SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-15341
DONEGAL GROUP INC.
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(Exact name of registrant as specified in its charter)
Delaware 23-2424711
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, Marietta, Pennsylvania 17547
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 426-1931
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in
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definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
On March 15, 2000, the aggregate market value (based on the closing sales price
on that date) of the voting stock held by non-affiliates of the Registrant was
$24,719,873.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 8,618,558 shares of Common
Stock outstanding on March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the fiscal
year ended December 31, 1999 are incorporated by reference into Parts I, II
and IV of this report.
2. Portions of the Registrant's proxy statement relating to the annual meeting
of stockholders to be held April 20, 2000 are incorporated by reference
into Part III of this report.
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DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT
Page
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I. PART I.
Item 1. Business................................................. 1
Item 2. Properties................................................23
Item 3. Legal Proceedings.........................................23
Item 4. Submission of Matters to a Vote of Security Holders.......23
Executive Officers of the Company.........................23
II. PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.............................25
Item 6. Selected Financial Data...................................25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............25
Item 8. Financial Statements and Supplementary Data...............25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................25
III. PART III.
Item 10. Directors and Executive Officers of the Registrant........26
Item 11. Executive Compensation....................................26
Item 12. Security Ownership of Certain Beneficial
Owners and Management...................................26
Item 13. Certain Relationships and Related Transactions............26
IV. PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................27
(i)
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PART I
Item 1. Business.
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(a) General Development of Business.
--------------------------------
Donegal Group Inc. is an insurance holding company formed in August 1986,
which is headquartered in Pennsylvania and engages, through its subsidiaries, in
the property and casualty insurance business in 19 mid-Atlantic and southeastern
states. As used herein, "DGI" or the "Company" refers to Donegal Group Inc. and
its insurance subsidiaries, Atlantic States Insurance Company ("Atlantic
States"), Southern Insurance Company of Virginia ("Southern"), Delaware Atlantic
Insurance Company ("Delaware Atlantic"), Pioneer Insurance Company ("Pioneer")
and Southern Heritage Insurance Company ("Southern Heritage"). DGI is currently
61.8% owned by Donegal Mutual Insurance Company (the "Mutual Company"). DGI and
its subsidiaries and the Mutual Company underwrite a broad line of personal and
commercial coverages, consisting of private passenger and commercial automobile,
homeowners, commercial multi-peril, workers' compensation and other lines of
insurance.
The Company's strategy is to seek growth both internally and through
acquisitions. Since the formation of the Company and Atlantic States in 1986,
the Company has completed the following acquisitions:
<TABLE>
<CAPTION>
Net Net Premiums
Premiums Written Year
Written Year Ended
Year Prior to December 31,
Company Acquired Acquired Acquisition 1999
- ---------------- -------- ------------ ------------
<S> <C> <C> <C>
Southern Insurance Company of Virginia 1988 $1,128,843 14,193,477
Delaware Atlantic Insurance Company 1995 2,824,398 3,813,812
Pioneer Insurance Company 1997 4,499,273 3,749,701
Southern Heritage Insurance Company 1998 32,002,540 17,422,801
</TABLE>
The Company evaluates other acquisition candidates on a continuing basis.
However, there can be no assurance as to whether or when the Company will effect
any additional acquisitions.
Atlantic States, which DGI organized in September 1986, participates in an
underwriting pool whereby it cedes to the Mutual Company the premiums, losses
and loss expenses from all of its insurance business and assumes from the Mutual
Company a specified portion of the pooled business, which also includes
substantially all of the Mutual Company's property and casualty insurance
business. Effective as of October 1, 1986, DGI entered into a pooling agreement
with the Mutual Company whereby Atlantic States assumed 35% of the pooled
business written or in force on or after October 1, 1986. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 hereof and Note 3 to the Consolidated
Financial Statements incorporated by reference herein.
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On December 29, 1988, DGI acquired all of the outstanding capital stock of
Southern in exchange for a $3,000,000 equity contribution to Southern. Since
January 1, 1991, Southern has ceded to the Mutual Company 50% of its direct
premiums written and 50% has been retained by Southern. Because the Mutual
Company places substantially all of the business assumed from Southern in the
pool, in which DGI has a 65% allocation, DGI's results of operations include
approximately 80% of the business written by Southern. See Note 3 to the
Consolidated Financial Statements incorporated by reference herein.
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 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.
On November 17, 1998, DGI purchased all of the outstanding capital stock of
Southern Heritage, a Georgia-domiciled property and casualty insurance company,
from Southern Heritage Limited Partnership for a purchase price, as finally
settled, of $18,824,950 in cash.
The Mutual Company is currently a party to retrocessional reinsurance
contracts with each of the Company's subsidiaries, Southern, Delaware Atlantic,
Pioneer and Southern Heritage, whereby the Mutual Company reinsures each such
subsidiary in respect of 100% of the net liability that may accrue to such
subsidiary from its insurance operations and retrocedes 100% of the net
liability back to such subsidiary, which such subsidiary assumes.
On March 19, 1999, the Mutual Company, the Company and Donegal Financial
Services Corporation, a Delaware corporation formed by the Mutual Company and
the Company in 1999 ("Donegal Financial" and together with the Mutual Company
and the Company, the "Applicants"), filed an Application for Permission to
Organize a Federal Stock Savings Bank and related holding company application
with the Office of Thrift Supervision (the "OTS") pursuant to Section 10(e) of
the Home Owners' Loan Act to organize a proposed de novo federal savings bank,
to be known as Donegal Federal Savings Bank (the "Savings Bank"), the deposits
of which will be insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation (the "FDIC"). An Application for Federal
Deposit Insurance was filed on behalf of the Savings Bank with the FDIC on April
9, 1999. These applications currently remain under review by the OTS and the
FDIC.
Unless otherwise stated, all information in this report gives retroactive
effect to: (i) the four-for-three split of the Company's Common Stock effected
through a stock dividend of one share of Common Stock for each three shares
outstanding, which was paid on July 15, 1997 to stockholders of record on June
25, 1997, and (ii) the four-for-three split of the Company's
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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.
(b) Financial Information about Industry Segments.
----------------------------------------------
The Company has three segments, which consist of the investment function,
the personal lines of insurance and the commercial lines of insurance. Financial
information about these segments is set forth in Note 17 to the Consolidated
Financial Statements incorporated by reference herein.
(c) Narrative Description of Business.
----------------------------------
Relationship with the Mutual Company
DGI's operations are interrelated with the operations of the Mutual Company
and, because of the percentage of the pooled business assumed by DGI, DGI's
results of operations are dependent to a material extent upon the success of the
Mutual Company. In addition, various reinsurance agreements exist between the
Company and the Mutual Company. The Mutual Company is responsible for
underwriting and marketing the pooled business and provides facilities,
employees and services required to conduct the business of DGI on a
cost-allocated basis. The Mutual Company owned 61.8% of DGI as of March 15,
2000.
Through the pool, DGI writes personal and commercial property and casualty
insurance lines, including automobile, homeowners, commercial multi-peril,
workers' compensation and other lines of business. The insurance agencies under
contract with the Mutual Company serve as representatives for the pool
participants.
The Mutual Company provides all personnel for the Company and certain of
its insurance subsidiaries, including Atlantic States, Delaware Atlantic,
Southern and Pioneer. Expenses are allocated to the Company, Delaware Atlantic,
Southern and Pioneer according to a time allocation and estimated usage
agreement, and to Atlantic States in relation to the relative participation of
the Mutual Company and Atlantic States in the pooling agreement described
herein. Expenses allocated to the Company under such agreement were $27,466,898
in 1999.
The Mutual Company leases office equipment and automobiles from the
Company, under a lease dated January 1, 1990. The Mutual Company made lease
payments to the Company of $819,474 in 1999.
Under the terms of the intercompany pooling agreement, Atlantic States
cedes to the Mutual Company the premiums, losses and loss expenses on all of its
insurance business. Substantially all of the Mutual Company's property and
casualty insurance business written or in force on or after October 1, 1986 is
included in the pooled business. 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
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of business on September 30, 1986, has increased the percentage of retrocessions
of the pooled business to Atlantic States. As most recently amended, effective
as of January 1, 1996, 65% of the pooled business has been retroceded to
Atlantic States. All premiums, losses, loss 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.
The underwriting pool is intended to produce a more uniform and stable
underwriting result from year to year for the participants in the pool than
they would experience individually and to spread the risk of loss among all the
participants. Each company participating in the pool has at its disposal the
capacity of the entire pool, rather than being limited to policy exposures of a
size commensurate with its own capital and surplus. The additional capacity
exists because such policy exposures are spread among the pool participants,
each of which has its own capital and surplus.
In addition to the underwriting pool, through the retrocessional
reinsurance agreements with each of the Company's subsidiaries, Southern,
Delaware Atlantic, Pioneer and Southern Heritage, the Mutual Company reinsures
each such subsidiary in respect of 100% of the net liability that may accrue to
such subsidiary from its insurance operations and retrocedes 100% of the net
liability back to such subsidiary, which such subsidiary assumes.
On March 19, 1999, the Mutual Company, the Company and Donegal Financial
filed an Application for Permission to Organize a Federal Stock Savings Bank and
related holding company application with the OTS pursuant to Section 10(e) of
the Home Owners' Loan Act to organize a proposed de novo federal savings bank,
to be known as Donegal Federal Savings Bank, the deposits of which will be
insured by the Savings Association Insurance Fund of the FDIC. An Application
for Federal Deposit Insurance was filed on behalf of the Savings Bank with the
FDIC on April 9, 1999. These applications currently remain under review by the
OTS and the FDIC.
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
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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.
DGI's Business Strategy
DGI, in conjunction with the Mutual Company, has multiple strategies which
the management of DGI believes have resulted in underwriting results that are
favorable when compared to those of the property and casualty insurance industry
in general over the past five years. The principal strategies comprise the
following:
o A regional company concept designed to provide the advantages of local
marketing, underwriting and claims servicing with the economies of
scale from centralized accounting, administrative, investment, data
processing and other services.
o An underwriting program and product mix designed to produce a
Company-wide underwriting profit, i.e., a combined ratio of less than
100%, from careful risk selection and adequate pricing.
o A goal of a closely balanced ratio between commercial business and
personal business.
o An agent selection process that focuses on appointing agencies with
proven market strategies for the development of profitable business
and an agent compensation plan providing for additional commissions
based upon premium volume and profitability and the right to
participate in the Company's Agency Stock Purchase Plan.
o A continuing effort to attract and retain qualified employees who
receive incentive compensation based upon historical results.
o A goal of expanding operations in current and adjacent states.
Property and Casualty Insurance Products and Services
The following table indicates the percentage of DGI's net premiums written
represented by commercial lines and by personal lines for the years ended
December 31, 1999, 1998 and 1997:
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Year Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Net Premiums Written:
Commercial................................ 35.6% 38.2% 41.0%
Personal.................................. 64.4% 61.8% 59.0%
The commercial lines consist primarily of automobile, multi-peril and
workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. These types of insurance are described in
greater detail below:
Commercial
o Commercial automobile -- policies that provide protection against
liability for bodily injury and property damage arising from
automobile accidents, and provide protection against loss from damage
to automobiles owned by the insured.
o Workers' compensation -- policies purchased by employers to provide
benefits to employees for injuries sustained during employment. The
extent of coverage is established by the workers' compensation laws of
each state.
o Commercial multi-peril -- policies that provide protection to
businesses against many perils, usually combining liability and
physical damage coverages.
Personal
o Private passenger automobile -- policies that provide protection
against liability for bodily injury and property damage arising from
automobile accidents, and provide protection against loss from damage
to automobiles owned by the insured.
o Homeowners -- policies that provide coverage for damage to residences
and their contents from a broad range of perils, including, fire,
lightning, windstorm and theft. These policies also cover liability
of the insured arising from injury to other persons or their property
while on the insured's property and under other specified conditions.
The following table sets forth the combined ratios of DGI, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, federal income taxes or other non-operating income or
expense. DGI's operating income depends on income from both underwriting
operations and investments. DGI's combined ratio
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for 1999 was adversely impacted by restructuring charges of approximately
$681,000 incurred in the third quarter of 1999.
Year Ended December 31,
------------------------------
1999 1998 1997
----- ----- -----
GAAP combined ratio........................... 106.5% 99.8% 97.6%
Statutory operating ratios:
Loss ratio................................. 68.8 64.0 64.0
Expense ratio.............................. 37.1 35.4 34.0
Dividend ratio............................. 0.9 1.4 1.2
-- --
Statutory combined ratio...................... 106.8% 100.8% 99.2%
===== ===== =====
Industry statutory combined ratio(1).......... 107.5% 105.6% 101.6%
===== ===== =====
- ----------
(1) Source: A.M. Best Co.
DGI is required to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty insurance lines, in
states in which DGI operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements
("FAIR") plans, reinsurance facilities and windstorm plans. Legislation
establishing these programs requires all companies that write lines covered by
these programs to provide coverage (either directly or through reinsurance) for
insureds who cannot obtain insurance in the voluntary market. The legislation
creating these programs usually allocates a pro rata portion of risks
attributable to such insureds to each company on the basis of direct premiums
written or the number of automobiles insured. Generally, state law requires
participation in such programs as a condition to doing business. The loss ratio
on insurance written under involuntary programs has traditionally been greater
than the loss ratio on insurance in the voluntary market. During 1998 and 1999,
the Company received assessments totaling $1.3 million and $726,000,
respectively, from the Pennsylvania Insurance Guaranty Association relating to
the insolvency of two medical malpractice insurers. The impact of these
involuntary programs on DGI were not material during 1997.
The following table sets forth the net premiums written and combined ratios
by line of insurance for the business of DGI, prepared in accordance with
statutory accounting practices prescribed or permitted by state insurance
authorities, for the periods indicated.
Year Ended December 31,
---------------------------------------
1999 1998 1997
------- ------- -------
(dollars in thousands)
Net Premiums Written:
Commercial:
Automobile ................... $12,608 $11,120 $10,522
Workers' compensation ........ 17,519 15,446 15,590
Commercial multi-peril ....... 18,872 17,046 16,357
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Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Other ........................ 1,433 1,473 1,612
-------- -------- --------
Total commercial ........... 50,432 45,085 44,081
-------- -------- --------
Personal:
Automobile ................... 60,716 46,609 38,989
Homeowners ................... 25,573 21,737 19,939
Other ........................ 5,135 4,724 4,597
-------- -------- --------
Total personal ............. 91,424 73,070 63,525
-------- -------- --------
Total business ................. $141,856 $118,155 $107,606
======== ======== ========
Statutory Combined Ratios:
Commercial:
Automobile ................... 113.8% 118.2% 89.9%
Workers' compensation ........ 96.7 80.4 89.5
Commercial multi-peril ....... 95.7 85.6 103.0
Other ........................ 80.6 71.1 57.7
-------- -------- --------
Total commercial ........... 100.0 91.3 93.5
-------- -------- --------
Personal:
Automobile ................... 106.8 104.2 98.7
Homeowners ................... 123.9 115.7 116.4
Other ........................ 87.1 91.2 87.6
-------- -------- --------
Total personal ............. 110.6 106.7 103.4
-------- -------- --------
Total business ................. 106.8% 100.8% 99.2%
======== ======== ========
Property and Casualty Underwriting
The underwriting department is responsible for the establishment of
underwriting and risk selection guidelines and criteria for the various
insurance products written by DGI. The underwriting department, in conjunction
with the marketing representatives, works closely with DGI's independent agents
to insure a comprehensive knowledge on the part of the agents of DGI's
underwriting requirements and risk selection process.
DGI's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio below 100%. DGI
and the Mutual Company have a conservative underwriting philosophy, which, in
the opinion of management, is one of the prime reasons for DGI's favorable loss
ratios relative to the property and casualty insurance industry over the last
five years, with the exception of 1999, when DGI's loss ratio was adversely
impacted by restructuring charges.
The underwriting department has over time initiated risk inspection
procedures and underwriting analyses on a per risk and class of business basis.
It has also automated
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underwriting processing utilizing technology such as bar coding. Management has
established monitoring and auditing processes to verify compliance with
underwriting requirements and procedures.
The underwriting department and the research and development department are
responsible for the development of new insurance products and enhancements of
existing products. Underwriting profitability is enhanced by the creation of
niche products focused on classes of business which traditionally have provided
underwriting profits.
Marketing
DGI's insurance products, together with the products of the Mutual Company
and their respective subsidiaries, are marketed through approximately 3,300
independent insurance agents associated with approximately 1,200 insurance
agencies. Business is written by either DGI or the Mutual Company depending upon
geographic location, agency license and product. Management has developed an
agency appointment procedure that focuses on appointing agencies with proven
marketing strategies for the development of profitable business. DGI regularly
evaluates its agency force and continues to strive to obtain and retain a
significant position within each agency relative to the amount of business
similar to that of DGI placed by the agency with other insurers. DGI and the
Mutual Company have developed a successful contingent commission plan for agents
under which additional commissions are payable based upon the volume of premiums
produced and the profitability of the business of the agency written by DGI and
the Mutual Company. Management believes the contingent commission program and
the Company's Agency Stock Purchase Plan have enhanced the ability of DGI and
the Mutual Company to write profitable business.
DGI has granted certain agents the authority to bind insurance within
underwriting and pricing limits specified by DGI without the prior approval of
DGI. However, DGI generally reviews all coverages placed by its agents and,
subject to applicable insurance regulations, may cancel the coverage if it is
inconsistent with DGI's guidelines.
DGI believes that its regional structure enables it to compete effectively
with large national companies. This regional structure permits DGI to take
advantage of its knowledge of local operating territories and the opportunity to
form strong, long-term relationships with the agents that represent DGI and the
Mutual Company.
DGI and the Mutual Company have developed comprehensive growth strategies
for each of the commercial and personal lines of insurance business. DGI has
focused on the small-to medium-sized commercial insurance markets, which have
traditionally been a more stable and profitable segment of the property and
casualty insurance business than the large commercial insurance markets, which
have become increasingly competitive in the past several years. Commercial lines
marketing is characterized by account selling, in which multiple lines of
insurance are offered to a single policyholder.
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DGI believes that competitive and comprehensive products targeted to
selected classes of personal lines business, along with excellent service to
agents and policyholders, provides a foundation for growth and profitability. As
is customary in the industry, insureds are encouraged to place both their
homeowners and personal automobile insurance with DGI or the Mutual Company and
are offered a discount for doing so.
Claims
The claims department develops and implements policies and procedures for
the establishment of claim reserves and the timely resolution and payment of
claims. The management and staff of the claims department resolve policy
coverage issues, manage and process reinsurance recoveries and handle salvage
and subrogation matters.
Insurance claims are normally investigated and adjusted by internal claims
adjusters and supervisory personnel. Independent adjusters are employed as
needed to handle claims in territories in which the volume of claims is not
sufficient to justify hiring internal claims adjusters. The litigation and
personal injury sections manage all claims litigation, and all claims above
$25,000 require home office review and settlement authorization.
Field office staffs are supported by home office technical, litigation,
material damage, subrogation and medical audit personnel who provide specialized
claims support. An investigative unit attempts to prevent fraud and abuse and to
control losses.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in
time of what the insurer expects to pay to claimants, based on facts and
circumstances then known, and it can be expected that the ultimate liability
will exceed or be less than such estimates. Liabilities are based on estimates
of future trends and claims severity, judicial theories of liability and other
factors. However, during the loss adjustment period, additional facts regarding
individual claims may become known, and consequently it often becomes necessary
to refine and adjust the estimates of liability. Any adjustments are reflected
in operating results in the year in which the changes are made.
DGI maintains liabilities for the eventual payment of losses and loss
expenses with respect to both reported and unreported claims. Liabilities for
loss expenses are intended to cover the ultimate costs of settling all losses,
including investigation and litigation costs from such losses. The amount of
liability for reported losses is primarily based upon a case-by-case evaluation
of the type of risk involved and knowledge of the circumstances surrounding each
claim and the insurance policy provisions relating to the type of loss. The
amount of liability for unreported claims and loss expenses is determined on the
basis of historical information by line of insurance. Inflation is implicitly
provided for in the reserving function through analysis of costs, trends and
reviews of historical reserving results. Liabilities are closely monitored and
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are recomputed periodically by the Company and the Mutual Company using new
information on reported claims and a variety of statistical techniques.
Liabilities for losses are not discounted.
The establishment of appropriate liabilities is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed DGI's loss and loss expense reserves and have an adverse effect on DGI's
results of operations and financial condition. As is the case for virtually all
property and casualty insurance companies, DGI has found it necessary in the
past to revise estimated future liabilities for losses and loss expenses in
non-material amounts, and further adjustments could be required in the future.
However, on the basis of DGI's internal procedures, which analyze, among other
things, DGI's experience with similar cases and historical trends such as
reserving patterns, loss payments, pending levels of unpaid claims and product
mix, as well as court decisions, economic conditions and public attitudes,
management of DGI believes that adequate provision has been made for DGI's
liability for losses and loss expenses.
Differences between liabilities reported in DGI's financial statements
prepared on the basis of generally accepted accounting principles ("GAAP") and
financial statements prepared on a statutory accounting basis result from
reducing statutory liabilities for anticipated salvage and subrogation
recoveries. These differences amounted to $7,736,942, $7,963,559 and $6,155,467
at December 31, 1999, 1998 and 1997, respectively.
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The following tables set forth a reconciliation of the beginning and ending
net liability for unpaid losses and loss expenses for the periods indicated on a
GAAP basis for the Company.
Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Net liability for unpaid losses
and loss expenses at
beginning of year ................. $ 93,863 $ 77,474 $ 75,428
Net liabilities of acquired company.. -- 14,967 --
-------- -------- --------
Net beginning balance as adjusted ... $ 93,863 $ 92,441 $ 75,428
Provision for net losses and
loss expenses for claims
incurred in the current year ...... 99,659 75,463 69,040
Decrease in provision for estimated
net losses and loss expenses for
claims incurred in prior years .... (454) (2,296) (1,384)
-------- -------- --------
Total incurred ...................... 99,205 73,167 67,656
Net losses and loss payments
for claims incurred during:
The current year .................... 58,906 44,389 39,133
Prior years ......................... 36,668 27,356 26,477
-------- -------- --------
Total paid .......................... 95,574 71,745 65,610
Net liability for unpaid losses
and loss expenses at
end of year ....................... $ 97,494 $ 93,863 $ 77,474
======== ======== ========
The following table sets forth the development of the liability for net
unpaid losses and loss expenses for DGI on a GAAP basis from 1989 to 1999, with
supplemental loss data for 1999 and 1998.
"Net liability at end of year for unpaid losses and loss expenses" sets
forth the estimated liability for net unpaid losses and loss expenses recorded
at the balance sheet date for each of the indicated years. This liability
represents the estimated amount of net losses and loss expenses for claims
arising in the current and all prior years that are unpaid at the balance sheet
date including losses incurred but not reported.
The "Liability reestimated as of" portion of the table shows the
reestimated amount of the previously recorded liability based on experience for
each succeeding year. The estimate is increased or decreased as payments are
made and more information becomes known about
-12-
<PAGE>
the severity of the remaining unpaid claims. For example, the 1990 liability has
developed an excess after nine years, in that reestimated net losses and loss
expenses are expected to be $2.8 million less than the estimated liability
initially established in 1990 of $31.9 million.
The "Cumulative excess" shows the cumulative excess at December 31, 1999 of
the liability estimate shown on the top line of the corresponding column. An
excess in liability means that the liability established in prior years exceeded
actual net losses and loss expenses or were reevaluated at less than the
original amount. A deficiency in liability would mean that the liability
established in prior years was less than actual net losses and loss expenses or
were reevaluated at more than the original amount.
The "Cumulative amount of liability paid through" portion of the table
shows the cumulative net losses and loss expense payments made in succeeding
years for net losses incurred prior to the balance sheet date. For example, the
1990 column indicates that as of December 31, 1999 payments equal to $28.9
million of the currently reestimated ultimate liability for net losses and loss
expenses of $29.1 million had been made.
-13-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability at end of
year for unpaid losses
and loss expenses...... $27,767 $31,898 $36,194 $44,339 $52,790 $63,317 $ 71,155 $75,428 $77,474 $93,863 $97,494
Net liability
reestimated as of:...
