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):
/_/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
/_/ $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(1)(3).
/_/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
/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: _____________________________________________________________
___________
*Set forth the amount on which the filing fee is calculated and state how it was
determined.
<PAGE>
DONEGAL GROUP INC.
---------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 15, 1999
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 15, 1999, at the Company's
offices, 1195 River Road, Marietta, Pennsylvania 17547, for the following
purposes:
1. To elect three Class A 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 (a) amend Article 4 of the
Company's Certificate of Incorporation (the "Amendment") to increase the
number of authorized shares of capital stock from 16,000,000 shares,
consisting of 1,000,000 shares of Series Preferred Stock and 15,000,000
shares of Common Stock, to 37,000,000 shares, consisting of 2,000,000
shares of Series Preferred Stock, 20,000,000 shares of Common Stock and
15,000,000 shares of Class A Common Stock, with the rights, powers and
terms of the Series Preferred Stock and the Class A Common Stock to be
established in the future by resolution of the Company's Board of
Directors, and (b) restate Article 4 of the Certificate of Incorporation as
so amended;
3. To consider and vote upon a proposal to approve an amendment to the
Company's Amended and Restated 1996 Equity Incentive Plan;
4. To act upon the election of KPMG LLP as independent public
accountants for the Company for 1999; 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 19, 1999
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, 1998
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 22, 1999
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 22, 1999, 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 15,
1999, 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, 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
19, 1999 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 19, 1999, the Company had
outstanding 8,248,731 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 19, 1999, Donegal Mutual Insurance Company (the "Mutual Company") owned
4,950,783 shares of the Company's outstanding Common Stock, or approximately 60%
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 Robert
S. Bolinger, Patricia A. Gilmartin and Philip H. Glatfelter, II as Class A
directors, for the proposal to approve and adopt an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of the
Company's capital stock and to restate the Certificate of Incorporation as so
amended, for the proposal to approve an amendment to the Amended and Restated
1996 Equity Incentive Plan (the "Equity Incentive Plan") and for the election of
KPMG LLP as the Company's independent public accountants for 1999. Accordingly,
Mr. Bolinger, Mrs. Gilmartin and Mr. Glatfelter will be elected as Class A
directors, the amendment to and restatement of the Certificate of Incorporation
will be approved and adopted, the amendment to the Equity Incentive Plan will be
approved and KPMG LLP will be elected as the Company's independent public
accountants for 1999, irrespective of the votes cast by the stockholders of the
Company other than the Mutual Company.
1
<PAGE>
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 June 25, 1998 to stockholders of record on
June 10, 1998.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth as of February 19, 1999 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....................... 4,950,783 60.0%
1195 River Road
Marietta, Pennsylvania 17547
Wellington Management Company, LLP..................... 427,868(3) 5.2%
75 State Street
Boston, MA 02109
DIRECTORS:
C. Edwin Ireland....................................... 20,086(4) --
Donald H. Nikolaus..................................... 234,887(5) 2.8%
Patricia A. Gilmartin.................................. 11,551(4) --
Philip H. Glatfelter, II............................... 12,379(4) --
R. Richard Sherbahn.................................... 9,598(4) --
Robert S. Bolinger..................................... 11,310(4) --
Thomas J. Finley, Jr................................... 10,220(4) --
EXECUTIVE OFFICERS (6):
Ralph G. Spontak....................................... 101,413(7) 1.2%
William H. Shupert..................................... 50,443(8) --
Robert G. Shenk........................................ 38,528(9) --
Frank J. Wood.......................................... 35,851(10) --
All directors and executive officers
as a group (14 persons)............................. 633,578(11) 7.2%
</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, 1998
in a filing made with the Securities and Exchange Commission (the "SEC").
2
<PAGE>
(4) Includes 8,889 shares of Common Stock the director has the option to
purchase under the Company's Amended and Restated 1996 Equity Incentive
Plan for Directors (the "Director Plan") that are currently exercisable or
that become exercisable within 60 days after the date of this Proxy
Statement.
(5) Includes 177,777 shares of Common Stock Mr. Nikolaus has the option to
purchase under the Company's 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."
(7) Includes 86,666 shares of Common Stock Mr. Spontak has the option to
purchase under the Company's Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(8) Includes 43,998 shares of Common Stock Mr. Shupert has the option to
purchase under the Company's Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(9) Includes 33,778 shares of Common Stock Mr. Shenk has the option to purchase
under the Company's Equity Incentive Plan that are currently exercisable or
that become exercisable within 60 days after the date of this Proxy
Statement.
(10) Includes 33,778 shares of Common Stock Mr. Wood has the option to purchase
under the Company's Equity Incentive Plan that are currently exercisable or
that become exercisable within 60 days after the date of this Proxy
Statement.
(11) Includes 465,774 shares of Common Stock purchasable upon the exercise of
options granted under the Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement, and 53,334 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.
3
<PAGE>
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, directors and more
than 10% stockholders, and the Company's review of the monthly statements of
ownership changes filed with the Company by its officers, directors and more
than 10% stockholders during 1998, the Company believes that all such filings
required during 1998 were made on a timely basis, except that Philip H.
Glatfelter, II, a director of the Company, filed one Form 4 Report after the
date on which the report was due.
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%. From
that date through February 19, 1999, the Mutual Company has at various times
purchased an aggregate of 431,500 shares of the Company's Common Stock in the
open market in exempt transactions under SEC Rule 10b-18 and in private
transactions. In addition, since the adoption of the Company's Dividend
Reinvestment Plan in July 1997, the Mutual Company has purchased 133,162 shares
of the Company's Common Stock through the reinvestment of dividends. The Mutual
Company's ownership of the Company's Common Stock was 4,950,783 shares, or
approximately 60% of the Company's outstanding Common Stock, as of February 19,
1999.
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"), Pioneer Insurance Company ("Pioneer") and
Southern Heritage Insurance Company ("Southern Heritage"). Expenses are
allocated to the Company, Delaware Atlantic, Southern, Pioneer and Southern
Heritage 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 $24,065,066 in 1998.
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
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<PAGE>
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 1998
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.
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, which 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 ended December 31, 1997
and December 31, 1998 by reason of the fact that Pioneer's loss and
5
<PAGE>
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 $306,400 from the
Mutual Company to Pioneer in 1998.
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 meets on an as-needed basis. 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.
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
1999, 2000 and 2001, respectively.
Three Class A 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, all 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 three nominees for Class A 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 A 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.
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<PAGE>
The names of the nominees for Class A director and the Class B directors
and Class C 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 A DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE*
- ---- --- -------- ------------
<S> <C> <C> <C>
Robert S. Bolinger....................................... 62 1986 2002
Patricia A. Gilmartin.................................... 59 1986 2002
Philip H. Glatfelter, II................................. 69 1986 2002
</TABLE>
- ------------------
*If elected at the Annual Meeting
DIRECTORS CONTINUING IN OFFICE
CLASS B DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ---- --- -------- ------------
<S> <C> <C> <C>
C. Edwin Ireland......................................... 89 1986 2000
Donald H. Nikolaus....................................... 56 1986 2000
</TABLE>
CLASS C DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ---- --- -------- ------------
<S> <C> <C> <C>
Thomas J. Finley, Jr..................................... 78 1986 2001
R. Richard Sherbahn...................................... 70 1986 2001
</TABLE>
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.
7
<PAGE>
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 five times in 1998. 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 21 times in 1998. 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 1998, 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 met one time in 1998, 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 such nominations are made in accordance with the
Company's By-laws. See "Stockholder Proposals."
The Compensation Committee of the Company consists of Messrs. Ireland,
Sherbahn and Glatfelter. The Compensation Committee met two times in 1998 to
review and recommend compensation plans, approve certain compensation changes
and grant options under and determine participants in the Equity Incentive Plan.
COMPENSATION OF DIRECTORS
Directors of the Company were paid an annual retainer of $16,000 in 1998
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 received $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
177 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.
