did not act in
good faith and in a manner which he reasonably
believed to be in or not opposed to the best
interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
6. The directors of the Corporation shall incur no
personal liability to the Corporation or its
stockholders for monetary damages for any breach of
the fiduciary duty as a director; provided, however,
that the directors of the Corporation shall continue
to be subject to liability (i) for any breach of
their duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the directors
derived an improper benefit.
7. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of
Directors, the number of members of which shall be
set forth in the By-laws of the Corporation. The
Directors need not be elected by ballot unless
required by the By-laws of the Corporation.
8. In the furtherance and not in limitation of the
objects, purposes and powers conferred by the laws of
the State of Delaware, the Board of Directors is
expressly authorized to made, amend and repeal the
By-laws, to fix the amount to be reserved as working
capital, and to authorize and cause to be executed
mortgages and liens without limit as to the amount,
upon the property and franchise of this corporation.
9. The Corporation is to have perpetual existence.
10. Meetings of the stockholders may be held within or
without the State of Delaware, as the By-laws may
provide. The books of the
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Corporation may be kept, subject to any provisions
contained in the statutes, outside the State of
Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the
By-laws of the Corporation. Elections of directors
need not be by written ballot unless the By-laws of
the Corporation shall so provide.
11. The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this
Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights
conferred upon stockholders herein are granted
subject to this reservation.
12. The name and address of the Incorporator is John L.
Olsen, Esquire, c/o Duane, Morris & Heckscher, 1220
Market Street Building, P.O. Box 195, Wilmington,
Delaware 19899.
13. The powers of Incorporator shall terminate upon the
election of directors.
I, THE UNDERSIGNED, being the Incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, and do hereby certify that this is my act and
deed and the facts herein stated are true; and accordingly, have hereunto set my
hand and seal this 26th day of August, 1986.
____________________________(SEAL)
John L. Olsen, Incorporator
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