One year later...... 29,175 32,923 37,514 45,408 50,583 60,227 68,348 74,044 75,178 93,409
Two years later..... 28,861 33,550 37,765 42,752 48,132 56,656 66,520 70,545 74,269
Three years later... 28,545 32,803 35,446 40,693 44,956 54,571 63,187 68,788
Four years later.... 27,717 31,004 33,931 38,375 42,157 51,825 60,457
Five years later.... 26,759 30,041 32,907 37,096 41,050 50,493
Six years later..... 26,180 29,595 32,234 36,682 40,572
Seven years later... 25,971 29,417 31,976 36,730
Eight years later... 25,828 29,175 31,685
Nine years later.... 25,904 29,058
Ten years later..... 25,856
Cumulative excess....... $(1,911) $(2,840) $(4,509) $(7,609) $(12,218) $(12,824) $(10,698)* $(6,640) $(3,205) $ (454)
======= ======= ======= ======= ======== ======== ======== ======= ======= ======
Cumulative amount of
liability paid through:
One year later....... $11,401 $13,003 $13,519 $16,579 $16,126 $19,401 $23,479 $26,477 $27,356 $36,668
Two years later...... 17,421 19,795 20,942 24,546 25,393 30,354 37,078 40,384 46,143
Three years later.... 20,986 24,178 25,308 29,385 32,079 38,684 45,796 52,071
Four years later..... 23,268 26,413 27,826 32,925 36,726 43,655 51,771
Five years later..... 24,331 27,439 29,605 34,757 39,122 46,331
Six years later...... 24,909 28,157 30,719 35,739 40,440
Seven years later.... 25,280 28,627 31,173 36,518
Eight years later.... 25,599 28,841 31,412
Nine years later..... 25,695 28,948
Ten years later...... 25,753
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999
------- ------- ------- ------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross liability at end of year......... $57,777 $70,093 $88,484 $98,894 $114,622 $118,112 $141,409 $149,979
Reinsurance recoverable................ 13,438 17,303 25,167 27,739 39,194 40,638 47,546 52,485
Net liability at end of year........... 44,339 52,790 63,317 71,155 75,428 77,474 93,863 97,494
Gross reestimated liability -- latest.. 58,615 56,519 74,406 85,727 107,600 115,187 135,464
Reestimated recoverable -- latest...... 21,885 15,947 23,913 25,270 38,812 40,918 42,055
Net reestimated liability -- latest.... 36,730 40,572 50,493 60,457 68,788 74,269 93,409
Gross cumulative deficiency (excess)... 838 (13,574) (14,078) (13,167) (7,022) (2,925) (5,945)
</TABLE>
-14-
<PAGE>
Reinsurance
DGI and the Mutual Company use several different reinsurers, all of which
have a Best rating of A- or better or, with respect to foreign reinsurers, have
a financial condition which, in the opinion of management, is equivalent to a
company with at least an A-rating.
The external reinsurance purchased by DGI and the Mutual Company includes
"excess treaty reinsurance," under which losses are automatically reinsured over
a set retention ($250,000 for 1999), and "catastrophic reinsurance," under which
the reinsured recovers 95% of an accumulation of many losses resulting from a
single event, including natural disasters (for 1999, $3,000,000 retention).
DGI's principal reinsurance agreement in 1999, other than that with the Mutual
Company, was an excess of loss treaty in which the reinsurers were Continental
Casualty Company, Dorinco Reinsurance Company and Swiss Re America. Reinsurance
is also purchased on an individual policy basis to reinsure losses that may
occur from large risks, specific risk types or specific locations. The amount of
coverage provided under each of these types of reinsurance depends upon the
amount, nature, size and location of the risk being reinsured. For property
insurance, excess of loss treaties provide for coverage up to $1,000,000. For
liability insurance, excess of loss treaties provide for coverage up to
$30,000,000. Property catastrophe contracts provide coverage up to $70,000,000
resulting from one event. On both property and casualty insurance, DGI and the
Mutual Company purchase facultative reinsurance to cover exposures from losses
that exceed the limits provided by their respective treaty reinsurance. Atlantic
States cedes to the Mutual Company all of its insurance business and assumes
from the Mutual Company 65% of the Mutual Company's total pooled insurance
business, including that assumed from Atlantic States and substantially all of
the business assumed and retained by the Mutual Company from Southern and
Delaware Atlantic. Atlantic States, Southern, Delaware Atlantic, Pioneer and
Southern Heritage each have a catastrophe reinsurance agreement with the Mutual
Company which limits the maximum liability under any one catastrophic occurrence
to $400,000, $300,000, $300,000, $200,000 and $400,000, respectively, and
$700,000 for a catastrophe involving more than one of the companies. The Mutual
Company and Delaware Atlantic have an excess of loss reinsurance agreement in
which the Mutual Company assumes up to $200,000 of losses in excess of $50,000
and a workers' compensation quota share agreement whereby Delaware Atlantic
cedes 70% of that business. The Mutual Company and Pioneer have an excess of
loss reinsurance agreement in which the Mutual Company assumes up to $200,000 of
losses in excess of $50,000. The Mutual Company and Southern have an excess of
loss reinsurance agreement in which the Mutual Company assumes up to $25,000 of
losses in excess of $100,000 and a quota share agreement whereby Southern cedes
50% of its direct business less certain reinsurance to the Mutual Company.
Southern, Delaware Atlantic, Pioneer and Southern Heritage each have
retrocessional reinsurance agreements with the Mutual Company, under which they
cede, and then assume back, 100% of their business net of other reinsurance.
-15-
<PAGE>
Competition
The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are numerous companies competing for this
business in the geographic areas where the Company operates, many of which are
substantially larger and have greater financial resources than DGI, and no
single company dominates. In addition, because the insurance products of DGI and
the Mutual Company are marketed exclusively through independent insurance
agencies, most of which represent more than one company, DGI faces competition
to retain qualified independent agencies, as well as competition within
agencies.
Investments
DGI's return on invested assets is an important element of its financial
results. Currently, the investment objective is to maintain a widely diversified
fixed maturities portfolio structured to maximize after-tax investment income
while minimizing credit risk through investments in high quality instruments. At
December 31, 1999, all debt securities were rated investment grade with the
exception of three unrated obligations of $878,000, and the investment portfolio
did not contain any mortgage loans or any non-performing assets.
The following table shows the composition of the debt securities investment
portfolio (at carrying value), excluding short-term investments, by rating as of
December 31, 1999:
December 31, 1999
--------------------------
Rating(1) Amount Percent
- --------- -------- -------
(dollars in thousands)
U.S. Treasury and U.S. agency securities(2)..... $111,574 47.3%
Aaa or AAA...................................... 66,696 28.2
Aa or AA........................................ 34,550 14.6
A............................................... 22,275 9.4
BBB............................................. 245 0.1
Not rated(3).................................... 878 0.4
-------- ----
Total...................................... $236,218 100%
======== ====
-16-
<PAGE>
- ----------
(1) Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's
Corporation.
(2) Includes mortgage-backed securities of $18.7 million.
(3) Represents one unrated obligation of The Lancaster County Hospital
Authority Mennonite Home Project, one unrated obligation of Lakewood,
Colorado and one unrated obligation of the Indianapolis, Indiana Economic
Development Authority, all of which management of DGI believes to be
equivalent to investment grade securities with respect to repayment risk.
DGI invests in both taxable and tax-exempt securities as part of its
strategy to maximize after-tax income. Such strategy considers, among other
factors, the alternative minimum tax. Tax-exempt securities made up
approximately 37.3%, 34.1% and 34.3% of the total investment portfolio at
December 31, 1999, 1998 and 1997, respectively.
-17-
<PAGE>
The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities(1):
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations and agencies $ 36,861 14.1% $ 32,891 12.9% $ 41,450 20.2%
Canadian government obligation ....... 498 0.2 -- -- -- --
Obligations of states and
political subdivisions ............... 67,824 25.9 66,941 26.2 57,621 28.1
Corporate securities ................. 15,819 6.1 9,131 3.6 7,250 3.5
Mortgage-backed securities ........... 15,172 5.8 18,221 7.1 10,925 5.4
-------- ----- -------- ----- -------- -----
Total held to maturity ............... 136,174 52.1 127,184 49.8 117,246 57.2
-------- ----- -------- ----- -------- -----
Available for sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies ............ 61,205 23.4 55,439 21.8 40,197 19.6
Obligations of states and political
subdivisions ......................... 20,223 7.7 19,957 7.8 12,762 6.2
Corporate securities ................. 15,053 5.8 10,787 4.2 3,252 1.6
Mortgage-backed securities ........... 3,563 1.4 4,342 1.7 1,520 0.8
-------- ----- -------- ----- -------- -----
Total available for sale ............. 100,044 38.3 90,525 35.5 57,731 28.2
-------- ----- -------- ----- -------- -----
Total fixed maturities ............... 236,218 90.4 217,709 85.3 174,977 85.4
Equity securities(2) ................. 9,229 3.5 6,764 2.7 7,275 3.5
Short-term investments(3) ............ 15,995 6.1 30,522 12.0 22,713 11.1
-------- ----- -------- ----- -------- -----
Total investments .................... $261,442 100.0% $254,995 100.0% $204,965 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
-18-
<PAGE>
- ----------
(1) The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting For Certain
Investments in Debt and Equity Securities." See Notes 1 and 4 to the
Consolidated Financial Statements incorporated by reference herein. Fixed
maturities held to maturity are valued at amortized cost; those fixed
maturities available for sale are valued at fair value. Total fair value of
fixed maturities held to maturity was $133,995,994 at December 31, 1999,
$131,633,299 at December 31, 1998 and $120,882,886 at December 31, 1997.
The amortized cost of fixed maturities available for sale was $103,419,994
at December 31, 1999, $89,089,995 at December 31, 1998 and $56,922,342 at
December 31, 1997.
(2) Equity securities are valued at fair value. Total cost of equity securities
was $9,043,818 at December 31, 1999, $6,206,735 at December 31, 1998 and
$6,551,020 at December 31, 1997.
(3) Short-term investments are valued at cost, which approximates market.
The following table sets forth the maturities (at carrying value) in the
fixed maturity and short-term investment portfolio at December 31, 1999,
December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- ---------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in:(1)
One year or less ................... $ 34,007 13.5% $ 47,760 19.2% $ 36,013 18.2%
Over one year through three years .. 27,107 10.8 31,964 12.9 30,910 15.6
Over three years through five years 30,878 12.2 23,139 9.3 20,303 10.3
Over five years through ten years .. 104,883 41.6 78,061 31.4 65,122 32.9
Over ten years through fifteen years 30,478 12.1 37,940 15.3 32,384 16.4
Over fifteen years ................. 6,125 2.4 6,805 2.8 513 0.3
Mortgage-backed securities ......... 18,735 7.4 22,563 9.1 12,445 6.3
-------- ----- -------- ----- -------- -----
$252,213 100.0% $248,232 100.0% $197,690 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
-19-
<PAGE>
- ----------
(1) Based on stated maturity dates with no prepayment assumptions. Actual
maturities will differ because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
As shown above, the Company held investments in mortgage-backed securities
having a carrying value of $18.7 million at December 31, 1999. Included in these
investments are collateralized mortgage obligations ("CMOs") with a carrying
value of $18.6 million at December 31, 1999. The Company has attempted to reduce
the prepayment risks associated with mortgage-backed securities by investing
approximately 99%, as of December 31, 1999, of the Company's holdings of CMOs in
planned amortization and very accurately defined tranches. Such investments are
designed to alleviate the risk of prepayment by providing predictable principal
prepayment schedules within a designated range of prepayments. If principal is
repaid earlier than originally anticipated, investment yields may decrease due
to reinvestment of the proceeds at current interest rates (which may be lower)
and capital gains or losses may be realized since the book value of securities
purchased at premiums or discounts may be different from the prepayment amount.
Investment results of DGI and its subsidiaries for the years ended December
31, 1999, 1998 and 1997 are shown in the following table:
Year Ended December 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Invested assets(1) .......... $264,293 $208,304 $202,283
Investment income(2) ........ 13,224 11,998 11,507
Average yield ............... 5.0% 5.6% 5.7%
- ----------
(1) Average of the aggregate invested amounts at the beginning and end of the
period, including cash.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
A.M. Best Rating
In 1999, the A.M. Best rating of the Mutual Company, Atlantic States,
Southern, Delaware Atlantic and Pioneer was "A", based upon their respective
current financial conditions and historical statutory results of operations.
Southern Heritage, which DGI acquired in November 1998, currently has a Best
rating of B++. Management believes that this Best rating is an important factor
in marketing DGI's products to its agents and customers. Best's ratings are
industry ratings based on a comparative analysis of the financial condition and
operating performance of insurance companies as determined by their publicly
available reports. Best's classifications are A++ and A+ (Superior), A and A-
(Excellent), B++ and B+ (Very Good), B and B- (Good), C++ and C+ (Fair), C and
C- (Marginal), D (below minimum standards) and E and F (Liquidation). Best's
ratings are based upon factors relevant to policyholders and are not directed
toward the protection of investors. According to Best, an "excellent" rating is
assigned
-20-
<PAGE>
to those companies which, in Best's opinion, have achieved excellent overall
performance when compared to the norms of the property and casualty insurance
industry and have generally demonstrated a strong ability to meet policyholder
and other contractual obligations.
Regulation
Insurance companies are subject to supervision and regulation in the states
in which they transact business. Such supervision and regulation relates to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
that must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of and limitations on investments, premium rates
for property and casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities for the benefit
of policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.
In addition to state-imposed insurance laws and regulations, in December
1993 the National Association of Insurance Commissioners (the "NAIC") adopted a
risk-based capital system for assessing the adequacy of statutory capital and
surplus which augments the states' current fixed dollar minimum capital
requirements for insurance companies. At December 31, 1999, DGI's insurance
subsidiaries and the Mutual Company each exceeded the required levels of
capital. There can be no assurance that the capital requirements applicable to
DGI's insurance subsidiaries will not increase in the future.
The states in which Atlantic States (Pennsylvania, Maryland and Delaware),
the Mutual Company (Pennsylvania, Ohio, Maryland, New York, Virginia, Delaware
and North Carolina), Southern (Virginia and Pennsylvania), Delaware Atlantic
(Delaware, Maryland and Pennsylvania), Pioneer (Ohio and Pennsylvania) and
Southern Heritage (Alabama, Arkansas, Florida, Georgia, Illinois, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Virginia)
do business have guaranty fund laws under which insurers doing business in such
states can be assessed on the basis of premiums written by the insurer in that
state in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. The Mutual Company,
Atlantic States, Southern, Delaware Atlantic, Pioneer and Southern Heritage have
made accruals for their portion of assessments related to such insolvencies
based upon the most current information furnished by the guaranty associations.
During 1998 and 1999, the Company received assessments totalling $1.3 million
and $726,000, respectively, from the Pennsylvania Insurance Guaranty Association
relating to the insolvency of two medical malpractice insurers. The impact of
these involuntary programs on DGI was not material during 1997.
Most states have enacted legislation that regulates insurance holding
company systems. Each insurance company in the holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the
-21-
<PAGE>
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of the insurers within
the system. Pursuant to these laws, the respective insurance departments may
examine the Mutual Company, the Company and their respective insurance
subsidiaries at any time, require disclosure of material transactions by the
holding company and require prior notice or prior approval of certain
transactions, such as "extraordinary dividends" from the insurance subsidiaries
to the holding company.
All transactions within the holding company system affecting the Mutual
Company and the Company's insurance subsidiaries must be fair and equitable.
Approval of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer. In some
states, including Pennsylvania, the acquisition of 10% or more of the
outstanding capital stock of an insurer or its holding company is presumed to be
a change in control. Pursuant to an order issued in October 1998, the
Pennsylvania Insurance Department has approved the Mutual Company's ownership of
up to 65% of the outstanding Common Stock of DGI. These laws also require notice
to the applicable insurance commissioner of certain material transactions
between an insurer and any person in its holding company system and, in some
states, certain of such transactions cannot be consummated without the prior
approval of the applicable insurance commissioner.
The Company's insurance subsidiaries are restricted by the insurance laws
of their respective states of domicile as to the amount of dividends or other
distributions they may pay to the Company without the prior approval of the
respective state regulatory authorities. Generally, the maximum amount that may
be paid by an insurance subsidiary during any year after notice to, but without
prior approval of, the insurance commissioners of these states is limited to a
stated percentage of that subsidiary's statutory capital and surplus as of a
certain date, or the net income or net investment income not including realized
capital gains of the subsidiary for the preceding year. As of December 31, 1999,
amounts available for payment of dividends in 2000 without the prior approval of
the various insurance commissioners were $6,851,802 from Atlantic States,
$184,285 from Southern, $956,381 from Delaware Atlantic, $567,793 from Pioneer
and $1,650,842 from Southern Heritage. See Note 12 to the Consolidated Financial
Statements incorporated by reference herein.
The NAIC has adopted the Codification of Statutory Accounting Principles
with an effective date of January 1, 2001. The codified principles are intended
to provide a basis of accounting recognized and adhered to in the absence of
conflict with, or silence of, state statutes and regulations. Various state laws
and regulations of the Company's insurance subsidiaries' respective states of
domicile may need to be amended for the codified principles to become effective.
The effect of the codified principles on the statutory financial statements of
the Company's insurance subsidiaries has not yet been determined.
The Mutual Company
The Mutual Company, which was organized in 1889, has a Best rating of A
(Excellent). At December 31, 1999, the Mutual Company had admitted assets of
$148,080,589 and policyholders' surplus of $61,409,896. At December 31, 1999,
the Mutual Company had no debt and, of its total liabilities of $86,670,693,
reserves for net losses and loss expenses accounted for $47,087,250 and unearned
premiums accounted for $24,921,293. Of the Mutual Company's investment portfolio
of $101,491,262 at December 31, 1999, investment-grade bonds accounted
-22-
<PAGE>
for $38,581,727, cash and short-term investments accounted for $(546,117) and
mortgages accounted for $9,276,319. At December 31, 1999, the Mutual Company
owned 5,252,326 shares of the Company's Common Stock, which were carried on the
Mutual Company's books at $43,909,448. The foregoing financial information is
presented on the statutory basis of accounting.
Employees
As of December 31, 1999, the Mutual Company had 376 employees. The Mutual
Company's employees provide a variety of services to DGI, Atlantic States,
Delaware Atlantic, Southern and Pioneer, as well as to the Mutual Company and
its subsidiaries. As of December 31, 1999, Southern Heritage had 27 employees.
Item 2. Properties.
- ------ -----------
DGI and Delaware Atlantic share headquarters with the Mutual Company's
headquarters in a building owned by the Mutual Company. The Mutual Company
charges DGI for an appropriate portion of the building expenses under an
intercompany allocation agreement which is consistent with the terms of the
pooling agreement. The headquarters of the Mutual Company has approximately
163,500 square feet of office space. Southern has a facility of approximately
10,000 square feet in Glen Allen, Virginia, which it owns. Pioneer has a
facility of approximately 10,000 square feet in Greenville, Ohio, which it owns.
Southern Heritage has a facility of approximately 14,000 square feet in Duluth,
Georgia, which it leases.
Item 3. Legal Proceedings.
- ------- ------------------
DGI is a party to numerous lawsuits arising in the ordinary course of its
insurance business. DGI believes that the resolution of these lawsuits will not
have a material adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ---------------------------------------------------
No matter was submitted to a vote of holders of the Company's Common Stock
during the fourth quarter of 1999.
Executive Officers of the Company
- ---------------------------------
Name Age Position
---- --- --------
Donald H. Nikolaus 57 President and Chief Executive Officer since 1981
Ralph G. Spontak 47 Senior Vice President since 1991; Chief
Financial Officer and Vice President since
1983; Secretary since 1988
Cyril J. Greenya 55 Senior Vice President - Commercial
Underwriting since 1997; Vice President -
Commercial Underwriting for five years prior
thereto; Manager - Commercial Underwriting
for nine years prior thereto
-23-
<PAGE>
Frank J. Wood 66 Senior Vice President - Marketing since 1997;
Vice President - Marketing for nine years
prior thereto; Manager - Marketing for one
year prior thereto
James B. Price 64 Senior Vice President - Claims since 1997;
Vice President - Claims for 25 years prior
thereto
Robert G. Shenk 47 Senior Vice President - Claims since 1997;
Vice President - Claims for five years prior
thereto
William H. Shupert 73 Senior Vice President - Underwriting since
1991; Vice President - Underwriting for 18
years prior thereto
Daniel J. Wagner 39 Treasurer since 1993; Controller for five
years prior thereto
-24-
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
- ------- -----------------------------------------------------
Stockholder Matters.
--------------------
The response to this Item is incorporated in part by reference to page 31
of the Company's Annual Report to Stockholders for the year ended December 31,
1999, which is included as Exhibit (13) to this Form 10-K Report. As of March
15, 2000, the Company had approximately 622 holders of record of its Common
Stock. The Company declared dividends of $.36 per share in 1999 and $.3375 per
share in 1998.
Item 6. Selected Financial Data.
- ------- -----------------------
The response to this Item is incorporated by reference to page 29 of the
Company's Annual Report to Stockholders for the year ended December 31, 1999,
which is included as Exhibit (13) to this Form 10-K Report.
Item 7. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations.
------------------------------------
The response to this Item is incorporated by reference to pages 10 through
12 of the Company's Annual Report to Stockholders for the year ended December
31, 1999, which is included as Exhibit (13) to this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The response to this Item is incorporated by reference to
pages 13 through 28 of the Company's Annual Report to Stockholders for the year
ended December 31, 1999, which is included as Exhibit (13) to this Form 10-K
Report.
Item 9. Changes in and Disagreements with Accountants on
- ------- ------------------------------------------------
Accounting and Financial Disclosure.
------------------------------------
None.
-25-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
The response to this Item with respect to the Company's directors is
incorporated by reference to pages 8 through 10 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 20,
2000. The response to this Item with respect to the Company's executive officers
is incorporated by reference to Part I of this Form 10-K Report.
Item 11. Executive Compensation.
- -------- -----------------------
The response to this Item is incorporated by reference to
pages 11 through 14 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 20, 2000, except for the
Compensation Committee Report and the Performance Graph, which are not
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The response to this Item is incorporated by reference to pages 3 through 5
of the Company's proxy statement relating to the Company's annual meeting of
stockholders to be held April 20, 2000.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The response to this Item is incorporated by reference to pages 3 through 7
and page 16 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 20, 2000.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------- ----------------------------------------------------------------
(a) Financial statements, financial statement schedules and exhibits
filed:
(1) Consolidated Financial Statements
<TABLE>
<CAPTION>
Page*
----
<S> <C>
Report of Independent Auditors.................................................................... 28
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................... 13
Consolidated Statements of Income for the three years ended
December 31, 1999, 1998 and 1997 ............................................................. 14
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1999, 1998 and 1997.............................................................. 15
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999, 1998 and 1997.............................................................. 16
Notes to Consolidated Financial Statements....................................................... 17-28
(2) Financial Statement Schedules
Page
----
Donegal Group Inc. and Subsidiaries:
Independent Auditors' Consent and Report on Schedules............................................. Exhibit 23
Schedule I. Summary of Investments - Other than Investments in Related Parties................. 33
Schedule II. Condensed Financial Information of Parent Company.................................. 34
Schedule III. Supplementary Insurance Information................................................ 37
Schedule IV. Reinsurance........................................................................ 39
Schedule VI. Supplemental Insurance Information Concerning Property and Casualty Subsidiaries... 40
</TABLE>
All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.
-27-
<PAGE>
- ----------
* Refers to the respective page of Donegal Group Inc.'s 1999 Annual Report to
Stockholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditor's Report thereon on pages 13 through 28 are
incorporated herein by reference. With the exception of the portions of such
Annual Report specifically incorporated by reference in this Item and Items 5,
6, 7 and 8 hereof, such Annual Report shall not be deemed filed as part of this
Form 10-K Report or otherwise subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits Reference
- ----------- ----------------------- ---------
<S> <C> <C>
(3)(i) Certificate of Incorporation of Registrant, as amended filed herewith
(3)(ii) Amended and Restated By-laws of Registrant (a)
(4) Form of Registrant's Common Stock Certificate (b)
Management Contracts and Compensatory Plans or Arrangements
- -----------------------------------------------------------
(10)(A) Donegal Mutual Insurance Company Money Purchase Pension Plan and (b)
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company Profit Sharing Plan and Trust (b)
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive Incentive Bonus Plan dated (e)
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock Purchase Plan, as amended (e)
(10)(E) Donegal Group Inc. Equity Incentive Plan, as amended (e)
(10)(F) Donegal Group Inc. Agency Stock Purchase Plan (l)
(10)(G) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (d)
Plan
</TABLE>
-28-
<PAGE>
<TABLE>
<S> <C> <C>
(10)(H) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (k)
Plan for Directors
(10)(I) Donegal Group Inc. Executive Restoration Plan (c)
(10)(J) Donegal Mutual Insurance Company 401(k) Plan filed herewith
(10)(K) Amendment No. 1 effective January 1, 2000 to Donegal Mutual filed herewith
Insurance Company 401(k) Plan
Other Material Contracts
(10)(L) Tax Sharing Agreement dated September 29, 1986 between Donegal (b)
Group Inc. and Atlantic States Insurance Company
(10)(M) Services Allocation Agreement dated September 29, 1986 between (b)
Donegal Mutual Insurance Company, Donegal Group Inc. and Atlantic
States Insurance Company
(10)(N) Proportional Reinsurance Agreement dated September 29, 1986 (b)
between Donegal Mutual Insurance Company and Atlantic States
Insurance Company
(10)(O) Amendment dated October 1, 1988 to Proportional Reinsurance (f)
Agreement between Donegal Mutual Insurance Company and Atlantic
States Insurance Company
(10)(P) Multi-Line Excess of Loss Reinsurance Agreement effective January (h)
1, 1993 between Donegal Mutual Insurance Company, Southern
Insurance Company of Virginia, Atlantic States Insurance Company
and Pioneer Mutual Insurance Company, and Christiana General
Insurance Corporation of New York, Cologne Reinsurance Company of
America, Continental Casualty Company, Employers Reinsurance
Corporation and Munich American Reinsurance Company
</TABLE>
-29-
<PAGE>
<TABLE>
<S> <C> <C>
(10)(Q) Amendment dated July 16, 1992 to Proportional Reinsurance (g)
Agreement between Donegal Mutual Insurance Company and Atlantic
States Insurance Company
(10)(R) Amendment dated as of December 21, 1995 to Proportional (i)
Reinsurance Agreement between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(S) Stock Purchase Agreement dated as of December 21, 1995 between (i)
Donegal Mutual Insurance Company and Donegal Group Inc.