8
<PAGE>
EXECUTIVE COMPENSATION
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, 1998 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 $100,000 in the fiscal year ended December
31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION (1) ------------------------
------------------------------------------------ RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#) COMPENSATION ($)
- ------------------ ---- ---------- --------- ---------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald H. Nikolaus, 1998 368,000 108,100 14,594 2,943 133,333 112,958(2)
President and Chief 1997 356,000 137,807 7,725 2,050 133,334 95,010
Executive Officer 1996 336,000 -- 7,327 -- -- 81,531
Ralph G. Spontak, 1998 242,000 55,594 5,558 2,943 60,000 57,747(2)
Senior Vice President, 1997 235,000 78,444 2,943 2,050 66,666 50,636
Chief Financial 1996 220,000 -- 2,747 -- -- 44,495
Officer
and Secretary
William H. Shupert, 1998 100,000 27,797 -- -- 20,000 46,144(2)
Senior Vice President, 1997 160,000 65,723 -- -- 37,333 49,075
Underwriting 1996 149,000 -- -- -- -- 28,669
Robert G. Shenk 1998 138,000 27,797 -- -- 26,667 17,799(2)
Senior Vice President, 1997 130,000 19,417 -- -- 26,667 15,153
Claims 1996 118,000 -- -- -- -- 13,614
Frank J. Wood 1998 116,000 27,797 -- -- 21,333 24,060(2)
Senior Vice President, 1997 110,500 25,441 -- -- 26,667 21,064
Marketing 1996 102,500 -- -- -- -- 15,713
</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, $11,101
for Mr. Shupert, $13,431 for Mr. Shenk and $11,159 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, $2,392 for Mr. Shupert, $2,858 for
Mr. Shenk and $2,404 for Mr. Wood. In the case of Mr. Nikolaus, the total
shown for 1998 also includes premiums paid under split-dollar life insurance
policies of $28,090, premiums paid under a term life insurance policy of
$3,825, directors and committee meeting fees of $24,150 and contributions
made by the Company of $36,855 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 1998 includes
premiums paid under a split-dollar life insurance policy of $5,076, premiums
paid under a term life insurance policy of $1,479, directors and committee
meeting fees of $17,700 and contributions made by the Company of $14,035
under the Company's Executive Restoration Plan. In the case of Messrs.
Shupert, Shenk and Wood, the totals shown for 1998 also include term life
insurance premiums of $12,746, $873 and $5,216, respectively.
9
<PAGE>
The following tables sets forth information with respect to options granted
during the fiscal year ended December 31, 1998 to the persons named in the
Summary Compensation table above.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT
% OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATE OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald H. Nikolaus..................... 133,333(1) 29.3 18.00 3/24/03 375,999 1,102,664
Ralph G. Spontak....................... 60,000(1) 13.2 18.00 3/24/03 169,200 496,200
William H. Shupert..................... 20,000(1) 4.4 18.00 3/24/03 56,400 165,400
Robert G. Shenk........................ 26,667(1) 5.9 18.00 3/24/03 75,201 220,536
Frank J. Wood.......................... 21,333(1) 4.7 18.00 3/24/03 60,159 176,424
</TABLE>
- ------------------
(1) These options vest in three substantially equal cumulative annual
installments on July 1, 1998, July 1, 1999 and July 1, 2000, respectively.
The following table sets forth information with respect to options
exercised during the year ended December 31, 1998 and held on December 31, 1998
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.................. -- -- 133,333 133,334 $188,889 $94,446
Ralph G. Spontak.................... -- -- 64,444 62,222 94,444 47,222
William H. Shupert.................. -- -- 31,554 25,779 52,887 26,446
Robert G. Shenk..................... -- -- 26,667 26,667 37,778 18,889
Frank J. Wood....................... -- -- 24,889 23,111 37,778 18,889
</TABLE>
REPORT ON 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
10
<PAGE>
requirements as to these officers include the use of specified tables and a
report of the Company's 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 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 $247,085 in 1998 compared to $326,832
in 1997 because the Company's underwriting income in 1998 was $2,718,180 less
than its underwriting income in 1997, as a result of losses caused by a series
of severe summer storms during the third quarter of 1998. The Compensation
Committee therefore believes that the amount of the incentive payments are tied
directly to the Company's performance.
11
<PAGE>
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.
Such factors as the Company's continued better than industry underwriting
results, negotiation and completion of the acquisition of Southern Heritage,
which is licensed in 12 southern states, continued expense control, enhancement
of the skills of the Company's workforce, expansion of the Company's insurance
products offered, 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'
leadership and performance, were considered by the Compensation Committee in
approving Mr. Nikolaus' participation percentage under the Company's cash
incentive program for 1998.
The Company's executive officers participate in the Company's 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 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 133,333 shares and 261,333
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 Equity
Incentive Plan during 1998.
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 1998, as well as the performance of the Company in 1998 compared to the
performance of other property and casualty insurance companies in 1998.
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 1998.
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, Berkshire Hathaway Inc., The
Chubb Corporation, Cincinnati Financial Corporation, CNA Financial Corp.,
Fremont General Corporation, Frontier Insurance Group, Inc., Gainsco Inc.,
Hartford Financial Services Group, HCC Insurance Holdings, Inc., Markel
Corporation, Mercury General Corporation, NAC Re Corporation, Old Republic
International Corporation, Orion Capital Corporation, Ohio Casualty Corporation,
The Progressive Corporation, RLI Corporation, SAFECO Corporation, Selective
Insurance Group, Inc., The St. Paul Companies, Inc., Transatlantic Holdings,
Inc., Vesta Insurance Group Inc. and XL Capital Limited.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Donegal Group Inc., Russell 2000 Index And Value Line Insurance
(Prop/Casualty) Index
(Performance Results Through 12/31/98)
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
Insurance
Donegal Group Inc. Russell 2000 Index (Prop/Casualty)
------------------ ------------------ ---------------
1993 100 100 100
1994 87.33 98.02 99
1995 115.77 125.89 139.11
1996 129.61 146.59 177.86
1997 190.37 179.13 274.31
1998 182.66 174.23 278.49
Assumes $100 invested at the close of trading on December 31, 1993 in
Donegal Group Inc. Common Stock, Russell 2000 Index and Value Line Insurance
(Property/Casualty).
- ------------------
* Cumulative total return assumes reinvestment of dividends.
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.
PROPOSAL TO AMEND AND RESTATE ARTICLE 4
OF THE COMPANY'S CERTIFICATE OF INCORPORATION
At the Annual Meeting, the stockholders will be asked to consider and vote
upon the amendment of Article 4 of the Company's Certificate of Incorporation,
in the form attached hereto as Exhibit A (the "Amendment"), to increase the
number of authorized shares of capital stock from 16,000,000 shares, consisting
of 1,000,000 shares of Series Preferred Stock, par value $1.00 per share, and
15,000,000 shares of Common Stock, par value $1.00 per share, to 37,000,000
shares of capital stock, consisting of 2,000,000 shares of Series Preferred
Stock, par value $.01 per share, 20,000,000 shares of Common Stock, par value
$1.00 per share, and 15,000,000 shares of Class A Common Stock, par value $.01
per share, with the rights, powers and terms of the Series Preferred Stock and
Class A Common Stock to be established in the future by resolution of the
Company's Board of Directors, and to restate Article 4 of the Company's
Certificate of Incorporation as so amended. As of March 22, 1999, the Company
had no outstanding shares of Series Preferred Stock and 8,248,731 outstanding
shares of Common Stock, leaving 1,000,000 shares of Series Preferred Stock and
6,751,269 shares of Common Stock available for issuance.
If the Amendment is approved by the stockholders of the Company, the Board
of Directors intends to prepare and file a Certificate of Amendment to the
Certificate of Incorporation of the Company in accordance with the Amendment,
which will become effective (the "Effective Date") immediately upon acceptance
of the filing by the Secretary of State of the State of Delaware. The Board of
Directors would then have the power, without soliciting further stockholder
approval, to issue the additional authorized shares, except to the extent that
such approval may be required by law or by the rules applicable to a class of
securities traded on the Nasdaq National Market System, and such shares may be
issued for such consideration, cash or otherwise, at such times and in such
amounts as the Board of Directors may determine in its discretion. The Board of
Directors currently anticipates that any shares of Class A Common Stock issued
in the future would have no voting rights. The future issuance by the Company of
shares of Series Preferred Stock, Common Stock or Class A Common Stock may
dilute the equity ownership position of certain holders of Common Stock and
Class A Common Stock. Although the Board of Directors currently intends to file
the Certificate of
14
<PAGE>
Amendment if the proposal is approved by the stockholders at the Annual Meeting,
the resolution of stockholders will reserve to the Board of Directors the right
to defer or abandon the proposal and not file such Amendment even if the
Amendment has been approved by the stockholders.
The Amendment has been unanimously approved by the Company's Board of
Directors, including directors who are neither officers nor employees of the
Mutual Company. The Board of Directors believes the Amendment is in the best
interests of the Company and its stockholders and recommends a vote for the
approval and adoption of the Amendment.
BACKGROUND OF THE PROPOSAL
In recent years, a number of publicly held companies with majority or
controlling ownership by a single family or entity have adopted dual class
capitalization structures whereby one class of common stock has either exclusive
voting rights or substantially greater voting power per share than the other
class of common stock. Many companies that adopted dual class voting structures
adopted such plans prior to the adoption of Rule 19c-4 by the SEC in 1988 under
the Exchange Act. In 1990, Rule 19c-4 was vacated by a federal appellate court
decision. The New York Stock Exchange, the American Stock Exchange and Nasdaq
have since adopted rules that permit dual class voting structures that do not
reduce the relative voting rights of the holders of an outstanding class of
voting securities by the issuance of a class of securities having greater voting
rights.
The Mutual Company has owned not less than a majority of the Company's
voting securities since the formation of the Company in 1986, and owned
approximately 60% of the Company's outstanding voting securities as of the date
of this Proxy Statement. See "Beneficial Ownership of Common Stock -- Principal
Beneficial Owners of Common Stock." The Board of Directors believes that the
consistent management, stable underwriting operations and external growth of the
Company in recent years have been achieved in substantial part due to the
influence and control of the Mutual Company. The Board of Directors further
believes that the authorization of a separate class of common stock that would
enhance the maintenance of the relative voting power of the Mutual Company will
continue to contribute significantly to the growth and success of the Company
and therefore is in the best interests of the Company and all of its
stockholders.
Because any issuance of voting stock by the Company reduces the percentage
of voting control of the Company by the Mutual Company as long as there is only
one class of common stock authorized and outstanding, preservation of the Mutual
Company's majority voting power limits the ability of the Company to obtain
additional equity capital through financings, effect acquisitions of other
companies for other than cash and tends to limit any increase in the public
float of the Company's Common Stock.
REASONS FOR THE AMENDMENT; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors believes that a capital structure that has
two classes of common stock offers a number of potential benefits to the
Company. The Amendment would enable the Company to issue Class A Common Stock or
securities convertible into or exchangeable for Class A Common Stock for
financing, acquisition and compensation purposes without materially adversely
affecting the voting percentage of any stockholder, including the Mutual
Company.
The Company's Board of Directors has given due consideration to the
Amendment and has determined that the Amendment is in the best interests of the
Company and its stockholders. Some stockholders, however, may believe that the
Amendment is disadvantageous to the extent that it may
15
<PAGE>
favor long-term investors and may discourage takeovers of the Company. The
Company's Board of Directors, five of whom are directors of the Mutual Company
and one of whom is an officer of the Mutual Company, considered this factor in
reaching their recommendation. The Company's Board of Directors believes the
Amendment is advantageous to the Company's long-term growth strategy to the
extent that it may favor long-term investors and may discourage attempts to
takeover the Company.
The Company's Board of Directors suggests that each stockholder read and
review carefully the description of the Amendment and certain potential effects
thereof as described herein.
Financing Flexibility
The Company has followed, and intends to continue to follow, a long-term
strategy for growth. The Company's Board of Directors believes that this
strategy will serve to maximize the value of the Company and further believes
that the voting control held by the Mutual Company has provided the stability
and absence of disruption necessary to pursue a long-term strategy. The future
issuance of Class A Common Stock with either limited or no voting rights as
permitted by the Amendment would provide the Company with increased flexibility
in the future to issue common equity in connection with acquisitions and raise
equity capital or to issue convertible debt as a means to finance future growth
without materially diluting the voting power of the Company's existing
stockholders, including the Mutual Company. The Class A Common Stock may also be
used for the Company's stock-based benefit plans for employees and agents. The
Company has no current plans to issue additional shares of Common Stock or to
issue any shares of Series Preferred Stock or Class A Common Stock. At an
appropriate and as yet undetermined time in the future, the Company intends to
consider a public offering of Class A Common Stock. The Company anticipates that
such an offering would be effected through certain underwriters, and that the
proceeds to be received by the Company would be used to repay certain
indebtedness incurred as part of the Company's external growth program,
expansion of the Company's internal growth and for working capital and general
corporate purposes. There can be no assurance, however, that the Company will
proceed with a public offering. Any such public offering is contingent on
approval thereof by the Company's Board of Directors, market conditions, a
determination as to the appropriate timing for such an offering and such other
factors as the Company's Board of Directors considers relevant in its judgment.
Any such public offering would be made only by means of a prospectus complying
with the requirements of the Securities Act of 1933, as amended. This Proxy
Statement does not constitute an offer to sell, or a solicitation of an offer to
buy, any shares of Common Stock or, if authorized at the Annual Meeting, Class A
Common Stock of the Company. If a public offering occurs in the future, existing
holders of Common Stock would experience a dilution of their percentage
ownership interest in the Company.
Stockholder Flexibility
As permitted under the Amendment, if the Company were in the future to
issue shares of Class A Common Stock with either low or no voting rights and to
distribute such shares as a dividend on the outstanding Common Stock,
stockholders desiring to maintain their voting position would be able to do so
even if they decided to sell or otherwise dispose of shares of Class A Common
Stock. The Amendment therefore may provide a potential future basis for all
stockholders, including the Mutual Company, to dispose of a portion of their
equity interest in the Company without necessarily affecting their relative
voting power.
16
<PAGE>
Furthermore, if the Company were in the future to issue shares of Class A
Common Stock with either low or no voting rights and to distribute such shares
as a dividend on the outstanding Common Stock, stockholders who are interested
in maintaining their relative voting power in the Company might be more willing
to sell or otherwise dispose of part of their holdings in the Company if the
sale or other disposition would not decrease their relative voting power, which
may result in increased trading of shares and increased liquidity in the
Company's Class A Common Stock.
Continuity
The adoption of the Amendment and the future issuance of Class A Common
Stock with either limited or no voting rights should reduce the risk of
disruption in the Company's long-term plans and objectives that could otherwise
result if the Company determined for insurance regulatory, diversification or
other reasons that it would be advisable to issue a significant amount of equity
securities, and would also provide the Mutual Company with additional
flexibility. Therefore, the Amendment would provide a basis for continuity
pursuant to such plans and objectives, if and when such circumstances arise.
CERTAIN POTENTIAL DISADVANTAGES OF THE PROPOSAL
While the Company's Board of Directors has determined that approval of the
Amendment is in the best interests of the Company and its stockholders, the
Company's Board of Directors recognizes that implementation of the Amendment and
the ability of the Company to issue Class A Common Stock in the future with
either limited or no voting rights may result in certain disadvantages to some
stockholders, including the following:
Change of Control Impact
The Mutual Company currently owns approximately 60% of the Common Stock and
has effective voting control over the Company. If the Amendment is adopted and
regardless of when or whether the Company were to issue Class A Common Stock in
the future with limited or no voting rights, the Mutual Company will maintain
the ability in its sole discretion to maintain or dispose of its voting control
of the Company. The ability of the Company to issue Class A Common Stock in the
future with limited or no voting rights is likely to limit to a greater degree
than currently the already unlikely future circumstances in which a sale or
transfer by the Mutual Company of its equity interest in the Company could lead
to a merger proposal or tender offer that is not acceptable to the Mutual
Company or a proxy contest for the removal of the Company's incumbent directors.