(10)(T) Donegal Group Inc. 1996 Employee Stock Purchase Plan (j)
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 (c)
between Donegal Mutual Insurance Company and Pioneer Insurance
Company
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 (c)
between Donegal Mutual Insurance Company and Delaware American
Insurance Company
(10)(W) Reinsurance and Retrocession Agreement dated May 21, 1996 (c)
between Donegal Mutual Insurance Company and Southern Insurance
Company of Virginia
(10)(X) Reinsurance and Retrocession Agreement effective January 1, 2000 filed herewith
between Donegal Mutual Insurance Company and Southern Heritage
Insurance Company
(10)(Y) Property Catastrophe Excess of Loss Reinsurance Agreement filed herewith
effective January 1, 2000 between Donegal Mutual Insurance
Company and Southern Heritage Insurance Company
(10)(Z) Stock Purchase Agreement dated as of May 14, 1998 between Donegal (m)
Group Inc. and Southern Heritage Limited Partnership
</TABLE>
-30-
<PAGE>
<TABLE>
<S> <C> <C>
(10)(AA) Amendment dated November 17, 1998 to Stock Purchase Agreement (m)
dated as of May 14, 1998 between Donegal Group Inc. and Southern
Heritage Limited Partnership
(10)(BB) Amended and Restated Credit Agreement dated as of July 27, 1998 (m)
among Donegal Group Inc., the banks and other financial
institutions from time to time party thereto and Fleet National
Bank, as Agent
(10)(CC) First Amendment and Waiver to the Amended and Restated Credit filed herewith
Agreement dated as of December 31, 1999
(13) 1999 Annual Report to Stockholders (electronic filing contains filed herewith
only those portions incorporated by reference into this
Form 10-K report)
(20) Proxy Statement relating to the Annual Meeting of Stockholders to (n)
be held on April 20, 2000, provided, however, that the
Compensation Committee Report and the Performance Graph shall not
be deemed filed as part of this Form 10-K Report
(21) Subsidiaries of Registrant filed herewith
(23) Consent of Independent Auditors filed herewith
(27) Financial Data Schedule filed herewith
</TABLE>
- ----------
(a) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-Q Report for the quarter ended September
30, 1998.
(b) Such exhibit is hereby incorporated by reference to the like-described
exhibits in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(c) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1996.
(d) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1998.
-31-
<PAGE>
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1986.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1988.
(g) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1992.
(h) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
declared effective September 29, 1993.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-1287
filed February 29, 1996.
(k) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1997.
(l) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
declared effective August 1, 1996.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(n) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 24, 2000.
(b) Reports on Form 8-K:
None.
-32-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
-----------------------------------------
($ in thousands)
December 31, 1999
<TABLE>
<CAPTION>
Amount at Which
Fair Shown in the
Cost Value Balance Sheet
-------- -------- ---------------
<S> <C> <C> <C>
Fixed Maturities:
Held to maturity:
United States government and governmental agencies
and authorities including obligations of states and
political subdivisions ............................ $104,684 $103,312 $104,684
Canadian government obligation ...................... 498 490 498
All other corporate bonds ........................... 15,819 15,253 15,819
Mortgage-backed securities .......................... 15,173 14,941 15,173
-------- -------- --------
Total fixed maturities held to maturity ............. 136,174 133,996 136,174
-------- -------- --------
Available for sale:
United States government and governmental agencies
and authorities including obligations of states and
political subdivisions ............................ 84,171 81,428 81,428
All other corporate bonds ........................... 15,472 15,053 15,053
Mortgage-backed securities .......................... 3,777 3,563 3,563
-------- --------
Total fixed maturities available for sale ........... 103,420 100,044 100,044
-------- -------- --------
Total fixed maturities .............................. 239,594 234,040 236,218
-------- -------- --------
Equity Securities:
Preferred stocks
Public utilities ................................... 125 115 115
Banks .............................................. 3,959 3,413 3,413
Industrial and miscellaneous ....................... 1,488 1,302 1,302
-------- -------- --------
Total preferred stocks .............................. 5,572 4,830 4,830
-------- -------- --------
Common stocks
Public utilities ................................... 131 63 63
Banks and insurance companies ...................... 733 1,271 1,271
Industrial and miscellaneous ....................... 2,608 3,065 3,065
-------- -------- --------
Total common stocks ................................. 3,472 4,399 4,399
-------- -------- --------
Total equity securities ............................. 9,044 9,229 9,229
-------- -------- --------
Short-term investments .............................. 15,995 15,995 15,995
-------- -------- --------
Total investments ................................... $264,633 $259,264 $261,442
======== ======== ========
</TABLE>
-33-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
Condensed Balance Sheets
($ in thousands)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
--------- ---------
<S> <C> <C>
Investment in subsidiaries (equity method) $ 138,702 $ 134,441
Cash 371 599
Property and equipment 2,232 2,276
Other 750 2,124
--------- ---------
Total assets $ 142,055 $ 139,440
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
--------- ---------
Cash dividends declared to stockholders $ 761 $ 708
Line of credit 37,000 37,500
Other 879 601
--------- ---------
Total liabilities 38,640 38,809
========= =========
Stockholders' equity
Preferred stock, $1.00 par value,
authorized 2,000,000 shares, none issued -- --
Common stock, $1.00 par value,
authorized 20,000,000 shares, issued
8,574,210 and 8,325,221 shares and
outstanding 8,451,922 and 8,202,933 shares 8,574 8,325
Class A Common Stock, $1.00 par value,
authorized 15,000,000 shares, none issued -- --
Additional paid-in capital 43,537 41,271
Accumulated other comprehensive income (loss) (2,074) 1,316
Retained earnings, including equity in
undistributed net income of subsidiaries
(72,539 and 64,922) 54,270 50,611
Treasury stock, at cost (892) (892)
--------- ---------
Total stockholders' equity 103,415 100,631
--------- ---------
Total liabilities and stockholders' equity $ 142,055 $ 139,440
========= =========
</TABLE>
-34-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
(Continued)
Condensed Statements of Income
($ in thousands)
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------- ------- --------
Revenues
Dividends-subsidiary $ 820 $ 1,000 $ 950
Lease income 819 754 643
Investment income 46 22 15
------- ------- --------
Total revenues 1,685 1,776 1,608
Expenses
Operating expenses 938 718 643
Interest 2,463 1,293 1,022
------- ------- --------
Total expenses 3,401 2,011 1,665
------- ------- --------
Loss before income tax
benefit and equity in
undistributed net income of
subsidiaries (1,716) (235) (57)
Income tax benefit (807) (413) (346)
------- ------- --------
Income (loss) before equity in
undistributed net income of
subsidiaries (909) 178 289
Equity in undistributed net
income of subsidiaries 7,566 8,840 10,352
------- ------- --------
Net income $ 6,657 $ 9,018 $ 10,641
======= ======= ========
-35-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY
-----------------------------------------------------
Condensed Statements of Cash Flows
($ in thousands)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,657 $ 9,018 $ 10,641
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries (7,566) (8,840) (10,352)
Other 2,365 (921) 382
-------- -------- --------
Net adjustments (5,201) (9,761) (9,970)
-------- -------- --------
Net cash provided by (used in) operating activities 1,456 (743) 671
-------- -------- --------
Cash flows from investing activities:
Net purchase of property and equipment (426) (564) (1,251)
Capital contribution to subsidiaries -- (2,000) --
Sale of subsidiary 100 -- --
Acquisition of Southern Heritage -- (18,028) --
Other (426) (5,613) 4
-------- -------- --------
Net cash used in investing activities (752) (26,205) (1,247)
-------- -------- --------
Cash flows from financing activities:
Cash dividends paid (2,946) (2,664) (2,252)
Issuance of common stock 2,514 2,481 1,131
Line of credit, net (500) 27,000 2,000
-------- -------- --------
Net cash provided by (used in) financing activities (932) 26,817 879
-------- -------- --------
Net change in cash (228) (131) 303
Cash beginning 599 730 427
-------- -------- --------
Cash ending $ 371 $ 599 $ 730
======== ======== ========
</TABLE>
-36-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
--------------------------------------------------
($ in thousands)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Amortization
Net of Deferred
Net Net Losses Policy Other Net
Earned Investment and Loss Acquisition Underwriting Premiums
Segment Premiums Income Expenses Costs Expenses Written
-------- ---------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
- ----------------------------
Personal Lines $ 96,167 $ -- $67,582 $16,448 $ 19,801 $ 91,424
Commercial Lines 47,707 -- 31,623 8,160 8,234 50,432
Investments -- 13,224 -- -- -- --
-------- ------- ------- ------- -------- --------
$143,874 $13,224 $99,205 $24,608 $ 28,035 $141,856
======== ======= ======= ======= ======== ========
Year Ended December 31, 1998
- ----------------------------
Personal Lines $ 71,676 $ -- $49,141 $12,614 $ 14,052 $ 73,070
Commercial Lines 44,493 -- 24,026 6,876 7,660 45,084
Investments -- 11,998 -- -- -- --
-------- ------- ------- ------- -------- --------
$116,169 $11,998 $73,167 $19,490 $ 21,712 $118,154
======== ======= ======= ======= ======== ========
Year Ended December 31, 1997
- ----------------------------
Personal Lines $ 61,600 $ -- $41,074 $11,578 $ 10,564 $ 63,525
Commercial Lines 45,702 -- 26,583 7,118 6,495 44,081
Investments -- 11,507 -- -- -- --
-------- ------- ------- ------- -------- --------
$107,302 $11,507 $67,657 $18,696 $ 17,059 $107,606
======== ======= ======= ======= ======== ========
</TABLE>
(continued)
-37-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
-------------------------------------------------------------
($ in thousands)
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
Deferred Liability Other Policy
Policy for Losses Claims and
Acquisition and Loss Unearned Benefits
Segment Costs Expenses Premiums Payable
------- ----------- ---------- -------- ------------
<S> <C> <C> <C> <C>
1999
----
Personal Lines $ 6,936 $ 79,085 $60,886 $ --
Commercial Lines 4,267 70,894 36,771 --
Investments -- -- -- --
-------- -------- ------- -------
$ 11,203 $149,979 $97,657 $ --
======== ======== ======= =======
1998
----
Personal Lines $ 7,648 $ 77,482 $63,916 $ --
Commercial Lines 3,686 63,927 30,807 --
Investments -- -- -- --
-------- -------- ------- -------
$ 11,334 $141,409 $94,723 $ --
======== ======== ======= =======
</TABLE>
-38-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
-------------------------
<TABLE>
<CAPTION>
Ceded Assumed Percentage
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
- ----------------------------
Property and casualty premiums $91,996,926 $67,487,819 $119,364,863 $143,873,970 83%
=========== =========== ============ ============ ===
Year Ended December 31, 1998
- ----------------------------
Property and casualty premiums $61,173,134 $56,338,098 $111,333,956 $116,168,992 96%
=========== =========== ============ ============ ===
Year Ended December 31, 1997
- ----------------------------
Property and casualty premiums $51,753,477 $51,753,477 $107,302,168 $107,302,168 100%
=========== =========== ============ ============ ====
</TABLE>
-39-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES
---------------------------------------------
<TABLE>
<CAPTION>
Discount,
Deferred Liability if any,
Policy for Losses Deducted
Acquisition and Loss from Unearned
Costs Expenses Reserves Premiums
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
At December 31,
1999 $11,203,302 $149,979,141 $ --- $97,657,020
=========== ============ ============= ===========
1998 $11,334,301 $141,409,008 $ --- $94,722,785
=========== ============ ============= ===========
</TABLE>
(continued)
-40-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED
--------------------------------------------------------
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Losses and Loss Amortization
Expenses Related to of Deferred Net
Net ------------------------- Policy Paid Losses Net
Earned Investment Current Prior Acquisition and Loss Premiums
Premiums Income Year Years Costs Expenses Written
------------ ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1999 $143,873,970 $13,223,537 $99,659,002 $ (454,000) $24,608,000 $95,574,426 $141,856,479
============ =========== =========== =========== =========== =========== ============
Year Ended December 31, 1998 $116,168,992 $11,997,661 $75,463,085 $(2,296,000) $19,490,000 $71,744,736 $118,153,817
============ =========== =========== =========== =========== =========== ============
Year Ended December 31, 1997 $107,302,168 $11,492,012 $69,040,518 $(1,384,000) $18,696,000 $65,610,249 $107,604,989
============ =========== =========== =========== =========== =========== ============
</TABLE>
-41-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DONEGAL GROUP INC.
Date: March 29, 2000 By: /s/ Donald H. Nikolaus
-----------------------------
Donald H. Nikolaus, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald H. Nikolaus President and a Director March 29, 2000
- ----------------------------- (principal executive officer)
Donald H. Nikolaus
/s/ Ralph G. Spontak Senior Vice President and March 29, 2000
- ----------------------------- Secretary (principal financial
Ralph G. Spontak and accounting officer)
/s/ Robert S. Bolinger Director March 29, 2000
- -----------------------------
Robert S. Bolinger
Director March __, 2000
- -----------------------------
Thomas J. Finley
/s/ Patricia A. Gilmartin Director March 29, 2000
- -----------------------------
Patricia A. Gilmartin
/s/ Philip H. Glatfelter, II Director March 29, 2000
- -----------------------------
Philip H. Glatfelter, II
/s/ C. Edwin Ireland Director March 29, 2000
- -----------------------------
C. Edwin Ireland
/s/ R. Richard Sherbahn Director March 29, 2000
- -----------------------------
R. Richard Sherbahn
</TABLE>
-42-
<PAGE>
EXHIBIT INDEX
-------------
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits Reference
- ----------- ----------------------- ---------
<S> <C> <C>
(3)(i) Certificate of Incorporation of Registrant, as amended filed herewith
(3)(ii) Amended and Restated By-laws of Registrant (a)
(4) Form of Registrant's Common Stock Certificate (b)
Management Contracts and Compensatory Plans or Arrangements
(10)(A) Donegal Mutual Insurance Company Money Purchase Pension Plan and (b)
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company Profit Sharing Plan and Trust (b)
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive Incentive Bonus Plan dated (e)
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock Purchase Plan, as amended (e)
(10)(E) Donegal Group Inc. Equity Incentive Plan, as amended (e)
(10)(F) Donegal Group Inc. Agency Stock Purchase Plan (l)
(10)(G) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (d)
Plan
(10)(H) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (k)
Plan for Directors
(10)(I) Donegal Group Inc. Executive Restoration Plan (c)
</TABLE>
-43-
<PAGE>
<TABLE>
<S> <C> <C>
(10)(J) Donegal Mutual Insurance Company 401(k) Plan filed herewith
(10)(K) Amendment No. 1 effective January 1, 2000 to Donegal Mutual filed herewith
Insurance Company 401(k) Plan
Other Material Contracts
(10)(L) Tax Sharing Agreement dated September 29, 1986 between Donegal (b)
Group Inc. and Atlantic States Insurance Company
(10)(M) Services Allocation Agreement dated September 29, 1986 between (b)
Donegal Mutual Insurance Company, Donegal Group Inc. and
Atlantic States Insurance Company
(10)(N) Proportional Reinsurance Agreement dated September 29, 1986 (b)
between Donegal Mutual Insurance Company and Atlantic States
Insurance Company
(10)(O) Amendment dated October 1, 1988 to Proportional Reinsurance (f)
Agreement between Donegal Mutual Insurance Company and
Atlantic States Insurance Company
(10)(P) Multi-Line Excess of Loss Reinsurance Agreement effective (h)
January 1, 1993 between Donegal Mutual Insurance Company,
Southern Insurance Company of Virginia, Atlantic States Insurance
Company and Pioneer Mutual Insurance Company, and Christiana
General Insurance Corporation of New York, Cologne Reinsurance
Company of America, Continental Casualty Company, Employers
Reinsurance Corporation and Munich American Reinsurance Company
(10)(Q) Amendment dated July 16, 1992 to Proportional Reinsurance (g)
Agreement between Donegal Mutual Insurance Company and Atlantic
States Insurance Company
</TABLE>
-44-
<PAGE>
<TABLE>
<S> <C> <C>
(10)(R) Amendment dated as of December 21, 1995 to Proportional (i)
Reinsurance Agreement between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(S) Stock Purchase Agreement dated as of December 21, 1995 between (i)
Donegal Mutual Insurance Company and Donegal Group Inc.
(10)(T) Donegal Group Inc. 1996 Employee Stock Purchase Plan (j)
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 between (c)
Donegal Mutual Insurance Company and Pioneer Insurance Company
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 between (c)
Donegal Mutual Insurance Company and Delaware American Insurance
Company
(10)(W) Reinsurance and Retrocession Agreement dated May 21, 1996 between (c)
Donegal Mutual Insurance Company and Southern Insurance Company
of Virginia
(10)(X) Reinsurance and Retrocession Agreement effective January 1, 2000 filed herewith
between Donegal Mutual Insurance Company and Southern Heritage
Insurance Company
(10)(Y) Property Catastrophe Excess of Loss Reinsurance Agreement filed herewith
effective January 1, 2000 between Donegal Mutual Insurance
Company and Southern Heritage Insurance Company
(10)(Z) Stock Purchase Agreement dated as of May 14, 1998 between Donegal (m)
Group Inc. and Southern Heritage Limited Partnership
(10)(AA) Amendment dated November 17, 1998 to Stock Purchase Agreement (m)
dated as of May 14, 1998 between Donegal Group Inc. and Southern
Heritage Limited Partnership
</TABLE>
-45-
<PAGE>
<TABLE>
<S> <C> <C>
(10)(BB) Amended and Restated Credit Agreement dated as of July 27, 1998 (m)
among Donegal Group Inc., the banks and other financial
institutions from time to time party thereto and Fleet National
Bank, as Agent
(10)(CC) First Amendment and Waiver to the Amended and Restated Credit filed herewith
Agreement dated as of December 31, 1999
(13) 1999 Annual Report to Stockholders (electronic filing contains filed herewith
only those portions incorporated by reference into this
Form 10-K report)
(20) Proxy Statement relating to the Annual Meeting of Stockholders to (n)
be held on April 20, 2000, provided, however, that the
Compensation Committee Report and the Performance Graph shall not
be deemed filed as part of this Form 10-K Report
(21) Subsidiaries of Registrant filed herewith
(23) Consent of Independent Auditors filed herewith
(27) Financial Data Schedule filed herewith
</TABLE>
- ----------
(a) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-Q Report for the quarter ended
September 30, 1998.
(b) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(c) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December
31, 1996.
(d) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December
31, 1998.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibits in Registrant's Form 10-K Report for the year ended December
31, 1986.
-46-
<PAGE>
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December
31, 1988.
(g) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December
31, 1992.
(h) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
declared effective September 29, 1993.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-1287
filed February 29, 1996.
(k) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended
December 31, 1997.
(l) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
declared effective August 1, 1996.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(n) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 24, 2000.
47
CERTIFICATE OF INCORPORATION
OF
DONEGAL GROUP INC.
1. The name of the Corporation is Donegal Group Inc.
2. The address of its registered office is 1220 Market Street
Building, Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is Wilmington
Corporate Services, Inc.
3. The nature of the business to be conducted or promoted is to
engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the
State of Delaware.
4. (a) The aggregate number of shares which the
Corporation shall have authority to issue is: Ten
Million (10,000,000) shares of Common Stock of the
par value of One Dollar ($1.00) per share (the
"Common Stock") and One Million (1,000,000) shares of
Series Preferred Stock of the par value of One Dollar
($1.00) per share (the "Preferred Stock").
(b) The Preferred Stock may be issued from time to time
by the Board of Directors as herein provided in one
or more series. The designations, relative rights,
preferences and limitations of the Preferred Stock,
and particularly of the shares of each series
thereof, may, to the extent permitted by law, be
similar to or may differ from those of any other
series. The Board of Directors of the Corporation is
hereby expressly granted authority, subject to the
provisions of this Article Four, to issue from time
to time Preferred Stock in one or more series and to
fix from time to time before issuance thereof, by
filing a certificate pursuant to the General
Corporation Law, the number of shares in each such
series and all designations, relative rights
(including the right, to the extent permitted by law,
to convert into shares of any class or into shares of
any series of any class), preferences and limitations
of the shares in each such series, including, but
without limiting the generality of the foregoing, the
following:
1
<PAGE>
(i) The number of shares to constitute such
series (which number may at any time, or
from time to time, be increased or decreased
by the Board of Directors, notwithstanding
that shares of the series may be outstanding
at the time of such increase or decrease,
unless the Board of Directors shall have
otherwise provided in creating such series)
and the distinctive designation thereof;
(ii) The dividend rate on the shares of such
series, whether or not dividends on the
shares of such series shall be cumulative
and the date or dates, if any, from which
dividends thereon shall be cumulative;
(iii) Whether or not the shares of such series
shall be redeemable, and, if redeemable, the
date or dates upon or after which they shall
be redeemable and the amount or amounts per
share (which shall be, in the case of each
share, not less than its preference upon
involuntary liquidation, plus an amount
equal to all dividends thereon accrued and
unpaid, whether or not earned or declared)
payable thereon in the case of the
redemption thereof, which amount may vary at
different redemption dates or otherwise as
permitted by law;
(iv) The right, if any, of holders of shares of
such series to convert the same into, or
exchange the same for, Common Stock or other
stock as permitted by law, and the terms and
conditions of such conversion or exchange,
as well as provisions for adjustment of the
conversion rate in such events as the Board
of Directors shall determine;
(v) The amount per share payable on the shares
of such series upon the voluntary and
involuntary liquidation, dissolution or
winding up of the Corporation;
(vi) Whether the holders of shares of such series
shall have voting power, full or limited, in
addition to the voting powers provided by
law, and, in case additional voting powers
are accorded, to fix the extent thereof; and
(vii) Generally to fix the other rights and
privileges and any qualifications,
limitations or restrictions of such rights
and
2
<PAGE>
privileges of such series, provided,
however, that no such rights, privileges,
qualifications, limitations or restrictions
shall be in conflict with the Certificate of
Incorporation of the Corporation or with the
resolution or resolutions adopted by the
Board of Directors providing for the issue
of any series of which there are shares then
outstanding.
(c) All shares of Preferred Stock of the same
Series shall be identical in all respects,
except that shares of any one series issued
at different times may differ as to the
dates, if any, from which dividends thereon
may accumulate. All shares of Preferred
Stock of all series shall be of equal rank
and shall be identical in all respects,
except that to the extent not otherwise
limited in this Article Four any series may
differ from any other series with respect to
any one or more of the designations,
relative rights, preferences and limitations
described or referred to in subparagraphs
(b) (i) to (vii) inclusive of this Article
Four.
(d) Dividends on the outstanding Preferred Stock
of each series shall be declared and paid or
set apart for payment before any dividends
shall be declared and paid or set apart for
payment on the Common Stock with respect to
the same quarterly dividend period.
Dividends on any shares of Preferred Stock
shall be cumulative only if and to the
extent set forth in a certificate filed
pursuant to law. After dividends on all
shares of Preferred Stock (including
cumulative dividends if and to the extent
any such shares shall be entitled thereto)
shall have been declared and paid or set
apart for payment with respect to any
quarterly dividend period, then and not
otherwise as long as any shares of Preferred
Stock shall remain outstanding, dividends
may be declared and paid or set apart for
payment with respect to the same quarterly
dividend period on the Common Stock out of
the assets or funds of the Corporation
legally available therefor.
(e) All shares of Preferred Stock of all series
shall be of equal rank, preference and
priority as to dividends irrespective of
whether or not the rates of dividends to
which the particular series of Preferred
Stock shall be entitled shall be the same
3
<PAGE>
and when the stated dividends are not paid
in full, the shares of all series of
Preferred Stock shall share ratably in the
payment thereof in accordance with the sums
which would be payable on such shares if all
dividends were paid in full, provided,
however, that any two or more series of
Preferred Stock may differ from each other
as to the existence and extent of the right
to cumulative dividends, as aforesaid.
(f) Except as otherwise specifically provided in
the certificate filed pursuant to law with
respect to any series of Preferred Stock or
as otherwise provided by law, the Preferred
Stock shall not have any right to vote for
the election of directors or for any other
purpose and the Common Stock shall have the
exclusive right to vote for the election of
directors and for all other purposes. Each
holder of Common Stock shall be entitled to
one vote for each share thereof held. In all
instances in which voting rights are granted
to Preferred Stock or any series thereof,
such Preferred Stock or series shall vote
with the Common Stock as a single class,
except with respect to any vote for the
approval of any merger, consolidation,
liquidation or dissolution of the
Corporation and except as otherwise provided
in the certificate filed pursuant to law
with respect to any series of Preferred
Stock or as otherwise provided by law.
(g) In the event of any liquidation, dissolution
or winding up of the Corporation, whether
voluntary or involuntary, each series of
Preferred Stock shall have preference and
priority over the Common Stock for payment
of the amount to which each outstanding
series of Preferred Stock shall be entitled
in accordance with the provisions thereof
and each holder of Preferred Stock shall be
entitled to be paid in full such amount, or
have a sum sufficient for the payment in
full set aside, before any payments shall be
made to the holders of the Common Stock. If,
upon liquidation, dissolution or winding up
of the Corporation, the assets of the
Corporation or the proceeds thereof,
distributable among the holders of the
shares of all series of Preferred Stock
shall be insufficient to pay in full the
preferential amount aforesaid, then such
assets, or the proceeds thereof, shall be
distributed
4
<PAGE>
among such holders ratably in accordance
with the respective amounts which would be
payable if all amounts payable thereon were
paid in full. After the holders of the
Preferred Stock of each series shall have
been paid in full the amounts to which they
respectively shall be entitled, or a sum
sufficient for the payment in full set
aside, the remaining net assets of the
Corporation shall be distributed pro rata to
the holders of the Common Stock in
accordance with their respective rights and
interests, to the exclusion of the holders
of Preferred Stock. A consolidation or
merger of the Corporation with or into
another corporation or corporations, or a
sale, whether for cash, shares of stock,
securities or properties, of all or
substantially all of the assets of the
Corporation, shall not be deemed or
construed to be a liquidation, dissolution
or winding up of the Corporation within the
meaning of this Article Four.