Consequently, the Amendment might reduce the possibility that stockholders of
the Company may sell their shares at a premium over prevailing market prices and
make it more difficult to replace the current Board of Directors and management
of the Company.
Although the Company's Board of Directors currently intends to utilize the
existing authorized but unissued shares of Common Stock and the shares of Class
A Common Stock to be authorized if the Amendment is approved solely for the
purposes previously described in this Proxy Statement, such shares could also be
used by the Company's Board of Directors to dilute the equity 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 Company's Board of Directors have knowledge of,
any effort to accumulate the Company's Common Stock or to obtain control of the
17
<PAGE>
Company by means of a merger, tender offer, solicitation in opposition to the
Company's Board of Directors or otherwise. Because the Mutual Company owns
approximately 60% of the outstanding Common Stock and, after approval of the
Amendment, will continue to own approximately 60% of the Company's outstanding
Common Stock, the likelihood of a non-negotiated attempt to obtain control of
the Company is remote.
State Statutes
Some state securities laws contain provisions that may restrict an offering
of securities by the Company or the secondary trading of its equity securities
in those states if the Company were in the future to issue Class A Common Stock
with either limited or no voting rights. However, due to exemptions or for other
reasons, the Company does not believe that such provisions will have a material
adverse effect on the amount of equity securities that the Company would be able
to offer, or on the price obtainable for such equity securities in an offering,
or in the secondary trading market for the Company's equity securities.
Interests of Certain Persons
The Mutual Company has an interest in the approval of the Amendment
because, as previously discussed in this Proxy Statement, the issuance by the
Company in the future of Class A Common Stock with limited or no voting rights
as would be permitted by approval of the Amendment is likely to enhance the
ability of the Mutual Company to retain voting control of the Company. See
"Reasons for the Amendment; Recommendation of the Board of Directors."
DESCRIPTION OF THE COMMON STOCK AND THE CLASS A COMMON STOCK
As previously indicated in this Proxy Statement, the Amendment will
authorize the issuance of a class of common stock designated as the Class A
Common Stock, the rights, powers and limitations of which can be subsequently
established by resolution of the Company's Board of Directors. The full text of
Article 4 as proposed to be amended and restated is set forth as Exhibit A to
this Proxy Statement and incorporated herein by reference. The following summary
of proposed Article 4 as amended and restated is a materially complete statement
of the rights, preferences and limitations of the Common Stock; however, such
summary should be read in conjunction with, and is qualified in its entirety by
reference to, Exhibit A.
Voting
The holders of shares of Common Stock are entitled to one vote per share
held on any matter to be voted on by the stockholders of the Company. The
holders of shares of Class A Common Stock issued in the future would be entitled
to such voting rights per share, if any, on any matter to be voted on by the
stockholders of the Company as would be established by resolution of the
Company's Board of Directors. The Board of Directors currently anticipates that
any shares of Class A Common Stock issued in the future would have no voting
rights. Except as required under the Delaware General Corporation Law (the
"DGCL") or the Company's Certificate of Incorporation, the holders of shares of
Common Stock and any holders of shares of Class A Common Stock issued in the
future would vote together, to the extent, if any, that the Class A Common Stock
had voting rights, as a single class on all matters to be voted on by the
stockholders of the Company.
18
<PAGE>
Under the Certificate of Incorporation of the Company, as proposed to be
amended and restated, and the DGCL, at any election of directors, those nominees
receiving the highest number of votes cast for the number of directors to be
elected will be elected as directors. Because there is no provision in the
Company's Certificate of Incorporation permitting cumulative voting in the
election of directors, the Mutual Company, as the holder of approximately 60% of
the Company's outstanding Common Stock, will for the indefinite future have the
right to control the election of all of the members of the Company's Board of
Directors, and the holders of the remainder of the outstanding Common Stock of
the Company and any shares of Class A Common Stock of the Company outstanding in
the future will not be able to cause the election of any directors of the
Company.
Furthermore, under the Certificate of Incorporation of the Company, as
proposed to be amended and restated, and the DGCL, only the affirmative vote of
the holders of a majority in voting power represented by the Common Stock and
any Class A Common Stock issued in the future present in person or by proxy at
any meeting of stockholders at which a quorum is present and voting as a single
class will be required to amend the Certificate of Incorporation, to authorize
additional shares of Common Stock or Class A Common Stock, to approve any merger
or consolidation of the Company with or into any other corporation or the sale
of all or substantially all of the Company's assets or to approve the
dissolution of the Company. In addition, as permitted under the DGCL, the
Company's Certificate of Incorporation, as proposed to be amended and restated,
will provide that the number of authorized shares of Common Stock or Class A
Common Stock may be increased or decreased, but not below the number of shares
then outstanding, by the affirmative vote of the holders of a majority in voting
power represented by the Common Stock and any Class A Common Stock issued in the
future, to the extent, if any, that the Class A Common Stock had voting rights,
present in person or by proxy at any meeting of stockholders at which a quorum
is present and voting as a single class.
Under the DGCL, the holders of any Class A Common Stock issued in the
future would be entitled to vote as a separate class on any proposal to change
the par value of the Class A Common Stock or to alter or change the rights,
preferences and limitations of the Class A Common Stock in a way that would
affect adversely such rights of the Class A Common Stock.
Dividends and Distributions
Each share of Common Stock is equal in respect to the right to receive such
dividends as are declared by the Company's Board of Directors in its discretion
from time to time from funds legally available therefor and other distributions
in cash, stock and property, including distributions in connection with any
recapitalization and upon liquidation, dissolution or winding up of the Company.
If and when the Company's Board of Directors were to authorize the issuance of
Class A Common Stock in the future, it is the current intention of the Company's
Board of Directors that any Class A Common Stock so issued would be equal with
respect to any such dividends or distributions to the Common Stock, except that
(i) a dividend or distribution in cash or property on a share of Class A Common
Stock may be greater than any dividend or distribution in cash or property on a
share of Common Stock and (ii) dividends or other distributions payable on the
Common Stock and the Class A Common Stock in shares of capital stock shall be
made to all holders of Common Stock and Class A Common Stock and may be made (a)
in shares of Common Stock to the holders of Common Stock and in shares of Class
A Common Stock to the holders of Class A Common Stock, (b) in shares of Class A
Common Stock to the holders of Common Stock and to the holders of Class A
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Common Stock or (c) in any other authorized class or series of capital stock to
the holders of Common Stock and to the holders of Class A Common Stock.
Although the Company's Board of Directors would have authority under the
Certificate of Incorporation as amended and restated by the Amendment to pay
dividends and make distributions on any Class A Common Stock issued in the
future in amounts greater than on the Common Stock, the Company's Board of
Directors currently intends that future dividends would be paid on the Common
Stock and any Class A Common Stock issued in the future on an equal per share
basis. In no event will either the Common Stock or the Class A Common Stock be
split, subdivided or combined unless both the Common Stock and the Class A
Common Stock are proportionately and simultaneously split, subdivided or
combined.
There are no redemption or sinking fund provisions applicable to the Common
Stock, and the Company's Board of Directors currently anticipates that any Class
A Common Stock issued in the future would not have the benefit of any redemption
or sinking fund provisions. Holders of Common Stock are not subject to further
calls or assessments by the Company nor would any Class A Common Stock issued in
the future be so subject. All shares of Class A Common Stock, when validly
issued by the Company pursuant to authorization granted by its Board of
Directors, would be fully paid and non-assessable.