(h) In the event that Preferred Stock of any
series shall be made redeemable as provided
in subparagraph (b)(iii) of this Article
Four, the Corporation, at the option of the
Board of Directors, may redeem at any time
or times, and from time to time, all or any
part of any one or more series of Preferred
Stock outstanding by paying for each share
the then applicable redemption price fixed
by the Board of Directors as provided
herein, plus an amount equal to accrued and
unpaid dividends to the date fixed for
redemption, upon such notice and terms as
may be specifically provided in the
certificate filed pursuant to law with
respect to such series of Preferred Stock.
5. The Corporation shall have the power to indemnify any
person who was or is a party or is threatened to be
made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action
by or in the right of the Corporation) by reason of
the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a
director, officer, employee or agent of another
corporation, partnership, joint venture, trust or
other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him
in
5
<PAGE>
connection with such action, suit or proceeding if he
acted in good faith and in a manner reasonably
believed to be in or not opposed to the best
interests of the Corporation, and, with respect to
any criminal action or proceedings, had no reasonable
cause to believe his conduct was unlawful. The
termination of any action, upon a plea of nolo
contendere or equivalent, shall not, of itself,
create a presumption that the person did not act in
good faith and in a manner which he reasonably
believed to be in or not opposed to the best
interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
6. The directors of the Corporation shall incur no
personal liability to the Corporation or its
stockholders for monetary damages for any breach of
the fiduciary duty as a director; provided, however,
that the directors of the Corporation shall continue
to be subject to liability (i) for any breach of
their duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the directors
derived an improper benefit.
7. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of
Directors, the number of members of which shall be
set forth in the By-laws of the Corporation. The
Directors need not be elected by ballot unless
required by the By-laws of the Corporation.
8. In the furtherance and not in limitation of the
objects, purposes and powers conferred by the laws of
the State of Delaware, the Board of Directors is
expressly authorized to made, amend and repeal the
By-laws, to fix the amount to be reserved as working
capital, and to authorize and cause to be executed
mortgages and liens without limit as to the amount,
upon the property and franchise of this corporation.
9. The Corporation is to have perpetual existence.
10. Meetings of the stockholders may be held within or
without the State of Delaware, as the By-laws may
provide. The books of the
6
<PAGE>
Corporation may be kept, subject to any provisions
contained in the statutes, outside the State of
Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the
By-laws of the Corporation. Elections of directors
need not be by written ballot unless the By-laws of
the Corporation shall so provide.
11. The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this
Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights
conferred upon stockholders herein are granted
subject to this reservation.
12. The name and address of the Incorporator is John L.
Olsen, Esquire, c/o Duane, Morris & Heckscher, 1220
Market Street Building, P.O. Box 195, Wilmington,
Delaware 19899.
13. The powers of Incorporator shall terminate upon the
election of directors.
I, THE UNDERSIGNED, being the Incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, and do hereby certify that this is my act and
deed and the facts herein stated are true; and accordingly, have hereunto set my
hand and seal this 26th day of August, 1986.
/s/ John L. Olsen
--------------------------(SEAL)
John L. Olsen, Incorporator
7
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DONEGAL GROUP INC.
UNDER SECTION 242 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
Donegal Group Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of Donegal Group Inc. (the
"Corporation"), at a meeting of the Board of Directors held on March 16, 1998
pursuant to notice duly given, duly adopted the following resolution setting
forth a proposed amendment of the Certificate of Incorporation of the
Corporation, declaring such amendment to be advisable and calling for a meeting
of the stockholders of said Corporation for consideration thereof. The
resolution setting forth the proposed amendment is as follows:
RESOLVED, that Article 4(a) of the Certificate of
Incorporation of Donegal Group Inc. is hereby amended and
restated to provide in full as follows:
"4.(a) The aggregate number of shares which the
Corporation shall have authority to issue is: Fifteen
Million shares of Common Stock of the par value of
One Dollar ($1.00) per share (the "Common Stock") and
One Million shares of Series Preferred Stock of the
par value of One Dollar ($1.00) per share (the
"Preferred Stock")."
SECOND: Thereafter, pursuant to a resolution of the Board of Directors,
at the annual meeting of the stockholders of the Corporation held on April 16,
1998, the holders of a majority of the outstanding shares entitled to vote
thereon voted in favor of the approval and adoption of the amendment.
THIRD: Such amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
Exhibit 3(i)
IN WITNESS WHEREOF, said Corporation has caused this Certificate of
Amendment to be signed by Donegal H. Nikolaus, its President and Chief Executive
Officer, and Ralph G. Spontak, its Senior Vice President, Chief Financial
Officer and Secretary, this 20th day of April, 1998.
(SEAL) DONEGAL GROUP INC.
By: /s/ Donald H. Nikolaus
-------------------------------------
Donald H. Nikolaus
President and Chief Executive Officer
ATTEST:
By: /s/ Ralph G. Spontak
--------------------
Ralph G. Spontak,
Senior Vice President,
Chief Financial Officer and Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DONEGAL GROUP INC.
UNDER SECTION 242 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
Donegal Group Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of Donegal Group Inc. (the "Corporation"), at
a meeting of the Board of Directors held on March 18, 1999 pursuant to notice
duly given, duly adopted the following resolutions setting forth a proposed
amendment of the Certificate of Incorporation of the Corporation, declaring such
amendment to be advisable and calling for a meeting of the stockholders of said
Corporation for consideration thereof. The resolutions setting forth the
proposed amendment are as follows:
WHEREAS, the Board of Directors declares it advisable to amend Article 4
of the Corporation's Certificate of Incorporation to (i) 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 and (ii) restate in its entirety Article 4 of the Corporation's
Certificate of Incorporation as so amended; it is
RESOLVED, that Article 4 of the Certificate of Incorporation of
Donegal Group Inc. is hereby amended and restated to provide in full as set
forth on Exhibit A hereto; and
<PAGE>
FURTHER RESOLVED, that the amendment to and restatement of Article 4
of the Certificate of Incorporation shall be submitted to the stockholders
of the Corporation for approval in accordance with the applicable
provisions of the Delaware General Corporation Law.
SECOND: Thereafter, pursuant to a resolution of the Board of Directors, at
the annual meeting of the stockholders of the Corporation held on April 15,
1999, the holders of a majority of the outstanding shares entitled to vote
thereon voted in favor of the approval and adoption of the amendment.
THIRD: Such amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by Donald H. Nikolaus, its President and Chief Executive
Officer, and Ralph G. Spontak, its Senior Vice President, Chief Financial
Officer and Secretary, this 15th day of April, 1999.
(SEAL) DONEGAL GROUP INC.
ATTEST:
By: /s/ Donald H. Nikolaus
----------------------------
Donald H. Nikolaus,
By: /s/ Ralph G. Spontak President and Chief
----------------------------- Executive Officer
Ralph G. Spontak,
Senior Vice President, Chief
Financial Officer and Secretary
-2-
<PAGE>
EXHIBIT A
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
A-1
<PAGE>
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.
(iii) Each share of Common Stock and each share of 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 to 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
A-2
<PAGE>
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
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,
A-3
<PAGE>
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.
A-4
DONEGAL MUTUAL INSURANCE COMPANY 401(K) PLAN
(Effective January 1, 1998)
Issue Date:
May 1, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I DEFINITIONS.............................................. 1
Section 1.1 Parties......................................... 1
1.2 Important Dates................................. 2
1.3 Service and Compensation........................ 2
1.4 Miscellaneous................................... 5
1.5 Construction.................................... 5
ARTICLE II PARTICIPATION............................................ 5
Section 2.1 Eligibility for Participation................... 5
2.2 Continuing Participation........................ 6
2.3 Reemployment After Termination of
Employment...................................... 6
ARTICLE III CONTRIBUTIONS............................................ 6
Section 3.1 Employer's Matching Contribution................ 6
3.2 Payment of Employer Matching
Contributions................................... 6
3.3 Return of Contributions......................... 6
3.4 Participant's Salary Reduction
Election........................................ 7
3.5 Participant Withdrawals......................... 8
3.6 Limitations on Participant's Salary
Reduction Election or Elective Deferrals........ 9
3.7 Limitations on Employee Contributions
and Matching Employer Contributions............. 11
3.8 Limitations on Contributions and Benefits....... 12
3.9 Distribution of Excess Deferrals................ 15
3.10 Excess Contributions............................ 15
3.11 Employee Rollover Contributions................. 16
3.12 Direct Rollovers Permitted...................... 17
3.13 Reemployment After Distribution................. 18
ARTICLE IV PARTICIPANTS' ACCOUNTS................................... 19
Section 4.1 Individual Accounts............................. 19
4.2 Valuation of the Trust.......................... 19
4.3 Adjustments and Allocations to
Accounts........................................ 19
4.4 Combined Limitations............................ 20
(1)
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4.5 Self-Directed Accounts.......................... 21
ARTICLE V PAYMENT OF BENEFITS...................................... 23
Section 5.1 Vesting and Forfeitures......................... 23
5.2 Retirement...................................... 23
5.3 Age 59-1/2...................................... 23
5.4 Disability...................................... 24
5.5 Death........................................... 24
5.6 Termination of Employment Prior to
Retirement, Disability or Death................. 24
5.7 Limitation on Distributions..................... 24
5.8 Distribution upon Retirement, Disability,
Death or Other Termination of Employment........ 25
5.9 Distributions of $5,000 or Less................. 26
5.10 Additional Distribution Restrictions............ 26
ARTICLE VI FIDUCIARY RESPONSIBILITY................................. 27
Section 6.1 Named Fiduciary................................. 27
6.2 Allocation of Fiduciary Responsibility.......... 27
6.3 Service in More than One Capacity............... 27
6.4 Employment of Advisers.......................... 27
6.5 Compensation of Fiduciaries and
Advisers........................................ 27
6.6 Liability of Fiduciaries ....................... 28
ARTICLE VII PLAN ADMINISTRATION...................................... 28
Section 7.1 Plan Committee.................................. 28
7.2 Duties and Powers of the Plan Committee......... 28
7.3 Claims Procedure................................ 29
7.4 Records and Reports............................. 29
7.5 Application and Forms for Benefits.............. 30
ARTICLE VIII AMENDMENT, MERGER AND TERMINATION
OF THE PLAN............................................ 30
Section 8.1 Amendment and Termination....................... 30
8.2 Action by Employer.............................. 31
8.3 Effect of Termination........................... 31
8.4 Partial Termination............................. 31
8.5 Manner of Distribution.......................... 31
8.6 Merger.......................................... 31
8.7 Successor Employer.............................. 32
(2)
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ARTICLE IX TOP-HEAVY PROVISIONS AND DEFINITIONS..................... 32
Section 9.1 Top-Heavy Plan Definitions...................... 32
9.2 Effective Date.................................. 34
9.3 Minimum Contribution Requirements............... 34
9.4 Maximum Compensation Limitation................. 35
9.5 Adjustment to Section 415 Limits................ 35
9.6 Remedial Provisions............................. 35
9.7 Top Heavy Vesting Schedule ..................... 36
ARTICLE X MISCELLANEOUS........................................... 36
Section 10.1 Non-Guarantee of Employment..................... 36
10.2 Non-Alienation of Benefits...................... 36
10.3 Facility of Payment............................. 36
10.4 Exclusive Benefit............................... 37
10.5 No Reversion.................................... 37
10.6 Effect of Social Security Benefits.............. 37
10.7 Titles.......................................... 37
10.8 Severability.................................... 37
10.9 Applicable Law.................................. 37
10.10 Initial Qualification........................... 37
10.11 Plan Designation................................ 37
(3)
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ARTICLE I
DEFINITIONS
Whenever used herein, the following words shall have the meaning set forth
below, unless otherwise clearly required by the context.
1.1 Parties
(a) "Employer" means Donegal Mutual Insurance Company, a Pennsylvania
corporation, and any successor.
(b) "Plan Committee" or "Committee" means the Committee established by the
Employer to administer the Plan as set forth in Article VII hereof.
(c) "Trustee" means the corporation, individual or individuals appointed by
the Employer to hold and administer the assets of the Trust.
(d) "Employee" means any individual employed by the Employer or an
Affiliated Employer, except that such term shall not include: (i) any leased
Employee as defined in Section 414(n)(2) and (ii) any employee who is hired as a
temporary employee and whose employment is to be of limited duration generally
not in excess of six (6) months.
(e) "Participant" means an Employee who has satisfied the eligibility
requirements and has entered the plan as provided in Article II.
(f) "Beneficiary" or "Designated Beneficiary" means a person or persons
(natural or otherwise) designated by a Participant to receive any death benefit
payable under this plan. If there is no such designation, or if the designated
person or persons predecease the Participant, Beneficiary shall mean the
surviving spouse, surviving children, surviving parents or estate of the
Participant, in the order listed.
(g) "Plan" means the Donegal Mutual Insurance Company 401(k) Plan as set
forth herein and as it may be amended in the future.
(h) "Trust" or "Trust Agreement" means the Donegal Mutual Insurance Company
401(k) Plan Trust established by the Employer.
(i) "Affiliated Employer" means the Employer, and any trade or business
(whether or not incorporated) which is under common control (as defined in
Section 414(c) of the Code) with the Employer; an organization (whether or not
incorporated) which is a member of an affiliated service group (as defined in
Section 414(m) of the Code) which includes the Employer; and any other entity
required to be aggregated with the Employer pursuant to regulations under
Section 414(o) of the Code.
(j) 'Highly Compensated Employee' means an Employee who performs services
during the determination year and is described in one or more of the following
groups:
1. An Employee who is a 5% owner, as defined in Section
<PAGE>
416(i)(1)(A)(iii), at anytime during the determination year or the
preceding year.
2. An Employee who received compensation during the preceding year in
excess of $80,000 (indexed in accordance with IRC Section 415(d)).
3. If the Employer so elects, an Employee who is in the top paid group
during the preceding year as such term is defined in IRC Section 414(q).
For purposes of this paragraph:
(1) Compensation is compensation within the meaning of IRC
Section 415(c)(3), including elective or salary reduction
contributions to a cafeteria plan, cash or deferred arrangement or
tax-sheltered annuity, and
(2) Employers aggregated under IRC Sections (415)(b), (c), (m),
or (o) are treated as a single employer.
(3) Highly Compensated Employee includes a former employee who
was separated from service for the Employer prior to the determination
year and was a Highly Compensated Employee for the year of the
termination or for any determination year in or after the date on
which he attains age 55.
(k) "Non-Highly Compensated Employee" means an Employee of the Employer who
is not a Highly Compensated Employee.
1.2 Important Dates
(a) "Effective Date" means January 1, 1998, the date on which the
provisions of the Plan became effective.
(b) "Plan Year" means the calendar year.
(c) "Anniversary Date" means the last day of each Plan Year after the
Effective Date.
(d) "Limitation Year" means the Plan Year.
1.3 Service and Compensation
(a) "Hour of Service" means:
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(1) Each hour for which an Employee is paid, or entitled to payment,
for the performance of duties for the Employer. These hours shall be
credited to the Employee for the computation period in which the duties are
performed; and
(2) Each hour for which an Employee is paid, or entitled to payment,
by the Employer on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence. No more
than 501 Hours of Service shall be credited under this paragraph for any
single continuous period (whether or not such period occurs in a single
computation period). Hours under this paragraph shall be calculated and
credited pursuant to Section 2530,200(b)2 of the Department of Labor
Regulations which are incorporated herein by reference; and
(3) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer. The same Hours of
Service shall not be credited both under paragraph (1) or paragraph (2), as
the case may be, and under this paragraph (3). These hours shall be
credited to the Employee for the computation period or periods to which the
award or agreement pertains rather than the computation period in which the
award, agreement or payment is made.
(4) For absences beginning on or after the first day of the Plan Year,
solely for purposes of determining whether a One-Year Break in Service for
participation and vesting purposes has occurred in a Plan Year (or other
computation period), an Employee who is on Maternity or Paternity Leave
shall receive credit for the Hours of Service which would otherwise have
been credited to such Employee but for such absence, or in any case in
which such Hours cannot be determined, 8 Hours of Service per day of such
absence. No more than 501 Hours of Service shall be credited under this
paragraph for any single absence due to Maternity or Paternity Leave. The
Hours of Service credited under this paragraph shall be credited only (i)
in the Plan Year (or other computation period) in which the absence begins
if the crediting is necessary to prevent a One-Year Break in Service in
that period, or (ii) in any other case, in the immediately following Plan
Year (or other computation period).
(b) "One-Year Break in Service" means a Plan Year during which an Employee
fails to complete at least 500 Hours of Service. For purposes of Section 2.1,
the relevant eligibility computation period shall be substituted for the Plan
Year.
(c) "Years of Service" means
(1) For purposes of eligibility to participate, as provided in Section
2.1.
(2) Years of Service credited prior to a period of consecutive
One-Year Breaks in Service shall not be credited if the number of
consecutive One-Year Breaks in Service during such period before the
Employee earns any vested benefit in Employer contributions under the Plan
equals or exceeds the greater of (A) five (5), or (B) the aggregate number
of Years of Service before such period.
(3) An Employee's Years of Service shall include Years of Service with
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the Employer and with other businesses under common control which includes
the Employer and with other members of an affiliated service group which
includes the Employer.
(d) "Compensation" means the total taxable compensation paid to an Employee
by the Employer during the Plan Year except as hereinafter provided. Any bonus,
payments under any Employee incentive plan, disability payments, taxable fringe
benefits, non-taxable fringe benefits, amounts realized from the exercise of
stock options, or when restricted stock (or property) held by the Employee
either becomes freely transferrable or is no longer subject to a substantial
risk of forfeiture, and amounts realized from the sale, exchange or other
disposition of stock options shall not be considered compensation. The foregoing
notwithstanding, compensation shall include any elective contributions made by
the Employer that are not includable in the Employee's gross income under Code
Sections 125, 402(g)(3), 402(h), 403(b) or any compensation deferred under Code
Section 457(b).
Compensation shall include all compensation (as defined above) which is
actually paid to the Employee during the applicable Plan Year, including the
Plan Year in which the Employee becomes a Participant. Compensation shall be
limited for all purposes to $160,000 as adjusted from time to time in accordance
with Code Section 401(a)(17).
(e) "Authorized Leave of Absence" means any absence authorized by the
Employer under the Employer's standard personnel practices provided that all
persons under similar circumstances must be treated alike in the granting of
such Authorized Leaves of Absence and provided further that the Employee returns
within the period of authorized absence. In the event of absence due to service
in the Armed Forces of the United States, (1) such absence shall be considered
an Authorized Leave of Absence provided that the Employee returns to employment
with the Employer within the period provided by law, and (2) credit for Hours of
Service shall be given to the extent required by law.
(f) "Employment Commencement Date" means the first day on which an Employee
completes an Hour of Service for the Employer.
(g) "Maternity or Paternity Leave" means an absence from work:
(1) By reason of pregnancy of the Participant;
(2) By reason of the birth of a child of the Participant;
(3) By reason of the placement of a child with the Participant in
connection with the adoption of such child by the Participant; or
(4) For purposes of caring for such child, for a period beginning
immediately after such birth or placement.
In approving such leave, the Plan Committee may require the Participant to
furnish such timely information as it may reasonably require to establish that
the reason for the absence from work is for one of the reasons set forth above
and the number of days for which there was such absence.
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1.4 Miscellaneous
(a) "Disability" means a condition which renders a Participant unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of a long, continued and indefinite duration. The Plan Committee
may require such proof of Disability as it deems necessary, and may require a
Participant to be examined by a physician of its own choosing.
(b) "Participant's Elective Deferral" or "Participant's Elective
Contribution" means as to each Participant the amount of the Participant's
salary reduction election made pursuant to Section 3.4 during the Plan Year by
the Employee and allocated to the Participant's Elective Deferral Account.
(c) "Employer Matching Contribution" means any contribution to the Plan
made by the Employer for the Plan Year and allocated to a Participant's Employer
Matching Contribution Account by reason of the Participant's Elective Deferrals.
(d) "ERISA" means Public Law No. 93-406, the Employees Retirement Income
Security Act of 1974, as amended from time to time.
(e) "Code" or "IRC" means the Internal Revenue Code of 1986 and amendments
thereto.
(f) "Forfeiture" means that portion of a Participant's account that is not
vested and occurs on the earlier of:
(1) The distribution of the entire vested portion of a Participant's
account, or
(2) The last day of the Plan Year in which the Participant incurs five
consecutive one year breaks in service.
(g) USERRA Compliance. Notwithstanding any provision of this Plan to the
contrary, contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with Section 414 (u) of the
Code.
1.5 Construction. Words used herein in the masculine include the feminine,
in the singular include the plural and in the plural include the singular,
unless the context indicates otherwise.
ARTICLE II
PARTICIPATION
2.1 Eligibility for Participation. Each Employee who is employed by the
Employer on the Effective Date shall eligible to become a Participant as of that
date. Each other Employee shall be eligible to become a Participant as of the
first day of the month immediately succeeding
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the month in which the Employee commences employment with the Employer. An
Employee becomes a Participant by filing with the Plan Committee a salary
reduction election in accordance with Section 3.4 hereof in the form prescribed
by the Committee.
2.2 Continuing Participation.
(a) The Participant shall continue to be a Participant until he incurs a
One-Year Break in Service. Participation shall cease as of the last day of the
Plan Year during which such event occurs.
(b) During a period of Authorized Leave of Absence, an Employee shall not
be deemed to have incurred a One-Year Break in Service. In the event that an
Employee is laid off, such layoff shall be treated as an Authorized Leave of
Absence, to the extent that the Employer's personnel policies so provide, or in
the absence of any such policies, for a period of one year from the date of
layoff.
2.3 Reemployment After Termination of Employment. Upon the reemployment of
any Employee who was a Participant such Employee again shall become a
Participant on the first day of the month coincident with or next following his
completion of at least one Hour of Service. All of an Employee's Years of
Service with the Employer shall be credited except Years of Service which are
disregarded under Section 1.3(c)(2).
ARTICLE III
CONTRIBUTIONS
3.1 Employer's Matching Contribution. The Employer shall contribute
annually on behalf of each Participant in the employ of the Employer on the
Anniversary Date an amount equal to twenty-five percent (25%) of each
Participant's Elective Deferrals for the Plan Year but not in excess of two
percent (2%) of the Participant's Compensation for the Plan Year ("Matching
Contribution"). The requirement that a Participant be employed by the Employer
on the Anniversary Date shall be waived if the employment of the Participant
terminated during the Plan Year because of retirement, disability or death.
3.2 Payment of Employer Matching Contributions. The Employer shall pay its
matching contribution to the Plan within thirty (30) days of the end of each
calendar quarter and under all circumstances the Employer's matching
contribution must be paid not later than the last date, including extensions
thereof for filing it income tax return for the Plan Year with respect to which
the matching contribution is made.
3.3 Return of Contributions. In no event shall any Employer Contributions
revert to or be recoverable by the Employer, unless:
(a) the contribution is made by reason of a mistake of fact, in which case
it shall be returned within one (1) year after the payment of the contribution,
or,
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(b) the contribution is conditioned upon qualification of the Plan under
Section 401 of the Code and if the Plan does not initially so qualify, it shall
be returned to the Employer within one (1) year after the date of denial of
qualification.
All contributions are conditioned upon the deductibility of the
contribution under Section 404 of the Code. To the extent the deduction is
disallowed, the contribution shall be returned within one (1) year after the
disallowance of the deduction.
3.4 Participant's Salary Reduction Election.
(a) Each Participant may make an Elective Contribution to the Plan and to
the extent he elects to reduce or forego an increase in his Compensation, the
amount by which his Compensation is reduced shall be treated as the
Participant's Elective Contribution and be allocated to that Participant's
Elective Account. The amount of the Elective Contribution may not be less than
1% nor more than 8% of the Participant's Compensation as elected by the
Participant in units of one percentage point on forms provided by the Plan
Committee, which may limit the amount of a Participant's Elective Contribution
at any time, if it determines that such limitation is necessary to satisfy the
requirements of IRC Section 401(k).
(b) The balance in each Participant's Elective Account shall be fully
vested at all times and shall not be subject to forfeiture for any reason.
(c) A Participant may not make withdrawals from his Elective Account prior
to his attaining age 59-1/2, except in the event of disability, retirement,
termination of employment or hardship as provided in Section 3.5. Distributions
made pursuant to this Section shall be deemed to be made as of the last day of
the preceding accounting quarter and the Participant's Elective Account shall be
reduced accordingly.
(d) The Employer shall pay all Participants' Elective Contributions
accumulated through payroll deduction to the Trustee with reasonable promptness
and in all events before the end of the succeeding month following such payroll
deductions.
(e) A Participant may change or terminate his deferral election as provided
in subparagraph (a) by giving thirty (30) days' written notice of such change or
termination to the Plan Committee or its designee and such change or termination
shall be effective as of the first pay period coincident with or next following
the expiration of said thirty (30)-day period. A Participant who has terminated
or not commenced making Elective Contributions pursuant to paragraph (a) above
may commence or reinstate his deferral election upon thirty (30) days' written
notice to the Plan Committee or its designee and the Participant's Elective
Contributions shall commence with the first pay period commencing on or after
the expiration of the thirty (30)-day period.
(f) A Participant who has taken a hardship distribution as provided in
Section 3.5 hereof shall have his salary reduction election terminated as of the
date of the hardship distribution and shall not be eligible to reinstate that
election until after the first anniversary date of that distribution.
Additionally, the Participant's Elective Contributions for the taxable year
immediately following the taxable year of the hardship distribution may not
exceed the applicable
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limit on Elective Deferrals under Code Section 402(g) less the Participant's
Elective Contributions for the year in which the Participant received the
hardship distribution.
3.5 Participant Withdrawals.
(a) Participant's Elective Deferral Account. A Participant may not withdraw
any amount attributable to his Elective Deferrals prior to the Participant's
retirement, death, disability, separation from service or attainment of age
59-1/2 except in the case of hardship as provided herein. Upon application to
the Plan Committee for a withdrawal based on hardship, the Plan Committee shall
make a determination of the existence of hardship. If the Plan Committee
determines that a hardship exists with respect to the Participant, the
Participant may withdraw up to 100 percent of his vested interest in the
Participant's Elective Deferral Account, but not in excess of the amount
requested by the Participant in his initial application. Withdrawal of amounts
less than the total amount in the Participant's Elective Deferral Account shall
be in units of $1,000 with a minimum withdrawal of $1,000. The Plan Committee
shall implement the foregoing by such rules, regulations, forms and procedures
as to which the Plan Committee seems appropriate, provided always that
participants similarly situated be treated uniformly. Hardship withdrawals may
be made from Participant's Elective Deferrals only, excluding withdrawal of any
income earned by Participant's Elective Deferrals.
(b) Participant's Employer Matching Contribution Account. A Participant may
not withdraw any amount attributable to his Employer Matching Contribution
Account prior to the Participant's retirement, death, disability, separation
from service, or attainment of age 59-1/2.
(c) Hardship Provisions. A distribution because of hardship will be made
only if the Participant has an immediate and heavy financial need which may not
be satisfied from other assets of the Participant. A distribution is deemed to
be on account of an immediate and heavy financial need only if the distribution
is for:
1. Expenses for medical care described in Section 213(d) of the Code
previously incurred by the Participant, the Participant's spouse or any
dependents of the Participant or necessary for those persons to obtain
medical care described in Section 213(d);
2. Costs directly related to the purchase of a principal residence for
the Participant (excluding mortgage payments);
3. Payment of tuition, related educational fees, and room and board
expenses for the next twelve (12) months of post-secondary education for
the Participant or the Participant's spouse, children or dependents; or
4. Payments necessary to prevent the eviction of a Participant from
the Participant's principal residence or foreclosure on the mortgage of
that residence.
(d) A distribution is deemed necessary to satisfy an immediate and heavy
financial need of a Participant if all of the following are satisfied:
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1. The distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant which may include amounts
necessary to pay the federal, state or local income taxes and penalties
reasonably anticipated as a result of the distribution.
2. The Participant has obtained all distributions other than hardship
distributions and all non-taxable (at the time of the loan) loans currently
available under all Plans maintained by the Employer.
3. The Plan and all other plans maintained by the Employer limit the
Participant's elective contributions for the next taxable year to the
applicable limit under Section 402(g) of the Code for that year minus the
Employee's elective contributions for the year of the hardship
distribution.
4. The Participant is prohibited under the terms of the Plan or an
otherwise legally enforceable agreement from making elective contributions
and Employee contributions to the Plan and all other plans maintained by
the Employer for at least twelve (12) months after receipt of the hardship
distribution.
3.6 Limitations on Participant's Salary Reduction Election or Elective
Deferrals.
(a) Maximum Amount of Elective Deferrals. No Employee shall be permitted to
have Elective Deferrals made under this Plan during any calendar year in excess
of $7,000.00 multiplied by the Adjustment Factor for such year as provided by
the Secretary of the Treasury.
(b) Average Actual Deferral Percentages.
(1) The Average Actual Deferral Percentage for Eligible Participants
who are Highly Compensated Employees for the Plan Year shall not exceed the
Average Actual Deferral Percentage for Eligible Participants who are
Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or
(2) The Average Actual Deferral Percentage for Eligible Participants
who are Highly Compensated Employees for the Plan Year shall not exceed the
Average Actual Deferral Percentage for Eligible Participants who are
Non-Highly Compensated Employees for the Plan Year multiplied by 2,
provided that the Average Actual Deferral Percentage for Eligible
Participants who are Highly Compensated Employees does not exceed the
Average Actual Deferral Percentage for Eligible Participants who are
Non-Highly Compensated Employees by more than two (2) percentage points, or
such lesser amount as the Secretary of the Treasury shall prescribe to
prevent the multiple use of this alternative limitation with respect to any
Highly Compensated Employee.
(c) Definitions. For purposes of this Section 3.6 the following definitions
shall be used:
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(1) "Actual Deferral Percentage" ("ADP") shall mean the ratio
(expressed as a percentage), of Elective Deferrals on behalf of each
Eligible Participant for the Plan Year to such Eligible Participant's
Compensation for the Plan Year. For this purpose, Elective Deferrals shall
be taken into account only to the extent they relate to Compensation that
either will be received by the Participant in the Plan Year, but for the
deferral election, or which is attributable to services performed by the
Participant in the Plan Year and will be received by the Participant within
2 1/2 months after the close of the Plan Year but for the deferral
election. Further, Elective Deferrals shall be taken into account only if
they are allocated to the Participant's Account within the Plan Year to
which they relate. An Elective Deferral is considered allocated within the
Plan Year if the allocation is not contingent upon the Participant's
performance of services or continued participation in the Plan after the
allocation date and the Elective Deferral is actually paid to the trust not
later than 12 months after the Plan Year to which the contribution relates.
(2) "Average Actual Deferral Percentage" shall mean the average
(expressed as a percentage) of the Actual Deferral Percentage of all
Eligible Participants as a group.
(3) "Eligible Participant" shall mean any Employee of the Employer who
is otherwise authorized under the terms of the Plan to have Elective
Deferrals allocated to his account for the Plan Year.
(4) "Excess Contributions" are defined in IRC Section 401(k)(8)(b) and
are determined and distributed as provided in Section 3.10 hereof.
(d) Special Rules.
(1) For purposes of this Section 3.6, the Actual Deferral Percentage
for any Eligible Participant who is a Highly Compensated Employee for the
Plan Year and who is eligible to have Elective Deferrals allocated to his
account under two or more Plans or arrangements described in Section 401(k)
of the Code that are maintained by the Employer or an Affiliated Employer
shall be determined as if all such Elective Deferrals were made under a
single arrangement.
(2) For purposes of distributing Excess Contributions, the amount of
Excess Contributions that may be distributed to a Highly Compensated
Employee for a Plan Year shall be reduced by the amount of excess deferrals
previously distributed to the Highly Compensated Employee for his or her
taxable year ending with or within such Plan Year.
(3) A Participant's Elective Contributions which are returned as
provided in (c)(4) above shall not be taken into account in determining the
amount of Matching Contributions to be made for the Participant's benefit
for the year. To the extent Matching Contributions have already been made
with respect to the Elective Contributions, such Matching Contributions
shall be distributed to the Participant at the same time as the Elective
Contributions are returned or recharacterized, provided however, that to
the extent the Participant does not have a vested interest in such Matching
Contributions, the Participant shall forfeit such Matching
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Contributions.
(4) For purposes of determining the ADP for the Non Highly Compensated
Employees for any determination year, the Plan shall rely on look-back year
data. For this purpose, determination year means the Plan Year with respect
to which the ADP or ACP is being calculated and look-back means the Plan
Year immediately preceding the determination year.
3.7 Limitations on Employee Contributions and Matching Employer
Contributions.
(a) Contribution Percentage. The Average Contribution Percentage ("ACP")
for Eligible Participants who are Highly Compensated Employees for the Plan Year
shall not exceed the Average Contribution Percentage for Eligible Participants
who are Nonhighly Compensated Employees for the Plan Year multiplied by 1.25; or
The Average Contribution Percentage for Eligible Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Average
Contribution Percentage for Eligible Participants who are Nonhighly Compensated
Employees the Plan Year multiplied by 2, provided that the Average Contribution
Percentage for Eligible Participants who are Highly Compensated Employees does
not exceed the Average Contribution Percentage for Eligible Participants who are
Nonhighly Compensated Employees by more than two (2) percentage points or such
lesser amount as the Secretary of the Treasury shall prescribe to prevent the
multiple use of this alternative limitation with respect to any Highly
Compensated Employee.
(b) Definitions. For purposes of this Section 3.7 the following definitions
shall apply.
(1) "Average Contribution Percentage" shall mean the average
(expressed as a percentage) of the Contribution Percentages of the Eligible
Participants in a group.
(2) "Contribution Percentage" shall mean the ratio (expressed as a
percentage), of the sum of the Employee Contributions and Matching
Contributions made on behalf of each Eligible Participant for the Plan Year
to such Eligible Participant's Compensation for the Plan Year.
(3) "Eligible Participant" shall mean any employee of the Employer who
is otherwise authorized under the terms of the plan to have Employee
Contributions or Matching Contributions allocated to his account for the
Plan Year.
(c) Special Rules.
(1) For purposes of this section 3.7, the Contribution Percentage for
any Eligible Participant who is a Highly Compensated Employee for the Plan
Year and who is eligible to receive Matching contributions, or Elective
Deferrals allocated to his account under two or more plans described in
Section 401(a) of the Code or arrangements described in Section 401(k) of
the Code that are maintained by the Employer or an Affiliated Employer
shall be
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determined as if all such contributions and Elective Deferrals were made
under a single plan.
(2) In the event that this plan satisfies the requirements of Section
410(b) of the Code only if aggregated with one or more other plans, or if
one or more other plans satisfy the requirements of Section 410(b) of the
Code only if aggregated with this plan, then this Section 3.7 shall be
applied by determining the Contribution Percentages of Eligible
Participants as if all such plans were a single plan.
(d) Excess Aggregate Contributions.
(i) Excess Aggregate Contributions for a Highly-Compensated
Employee will be determined by reducing the Actual Contribution Ratio
(ACR) of the Highly-Compensated Employee with the highest ACR to the
extent necessary to satisfy the Actual Contribution Percentage ("ACP")
test or to cause such ratio to equal the ACR of the Highly-Compensated
Employee with the next highest ratio. This process will be repeated
until the ACP test is satisfied. In no event will Excess Aggregate
Contributions remain unallocated or be allocated to a suspense account
for allocation in the future Plan Year. The amount of the Excess
Aggregate Contributions shall be distributed first to the
Highly-Compensated Employee with the highest dollar amounts of
Matching Contributions or Elective Contributions taken into account in
computing the ACP in an amount equal to the lesser of such total
Excess Aggregate Contributions or the amount necessary to cause the
amount of such Employee's Matching Contributions to equal the amount
of the Matching Contributions taken into account in computing the ACP
of the Highly Compensated Employee with the next highest dollar amount
of Matching Contributions taking into account in computing the ACP.
This process will be repeated until the aggregate amount required to
be distributed is so distributed. Income on such Excess Aggregate
Contributions shall be distributed in accordance with the applicable
Treasury Regulations. Distribution of Excess Aggregate Contributions
will be made after the close of the Plan Year to which the
contributions relate but within twelve months after the close of such
Plan Year. Such distributions shall be treated as Employer
contributions for purposes of Code Sections 401(a)(4), 404 and 415.
Notwithstanding the foregoing, to the extent a Participant receives a
distribution of Excess Aggregate Contributions which relate to
Matching Contributions in which the Participant does not have a vested
interest, such portion of the Excess Aggregate Contribution shall be
forfeited.
(ii) The amount of Excess Aggregate Contributions for a Plan Year
will be determined only after first determining the Excess
Contributions that are treated as Employee contributions because of
recharacterization for the Plan Year.
3.8 Limitations on Contributions and Benefits.
(a) Definition of Annual Additions. For purposes of the Plan, "Annual
Addition" shall mean the amounts allocated to a Participant's account during the
limitation year that constitute:
(1) Employer Contributions,
(2) Employee Contributions,
(3) Forfeitures, and
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(4) Amounts described in Sections 415(l)(1) and 419A(d)(2) of the
Code.
(b) Maximum Annual Addition. The maximum annual addition that may be
contributed or allocated to a Participant's account under the Plan for any
limitation year shall not exceed the lesser of
(1) the Defined Contribution Dollar Limitation, or
(2) Twenty-five (25%) percent of the Participant's compensation,
within the meaning of Section 415(c)(3) of the Code for the Limitation
Year.
(c) Special Rules. The compensation limitation referred to in subsection
(b)(2) shall not apply to:
(1) Any contribution for medical benefits (within the meaning of
Section 419A(f)(2) of the Code) after separation from service which is
otherwise treated as an Annual Addition, or
(2) Any amount otherwise treated as an Annual Addition under Section
415(l)(1) of the Code.
(d) Definitions. For purposes of Section 3.8,
(1) Defined Contribution Dollar Limitation means $30,000.00 or, if
greater, 1/4 of the defined benefit dollar limitation set forth in Section
415(b)(1) of the Code as in effect for the Limitation Year.
(2) Limitation Year means the calendar year.
(e) Limitations if Participant in More Than One Plan. The foregoing
limitations of this Section 3.8 shall apply to the Annual Additions to this Plan
and all Annual Additions made to all other defined contribution plans whether
terminated or ever maintained by the Employer or a Related Employer in which the
Participant is or was a Participant.
(f) Overall Limitation on Defined Benefit and Defined Contribution Plan
Benefits. The sum of a Participant's defined benefit plan fraction and his
defined contribution plan fraction shall not exceed 1.0. This limitation shall
be applied in accordance with the following provisions specified in the
following subparagraphs.
(1) A Participant's defined benefit plan fraction is the projected
annual benefit of the Participant under all defined benefit plans (whether
terminated or not) ever maintained by the Employer or by Related Employers
divided by the lesser of
(a) the product of 1.25 multiplied by the dollar limitation in effect from
time to time under Section 415(b)(1)(A) of the Code, or
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(b) the product of 1.4 multiplied by the amount that may be taken into
account under Section 415(b)(1)(B) of the Code with respect to such individual
for such year.
All such amounts shall be determined as of the close of the Limitation
Year, with such applicable adjustments and reductions as are required under
Section 415(b) of the Code. Notwithstanding the above, if the Participant was a
Participant as of the first day of the first Limitation Year beginning after
December 31, 1986, in one or more defined benefit plans maintained by the
Employer that were in existence on May 6, 1986, the denominator of the fraction
may not be less than 125 percent of the sum of the annual benefits under such
plans that the Participant had accrued as of the close of the Last Limitation
Year beginning before January 1, 1987, disregarding any changes in the terms and
conditions of the plans after May 5, 1986. The preceding sentence shall only
apply if the defined benefit plans individually and in the aggregate satisfied
the requirements of Section 415 of the Code for all Limitation Years beginning
before January 1, 1987.
(2) A Participant's defined contribution plan fraction is the sum of
the Annual Additions to the Participant's account under the Plan and all
other defined contribution plans (whether terminated or not) ever
maintained by the Employer or by Related Employers as of the close of the
Limitation Year, divided by the lesser of:
(a) the sum of the product of 1.25 multiplied by the dollar
limitation in effect under Section 415(c)(1)(A) of the Code
(determined without regard to subsection (c)(6) thereof) for such year
and each prior year of service with the Employer or Related Employers,
or
(b) the sum of the product of 1.4 multiplied by the amount that
may be taken into account under Section 415(c)(1)(B) (or subsection
(c)(7), if applicable) of the Code for such year and each prior year
of service with the Employer or Related Employers.
All such amounts shall be determined as of the close of the Limitation
Year and with such applicable limits and adjustments as are required under
Section 415(b) of the Code. Notwithstanding the above, if the Employee was a
Participant as of the first day of the first Limitation Year beginning after
December 31, 1986, in one or more defined benefit contribution plans maintained
by the Employer that were in existence on May 6, 1986, the numerator of this
fraction will be adjusted if the sum of this fraction and the defined benefit
fraction would otherwise exceed 1.0 under the terms of the Plan. Under the
adjustment, an amount, equal to the product of the excess of the sum of the
fractions over 1.0 times the denominator of this fraction, will be permanently
subtracted from the numerator of this fraction. The adjustment is calculated
using the fractions as they would be computed as of the end of the last
Limitation Year beginning before January 1, 1987, and disregarding any changes
in the terms and conditions of the plans made after May 6, 1986, but using the
Section 415 limitation applicable to the first Limitation Year beginning on or
after January 1, 1987.
(3) For purposes of applying the limitations of this Section 3.8, the
amount of any nondeductible Employee Contributions credited for the
Limitation Year under any defined benefit plan maintained by the Employer
or by any Related Employer shall be treated as an
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Annual Addition for the benefit of the Participant under a qualified
defined contribution plan.
(g) Source of Benefit Reduction Necessary to Meet Annual Addition
Limitation. If as a result of the foregoing, a Participant's defined
contribution plan Annual Additions will exceed the limitations of this Section,
the required reduction in such Additions shall be made first to the Donegal
Mutual Insurance Company Profit Sharing Plan Annual Additions and, if necessary,
then to the Annual Additions with respect to a Participant made to this Plan,
proceeding first through forfeitures allocated to the Participant's Employer
Matching Contribution account, then the Employer's Matching Contribution for the
Plan Year and then to the return of the Elective Contributions of a Participant
for the Plan Year. Any reduction in Employer Matching Contributions or
forfeitures that would otherwise have been allocated to the Participant under
this Plan in order to meet the above limitations shall be treated as a
forfeiture and used to reduce the Employer Matching Contribution otherwise
required.
3.9 Distribution of Excess Deferrals.
(a) In General. Notwithstanding any other provision of the Plan, Excess
Deferral Amounts for any Plan Year and the income allocable thereto shall be
distributed no later than April 15 of the next succeeding year to Participants
who claim such Allocable Excess Deferral Amounts for the calendar year.
(b) Definitions. For purposes of this Section 3.9, "Excess Deferral Amount"
means the amount of Elective Deferrals for a calendar year that the Participant
allocates to this Plan pursuant to the claim procedure set forth in Section
3.9(c).
(c) Claims. The Participant's claim shall be in writing and be submitted to
the Plan Committee no later than March 1 of the next succeeding year. It shall
specify the Participant's Excess Deferral Amount for the preceding calendar year
and be accompanied by the Participant's written statement that if such amounts
are not distributed, such Excess Deferral Amount, when added to amounts deferred
under other plans or arrangements described in Section 401(k), 408(k) or 403(b)
of the Code, will exceed the limit imposed on the Participant by Section 402(g)
of the Code for the year in which the deferral occurred.
(d) Maximum Distribution Amount. The Excess Deferral Amount distributed to
a Participant with respect to a calendar year shall be adjusted for income and,
if there is a loss allocable to the Excess Deferral, shall in no event be less
than the lesser of the Participant's account under the Plan or the Participant's
Elective Deferrals for the Plan Year.
3.10 Excess Contributions.
(a) In General. Excess Contributions as defined in IRC Section 401(k)(8)(B)
and the income allocable thereto (as provided in paragraph (c) hereof) shall be
distributed no later than the March 15th of the next succeeding Plan Year to the
Highly-Compensated Employees as provided herein. The amount of Excess
Contributions to be distributed shall be determined by reducing the Elective
Deferral amount of the Highly Compensated Employee having the highest Elective
Deferral amount for such year to the higher of (1), the level at which the ADP
test is passed by the Plan without the reduction of the ADP of any other Highly
Compensated
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Employees or (2) the ADP of the Highly Compensated Employee having the next
highest Elective Deferral amount. If this process does not satisfy the ADP test
for the Plan, this process as described in the preceding sentence shall be
repeated at the progressively descending elective deferral amount levels amount
Highly Compensated Employees until the ADP test is satisfied, or until the
aggregate of excess Elective Deferral amounts has been refunded, whichever is
the first to occur. All excess contributions must be corrected by the close of
the Plan Year following the Plan Year for which they were made.
(b) Election to Treat As Employee Contributions. Any amount required to be
distributed to a Participant by paragraph (a) hereof shall, at the election of
the Participant and to the extent provided in Treasury Regulations, be retained
in the Plan as a Voluntary Employee Contribution and treated as an amount
distributed to the Participant and then contributed as such a Voluntary Employee
Contribution. Any excess contributions recharacterized as Employee Contributions
pursuant to the preceding sentence shall nevertheless remain subject to the same
nonforfeitability requirements and distribution limitations as apply to Elective
Contributions.
(c) Excess Aggregate Contributions. Excess Aggregate Contributions in the
amount allocable thereto (as provided in paragraph (d) hereof shall be
distributed no later than the March 15th of the next succeeding Plan Year to the
Highly-Compensated Participants on the basis of the respective portions of such
amounts attributable to each of such Participants. Excess Aggregate
Contributions means the amount described in Section 401(m)(6)(B) of the Code.
The foregoing notwithstanding, the amount of Excess Contributions to be
distributed shall be reduced by Excess Deferrals (ss.3.9) previously distributed
for the taxable year ending in the same Plan Year and Excess Deferrals to be
distributed for a taxable year will be reduced by Excess Contributions
previously distributed or recharacterized for the Plan Year beginning in such
taxable year.
(d) Determination of Income. The income allocable to Excess Contributions
and Excess Aggregate Contributions shall be determined by computing both the
income for the Plan Year with respect to which the excess amounts relate and the
income for the period between the end of that year and the date of distribution
("the gap"). The income allocable to such excess amounts will be equal to the
sum of the income allocable to the Participant's account containing the excess
amounts for the applicable year and the income allocable to such account for the
gap period multiplied by a fraction, the numerator of which is the excess amount
and the denominator of which is the closing balance as of the end of the
applicable year. Until provided otherwise by Treasury Regulations, such
distribution shall be made without reduction for net losses.
(e) Limitations on Multiple Use of Alternative Limitation. The alternative
method of compliance with IRC Sections 401(k) and 401(m) shall be limited as
provided in Treas. Reg. Section 1.401(m)-(2)(b). In the event a multiple use of
the alternative limitation occurs, correction of such use with respect to the
affected Highly-Compensated Employees shall be accomplished by reducing the
Actual Deferral Percentage of the Highly-Compensated Employees and such
reduction shall be treated as an Excess Contribution subject to the provisions
of this Section 3.10.
3.11 Employee Rollover Contributions.
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(a) An Employee eligible to participate in the Plan, whether or not a
Participant, may transfer to the Plan within the time period and in the manner
prescribed in paragraph (c) below and pursuant to procedures promulgated by the
Plan Committee, a rollover amount as defined in paragraph (b) below, provided
that such rollover amount shall be subject in all respects to this section 3.11.
The rollover amount shall be credited to a Rollover Account maintained for that
Employee/Participant. That Account shall share in the income allocations of the
trust fund as provided in section 4.3(d) hereof, but it shall not share in
Employer contributions nor any other allocations under section 4.3. Upon the
termination of the Participant's employment with the Employer, for whatever
reason, the total balance in the Rollover Account shall be distributed in the
same manner as the balances in the Participant's other accounts in accordance
with Article V hereof.
(b) For purposes of this section, rollover amount means as to any Employee,
an "eligible rollover distribution" as defined in Section 402(c)(4) of the Code.
(c) Rollover amounts must be transferred to this Plan on or before the
sixtieth (60th) day following the Employee's receipt of the rollover amount. The
Employee may authorize the Plan Committee to obtain the rollover amount from the
transferor plan directly. As a condition precedent to being permitted to
transfer a rollover amount to the Plan, the Employee shall comply with such
requirements and complete such forms as the Plan Committee reasonably believes
are necessary to insure that any amount it authorizes the Trustee to accept
constitutes a rollover amount as defined in Section 402(c)(4) of the Code.
(d) The foregoing notwithstanding, in determining whether the distribution
to be received as a rollover is being received from a qualified plan, the Plan
Committee shall be entitled to rely on the representations of the Employee as
provided in the Treasury Regulations that the distributing plan is a qualified
plan. Regardless of whether it is ultimately determined that such distributing
plan is or is not a qualified plan, the acceptance of such contribution shall
not be a grounds for disqualification of the Plan. Nevertheless, if the Plan
Committee determines at any time that any amount accepted as a rollover amount
pursuant to this section, for whatever reason, was not eligible for such
classification or otherwise did not qualify as a rollover amount, the Committee
shall direct the Trustees to pay to the Employee/Participant or his designated
beneficiary the total amount accepted as a rollover amount plus all earnings and
increments in value thereon from the date of acceptance to the date of such
distribution. The Plan Committee shall authorize the Trustees or other payor to
withhold from such distribution any taxes as required by law and to submit such
information documents to the taxing authorities as required by law.
(e) Under all circumstances and at all times the Employee/Participant shall
be 100% vested in the balance of the Employee's Rollover Account.
3.12 Direct Rollovers Permitted
(a) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Section, a distributee may
elect, at the time and in the manner prescribed by the Committee, to have any
portion of an eligible
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rollover distribution paid directly to an eligible retirement plan specified by
the distributee in a direct rollover.
(b) Definitions.
1. Eligible rollover distribution: An eligible rollover distribution
is any distribution of all or any portion of the balance to the credit of
the distributee, except that an eligible rollover distribution does not
include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Section
401(a)(9) of the Code; and the portion of any distribution that is not
includible in gross income (determined without regard to the exclusion for
net unrealized appreciation with respect to employer securities).
2. Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in Section 408(a) of the Code, an
individual retirement annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code, or a qualified trust
described in Section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible retirement plan
is an individual retirement account or individual retirement annuity.
3. Distributee: A distributee includes an Employee or former Employee.
In addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are distributees with regard to the interest of
the spouse or former spouse.