Except as otherwise required by the DGCL or as otherwise provided in the
Company's Certificate of Incorporation or a resolution of the Company's Board of
Directors authorizing the issuance of Class A Common Stock, the Company's Board
of Directors currently intends that each share of Common Stock and any shares of
Class A Common Stock issued in the future would have identical powers,
preferences and rights in all respects other than as stated herein.
Convertibility
The Common Stock is not convertible into another class of common stock or
any other security of the Company, and the Company's Board of Directors
currently intends that any Class A Common Stock issued in the future would not
be convertible into another class of common stock or any other security of the
Company.
Transferability; Trading Market
Like the Common Stock, the Company's Board of Directors currently intends
that any Class A Common Stock issued in the future would be freely transferable.
It is also the current intention of the Company's Board of Directors that if any
Class A Common Stock were issued in the future, the Company would file a listing
application with the Nasdaq Stock Market seeking to have such Class A Common
Stock quoted for trading on the Nasdaq National Market.
Increase in Authorized Capital Stock
The Company's Certificate of Incorporation currently authorizes 1,000,000
shares of Series Preferred Stock and 15,000,000 shares of Common Stock. The
Amendment would increase the total authorized number of shares of capital stock
from 16,000,000 shares to 37,000,000 shares, and authorize the issuance of up to
2,000,000 shares of Series Preferred Stock, up to 20,000,000 shares of Common
Stock and up to 15,000,000 shares of Class A Common Stock. After the Amendment
becomes effective, 8,248,731 shares of Common Stock would be issued and
outstanding.
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Approximately 2,000,000 shares of Series Preferred Stock, 11,751,269 shares of
Common Stock and 15,000,000 shares of Class A Common Stock would therefore be
available for issuance from time to time for any proper corporate purpose,
including stock splits, stock dividends, acquisitions, stock option plans,
funding of employee benefit plans and public and private equity offerings. No
further action or authorization by stockholders would be necessary prior to the
issuance of the authorized by unissued shares of Series Preferred Stock, Common
Stock or Class A Common Stock after the Amendment is approved unless applicable
laws or regulations would require such approval in a given instance.
The Amendment would increase from 15,000,000 to 20,000,000 the number of
shares of Common Stock that could be issued and would authorize the issuance of
an additional 1,000,000 shares of Series Preferred Stock (and change the par
value thereof from $1.00 per share to $.01 per share) and 15,000,000 shares of
Class A Common Stock. The Company's Board of Directors believes that it is
desirable to have the additional authorized shares of capital stock available
for possible future financing and acquisition transactions and other general
corporate purposes. Having such additional authorized shares of capital stock
available for issuance in the future will give the Company greater flexibility
and may allow such shares to be issued without the expense or delay of a special
meeting of stockholders. The Company does not currently have any agreement,
understanding, arrangement or plans that would result in the issuance of any of
the additional shares of capital stock to be authorized by the Amendment, except
pursuant to the Company's Employee Stock Purchase Plan, the Company's Equity
Incentive Plan, the Company's Amended and Restated 1996 Equity Incentive Plan
for Directors, the Company's Agency Stock Purchase Plan, the Company's Dividend
Reinvestment Plan and as described herein under "Reasons for the Amendment;
Recommendation of the Board of Directors -- Financing Flexibility." Unissued
shares of capital stock could be issued in circumstances that would serve to
preserve the control of the Company by the Mutual Company and the Company's
current management. The Amendment will permit the holders of a majority of the
outstanding shares of Common Stock to have decisive influence over the amendment
of the Company's Certificate of Incorporation in the future to increase the
number of authorized shares of Common Stock, Class A Common Stock and Series
Preferred Stock.
STOCKHOLDER INFORMATION
If the Company's Board of Directors were to authorize the issuance of any
Class A Common Stock in the future, the Company would deliver to the holders of
Class A Common Stock the same proxy statements, annual reports and other
information and reports as it delivers to holders of Common Stock.
VOTE REQUIRED
Approval and adoption of the Amendment will require the affirmative vote of
the holders of a majority of the shares of Common Stock of the Company
outstanding and entitled to vote. For purposes of this matter, therefore,
abstentions and broker non-votes will have the effect of negative votes. The
Mutual Company, as the holder of approximately 60% of the outstanding Common
Stock, has advised the Company that the Mutual Company will vote its shares for
approval and adoption of the Amendment. Accordingly, the Amendment will be
approved and adopted, irrespective of the votes cast by the stockholders of the
Company other than the Mutual Company.
The Company's Board of Directors recommends a vote FOR approval and
adoption of the Amendment.
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AMENDMENT OF THE AMENDED AND RESTATED
1996 EQUITY INCENTIVE PLAN
At the Annual Meeting, the stockholders will be asked to consider and vote
upon the amendment of the Equity Incentive Plan. The Board of Directors amended
the Equity Incentive Plan on March 17, 1999, subject to stockholder approval at
the Annual Meeting, to increase the total number of shares for which grants may
be made to 1,800,000 shares, in order to make additional shares available under
the Equity Incentive Plan in the future for officers and key employees. If the
amendment to the Equity Incentive Plan is not approved by the stockholders at
the Annual Meeting, the Equity Incentive Plan will remain in force in its
current form. However, because the Mutual Company will vote for approval of the
amendment to the Equity Incentive Plan, the amendment to the Equity Incentive
Plan will be approved regardless of the votes of the Company's stockholders
other than the Mutual Company.
The purpose of the Equity Incentive Plan is to further the growth,
development and financial success of the Company, the Mutual Company and the
subsidiaries of the Company and the Mutual Company by providing additional
incentives to those officers and key employees who are responsible for the
management and affairs of the Company, the Mutual Company and the subsidiaries
of the Company and the Mutual Company, which will enable them to participate in
any increase in value of the Common Stock of the Company.
The Equity Incentive Plan permits the granting of Options, including
Options intended to qualify as incentive stock options under the Code
("Incentive Stock Options") and Options not intended to so qualify
("Non-Qualified Options") to those officers and key employees of the Company,
the Mutual Company and the subsidiaries of the Company and the Mutual Company
who are in positions in which their decisions, actions and counsel significantly
impact upon the profitability and success of the Company, the Mutual Company and
the subsidiaries of the Company and the Mutual Company. Directors of the Company
who are not also officers or employees of the Company, the Mutual Company or the
subsidiaries of the Company and the Mutual Company are not eligible to
participate in the Equity Incentive Plan. Nothing contained in the Equity
Incentive Plan affects the right of the Company, the Mutual Company or any
subsidiary of the Company or the Mutual Company to terminate the employment of
any employee.
The total number of shares of Common Stock that may be the subject of
Options granted under the Equity Incentive Plan may not currently exceed
1,219,364 shares in the aggregate. As of February 19, 1999, Options for the
purchase of an aggregate of 1,003,116 shares were outstanding. Therefore, a
total of only 216,248 shares of Common Stock are currently available for grants
under the Equity Incentive Plan.
The amendment will increase the number of shares currently available for
grants under the Equity Incentive Plan in furtherance of the purposes of the
plan for the next several years. No determination has been made as to the
allocation of grants with respect to the additional shares to specific
employees. The Company believes that the additional shares will be required to
satisfy anticipated annual Option grants over the next several years.
The number of persons who are eligible to participate in the Equity
Incentive Plan is approximately 345, including executive officers of the
Company, the Mutual Company and the subsidiaries of the Company and the Mutual
Company. Through February 19, 1999: (i) Non-Qualified Options to purchase an
aggregate of 621,332 shares were granted to executive officers of the Company,
which included the following: Mr. Nikolaus, 240,000 shares; Mr. Spontak, 113,333
shares;
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Mr. Shupert, 52,000 shares; Mr. Wood, 45,333 shares and Mr. Shenk, 50,667 shares
and (ii) Incentive Stock Options to purchase an aggregate of 57,778 shares were
granted to executive officers of the Company, which included the following: Mr.