4. Direct rollover: A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
3.13 Reemployment after Distribution. If any former Participant shall be
re-employed by the Employer before incurring five consecutive 1 year Breaks in
Service, and such former Participant had received a distribution of his entire
vested interest prior to his re-employment, his forfeited account shall be
reinstated only if he repays the full amount distributed to him before the
earlier of five years after (1) the first date on which the Participant is
subsequently re-employed by the Employer, or (2) the close of the first of five
consecutive 1 year Breaks in Service commencing after the distribution. If a
distribution occurs for any reason other than a separation from service, the
time for repayment may not end earlier than five years after the date of
separation. In the event the former Participant does repay the full amount
distributed to him, the undistributed portion of the Participant's Account must
be restored in full, unadjusted by any gains or losses occurring subsequent to
the Anniversary Date coinciding with or preceding his
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termination. The source for such reinstatement shall first be any forfeitures
occurring during the year. if such source is insufficient, then the Employer
shall contribute an amount which is sufficient to restore any such forfeited
Account. Additionally, the Employer shall establish a separate account for the
Participant's interest in the Plan at the time of the distribution and at any
time during which the Participant's vested percentage in that account can
increase that vested portion will equal or exceed an amount determined by
applying the following formula where "x" equals the amount: x = P (ab + (r x d)
- - (r x d). "P" is the vested percentage; "ab" is the account balance; "d" is the
amount of the distribution; and "r" is the ratio of the account balance at the
relevant time to the account balance after the distribution.
ARTICLE IV
PARTICIPANTS' ACCOUNTS
4.1 Individual Accounts. The Plan Committee shall establish and maintain
for each Participant (or Beneficiary of a deceased Participant) an Elective
Deferral Account and Employer Matching Contribution Account. Credits and charges
shall be made to each such Account in the manner hereinafter described. The
maintenance of Accounts is for accounting purposes only, and a segregation of
the assets of the Trust to each Account shall not be required.
4.2 Valuation of the Trust. The Trust shall be valued by the Trustees on
the Anniversary Date in each Plan Year. Such valuation shall be made on the
basis of the fair market value of all property held in Trust. Any contribution
made on account of a particular Plan Year but received by the Trustees after the
end of such Plan Year shall be treated as having been made on the Anniversary
Date.
4.3 Adjustments and Allocations to Accounts. At the end of each Plan Year,
the Accounts of each Participant (or Beneficiary of a deceased Participant)
shall be adjusted in the following order:
(a) decreased by any amounts distributed to or for the benefit of the
Participant (or Beneficiary of a deceased Participant);
(b) increased by the contributions made by or on behalf of the Participant
to his account not previously so allocated;
(c) increased by the Employer's Matching Contribution which shall be
allocated to each Participant's Employer Matching Contribution Account, provided
that no allocation shall be made to the account of a Participant unless that
Participant is in the employ of the Employer on the last day of the year, except
as provided in Section 3.1; and
(d) increased by the income of the Trust in proportion to the account
balances in each such account on the last day of each calendar quarter in
proportion to the balances of all such accounts on the same day prior to the
income allocation provided herein.
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(e) The foregoing notwithstanding, if as a result of a reasonable error in
estimating a Participant's Plan Compensation, or a reasonable error in
determining the amount of a Participant's Elective Deferrals, the annual
additions for a Participant for a particular Plan Year would cause the
limitations of Code Section 415 applicable to that Participant for that Plan
Year to be exceeded, such excess amounts shall not be deemed to be annual
additions to that Participant's account and shall not increase that
Participant's account, but rather shall be removed from that Participant's
account and be used to reduce the Employer contributions for the next Limitation
Year (Plan Year) and succeeding Limitation Years, if necessary, for that
Participant if that Participant is covered by the Plan as of the end of the
Limitation Year. If the Participant is not covered by the Plan as of the end of
the Limitation Year, then such excess must be held unallocated in a suspense
account for that Limitation Year and allocated and reallocated in the next
Limitation Year to all remaining Participants and such excess amounts must be
used to reduce the Employer contributions for such Limitation Years. No such
excess amounts may be distributed to Participants or former participants.
4.4 Combined Limitations.
(a) In the event any Participant in this Plan is a participant under any
other Defined Contribution Plan maintained by the Employer (whether or not
terminated), the total amount of Annual Additions to such Participant's Accounts
for any Limitation Year from all such Defined Contribution Plans shall not
exceed the limitations set forth in Section 3.8. Any reduction shall be made
first from the Employer's profit sharing plan or plans and then from the
Employer's other defined contribution plans. If it is determined that as a
result of the limitations set forth in this Section, the Annual Additions to a
Participant's account in this Plan must be reduced, such reduction shall be
accomplished in accordance with the provisions of Section 3.10.
(b) In the event that any Participant under this Plan is a participant
under one or more Defined Benefit Plans maintained by the Employer (whether or
not terminated), then for any Limitation Year the sum of the Defined Benefit
Plan Fraction for such Limitation Year and the Defined Contribution Plan
Fraction for such Limitation Year shall not exceed one (1.0). If it is
determined that, as a result of the limitations set forth in this Section 4.4,
the Annual Additions under this Plan must be reduced, such reduction shall be
accomplished in accordance with the provisions of Section 3.10.
(c) Definitions Relating to Annual Addition Limitations: For purposes of
Section 4.4, the following definitions shall apply:
(1) "Retirement Plan" means a Plan maintained by the Employer which is
(A) a profit sharing, or pension plan described in Section 401(a) of the
Code, (B) an annuity plan or annuity contract described in Sections 403(a)
or 403(b) of the Code, (C) a qualified bond purchase plan described in
Section 405(a) of the Code, or (D) an individual retirement account,
individual retirement annuity or retirement bond described in Sections
408(a), 408(b) or 409 of the Code.
(2) "Defined Contribution Plan" means a Retirement Plan which provides
for an individual account for each Participant and for benefits based
solely on the amount contributed to the Participant's account, and any
income, expense, gains and losses, and any
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forfeitures of accounts of other participants which may be allocated to
such participant's account.
(3) "Defined Benefit Plan" means any Retirement Plan which does not
meet the definition of a Defined Contribution Plan.
(4) "Defined Benefit Plan Fraction", for any Limitation Year means a
fraction (A) the numerator of which is the projected annual benefit of the
Participant (the annual benefit to which such Participant would be entitled
under the terms of the Defined Benefit Plan on the assumptions that he
continues employment until his normal retirement age as determined under
the terms of such Defined Benefit Plan, that his compensation continues at
the same rate as in effect in the Limitation Year under consideration until
the date of his normal retirement age and that all other relevant factors
used to determined benefits under such Defined Benefit Plan remain constant
as of the current Limitation Year for all future Limitation Years) under
all Defined Benefit Plans maintained by the Employer, determined as of the
close of the Limitation Year, and (B) the denominator of which is the
lesser of (i) the product of 1.25 multiplied by the dollar limitation in
effect under subsection (b)(1)(A) of Section 415 of the Code for such
Limitation Year, or (ii) the product of 1.4 multiplied by 100% of the
Participant's average compensation for his high three Limitation Years.
(5) "Defined Contribution Plan Fraction" for any Limitation Year shall
mean a fraction (A) the numerator of which is the sum of the Annual
Additions to the Participant's accounts under all Defined contribution
Plans maintained by the Employer in such Limitation Year, and (B) the
denominator of which is the sum of the lesser of the following amounts
determined for such Limitation Year and for each prior Limitation Year of
service with the Employer: (i) the product of 1.25 multiplied by the dollar
limitation in effect under subsection (c)(1)(A) of Section 415 of the Code
for such Limitation Year (without regard to subsection (c)(6) thereof), or
(ii) the product of 1.4 multiplied by 25% of the Participant's Limitation
Year Compensation.
(6) "Limitation Year" shall mean the Plan Year.
(7) "Limitation Year Compensation" shall mean compensation as defined
in Section 1.3(d) of the Plan.
(8) "Employer" means the employer that adopts this Plan, and all
members of a controlled group of corporations (as defined in Section 414(b)
of the Code as modified by Section 415(h), all commonly controlled trades
or businesses (as defined in Section 414(c) of the Code as modified by
Section 415(h) or affiliated Service groups (as defined in Section 414(m)
of the Code) of which the adopting employer is a part.
4.5 Self-Directed Accounts.
(a) Each Participant shall direct the Trustees as to how all or any portion
of the Participant's Account shall be invested in accordance with such rules and
regulations that permit a Participant the opportunity to exercise control over
the assets in his individual account and provide an opportunity to choose, from
a broad range of investments, the manner in which
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some or all of such assets are invested. The Trustees shall implement such
Participant instructions except as provided in paragraph (c) below. All rules
and regulations shall be applied consistently and uniformly to all Participants
similarly situated.
(b) The Trustees shall make available to each Participant the opportunity
to choose from at least three diversified categories of investments (including
look-through investments) and to transfer all or any portion of the
Participant's Account between and among such investments no less frequently than
quarterly annually. In addition to investment directions which may be given
pursuant to paragraph (d) below, a Participant may invest in any of the
look-through investment vehicles as selected by the Trustees. All of the
information concerning such investments shall be made available to a Participant
upon request to the Trustees by distribution of the prospectuses and other
information concerning such look-through investments as is provided to the
Trustees.
(c) The Trustees shall not honor investment directions which, if
implemented would not be in accordance with the Plan documents to the extent the
Plan documents are consistent with Title I of ERISA; would cause the Plan to
maintain an indicia of ownership of any Plan assets outside of the United
States; would jeopardize the Plan's tax qualified status under the Internal
Revenue Code; would result in a prohibited transaction as described in ERISA
Section 406, or in IRC Section 4975; could result in a loss in excess of the
Participant's Account balance; or, would generate income taxable to the Plan.
(d) In addition to the look-through investment vehicles available to the
Participant under paragraph (b) above, a Participant may select any other
investment, subject to the limitations of paragraph (c) and subject to the
Participant bearing the expenses of carrying out the Participant's instructions
in purchasing such investments, all of which shall be detailed in writing by the
Trustees to the Participant to the extent known and, if there are expenses which
are unknown that fact shall be in writing on forms supplied by the Trustees and
shall be signed by the Participant and witnessed by a Trustee.
(e) Under no circumstances shall the ability of a Participant to direct the
investment of the amounts credited to his Account be interpreted to allow the
Participant to invest such Accounts directly or to ever take possession of all
or any portion of his Account, except as specifically provided by this Plan. All
funds while held in the Trust are part of the trust fund and are managed
exclusively by the Trustees subject to this Section 4.5.
(f) It is specifically intended that the Plan qualify as an ERISA 404(c)
Plan. The Plan Committee is the identified plan fiduciary to accept
Participant's investment choices and to distribute such investment information.
The Plan Committee may designate all or a portion of this responsibility to
others provided such designation is communicated in writing to the Participants.
To the extent the Plan does qualify as an ERISA 404(c) Plan, with respect to
each Participant the Plan fiduciaries may be relieved of liability for any
losses which are the direct and necessary result of investment choices made by
the Participant or the Participant's beneficiary. A Participant may change the
allocation of his contribution and account balances at least once in any three
months. Each Participant shall have the opportunity to give investment
instructions to the Plan Committee or its designee and will obtain written
conformation of such instructions. Under no circumstances is any person,
including any member of the Plan Committee, or any employee of
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the Employer, authorized to distribute to a Participant information concerning
any investment that is not contained in a prospectus or otherwise made available
pursuant to all applicable laws regulating the sale and investment of securities
and other property.
ARTICLE V
PAYMENT OF BENEFITS
5.1 Vesting and Forfeitures.
(a) Elective Deferral Account - A Participant shall be 100% vested at all
times in the amounts held in this account.
(b) Employer Matching Contribution Account - A Participant will be 100%
vested in the amounts held in this account after the completion of three (3)
Years of Service:
(c) Except as provided above, for purposes of this Plan, the word
"Accounts" shall mean both a Participant's Elective Deferral Account and the
Employer Matching Contribution Account.
(d) All forfeitures arising under this Plan shall be applied to the
restoration of any accounts of Participants who are reemployed during the Plan
Year as required by this Plan and forfeitures remaining, if any, will be applied
toward the Employer's Matching Contribution for the Plan Year in which the
forfeitures occurred. If there are any forfeitures remaining unapplied after the
application of the preceding sentence, they will be applied to the Matching
Contribution accounts of the Participants remaining in the Plan in proportion to
their compensation for that Plan Year.
5.2 Retirement. A Participant shall reach Normal Retirement Age upon
attaining age 65 and Early Retirement Age upon attaining age 55 and may retire
as of the first day of the month coincident with or following his attainment of
such ages as the Participant elects, which day shall be called the Participant's
Retirement Date. A Participant shall have a nonforfeitable right to the balances
in his Accounts upon attainment of Early or Normal Retirement Age. A Participant
may remain actively employed by the Employer after his Normal Retirement Date,
subject to any written mandatory retirement policy of the Employer. He shall
continue to be a Participant in the Plan as long he remains so employed by the
Employer, and he may retire or be retired in accordance with any such written
mandatory retirement policy of the Employer, as of the first day of any month
after his Normal Retirement Date. A Participant who retires under this section
shall be entitled to distribution of his entire Accounts balance at the time and
in the manner provided by Section 5.8.
5.3 Age 59-1/2. Upon attainment of age 59-1/2, a Participant may request a
distribution of all or any portion of the vested portion of his Accounts
attributable to contributions made pursuant to Sections 3.1, 3.4, and 3.11. Such
distribution may be made even though the Participant has not terminated
employment and continues as a Participant in the Plan thereafter. A Participant
requesting a distribution under this Section shall be entitled to distribution
at the
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time and in the manner provided by Section 5.8.
5.4 Disability. A Participant who is determined by the Employer to be
disabled as defined in Section 1.4(a) hereof, shall be considered to have taken
disability retirement as of the first day of the month following the month in
which the Employer makes such determination. The Employer may require the
Participant to submit to medical examinations for the purpose of verifying the
Participant's disability. A Participant who becomes disabled shall have a 100%
nonforfeitable right to the balances in his Accounts and shall be entitled to
distribution of his Accounts at the time and in the manner provided by Section
5.8.
5.5 Death. In the event of a Participant's death prior to his termination
of employment with the Employer, the balances in such Participant's Accounts
shall become fully vested and payable to the Participant's beneficiary as
designated under the Plan. Distribution of such balances shall be made at the
time and in the manner provided by Section 5.8. Unless otherwise elected in the
manner prescribed in this Section, the Beneficiary of any death benefit payable
hereunder shall be the Participant's spouse. The Participant may designate a
Beneficiary other than his or her spouse only if:
(a) The Participant's spouse has consented to the Beneficiary
Designation. Such consent must be in writing and must be witnessed by a
representative of the Plan Committee or notarized. The consent will be
valid only as to the spouse who signed it; or
(b) The Participant establishes to the satisfaction of the Plan
Committee that he or she has no spouse; or
(c) The Participant's spouse cannot be located; or
(d) Because of other circumstances under which no spousal consent is
required in accordance with applicable regulations under the Code or ERISA.
5.6 Termination of Employment Prior to Retirement, Disability or Death. A
Participant who terminates employment with the Employer and who is not entitled
to distribution of his account balance under any previous section of this
Article V, shall be entitled to distribution of the vested balances in his
Accounts at the time and in the manner provided by Section 5.8.
5.7 Limitation on Distributions. Except as provided in Section 5.8, no
distributions shall be made to a Participant from his Accounts until such
Participant's retirement, attainment of age 59-1/2, death, disability, other
termination of employment or due to hardship as provided herein.
The Plan Administrator shall not permit a distribution of any benefit prior
to the Participant's Normal or Early Retirement Age where the present value of
the non-forfeitable accrued benefit (taking into account benefits derived from
both Employer and Employee contributions) is in excess of $5,000 without the
consent of the Participant's spouse. The Plan Administrator must obtain the
written consent of the Participant and where applicable the Participant's spouse
not more than 90 days before the commencement of the distribution of any part of
an accrued benefit hereunder.
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5.8 Distribution upon Retirement, Disability, Death or Other Termination of
Employment.
(a) Time and Manner of Distribution. Upon a Participant's retirement,
attainment of age 59-1/2 (if a distribution is requested at that time pursuant
to the provisions of Section 5.3), disability, death, or other termination of
employment, there shall be distributed to the Participant, or to his Beneficiary
in the case of death, the vested balances in the Participant's Accounts as of
the Accounting Date immediately preceding the date of such separation from
employment, plus any contributions credited or to be credited to his Accounts
subsequent to such Accounting Date, in a lump sum, to be distributed as soon as
practicable after such separation from employment (and in the case of an age
59-1/2 in-service distribution as soon as practical after the written request is
received by the Plan Committee) unless elected otherwise by the Participant or
the Participant's surviving spouse. For purposes of this Section 5.8 "Accounting
Date" means a date on which the Trustee values the Investment Funds and makes
allocations to Accounts pursuant to Article IV. Notwithstanding the foregoing, a
Participant who has separated from employment may elect, pursuant to Plan
Committee rules, to defer such lump sum distribution to any subsequent date,
subject to the restrictions contained in subsection (b) hereof. The Accounting
Date for such deferred lump sum distribution shall be the Accounting Date which
immediately precedes the date of distribution elected by the Participant. An
election to defer a distribution may be changed no more frequently than annually
and shall be irrevocable upon the death of the Participant.
If a Participant (or Beneficiary) entitled to receive a distribution under
this Section 5.8 should die prior to the time he has received the full
distribution to which he is entitled, then the amount credited to his Accounts
as of the Accounting Date for the month in which the death occurs shall be
distributed to the deceased Participant's Beneficiary or to the estate of the
Beneficiary in the case of the Beneficiary's death. The provisions of this
Section 5.8 shall apply to all benefits payable to a Participant derived from
both Employer and non-deductible Employee Contributions. If a distribution is
considered to have commenced in accordance with the Treasury Regulations before
the Participant's death, the remaining interest of the Participant will be
distributed at least as rapidly as under the method of distribution being used
as of the date of the Participant's death. Additionally, distributions under
this Plan will be made in accordance with the requirement of the Treasury
Regulations under Section 401(a)(9), including the minimum distribution
incidental benefit requirements of Section 1.401(a)(9)-2 of the proposed
Regulations.
(b) Restrictions. Distributions are subject to the following restrictions
where applicable:
(1) No Participant (or Beneficiary) may elect a distribution date
which is earlier than 60 days following the date on which the Participant's
Accounts are to be valued.
(2) Each Participant's Accounts balances must be distributed to him in
full no later than the April 1st following the calendar year in which he
attains age 70-1/2; provided however, if Participant dies before his entire
Accounts balances have been distributed, or if distribution has commenced
to the Participant's surviving spouse who dies before the entire Account
balances have been distributed then the entire remaining Account balances
must be distributed to the Participant's designated Beneficiary within five
years of the Participant's death
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(or the death of his surviving spouse). The foregoing notwithstanding, a
Participant other than a five (5%) percent owner shall not be required to
accept a distribution regardless of age prior to the termination of his
employment with the Employer.
(3) Notwithstanding (2) above or any other provision herein to the
contrary, in no event shall distribution of a Participant's Accounts be
made later than the sixtieth (60th) day after the close of the Plan Year in
which occurs the latest of the following events:
(a) The attainment by the Participant of age 65;
(b) In the case of a Plan Participant who commences participation
in the Plan within five (5) years before attaining age 65, the fifth
anniversary of the time the Plan Participant commences participation
in the Plan;
(c) In the case of a Plan Participant not described in paragraph
(b) above, the tenth anniversary of the Plan Year in which the
Participant joined the Plan as a Participant;
(d) The termination of the Participant's service with the
Employer; or
(e) The date specified by the Participant in his election made
pursuant to subsection (a) hereof.
5.9 Distributions of $5,000 or Less. Upon the termination of a
Participant's employment with the Employer, prior to a Participant's annuity
starting date, the Plan Committee shall make an immediate total distribution of
the vested value of the account of the Participant if the present value of such
account to the extent vested (calculated using an interest rate not greater than
the PBGC rate) is $5,000 or less and, at no time prior to the termination of the
Participant's employment, ever exceeded $5,000.00. Such amount shall be paid to
the Participant, or if the Participant is then deceased, to the Participant's
designated beneficiary; provided, however, if the distribution provided
hereunder is less than the total amount of the Participant's account at the time
of the distribution and if the Participant is reemployed within the five (5)
year period commencing on such termination, the Participant shall have repayment
rights with respect to such distribution identical to those provided in Section
3.13 hereof.
5.10 Additional Distribution Restrictions. Notwithstanding anything else
contained in this Plan, amounts attributable to Elective Deferrals may not be
distributed earlier than the occurrence of one of the following events:
(1) the Participant's retirement, death or disability or separation
from service;
(2) the termination of this Plan without the establishment or
maintenance of another defined contribution plan (other than an ESOP or
SEP);
(3) the Participant's attainment of age 59 1/2 or hardship as provided
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herein;
(4) the sale or disposition by the Employer to an unrelated
corporation of substantially all of its assets, but only with respect to
Employees who continue employment with the acquiring corporation and the
acquiring corporation does not maintain the Plan after the disposition; and
(5) the sale or other disposition by the Employer of its interest in a
subsidiary to an unrelated entity but only with respect to Employees who
continue employment with the subsidiary and the acquiring entity does not
maintain the Plan after the disposition.
Clauses, 2, 4, and 5 apply only if the distribution is in the form of
a lump sum and clauses 4 and 5 apply only if the transferor corporation
continues to maintain the Plan.
ARTICLE VI
FIDUCIARY RESPONSIBILITY
6.1 Named Fiduciary. The Employer shall be the "named fiduciary" referred
to in Section 402(a) of ERISA with respect to the management, operation and
administration of the Plan and is also responsible for making contributions
provided for under Section 3.1. The "Plan Administrator" as defined in Section
414(g) of the Code and Section 3(16) of ERISA is the Plan Committee as
established by Article VIII hereof.
6.2 Allocation of Fiduciary Responsibility. Each fiduciary, whether named
herein or otherwise, shall only have the individual responsibility for
exercising the functions and responsibilities assigned or allocated to such
fiduciary hereunder. Unless otherwise specifically provided herein, no fiduciary
responsibility shall be shared by two or more fiduciaries. Where one fiduciary
follows the directions of another fiduciary, who has the fiduciary
responsibility for such action, then the fiduciary following such direction
shall not be deemed a fiduciary hereunder in taking such action.
6.3 Service in More than One Capacity. Any person, or group of persons, may
serve in more than one fiduciary capacity with respect to this Plan.
6.4 Employment of Advisers. A fiduciary may engage accountants, attorneys,
actuaries or such other advisers as it deems necessary or advisable to properly
carry out its duties under this Plan. The functions of any such persons
designated by the fiduciary shall be limited to the specific services and duties
for which they are engaged, and such persons shall have no other
duties, obligations or responsibilities under the Plan.
6.5 Compensation of Fiduciaries and Advisers. The fees, expenses and costs
charged or incurred by any fiduciary or any adviser hereunder may be paid in
whole or in part by the Employer, and any such fees, expenses or costs not paid
by the Employer shall be paid out of the
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Trust; provided that such compensation or reimbursement is reasonable under the
circumstances; and provided further that no person who already receives
full-time pay from an Employer whose employees are Participants in the Plan
shall receive any compensation from the Trust, except for reimbursement of
expenses properly and actually incurred.
6.6 Liability of Fiduciaries. Each fiduciary, and each adviser to any
fiduciary, shall be free from all liability for any act or conduct in carrying
out its responsibilities under this Plan, except for acts of willful misconduct
or gross negligence; provided, however, that the foregoing shall not relieve any
such fiduciary or adviser from any responsibility or liability that it may have
pursuant to ERISA.
ARTICLE VII
PLAN ADMINISTRATION
7.1 Plan Committee. A Plan Committee consisting of at least two officers of
the Employer shall be the Plan Administrator. The Plan Committee may appoint one
member authorized to sign any reports required by ERISA in representation of all
members. Members of the Plan Committee shall serve until their resignation or
dismissal by the Employer and vacancies shall be filled in the same manner as
the original appointments. The Employer may dismiss any member of the Plan
Committee at any time with or without cause.
7.2 Duties and Powers of the Plan Committee. The Plan Committee shall have
such duties and powers as may be necessary to discharge its duties hereunder,
including, but not limited to, the following:
(a) To construe and interpret the Plan and Trust.
(b) To decide all questions of the eligibility of Employees to become
Participants under the Plan.
(c) To determine the amount, manner and time of payment of benefits under
the Plan.
(d) To authorize and direct all disbursements by the Trustee from the
Trust.
(e) To prescribe procedures to be followed by Participants or Beneficiaries
for filing applications for benefits.
(f) To prepare and distribute to Participants information explaining the
Plan.
(g) To make and publish rules for the regulation of the Plan which are not
inconsistent with the terms of the Plan or with ERISA.
(h) To designate one or more of its members to assume responsibility for
any of its functions or to delegate to individuals not members of the Committee
any administrative,
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clerical or other nondiscretionary duties provided always in such delegation,
the Committee shall alone remain responsible for decisions affecting the rights
of Participants and their beneficiaries.
(i) To take any action required to take self corrective measures as
required by the Internal Revenue Service or the Department of Labor to preserve
the tax qualified status of the Plan, to correct errors in fiduciary conduct or
such other action to maintain the Plan in compliance with all applicable laws.