Nikolaus, 26,667 shares; Mr. Spontak, 13,333 shares; Mr. Shupert, 5,333 shares;
Mr. Wood, 2,667 shares and Mr. Shenk, 2,667 shares.
On March 2, 1999, the closing price of the Company's Common Stock as
reported on the Nasdaq National Market was $13.78 per share.
No Options may be granted under the Equity Incentive Plan after February
15, 2006. If an Option expires or is terminated for any reason without having
been fully exercised, the number of shares subject to such Option which have not
been purchased may again be made subject to an Option under the Equity Incentive
Plan. Appropriate adjustments to outstanding Options and to the number or kind
of shares subject to the Equity Incentive 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. As amended, the maximum number of shares of Common Stock for which
Options may be granted under the Equity Incentive Plan to any officer or
employee in any calendar year is 100,000 shares.
As amended, the Equity Incentive Plan may be administered by the Board of
Directors of the Company or a committee of two or more members, each of whom
must be a "non-employee director" within the meaning of Rule 16b-3 under the
Exchange Act (the "Committee"), and is currently administered by the
Compensation Committee of the Board of Directors, consisting of Messrs. Ireland,
Sherbahn and Glatfelter. See "Election of Directors -- The Board of Directors
and Its Committees." The Committee is authorized to (i) interpret the provisions
of the Equity Incentive Plan and decide all questions of fact arising in its
application; (ii) select the employees to whom Options are granted and determine
the timing, type, amount, size and terms of each such grant and (iii) to make
all other determinations necessary or advisable for the administration of the
Equity Incentive Plan.
INCENTIVE AND NON-QUALIFIED OPTIONS
The exercise price of shares subject to Options granted under the Equity
Incentive Plan will be set by the Committee but may not be less than 100% of the
fair market value per share of Common Stock on the date the Option is granted as
determined by the Committee.
Options will be evidenced by written agreements in such form not
inconsistent with the Equity Incentive Plan as the Committee shall approve from
time to time. Each agreement will state the period or periods of time within
which the Option may be exercised. The Committee may accelerate the
exercisability of any Option upon such circumstances and subject to such terms
and conditions as the Committee deems appropriate. Unless the Committee
accelerates exercisability, no Option that is unexercisable at the time of the
optionee's termination of employment may thereafter become exercisable. No
Option may be exercised after ten years from the date of grant.
An outstanding Non-Qualified Option that has become exercisable generally
terminates one year after the termination of employment due to death, retirement
or total disability and three months after employment termination for any reason
other than retirement, total disability or death. Incentive Stock Options that
have become exercisable generally will terminate one year after termination of
employment due to total disability or death and three months after an employment
termination for any other reason. No Option may be assigned or transferred,
except by will or by the applicable laws of
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descent and distribution. During the lifetime of the optionee, an Option may be
exercised only by the optionee.
The Committee will determine whether Options granted are to be Incentive
Stock Options meeting the requirements of Section 422 of the Code. Incentive
Stock Options may be granted only to eligible employees. Any such optionee must
own less than 10% of the total combined voting power of the Company or of any of
its subsidiaries unless, at the time such Incentive Stock Option is granted, the
option price is at least 110% of the fair market value of the Common Stock
subject to the Option and, by its terms, the Incentive Stock Option is not
exercisable after the expiration of five years from the date of grant. An
optionee may not receive Incentive Stock Options for shares that first become
exercisable in any calendar year with an aggregate fair market value determined
at the date of grant in excess of $100,000.
The option price must be paid in full at the time of exercise unless
otherwise determined by the Committee. 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 Committee. It is the policy of
the Committee that any taxes required to be withheld must also be paid at the
time of exercise. The Committee 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 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 Option has
been exercised.
AMENDMENT AND TERMINATION
The Committee may terminate or amend the Equity Incentive Plan at any time
with respect to shares as to which Options have not been granted, 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 may be made to the Equity Incentive Plan
without the consent of an optionee if such modification, amendment or
termination will affect the rights of the optionee under an Option previously
granted.
FEDERAL INCOME TAX CONSEQUENCES
Based on the advice of counsel, the Company believes that the normal
operation of the Equity Incentive Plan should generally have, under the Code and
the regulations thereunder, all as in effect on the date of this Proxy
Statement, the principal federal income tax consequences described below. The
tax treatment described below does not take into account any changes in the Code
or the regulations thereunder that may occur after the date of this Proxy
Statement. The following discussion is only a summary; it is not intended to be
all-inclusive or to constitute tax advice, and, among other things, does not
cover possible state or local tax consequences. This description may differ from
the actual tax consequences of participation in the Equity Incentive Plan.
An employee receiving an Option (an "Optionee") will not recognize taxable
income upon the grant of the Option, nor will the Company be entitled to any
deduction on account of such grant.
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In the case of Non-Qualified Stock Options, the Optionee will recognize
ordinary income upon the exercise of the Non-Qualified Stock Option in an amount
equal to the difference between the option price and the fair market value of
the shares on the date of exercise. An Optionee exercising a Non-Qualified Stock
Option is subject to federal income tax withholding on the income recognized as
a result of the exercise of the Non-Qualified Stock Option. Such income will
include any income attributable to any shares issuable upon exercise that are
surrendered, if permitted under the applicable stock option agreement, in order
to satisfy the federal income tax withholding requirements.
Except as provided below, the basis of the shares received by the Optionee
upon the exercise of a Non-Qualified Stock Option will be the fair market value
of the shares on the date of exercise. The Optionee's holding period will begin
on the day after the date on which the Optionee recognizes income with respect
to the transfer of such shares, i.e., generally the day after the exercise date.
When the Optionee disposes of the shares acquired upon exercise of a
Non-Qualified Stock Option, the Optionee will generally recognize capital gain
or loss under the Code rules that govern stock dispositions, assuming the shares
are held as capital assets, equal to the difference between (i) the selling
price of the shares and (ii) the sum of the option price and the amount included
in his or her income when the Non-Qualified Stock Option was exercised. Any net
capital gain (i.e., the excess of the net long-term capital gains for the
taxable year over net short-term capital losses for such taxable year) will be
taxed at a capital gains rate that depends on how long the shares were held and
the Optionee's tax bracket. Any net capital loss may be used only to offset up
to $3,000 per year of ordinary income (reduced to $1,500 in the case of a
married individual filing separately) or carried forward to a subsequent year.
The use of shares to pay the exercise price of a Non-Qualified Stock Option, if
permitted under the applicable stock option agreement, will be treated as a
like-kind exchange under Section 1036 of the Code to the extent that the number
of shares received on the exercise does not exceed the number of shares
surrendered. The Optionee will therefore recognize no gain or loss with respect
to the surrendered shares and will have the same basis and holding period with
respect to the newly acquired shares (up to the number of shares surrendered) as
with respect to the surrendered shares. To the extent the number of shares
received exceeds the number surrendered, the fair market value of such excess
shares on the date of exercise, reduced by any cash paid by the Optionee upon
such exercise, will be includible in the gross income of the Optionee. The
Optionee's basis in such excess shares will equal the fair market value of such
shares on the date of exercise, and the Optionee's holding period with respect
to such excess shares will begin on the day following the date of exercise.
Incentive Stock Options granted under the Equity Incentive Plan are
intended to qualify as incentive stock options under Section 422 of the Code. A
purchase of shares upon exercise of an Incentive Stock Option will not result in
recognition of income at that time, provided the Optionee was an employee of the
Company or certain related corporations described in Section 422(a)(2) of the
Code during the entire period from the date of grant of the Incentive Stock
Option until three months before the date of exercise (increased to 12 months if
employment ceased due to total and permanent disability). The employment
requirement is waived in the event of the Optionee's death. (Of course, in all
of these situations, the Incentive Stock Option itself may provide a shorter
exercise period after employment ceases than the allowable period under the
Code.) However, the excess of the fair market value of the shares purchased over
the exercise price will constitute an item of tax preference. This tax
preference will be included in the Optionee's computation of the Optionee's
alternative minimum tax. The basis of the shares received by the Optionee upon
exercise of an Incentive Stock Option is the exercise price. The Optionee's
holding period for such shares begins on the date of exercise.