The Plan Committee shall have no power to add to, subtract from or modify
any of the terms of the Plan, or to modify any benefits provided by the Plan, or
to waive or fail to apply any requirements for eligibility for a benefit under
the Plan. All policies, rules, interpretations and decisions of the Plan
Committee shall be uniformly and consistently applied in a nondiscriminatory
manner to all Participants in similar circumstances. The Plan Committee shall be
entitled to rely upon information furnished by a Participant or Beneficiary in
carrying out its duties hereunder.
7.3 Claims Procedure. The Plan Committee shall make all determinations as
to the right of any person to a benefit under this Plan. If a claim is denied by
the Plan Committee, it shall give written notice to the claimant setting forth
(a) the specific reason or reasons for the denial, (b) the specific reference to
pertinent Plan provisions on which the denial is based, (c) a description of any
additional material or information necessary for the claimant to perfect the
claim and an explanation of why such material or information is necessary, and
(d) an explanation of the claim review procedure, in accordance with this
Section.
Within sixty days after the receipt by the claimant of a written notice of
denial of a claim, or such later time as may be deemed reasonable taking into
account the nature of the benefit subject to the claim and any other attendant
circumstances, the claimant may file a written request with the Plan Committee
that it conduct a full and fair review of the denial of the claim for benefits.
If such review is requested, the claimant or his duly authorized representative
may (a) request a review upon written application, (b) review pertinent
documents, and (c) submit issues and comments in writing.
The Plan Committee shall issue a written decision on the claim within sixty
days after the receipt of the aforesaid request for review, except that if there
are special circumstances (such as the need to hold a hearing) which require an
extension of time for processing the claim, the aforesaid sixty day period shall
be extended to one hundred twenty days. In the event of such extension, written
notice of the extension shall be furnished to the claimant prior to the
commencement of the extension. Any decision on review shall be in writing, and
shall be written in a manner calculated to be understood by the claimant, shall
include the specific reason or reasons for the decision, and shall contain
specific reference to pertinent Plan provisions upon which the decision is
based.
The foregoing notwithstanding, the Plan Committee shall be responsible for
maintaining records of Participants' service, account balances, vesting and
other matters relating to amount of benefits under the Plan. The Plan Committee
shall also be responsible for filing such reports, and making such disclosure to
Participants as may be required by ERISA and the Code.
7.4 Records and Reports. The Plan Committee shall be responsible for
maintaining
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records of Participants' service, account balances, vesting and other matters
relating to amount of benefits under the Plan. The Plan Committee shall also be
responsible for filing such reports, and making such disclosures to Participants
as may be required by ERISA and the Code.
7.5 Application and Forms for Benefits. The Plan Committee may require a
Participant to complete and file with the Committee an application for a
benefit, or any other forms approved by the Committee, and to furnish all
pertinent information requested by the Plan Committee. The Plan Committee may
rely on all such information so furnished.
ARTICLE VIII
AMENDMENT, MERGER AND TERMINATION OF THE PLAN
8.1 Amendment and Termination.
(a) General. The Employer intends to continue this Plan and the payment of
contributions hereunder indefinitely, but such continuance is not assumed as a
contractual obligation, and the Employer expressly reserves the right to
discontinue contributions to the Plan or to terminate the Plan at any time, as
to its Employees without the consent of any other party. Any amendment may be
made retroactive by its terms, but no such amendment shall cause any part of the
Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of Participants or their Beneficiaries; provided, however, the Employer
may make any amendment it determines necessary or desirable, with or without
retroactive effect, to qualify or maintain the Plan as a qualified plan within
the meaning of Section 401(a) of the Code, and to qualify or maintain the Trust
as tax exempt under Section 501(a) of the Code, and the regulations issued
thereunder.
(b) Limitations on Amendment.
(1) If the Plan's vesting schedule is amended or the Plan is amended
in any way that directly or indirectly affects the computation of a
Participant's nonforfeitable percentage, or if the Plan is deemed amended
by an automatic change to or from a top-heavy vesting schedule, each
Participant with at least three years of service with the Employer may
elect, within a reasonable period after the adoption of the amendment or
change to have the Participant's nonforfeitability percentage computed
under the Plan without regard to such amendment or change. The period
during which the election may be made shall commence with the date the
amendment is adopted or deemed to be made and shall end on the latest of:
(i) Sixty (60) days after the amendment is adopted
(ii) Sixty (60) days after the amendment becomes effective or
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(iii) Sixty (60) days after the Participant is issued written
notice of the amendment by the Plan Committee.
(2) No amendment to the Plan shall be effective to the extent it has
the effect of decreasing a Participant's accrued benefit. Notwithstanding
the preceding sentence, a Participant's account balance may be reduced to
the extent permitted under Section 412(c)(8) of the Code. For purposes of
this section, a Plan amendment which has the effect of decreasing a
Participant's account balance or eliminating an optional form of benefit
with respect to benefits attributable to service before the amendment shall
be treated as reducing an accrued benefit. Furthermore, no amendment of the
Plan shall have the effect of decreasing a Participant's vested interest
determined without regard to such amendment as of the later of the date
such amendment is adopted or the date it becomes effective.
8.2 Action by Employer. Any action by the Employer under this Plan may be
taken by means of a writing signed by an authorized officer.
8.3 Effect of Termination. Upon termination of the Plan, the accounts of
all Participants or Beneficiaries affected thereby shall become fully vested and
nonforfeitable, and the Plan Committee shall, after payment of expenses properly
chargeable to the Fund, allocate any unallocated assets in the Fund to the
accounts of such Participants or Beneficiaries pursuant to the rules set forth
in Article IV hereof. In making such final allocation, the Plan Committee may,
if it determines that a termination of the Plan has occurred prior to the date
of formal action by the Employer, reverse any forfeitures of accounts of
Participants which have occurred in the interim.
8.4 Partial Termination. Upon termination of the Plan with respect to a
group of Participants which constitutes a partial termination of the Plan under
the Code, the accounts of such group of Participants shall become fully vested
and non-forfeitable.
8.5 Manner of Distribution. In the event of termination or partial
termination of the Plan, the Plan Committee shall direct the Trustee either (a)
to make distribution of benefits to Participants or their Beneficiaries affected
by such termination or partial termination pursuant to Section 5.8, or (b) to
retain such benefits for distribution upon the occurrence of one of the events
set forth in Article V hereof.
To the extent that no discrimination in value results, any distribution
after termination or partial termination of the Plan may be made, in whole or in
part, in cash, in securities or other assets in kind, or in nontransferable
annuity contracts, as the Plan Committee and the Trustee may determine. All
non-cash distributions shall be valued at fair market value at the date of
distribution.
8.6 Merger. In the event of any merger or consolidation of the Plan with,
or transfer in whole or in part of the assets and liabilities of the Fund to
another trust fund held under any other plan of deferred compensation maintained
or to be established for the benefit of all or some of the Participants in this
Plan, the assets of the Fund applicable to such Participants shall be
transferred to the other trust fund only if:
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(a) Each Participant would (if either this Plan or the other plan then
terminated) receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he would have been
entitled to receive immediately before the merger, consolidation or transfer (if
this Plan had then terminated).
(b) A writing signed by the authorized partner of the Employer under this
Plan, or of any new or successor employer of the affected Participants, shall
authorize such transfer of assets, and, in the case of the new or successor
employer of the affected Participants, its resolutions shall include an
assumption of liabilities with respect to such Participants' inclusion in the
new employer's plan, and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Internal Revenue Code.
8.7 Successor Employer. In the event of the dissolution, merger,
consolidation or reorganization of the Employer, provision may be made by which
the Plan and Trust will be continued by the successor; and, in that event, such
successor shall be substituted for the Employer under the Plan. The substitution
of the successor shall constitute an assumption of Plan liabilities by the
successor and the successor shall have all of the powers, duties and
responsibilities of the Employer under the Plan.
ARTICLE IX
TOP-HEAVY
PROVISIONS AND DEFINITIONS
9.1 Top-Heavy Plan Definitions.
(a) "Top-Heavy Plan" means a plan which, as of the Determination Date (1)
the Present Value of Accrued Benefits of Key Employees and (2) the aggregate of
the Accounts of Key Employees under the plan exceeds sixty percent (60%) of the
Present Value of Accrued Benefits and the aggregate of the Accounts of all
employees under such plan. The determination of whether a plan is top-heavy
shall be made after aggregating all other plans of the Employer or any of its
affiliates which are part of a Required Aggregation Group and after aggregating
any other plan of the Employer or any of its affiliates which is part of the
Permissive Aggregation Group, if such permissive aggregation thereby eliminates
the top-heavy status of any plan within such Permissive Aggregation Group. A
plan is a "Super Top-Heavy Plan" if, as of the Determination Date, the plan
would meet the test specified above for being a Top-Heavy Plan if
ninety percent (90%) were substituted for sixty percent (60%) in each place it
appears in this subsection.
(b) "Determination Date" means, for purposes of determining whether a plan
is a Top-Heavy Plan for a particular Plan Year, the last day of the preceding
Plan Year (or, in the case of the first Plan Year of a plan, the last day of the
first Plan Year).
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(c) "Valuation Date" means, for purposes of determining the value of
Accounts under this Section, the same date as the Determination Date.
(d) "Key Employee" means any Employee or former Employee (including a
Beneficiary of such Employee) who at any time during the Plan Year of
Determination, or during any of the four (4) preceding Plan Years, is:
(1) An officer of the Employer having annual Compensation for such
Plan Year which is in excess of 50% of the dollar limit in effect under
Section 415(b)(1)(A) for the calendar year in which such Plan Year ends;
(2) An owner of (or considered as owning within the meaning of Section
318) both more than an one-half percent interest as well as one of the ten
largest interests in the Employer and having annual compensation greater
than the dollar limit in effect under Section 415(c)(1)(A) for the Plan
Year;
(3) A 5% owner of the Employer; or
(4) A 1% owner of the Employer whose annual compensation is more than
$150,000.
For purposes of determining 5% and 1% owners, the aggregation rules and the
rules of subsections (b), (c) and (m) of Section 414 of the Code do not apply.
(e) "Non-Key Employee" means any Employee or former Employee (including a
Beneficiary of such Employee) who is not a Key Employee.
(f) "Account" means the value of all accounts (as defined in Sections
1.4(b), (c) and (d) under the Plan as of the Valuation Date, including all
employer contributions paid or payable to such Account and all employee
contributions actually paid to such Account, except as follows:
(1) The value of each Account shall be increased by the aggregate
distributions made with respect to an Employee under the Plan during the
five (5) year period ending on the Determination Date.
(2) In the case of a profit sharing plan, the value of each Account
shall not include any employer contribution actually made after the
Determination Date, except in the case of the first Plan Year each account
shall include such contributions that are allocated to the Account as of a
date within the first Plan Year.
(3) The value of an Account maintained for voluntary deductible
Employee contributions (if any) shall not be included.
(4) The value of an Account maintained for rollover contributions (if
any) shall not be included if the rollover contribution was initiated by
the Employee and was not made from a plan maintained by the Employer (or by
an employer required to be aggregated with
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the Employer under Sections 414(b), (c) or (m) of the Code).
(5) The value of an Account maintained for an Employee who is a
Non-Key Employee with respect to a plan for any Plan Year who was a Key
Employee with respect to a plan for any prior Plan Year shall not be
included.
(6) If an individual has not performed any services for any employer
maintaining the Plan at any time during the five (5) year period ending on
the Determination Date, the value of the Account of such individual shall
not be included.
(g) "Required Aggregation Group" means (1) each qualified plan of the
Employer or any of its affiliates in which at least one Key Employee
participates, including for this purpose any terminated plan that covered a Key
Employee maintained by the Employer within the five year period ending on the
Determination Date, and (2) any other qualified plan of the Employer or any of
its affiliates which enables a plan described in (1) to meet the requirements of
Sections 401(a)(4) or 410 of the Code.
(h) "Permissive Aggregation Group" means the Required Aggregation Group of
plans plus any other plan or plans of the Employer or any of its affiliates
which, when considered as a group with the Required Aggregation Group would
continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code.
(i) "Present Value of Accrued Benefit" means, in the case of a defined
benefit plan, the present value of a Participant's accrued benefit as determined
under the provisions of the applicable defined benefit plan.
(j) "Employer or any of its Affiliates" means the Employer maintaining the
Plan, and all commonly controlled trades or businesses (as defined in Section
414(c) of the Code), and affiliated service groups (as defined in Section 414(m)
of the Code) of which the Employer is a part.
9.2 Effective Date. In any Plan Year in which the Plan is a Top-Heavy Plan,
the Plan shall meet the requirements set forth in Sections 9.3 and 9.7.
9.3 Minimum Contribution Requirements.
(a) Definition of Compensation. For purposes of this Section, Compensation
for any Plan Year shall mean the amount of Compensation received from the
Employer for that Plan Year.
(b) Allocation. The total allocable amount under Section 4.3 shall be
allocated as follows:
(1) The total allocable amount shall first be allocated among the
accounts of Participants who have completed a Year of Service as defined in
Section 2.1 (except that such requirement that the Participant complete
1,000 Hours of Service in the Plan Year shall not apply to any Participant)
in the same proportion that each such Participant's Compensation
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<PAGE>
bears to the aggregate Compensation of all such Participants for such Plan
Year, provided that the amount so allocated to the account of any
Participant who is not a Key Employee shall not be less than the lesser of
3% or the highest rate allocated to any Key Employee for the Plan Year
(such rate determined by calculating the largest percentage of Compensation
not in excess of $200,000.00). If the highest rate allocated to a Key
Employee for such Plan Year is less than 3%, amounts contributed
attributable to a salary reduction arrangement shall be included in
determining contributions made on behalf of Key Employees.
(2) The remainder of the total allocable amount, if any, shall be
allocated as set forth in Section 4.3.
(c) Exceptions to the Minimum Contribution Requirement. The minimum
contribution required under subsection (b) shall be reduced or eliminated, as
the case may be, in the following circumstances:
(1) If the allocation in any Plan Year of the total allocable amount
under Section 4.3 (determined without regard to this Section) results in an
allocation to each Participant who is eligible to receive an allocation
under Section 9.3(b)(1) of at least 3% of such Participant's Compensation
for the Plan Year, then the provisions of Section 9.3(b) shall not apply
for such Plan Year.
(2) No minimum contribution will be required (or the minimum
contribution percentage will be reduced, as the case may be) for any Plan
Year for a Participant who is eligible to receive an allocation under
Section 9.3(b)(1) if the employer maintains another qualified plan under
which a minimum benefit or contribution is being accrued or made for such
Plan Year in whole or in part for the Participant in accordance with
Section 416(c) of the Code.
(d) Effect of Defined Benefit Plan. The 3% minimum contribution requirement
in subsections (b) and (c) shall be increased to 5% for any Plan Year in which
the Employer also maintains a defined benefit pension plan to the extent
necessary to avoid the application of Section 416(f) of the Code and regulations
thereunder.
9.4 Maximum Compensation Limitation. The Compensation (as defined in both
Section 9.3(a) and Section 1.3(d)) of each Participant in the Plan for any Plan
Year shall not exceed the first $200,000 of such Participant's Compensation;
provided that such dollar limitation shall be adjusted to take into account any
adjustments prescribed by the Secretary of the Treasury or his delegate under
Section 416(d)(2) of the Code.
9.5 Adjustment to Section 415 Limits. If the Plan is a Super Top-Heavy Plan
or if the Plan is a Top-Heavy Plan, and the minimum benefits required by Section
416(h) of the Code are not provided, then the 1.25 factor used in the
denominators of the Defined Contribution Plan Fraction (under Section 4.4(c)(5))
and Defined Benefit Plan Fraction (under Section 4.4(c)(4)) shall be changed to
1.0.
9.6 Remedial Provisions. In addition to the other powers granted hereunder,
the Plan Committee shall have the power to take such action as it deems
necessary or appropriate to determine whether the Plan is a Top-Heavy Plan, and
in such event, to apply the provisions of this
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<PAGE>
Article to the Plan, including, but not limited to the power to reallocate
employer contributions, forfeitures and income, to reverse all or part of any
forfeitures which may have been improperly recognized, and to direct the Trustee
to make required distributions hereunder.
9.7 Top Heavy Vesting Schedule. For any Plan Year in which the Plan is
determined to be "top heavy", as defined in Section 9.1 hereof, the vesting
schedule applicable to Employer Matching Contributions as provided in Section
5.1(b) shall be superseded by the following schedule:
Years Vesting
of Service Percentage
---------- ----------
Less than 2 0
2 20
3 40
4 60
5 80
6 or more 100
If the Plan ceases to be top heavy in a subsequent Plan Year, the vesting
schedule provided in Section 5.1(b) will apply to a Participant's benefits
accrued subsequent to the last year the Plan was top heavy, provided however
that any Participant with 5 or more Years of Service must be given the
opportunity to choose between the vesting schedule contained in this Section and
that contained in Section 5.1(b).
ARTICLE X
MISCELLANEOUS
10.1 Non-Guarantee of Employment. Nothing contained herein shall be
construed as a contract of employment between the Employer and any Employee, or
as a right of any Employee to be continued in the employment of the Employer, or
as a limitation of the right of the Employer to discharge any Employee, with or
without cause.
10.2 Non-Alienation of Benefits. The benefits payable hereunder shall not
be assigned or alienated by or on behalf of any Participant or Beneficiary
except to the extent permitted under Sections 401(a)(13) and 414(p) of the Code.
10.3 Facility of Payment. If any Participant or Beneficiary shall be
physically or mentally incapable of receiving or acknowledging receipt of any
payment due under the terms of the Plan, and no legal representative shall have
been appointed for him, the Plan Administrator may direct the Trustee to make
such payment to the person or institution maintaining such Participant or
Beneficiary, and the payment to such person or institution in good faith shall
constitute a valid and complete discharge for such payment.
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<PAGE>
10.4 Exclusive Benefit. This Plan is established for the exclusive benefit
of the Employees of the Employer.
10.5 No Reversion. Except as otherwise expressly permitted hereunder, no
assets of the Plan or the Trust shall ever revert to or be used or enjoyed by
the Employer, nor, prior to the satisfaction of all liabilities under this Plan
to Participants and their Beneficiaries, shall any of the assets of the Plan or
Trust ever be used other than for the benefit of the Employees of the Employer
and their Beneficiaries and defraying reasonable expenses of administering the
Plan.
10.6 Effect of Social Security Benefits. Benefits paid to or on behalf of a
retired or terminated Participant hereunder shall not be reduced or otherwise
affected by increases or other adjustments in Social Security benefits such
Participants may receive.
10.7 Titles. Titles of Articles and Sections are inserted for convenience
only and shall not affect the meaning or construction of the Plan.
10.8 Severability. If any provision of this Plan shall be held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provisions hereof, and this Plan shall be constructed and enforced as if such
provision had not been included herein.
10.9 Applicable Law. This Plan shall be construed in accordance with
Pennsylvania law.
10.10 Initial Qualification. This Plan has been adopted and is based upon
the condition precedent that the Internal Revenue Service issue its
determination that it meets the requirements of the Code and regulations issued
hereunder with respect to qualified plans. Notwithstanding any other provision
herein, if the Internal Revenue Service determines that the Plan does not
initially qualify under the Code, any assets attributable to Employer
contributions which have been made prior to notice of such adverse determination
shall be returned to the Employer, and this Plan shall terminate.
10.11 Plan designation. For purposes of Codess.401(a)(27), this Plan is a
profit sharing plan.
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<PAGE>
IN WITNESS WHEREOF, and as evidence of the adoption of the Plan, the
Employer has caused its duly authorized president to execute this Plan as of
this 28th day of October, 1999.
DONEGAL MUTUAL INSURANCE COMPANY
ATTEST:
/s/ Ralph G. Spontak By: /s/ Donald H. Nikolaus
- ----------------------------- ----------------------------------
Secretary President
[CORPORATE SEAL]
-38-
Amendment No. 1
Donegal Mutual Insurance Company
401(K) Plan ("Plan")
In accordance with Section 8.1 of the Plan, the Plan is hereby amended
effective January 1, 2000 as follows:
1. Section 3.1 is deleted and the following substituted therefor:
"3.1 Employer's Matching Contribution. The Employer shall contribute
annually on behalf of each Participant in the employ of the Employer on the
Anniversary Date an amount equal to the sum of (a) 100% of each Participant's
Elective deferrals for the Plan Year not in excess of 3% of the Participant's
Compensation for the Plan year and (b) 50% of each Participant's Elective
Deferrals in excess of 3% of the Participant's Compensation, but not in excess
of 9% of the Participant's Compensation for the Plan year ("Matching
Contribution"). The requirement that a Participant be employed by the Employer
on the Anniversary Date shall be waived if the employment of the Participant
terminated during the Plan Year because of retirement, disability or death."
2. Paragraph (a) of Section 3.4 is deleted and the following
substituted therefor:
"(a) Each Participant may make an Elective Contribution to the Plan and
to the extent he elects to reduce or forego an increase in his Compensation, the
amount by which his compensation is reduced shall be treated as the
Participant's Elective Contribution and be allocated to that Participant's
elective account. The amount of the Elective Contribution may not be less than
1% nor more than 15% of the Participant's Compensation as elected by the
Participant in units of one (1) percentage point on forms provided by the Plan
Committee, which may limit the amount of the
<PAGE>
Participant's Elective Contribution at any time if it determines that such
limitation is necessary to satisfy the requirement with IRC Section 401(k)."
3. There is added to the Plan at the end of paragraph (b) of Section
4.5 the following:
"Effective January 1, 2000, each Participant shall have the opportunity
to invest all or a portion of the Participant's Account in the common stock of
the Employer. The duties of the Employer and Trustees concerning such investment
and the rights of Participants concerning an investment in the stock of the
Employer are detailed in Section 4.6 below."
4. There is added to the Plan new Section 4.6 reading as follows:
4.6 Investment in Employer Stock.
(a) Definitions.
i. Employer Stock means the common stock of Donegal Group, Inc.,
the parent company of the Employer as traded on the NASDAQ National
Market Exchange.
ii. Custodian means Reliance Trust Company, a Georgia
corporation. Custodian is an "investment manager" as defined in
Section 3(38) of ERISA with respect to Employer Stock.
iii. Record Keeper means TransAmerica. The Record Keeper will
maintain all record of the Participants' accounts with respect to
investments in Employer Stock.
iv. Investment in Employer Stock. A Participant may elect to
invest a portion of the Participant's Elective Contributions and
Employer Matching Contributions made on his behalf in Employer Stock.
Such election shall be made on forms supplied by the Trustees and
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<PAGE>
maintained by the Record Keeper.
(b) Purchase and Sale of Employer Stock.
i. Notwithstanding anything to the contrary contained in this
Plan or the Trust Agreement, the Trustees may direct the Custodian to
purchase shares of Employer Stock upon the receipt by the Custodian of
contributions from the Employees pursuant to a nondiscretionary
purchasing program developed by the Custodian to effect such purchases
in an orderly manner without disruption of the market for such stock.
ii. If a Participant's vested interest in the Participant's
Accounts or a portion thereof is to be distributed on account of the
Participant's retirement, disability, death, termination of
employment, pursuant to a hardship withdrawal, withdrawal of a
rollover contribution or as a result of a qualified domestic relations
order or because of the minimum distribution rules, the Trustees will
direct the Custodian to sell the Participant's shares of Employer
Stock or distribute such stock in kind, at the election of the
Participant or the Participant's designated beneficiary. If the
Participant elects to take a cash distribution, the amount of cash to
be distributed to the Participant attributable to the Participant's
shares of Employer Stock, will be determined on the basis of the price
or the average of the prices realized on the disposition of such
shares on the day or days during the calendar month as may be
designated by the Trustees in a uniform and nondiscriminatory manner.
Notwithstanding the foregoing, the Custodian may net out transactions
internally (so as not to be both a buyer and a seller on the open
market) at the then prevailing market prices as determined by the
Custodian.
(c) Voting of Shares. Notwithstanding anything to the contrary
contained in this Plan or the Trust Agreement, whenever any proxies or consents
are solicited from shareholders, each
3
<PAGE>
Participant (or designated beneficiary in the case of a decease Participant)
whose account contains Employer Stock will have the right to direct the
Trustees, in writing, as to the voting of such shares. The Trustees or the
Custodian will use their best efforts to distribute or cause to be distributed
in a timely manner to each Participant or designated beneficiary a copy of the
proxy solicitation material sent to shareholders, together with a form addressed
to the Trustees or the Custodian containing confidential, written instructions
as to the manner in which said shares will be voted. If the instructions are
sent to the Custodian, the Custodian must communicate the instructions to the
Trustees. Upon receipt of such instructions, the Trustees will vote said shares
as instructed. Shares of Employer Stock as to which the Trustees do not receive
instructions will be voted by the Trustees in the proportion as shares are to be
voted pursuant to the written voting instructions received from all Participants
by the Trustees. Each Participant (or designated beneficiary) will be entitled
to one vote for each full share of Employer Stock allocated to the Participant's
accounts. Fractional shares of Employer Stock will not be permitted to vote.
(d) Valuation. Employer Stock will be valued as of any business day of
each Plan Year based on the published valuation for such stock on the NASDAQ
National Market Exchange. Any dividends received on Employer Stock will be
reinvested and become part of the Participant's Accounts. The Record Keeper will
maintain adequate records of the cost basis of Employer Stock for each
Participant's account. The Record Keeper may time to time modify its accounting
procedures to achieve equitable and nondiscriminatory allocations among
Participants" Matching Contributions Account in accordance with the provisions
of this Plan and requirements of law.