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If the Optionee does not dispose of the shares issued to the optionee upon
the exercise of an Incentive Stock Option within one year after such issuance or
within two years after the date of the grant of such Incentive Stock Option,
whichever is later, then any gain or loss realized by the Optionee on a later
sale or exchange of such shares generally will be a long-term capital gain or a
long-term capital loss equal to the difference between the amount realized upon
the disposition and the exercise price, if such shares are otherwise a capital
asset in the hands of the Optionee. Any net capital gain (i.e., the excess of
the net long-term capital gains for the taxable year over net short-term capital
losses for such taxable year) will be taxed at a capital gains rate that depends
on how long the shares were held and the Optionee's tax bracket. Any net capital
loss may be used only to offset up to $3,000 per year of ordinary income
(reduced to $1,500 in the case of a married individual filing separately) or
carried forward to a subsequent year. If the Optionee sells the shares during
such period (i.e., within two years after the date of grant of the Incentive
Stock Option or within one year after the transfer of the shares to the
Optionee), the sale will be deemed a "disqualifying disposition." In that event,
the Optionee will recognize ordinary income for the year in which the
disqualifying disposition occurs equal to the amount, if any, by which the
lesser of the fair market value of such shares on the date of exercise of such
Incentive Stock Option or the amount realized from the sale exceeded the amount
the Optionee paid for such shares. In the case of disqualifying dispositions
resulting from certain transactions, such as gift or related party transactions,
the Optionee will realize ordinary income equal to the fair market value of the
shares on the date of exercise minus the exercise price. The basis of the shares
with respect to which a disqualifying disposition occurs will be increased by
the amount included in the Optionee's ordinary income. Disqualifying
dispositions of shares may also, depending upon the sales price, result in
capital gain or loss under the Code rules that govern other stock dispositions,
assuming that the shares are held as a capital asset. The tax treatment of such
capital gain or loss is summarized above.
Except as provided below, the use of shares already owned by the Optionee
to pay the purchase price of an Incentive Stock Option will be treated as a
like-kind exchange under Section 1036 of the Code to the extent that the number
of shares received on the exercise does not exceed the number of shares
surrendered. The Optionee will therefore recognize no gain or loss with respect
to the surrendered shares and will have the same basis and holding period with
respect to the newly acquired shares (up to the number of shares surrendered) as
with respect to the surrendered shares. To the extent that the number of shares
received exceeds the number surrendered, the Optionee's basis in such excess
shares will equal the amount of cash paid by the Optionee upon the exercise of
the Incentive Stock Option (if any), and the Optionee's holding period with
respect to such excess shares will begin on the date such shares are transferred
to the Optionee. However, if payment of the purchase price upon exercise of an
Incentive Stock Option is made with shares acquired upon exercise of an
Incentive Stock Option before the shares used for payment have been held for the
two-year or one-year period described herein, use of such shares as payment will
be deemed a "disqualifying disposition" of the shares used for payment subject
to the rules described herein.
Under current law, any gain realized by an Optionee, other than long-term
capital gain, is taxable at a maximum federal income tax rate of 39.6%. Under
current law, long-term capital gain is taxable at a maximum federal income tax
rate of 20%.
The Company will be entitled to a tax deduction in connection with an
Option under the Equity Incentive Plan in an amount equal to the ordinary income
realized by the Optionee and at the time such
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Optionee recognizes such income (including any ordinary income realized by the
Optionee upon a "disqualifying disposition" of an Incentive Stock Option
described above).
The foregoing discussion is only a summary of certain of the federal income
tax consequences relating to the Equity Incentive Plan as in effect on the date
of this Proxy Statement. No consideration has been given to the effects of
state, local, and other laws (tax or other) upon the Equity Incentive Plan or
upon the Optionee or Company, which laws will vary depending upon the particular
jurisdiction or jurisdictions involved.
VOTE REQUIRED
Approval of the amendment to the Equity Incentive 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 a majority. An
abstention therefore will have the practical effect of voting against adoption
of the amendment to the amendment to the Equity Incentive Plan because it
represents one fewer vote for the amendment. Broker non-votes are not considered
shares present in person or represented by proxy and entitled to vote on the
Equity Incentive Plan and will have no effect on the vote. The Mutual Company,
as the holder of approximately 60% of the outstanding Common Stock, has advised
the Company that the Mutual Company will vote its shares for approval and
adoption of the amendment to the Equity Incentive Plan. Accordingly, the
amendment to the Equity Incentive Plan will be approved and adopted,
irrespective of the votes cast by the stockholders of the Company other than the
Mutual Company.
The Company's Board of Directors recommends a vote FOR approval and
adoption of the amendment to the Equity Incentive Plan.
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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 LLP as the Company's
independent public accountants for 1999. The Company has been advised by KPMG
LLP that none of its members has any financial interest in the Company. Election
of KPMG 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 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 1998 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
Rule 14a-8 under the Exchange Act, wishes to submit a proposal for inclusion in
the Company's proxy statement for its 2000 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 22, 1999.
Except for a proposal submitted under Rule 14a-8, any stockholder who, in
accordance with and subject to the provisions of the Company's By-laws, wishes
to submit a proposal for the Company's 2000 Annual Meeting of Stockholders,
relating either to (i) nominations for and election of directors for
consideration by the Nominating Committee of the Company's Board of Directors or
(ii) other than nominations for and election of directors, must deliver such
proposal in writing during the period commencing on November 22, 1999 and ending
on December 22, 1999. Written notice of any such proposal containing the
information required under the Company's By-laws, as described herein, must be
delivered in person, by first class United States mail postage prepaid or by
reputable overnight delivery service to the Company's Secretary at the Company's
principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547.
Such written proposal of nomination for a director must set forth (i) the
name and address of the stockholder who intends to make the nomination (the
"Nominating Stockholder"), (ii) the name, age, business address and, if known,
residence address of each person so proposed, (iii) the principal occupation or
employment of each person so proposed for the past five years, (iv) the number
of shares of capital stock of the Company beneficially owned within the meaning
of SEC Rule 13d-1 by each person so proposed and the earliest date of
acquisition of any such capital stock, (v) a description of any arrangement or
understanding between each person so proposed and the Nominating Stockholder
with respect to such person's proposal for nomination and election as a director
and actions to be proposed or taken by such person as a director, (vi) the
written consent of each person so proposed to serve as a director if nominated
and elected as a director and (vii) such other information regarding each such
person as would be required under the proxy solicitation rules of the SEC if
proxies were to be solicited for the election as a director of each person so
proposed. Only candidates nominated by
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stockholders for election as a member of the Company's Board of Directors in
accordance with the By-law provisions summarized herein will be eligible to be
considered by the Nominating Committee for nomination for election as a member
of the Company's Board of Directors at such meeting of stockholders, and any
candidate not nominated in accordance with such provisions will not be
considered or acted upon for election as a director at such meeting of
stockholders.
Such written notice of presentation of a matter other than a nomination for
election as a director shall set forth information regarding such matter
equivalent to the information regarding such matter that would be required under
the proxy solicitation rules of the SEC if proxies were solicited for
stockholder consideration of such matter at a meeting of stockholders. Only
stockholder proposals submitted in accordance with the By-law provisions
summarized herein shall be eligible for presentation at the 2000 Annual Meeting
of Stockholders, and any matter not submitted to the Company's Board of
Directors in accordance with such provisions shall not be considered or acted
upon at such meeting of stockholders.
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, proxies in
the enclosed form returned to the Company will be voted in accordance with the
recommendation of the Board of Directors or, in the absence of such a
recommendation, in accordance with the judgment of the proxy holder.
By Order of the Board of Directors,
/s/ Donald H. Nikolaus
-------------------------------------
Donald H. Nikolaus,
President and Chief Executive Officer
March 22, 1999
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EXHIBIT A
Article 4 of the Certificate of Incorporation of Donegal Group Inc. (the
"Corporation") is hereby amended and restated so that as amended and restated
Article 4 shall read in its entirety as follows:
"4. The aggregate number of shares of stock which the Corporation
shall have authority to issue is 37,000,000 shares, consisting of (i)
20,000,000 shares of Common Stock (the "Common Stock"), par value $1.00 per
share, (ii) 15,000,000 shares of Class A Common Stock (the "Class A Common
Stock"), par value $.01 per share, and (iii) 2,000,000 shares of Series
Preferred Stock (the "Preferred Stock"), par value $.01 per share.
(a) The Class A Common 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 (including voting rights), preferences,
limitations and restrictions of the Class A Common 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 4, to issue from time to time Class A
Common Stock in one or more series and to fix from time to time before
issuance thereof, by filing a certificate of designations pursuant to the
General Corporation Law of the State of Delaware (the "GCL"), 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,
qualifications, limitations and restrictions of the shares in each such
series. Notwithstanding anything to the contrary set forth above, the
powers, preferences and rights, and the qualifications, limitations and
restrictions, of the Common Stock and the Class A Common Stock shall be
subject to the following:
(i) Except as otherwise required by law or as otherwise provided in
this Certificate of Incorporation or in a certificate of designations
filed pursuant to the GCL with respect to any series of Class A Common
Stock, each share of Common Stock and each share of Class A Common Stock
shall be of equal rank and shall have identical powers, preferences,
qualifications, limitations, restrictions and other rights, including
rights in liquidation. All shares of Class A Common Stock of the same
series shall be identical in all respects.
(ii) Each holder of Common Stock shall be entitled to one vote for
each share of Common Stock held. Except as otherwise specifically
provided in the certificate of designations filed pursuant to the GCL
with respect to any series of Class A Common Stock or as otherwise
provided by law, the Class A Common Stock shall not have any right to
vote for the election of directors or for any other purpose and the
Common Stock and, to the extent provided in a certificate of
designations filed pursuant to the GCL with respect to any series of
Preferred Stock, the Preferred Stock shall have the exclusive right to
vote for the election of directors and for all other purposes. In all
instances in which voting rights are granted to the Class A Common Stock
or any series thereof, the Class A Common Stock or series thereof shall
vote with the Common Stock and, to the extent provided in a certificate
of designations filed pursuant to the GCL with respect to any series of
Preferred Stock, the Preferred Stock as a single class, except as
otherwise provided in the certificate of designations filed pursuant to
the GCL with respect to any series of Class A Common Stock or as
otherwise provided by law.
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(iii) Each share of the Common Stock and each share of the Class A
Common Stock shall be equal in respect of rights to dividends and
distributions, except that (A) a dividend or distribution in cash or
property on a share of Class A Common Stock may be greater than a
dividend or distribution in cash or property on a share of Common Stock
and (B) dividends or other distributions payable on the Common Stock and
the Class A Common Stock in shares of capital stock shall be made to all
holders of Common Stock and Class A Common Stock and may be made (1) in
shares of Common Stock to the holders of Common Stock and in shares of
Class A Common Stock to the holders of Class A Common Stock, (2) in
shares of Class A Common Stock to the holders of Common Stock and the
holders of Class A Common Stock or (3) in any other authorized class or
series of capital stock to the holders of Common Stock and to the
holders of Class A Common Stock.
(iv) Except to the extent provided in paragraph (a)(iii) of this
Article 4, the Corporation shall not split, divide or combine the shares
of the Common Stock or the Class A Common Stock unless, at the same
time, the Corporation splits, divides or combines, as the case may be,
the shares of both the Common Stock and the Class A Common Stock in the
same proportion and manner.
(v) The number of authorized shares of Common Stock and the number
of authorized shares of Class A Common Stock may be increased or
decreased (but not below the number of shares then outstanding) by the
affirmative vote of the holders of a majority of the voting power of the
stock of the Corporation entitled to vote irrespective of any other
voting requirements set forth in Section 242(b)(2) of the GCL, but
subject in all events to compliance with the requirements of this
Article 4.
(b) The Preferred Stock may be issued from time to time by the Board
of Directors of the Corporation as herein provided in one or more series.
The designations, relative rights (including voting rights), preferences,
limitations and restrictions 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 4, 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 of designations pursuant to the GCL, 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, limitations and restrictions of the shares in each such
series. Notwithstanding anything to the contrary set forth above, the
powers, preferences and rights, and the qualifications, limitations and
restrictions, of the Preferred Stock shall be subject to the following:
(i) The number of authorized shares of the Preferred Stock may be
increased or decreased (but not below the number of shares then
outstanding) by the affirmative vote of the holders of a majority of the
voting power of the stock of the Corporation entitled to vote
irrespective of any other voting requirements set forth in Section
242(b)(2) of the GCL, but subject in all events to compliance with the
requirements of this Article 4.
(ii) 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, if any, may accumulate. All shares of Preferred Stock
of all
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series shall be of equal rank and shall be identical in all respects,
except that, to the extent not otherwise limited in this Article 4, any
series may differ from any other series with respect to any one or more
of the designations, relative rights, preferences, limitations and
restrictions set forth in a certificate of designations filed under the
GCL with respect to any series.
(iii) Except as otherwise specifically provided in the certificate
of designations filed pursuant to the GCL 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 and, to the extent provided in a
certificate of designations filed pursuant to the GCL with respect to
any series of Class A Common Stock, the Class A Common Stock shall have
the exclusive right to vote for the election of directors and for all
other purposes. In all instances in which voting rights are granted to
the Preferred Stock or any series thereof, such Preferred Stock or
series thereof shall vote with the Common Stock and, to the extent
provided in a certificate of designations filed pursuant to the GCL with
respect to any series of Class A Common Stock, the Class A Common Stock
as a single class, except as otherwise provided in the certificate of
designations filed pursuant to the GCL with respect to any series of
Preferred Stock or as otherwise provided by law.
(c) 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 and the
Class A 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 and the Class A Common Stock. 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 and the
Class A 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 4."
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DONEGAL GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 15, 1999
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 15, 1999 at 10:00 a.m., and
at any adjournment, postponement or continuation thereof, as set forth on the
reverse side of this proxy card.
PROXY
Election of Class A Directors, Nominees:
Robert S. Bolinger
Patricia A. Gilmartin
Philip A. Glatfelter, II
You are encouraged to specify your choices by marking the appropriate boxes, SEE
REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance
with the Board of Directors' recommendations.
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|X|
Please mark your
votes as in this
example.
This proxy will be voted as specified. If a choice isn not specifies, the
proxy will be voted FOR the nonimmes for Director and FOR Prospals 2, 3, 4.
The Board of Directors recommends a vote FOR
proposals 2, 3 and 4.
FOR WITHHELD
1. Election of |_| |_|
Class A Directors
(see reverse side)
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------
FOR AGAINST ABSTAIN
2. Amendment and rxestatement of Article 4 of
the Company's Certificate of Incorporation. |_| |_| |_|
The Board of Directors recommends a vote
FOR this proposal.
FOR AGAINST ABSTAIN
3. Amendment of the Company's 1996
Equity Incentive Plan. The
Board of Directors recommends |_| |_| |_|
a vote FOR this proposal.
FOR AGAINST ABSTAIN
4. Proposal to elect KPMG LLP as the inde-
pendent public accountants for the Com-
pany for 1999. The Board of Directors |_| |_| |_|
recommends a vote FOR this porposal.
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 therof.
This proxy should be dated, signed by the stockholder exactly as his or her 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.
.........................................(SEAL)
.........................................(SEAL)
...............................................
Date:................, 1999