(e) Named Fiduciary Status\Confidentiality. Each Participant or
designated beneficiary shall be deemed to be a named fiduciary within the
meaning of Section 402(a) of ERISA
4
<PAGE>
with respect to the voting of the shares of Employer Stock as to which such
Participant or designated beneficiary has the right of direction. Directions
received from Participants or designated beneficiaries by the Trustees or the
Custodian shall be held in strict confidence and shall not be divulged or
released to any person, including employees, officers or directors of the
Employer, provided, however, that to the extent necessary for the operation of
the Plan, such directions may be relayed by the Trustees to the Record Keeper or
auditor for the Plan, which Record Keeper or Auditors is not the Employer and
agrees not to divulge such directions to any other person including employees,
officers or directors of the Employer."
5. There is added to the Plan new ARTICLE XI reading as follows:
"ARTICLE XI. Money Purchase Pension Plan Account.
Section 11.1. General. This Article applies only to those employees who
were participants in DMIC Money Purchase Pension Plan and who had accounts in
that Plan on December 31, 1999. This Articles does not apply to any other
Employee or Participant.
Section 11.2. Money Purchase Pension Benefit. For purposes of this
Plan, the term "Money Purchase Pension Benefit" means the account balance of the
Participant in the Money Purchase Pension Plan as of December 31, 1999. As
provided by amendment to that Plan, all such accounts are fully vested in the
Participants and under no circumstances may any forfeitures arise with respect
to those accounts.
Section 11.3. Participants' Accounts. Under all circumstances a
Participant's Account shall be treated as a segregated investment individually
directed by the Participant and shall be adjusted for only the income or loss
realized with respect to each such Account.
Section 11.4. Determination and Distribution of Benefits. The
provisions of ARTICLES VI
5
<PAGE>
and VII of the Money Purchase Pension Plan as in effect on December 31, 1999 are
hereby incorporated by reference and for convenience set forth in full in
Appendix "A" to the Plan. The provisions of these Articles will apply to the
determination and distribution of a Participant's Money Purchase Pension
Benefit. Otherwise, the provisions of this Plan shall govern with respect to a
Participant's Money Purchase Pension Benefit.
6. There is added to the Plan new ARTICLE XII reading as follows:
"ARTICLE XII. Profit Sharing Plan.
Section 12.1. General. This Article applies only to those employees who
were participants in the DMIC Profit Sharing Plan and who had accounts in that
Plan on December 31, 1999. This Articles does not apply to any other Employee or
Participant.
Section 12.2. Profit Sharing Plan. For purposes of this Plan, the term
"Profit Sharing Benefit" means the account balance of the Participant in the
Profit Sharing Pension Plan as of December 31, 1999. As provided by amendment to
that Plan, all such accounts are fully vested in the Participants and under no
circumstances may any forfeitures arise with respect to those accounts.
Section 12.3. Participants' Accounts. Under all circumstances a
Participant's Account shall be treated as a segregated investment individually
directed by the Participant and shall be adjusted for only the income or loss
realized with respect to each such Account.
Section 12.4. Determination and Distribution of Benefits. The
provisions of ARTICLES VI and VII of the Profit Sharing Plan as in effect on
December 31, 1999 are hereby incorporated by reference and for convenience set
forth in full in Appendix "B" to the Plan. The provisions of these Articles will
apply to the determination and distribution of a Participant's Profit Sharing
Benefit. Otherwise, the provisions of this Plan shall govern with respect to a
Participant's Profit Sharing
6
<PAGE>
Benefit.
IN WITNESS WHEREOF and as evidence of the adoption of this amendment,
Donegal Mutual Insurance Company has caused its duly authorized officers to
execute this document on its behalf and under its seal as of this 6th day
January, 2000.
Donegal Mutual Insurance Company
ATTEST:
/s/ Ralph G. Spontak By: /s/ Donald H. Nikolaus
- --------------------------- -----------------------------
Ralph G. Spontak, Secretary Donald H. Nikolaus, President
(Corporate Seal)
INTEREST AND LIABILITIES CONTRACT
to
RETROCESSIONAL REINSURANCE CONTRACT
between
SOUTHERN HERITAGE INSURANCE COMPANY
DULUTH, GEORGIA
and
DONEGAL MUTUAL INSURANCE COMPANY
It is hereby agreed by and between Southern Heritage Insurance Company (Southern
Heritage), Duluth, Georgia, and Donegal Mutual Insurance Company (Donegal) that
Donegal will assume and retrocede a 100% share and Southern Heritage will assume
a 100% share of the retrocession of the Interests and Liabilities as set forth
in the attached Retrocessional Reinsurance Agreement effective January 1, 2000
until terminated.
This Contract made and executed in duplicate this 10th day of March, 2000
SOUTHERN HERITAGE INSURANCE COMPANY
/s/ Ralph G. Spontak
- -------------------------------------------
RALPH G. SPONTAK, SECRETARY
DONEGAL MUTUAL INSURANCE COMPANY
/s/ Donald H. Nikolaus
- -------------------------------------------
DONALD H. NIKOLAUS, PRESIDENT
<PAGE>
REINSURANCE AND RETROCESSION AGREEMENT
between
SOUTHERN HERITAGE INSURANCE COMPANY
DULUTH, GEORGIA
and
DONEGAL MUTUAL INSURANCE COMPANY
Article 1 Business Covered
This Agreement, subject to the terms and conditions herein contained, is for
Donegal Mutual Insurance Company (Donegal) to indemnify Southern Heritage
Insurance Company (Southern Heritage), Duluth, Georgia, in respect of the net
liability as herein provided and specified which may accrue to Southern Heritage
as a result of any loss or losses which may occur during the term of this
Agreement under any and all binders, policies, and contracts of insurance or
reinsurance (hereinafter referred to as "policy" or "policies") heretofore or
hereafter issued or entered into by or on behalf of Southern Heritage and for
Donegal to retrocede the net liability back to Southern Heritage and Southern
Heritage to assume the net liability back from Donegal as part of the
retrocession.
Article 2 Territory
This Agreement shall cover wherever Southern Heritage's policies cover.
Article 3 Exclusions
This Agreement shall not cover:
A. Business classified by the Reinsured as:
(1) Overhead transmission and distribution lines and their supporting
structures other than those on or within 150 meters (or 500 feet) of
the insured premises. It is understood and agreed that public
utilities extension and/or suppliers extension and/or contingent
business interruption coverage are not subject to this exclusion
provided that these are not part of a transmitter's or distributor's
policy.
2
<PAGE>
(2) Pools, Associations, or Syndicates, including State Insurance Guaranty
Associations. However, such operations which Southern Heritage is
obliged to cover by reason of membership or participation in any
Automobile Assigned Risk Pool, Plan or Facility, any FAIR Plan, or any
Coastal Pool are not to be excluded. Furthermore, this exclusion shall
not apply to any Inter-Company Pooling.
(3) Insurance on Growing and/or Standing Crops.
(4) Reinsurance of any kind assumed by the Reinsured, except local agency
reinsurance accepted in the normal course of business.
(5) Bridges, tunnels and art collections valued at over $150,000,000.
(6) Aviation.
(7) Insolvency Funds, as per clause attached.
(8) Flood, when written as such.
B. Extra Contractual Obligations and Loss in Excess of Original Policy Limits
- Extra Contractual Obligations" are defined as those liabilities not
covered under any other provision of this Agreement and which arise from
the handling of any claim on business covered hereunder, such liabilities
arising because of, but not limited to, the following: failure by Southern
Heritage to settle within the policy limit, or by reason of alleged or
actual negligence, fraud or bad faith in rejecting an offer of settlement
or in the preparation of the defense or in the trial of any action against
its Insured or Reinsured or in the preparation or prosecution of an appeal
consequent upon such action.
The term "Loss in Excess of Original Policy Limits" shall mean a net loss
of Southern Heritage which is in excess of the limit of its original
policy, such loss in excess of the limit having been incurred because of
the following: failure by Southern Heritage to settle within the policy
limit or by reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer or settlement or in the preparation of the defense or in
the trial of any action against its Insured or Reinsured or in the
preparation or prosecution of an appeal
3
<PAGE>
consequent upon such action.
C. Fidelity, Surety, Credit, Title, Insolvency and Financial Guaranty.
D. Loss or Liability excluded by the provisions of the Nuclear Incident
Exclusion Clause - Physical Damage Reinsurance, as per clause attached
hereto.
E. War, as defined in the original policy.
F. Ocean Marine
Article 4 Term
This Agreement shall become effective on January 1, 2000 at 12:01 A. M.
Standard Time. It is unlimited as to its duration and may be terminated by
either party upon giving ninety (90) days notice of cancellation in writing. In
the event either party terminates in accordance with the above, it is understood
that all transactions coming within the terms of this Agreement will continue in
effect within the said ninety (90) days and that losses well be included within
the contract on a cut-off basis (losses with dates of loss within the contract
period only will be included).
Article 5 Definition of Loss Occurrence
The term "Loss Occurrence" shall mean any one occurrence or series of
occurrences arising out of one event.
Article 6 Net Retained Lines
This Agreement applies only to that portion of any insurance or reinsurance
covered by this Agreement which Southern Heritage retains net for its own
account, and in calculating the amount of any loss hereunder and also in
computing the amount in excess of which this Agreement attaches, only loss or
losses in respect of that portion of any insurance or reinsurance which Southern
Heritage retains net for its own account shall be included. It being understood
and agreed that the amount of Donegal's liability hereunder in respect of any
loss or losses shall not be increased by reason of the inability of the Southern
Heritage to collect from any other reinsurers whether specific or general any
amounts which may have become due from them whether such inability arises from
the insolvency of such other reinsurer or otherwise.
Article 7 Ultimate Net Loss Incurred
The term "Ultimate Net Loss Incurred" shall be understood to
4
<PAGE>
mean the actual loss or losses incurred or to be incurred by Southern Heritage
under its policies, such loss or losses to include expenses of litigation, if
any, interest accrued where such interest is part of the judgement and all other
loss expenses of Southern Heritage including legal expenses and costs incurred
in connection with coverage and validity questions and legal actions connected
thereto which are allocable only to a specific claim or action on policies
covered hereunder less proper deductions for all recoveries (including amounts
recoverable under other reinsurance) and salvages actually made by the Southern
Heritage; provided always that nothing in this Article shall be construed to
mean that losses under this Agreement are not recoverable until Southern
Heritage's ultimate net loss has been ascertained.
All salvages, recoveries and payments recovered or received subsequent to a loss
settlement under this Agreement shall be applied as if recovered or received
prior to the said settlement and all necessary adjustments shall be made by the
parties hereto.
Article 8 Ceding and Retroceding Net Loss
A. As of the effective date and time of this agreement Southern Heritage will
cede and Donegal will accept 100% of Southern Heritage's Net Liability for
losses. Net Liability for losses includes case basis reserves and reserves
for allocated loss adjusting retained for Southern Heritage's own account
in accordance with Article 6. Thereafter Southern Heritage will cede and
Donegal will accept 100% of Southern Heritage's Net Losses Incurred, Net
losses incurred include losses and allocated loss adjusting expense
incurred in accordance with Article 6.
B. As of the effective date and time of this agreement Donegal will retrocede
and Southern Heritage will accept 100% of the net liability for losses
Donegal assumed from Southern Heritage and, thereafter, Donegal will
retrocede 100% of the Net Incurred Losses it assumed from Southern Heritage
including allocated loss adjusting expenses incurred.
Article 9 Rate and Premium
Southern Heritage shall pay to Donegal and Donegal will retrocede to Southern
Heritage during the term of this Agreement Net Earned Premium Income of Southern
Heritage during such term in respect of business the subject matter of this
Agreement.
5
<PAGE>
The term "Net Earned Premium Income" as used herein shall be understood to mean
gross premiums earned by Southern Heritage less premiums for reinsurance which
inure to the benefit of this Agreement.
All premiums and losses paid under this Agreement shall be made in United States
currency.
Article 10 Access to Records
Southern Heritage and Donegal, by their duly appointed representatives, shall
have the right at any reasonable time, to examine all papers in the possession
of the other referring to business effected hereunder.
Article 11 Errors and Omissions
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made. Such delay, omission or error shall
be rectified immediately upon discovery.
Article 12 Rate and Premium
As a precedent to any right of action hereunder, if any dispute shall arise
between Southern Heritage and Donegal with reference to the interpretation of
this Agreement or their rights with respect to any transaction involved, whether
such dispute arises before or after termination of this Agreement, such dispute
upon the written request of either party, shall be submitted to three
arbitrators, one to be chosen by each party, and the third by the two so chosen.
If either party refuses or neglects to appoint an arbitrator within thirty days
after the receipt of written notice from the other party requesting it to do so,
the requesting party may appoint two arbitrators. If the two arbitrators fail to
agree in the selection of a third arbitrator within thirty days of their
appointment, each of them shall name two, of whom the other shall decline one
and the decision shall be made by drawing lots. All arbitrators shall be
disinterested active or retired executive officers of insurance or reinsurance
companies or Underwriters at Lloyd's, London not under the control of either
party to this Agreement.
The Arbitrators shall interpret the Agreement and make their decision with
regard to the custom and usage of the insurance and reinsurance business. They
shall issue their decision in writing based upon a hearing in which evidence may
be introduced without following strict rules of evidence, but in
6
<PAGE>
which cross examination and rebuttal shall be allowed. They shall make their
award with a view to effecting the general purpose of this Agreement in a
reasonable manner rather than in accordance with a literal interpretation of the
language.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered upon
the final decision of the arbitrators in any court having jurisdiction. Each
party shall bear the expense of its own arbitrator and shall jointly and equally
bear with the other party the expense of the third arbitrator and of the
arbitration. Said arbitration shall take place in the state of Georgia.
Article 13 Insolvency Funds Exclusion Clause
This Agreement excludes all liability of Southern Heritage arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed; which provides for
any assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee, or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligation in whole or in part.
The term of this exclusion shall not operate so as to result in a diminution of
the subscribing Reinsurer's obligation to the Company under policy obligations
subject to cessions under this Agreement.
Article 14 Reporting and Settlement
Southern Heritage shall provide to the reinsurer, no less frequently than at the
end of each quarter, the necessary reports needed to document the calculation of
premiums and losses ceded under this agreement. Net amounts due under this
contract must be remitted within 15 days from the issuance of said reports.
Article 15 Insolvency
In the event of the insolvency of the Reinsured, this reinsurance shall be
payable directly to the reinsured, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Reinsured without
diminution because of the insolvency of the Reinsured or because the liquidator,
receiver, conservator or statutory successor of the Reinsured has failed to pay
all or a portion of any claim. It is agreed, however that the liquidator,
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receiver, conservator or statutory successor of the Reinsured shall give written
notice to the Reinsurer of the pendency of a claim against the Reinsured
indicating the policy or bond reinsured which claim would involve a possible
liability on the part of the Reinsurer within a reasonable time after such claim
is filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may investigate such
claim and interpose, at their own expense, in the proceeding where such claim is
to be adjudicated any defense or defenses that they may deem available to the
Reinsured or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable subject to the
approval of the court, against the Reinsured as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Reinsured solely as a result of the defense undertaken
by the Reinsurer.
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PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
between
SOUTHERN HERITAGE INSURANCE COMPANY
Duluth, Georgia
(hereinafter collectively called the "Reinsured")
and
The Reinsurers subscribing to the respective
Interests and Liabilities Contract to which
this Agreement is attached (hereinafter called
the "Reinsurer")
ARTICLE 1 BUSINESS COVERED
This Agreement, subject to the terms and conditions herein contained, is to
indemnify the Reinsured in respect of the net excess liability as herein
provided and specified which may accrue to the Reinsured as a result of any loss
or losses which may occur during the term of this Agreement under any and all
binders, policies, and contracts of insurance or reinsurance (hereinafter
referred to as "policy" or "policies") heretofore or hereafter issued or entered
into by or on behalf of the Reinsured and classified by the Reinsured as
Property, including the property portion of Multi-Peril and Automobile policies.
ARTICLE 2 TERRITORY
This Agreement shall cover wherever the Reinsured's policies cover.
ARTICLE 3 EXCLUSIONS
This Agreement shall not cover:
A. Business classified by the Reinsured as:
(1) Overhead transmission and distribution lines and their supporting structures
other than those on or within 150 meters (or 500 feet) of the insured premises.
It is understood and agreed that public utilities extension and/or suppliers
extension and/or contingent business interruption coverages are not
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subject to this exclusion provided that these are not part of a transmitter's or
distributor's policy.
(2) Pools, Associations, or Syndicates, including State Insurance Guaranty
Associations. However, such operations which the Reinsured is obliged to cover
by reason of membership or participation in any Automobile Assigned Risk Pool,
Plan or Facility, any FAIR Plan, or any Coastal Pool are not to be excluded.
Furthermore, this exclusion shall not apply to any Inter-Company Pooling.
(3) Insurance on Growing and/or Standing Crops.
(4) Reinsurance of any kind assumed by the Reinsured, except local agency
reinsurance accepted in the normal course of business.
(5) Bridges, tunnels and art collections valued at over $150,000,000.
(6) Aviation.
(7) Insolvency Funds, as per clause attached.
(8) Flood, when written as such.
B. Extra Contractual Obligations and Loss in Excess of Original Policy Limits -
"Extra Contractual Obligations" are defined as those liabilities not covered
under any other provision of this Agreement and which arise from the handling of
any claim on business covered hereunder, such liabilities arising because of,
but not limited to, the following: failure by the Reinsured to settle within the
policy limit, or by reason of alleged or actual negligence, fraud or bad faith
in rejecting an offer of settlement or in the preparation of the defense or in
the trial of any action against its Insured or Reinsured or in the preparation
or prosecution of an appeal consequent upon such action.
The term "Loss in Excess of Original Policy Limits" shall mean a net loss of the
Reinsured which is in excess of the limit of its original policy, such loss in
excess of the limit having been incurred because of the following: failure by
the Reinsured to settle within the policy limit or by reason of alleged or
actual negligence, fraud or bad faith in rejecting an offer or settlement or in
the preparation of the defense or in the trial of any action against its Insured
or Reinsured or in the preparation or prosecution of an appeal consequent upon
such action.
C. Fidelity, Surety, Credit, Title, Insolvency and Financial Guaranty.
D. Loss or Liability excluded by the provisions of the Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance, as per clause attached hereto.
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E. War, as defined in the original policy.
F. Ocean Marine
G. Loss/or Damage/or Costs/or Expenses arising from Seepage and/or Pollution
and/or Contamination, other than Contamination from Smoke Damage. Nevertheless,
this exclusion does not preclude any payment of the cost of the removal of
debris of property damaged by a loss otherwise covered hereunder, but subject
always to a limit of 25% of the Reinsured's Property loss under the original
policy.
ARTICLE 4 TERM
This Agreement shall become effective January 1, 2000 and the Reinsurer shall be
liable for all losses occurring during the term of this Agreement.
If this Agreement shall terminate while a loss covered hereunder is in progress,
subject to the other conditions of this Agreement, the Reinsurer shall indemnify
the Reinsured as if the entire loss had occurred during the time this Agreement
is in force, provided the loss covered hereunder started before the time of
termination.
ARTICLE 5 DEFINITION OF LOSS OCCURRENCE
The term "Loss Occurrence" shall mean the sum of all individual losses
occasioned by any one disaster, accident or loss or series of disasters,
accidents or losses arising out of one event which occurs within the area of one
state of the United States or province of Canada and states or provinces
contiguous thereto and to one another. However, the duration and extent of any
one "Loss Occurrence" shall be limited to all individual losses sustained by the
Reinsured occurring during any period of 168 consecutive hours arising out of
and directly occasioned by the same event except that the term "Loss Occurrence"
shall be further defined as follows:
i) As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing
collapse and water damage, all individual losses sustained by the Reinsured
occurring during any period of 72 consecutive hours and arising out of and
directly occasioned by the same event. However, the event need not be limited to
one state or province or states or provinces contiguous thereto.
ii) As regards riot, riot attending a strike, civil commotion, vandalism and
malicious mischief, all individual losses sustained by the Reinsured occurring
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during any period of 72 consecutive hours within the area of one municipality or
county and the municipalities or counties contiguous thereto arising out of and
directly occasioned by the same event. The maximum duration of 72 consecutive
hours may be extended in respect of individual losses which occur beyond such 72
consecutive hours during the continued occupation of an assured's premises by
strikers, provided such occupation commenced during the aforesaid period.
iii) As regards earthquake (the epicenter of which need not necessarily be
within the territorial confines referred to in the opening paragraph of this
article) and fire following directly occasioned by the earthquake, only those
individual fire losses which commence during the period of 168 consecutive hours
may be included in the Reinsured's "Loss Occurrence".
iv) As regards "Freeze", only individual losses directly occasioned by collapse,
breakage of glass and water damage (caused by bursting of frozen pipes and
tanks) may be included in the Reinsured's "Loss Occurrence".
Except for those "Loss Occurrences" referred to in (i) and (ii) the Reinsured
may choose the date and time when any such period of consecutive hours commences
provided that it is not earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the Reinsured arising out of that
disaster, accident or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event.
However, as respects those "Loss Occurrences" referred to in (i) and (ii), if
the disaster, accident or loss occasioned by the event is of greater duration
than 72 consecutive hours, then the Reinsured may divide that disaster, accident
or loss into two or more "Loss Occurrences" provided no two periods overlap and
no individual loss is included in more than one such period and provided that no
period commences earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the Reinsured arising out of that
disaster, accident or loss.
No individual losses occasioned by an event that would be covered by 72 hours
clauses may be included in any "Loss Occurrence" claimed under the 168 hours
provision.
ARTICLE 6 NET RETAINED LINES
This Agreement applies only to that portion of any insurance or reinsurance
covered by this Agreement which the Reinsured retains net for its own account,
and in calculating the amount of any loss hereunder and also in computing the
amount in excess of which this Agreement attaches, only loss or losses in
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respect of that portion of any insurance or reinsurance which the Reinsured
retains net for its own account shall be included, it being understood and
agreed that the amount of the Reinsurer's liability hereunder in respect of any
loss or losses shall not be increased by reason of the inability of the
Reinsured to collect from any other reinsurers, whether specific or general any
amounts which may have become due from them whether such inability arises from
the insolvency of such other reinsurers or otherwise.
It is understood that any Inter-Company Pooling shall be disregarded hereunder
when determining the net retained lines.
ARTICLE 7 ULTIMATE NET LOSS
The term "Ultimate Net Loss" shall be understood to mean the actual loss or
losses paid or to be paid by the Reinsured under its policies, such loss or
losses to include expenses of litigation, if any, interest accrued where such
interest is part of the judgement and all other loss expenses of the Reinsured
including legal expenses and costs incurred in connection with coverage and
validity questions and legal actions connected thereto which are allocable only
to a specific claim or action on policies covered hereunder (including a pro
rata share of salaries and expenses of the Reinsured's field employees while
adjusting such claims or losses and expenses of the Reinsured's officials
incurred in connection with claims or losses, but no salaries of the Reinsured's
officials or any normal overhead charges such as rent, postal, lighting,
cleaning, heating, etc., shall be included) less proper deductions for all
recoveries (including amounts recoverable under other reinsurance except
reinsurance, if any, inuring to the benefit of the Reinsured) and salvages
actually made by the Reinsured; provided always that nothing in this Article
shall be construed to mean that losses under this Agreement are not recoverable
until the Reinsured's ultimate net loss has been ascertained.
All salvages, recoveries and payments recovered or received subsequent to a loss
settlement under this Agreement shall be applied as if recovered or received
prior to the said settlement and all necessary adjustments shall be made by the
parties hereto.
ARTICLE 8 LIMIT AND RETENTION
No claim shall be made upon the Reinsurer unless and until the Reinsured shall
have first sustained an ultimate net loss in excess of $400,000 each and every
loss occurrence and then the Reinsurer shall be liable for the ultimate net loss
sustained by the Reinsured in excess of $400,000 in respect of each such loss
occurrence. The limit of liability of the Reinsurer in respect of any one such
loss
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occurrence shall be $2,600,000.
It is further warranted that the Reinsurer shall not be liable hereunder until
two or more risks are involved in any one loss occurrence. The Reinsured shall
be the sole judge of what constitutes one risk.
ARTICLE 9 RATE AND PREMIUM
The Reinsured shall pay to the Reinsurer during the term of this Agreement
premium calculated by applying a rate of 3.00% to the Gross Net Earned Premium
Income of the Reinsured during such term in respect of business the subject
matter of this Agreement.
The term "Gross Net Earned Premium Income" as used herein shall be understood to
mean gross premiums earned by the Reinsured less premiums paid for reinsurances
which inure to the benefit of this Agreement. For purposes hereof, 90% of the
Reinsured's original premium in respect of Homeowners and Farmowners and 80% in
respect of Commercial Multiple Peril Policies, where the premium is indivisible,
shall be considered subject matter premium.
As soon as practicable after each year, the Reinsured shall submit a statement
showing the actual premium due for the term calculated in accordance with the
first paragraph of this Article, and the debtor party shall remit to the other.
ARTICLE 10 CURRENCY
All premiums and losses paid under this Agreement shall be made in United States
currency.
ARTICLE 11 NOTICE OF LOSS AND LOSS SETTLEMENTS
In the event of a loss occurrence which either results in or appears to be of
serious enough nature as probably to result in a loss involving this Agreement,
the Reinsured shall give notice as soon as reasonably practicable to the
Reinsurer and the Reinsured shall keep the Reinsurer advised of all subsequent
developments in connection therewith.
The Reinsurer agrees to abide by the loss settlements of the Reinsured, such
settlements to be considered as satisfactory proof of loss, and amounts falling
to the share of the Reinsurer shall be immediately payable to the Reinsured by
them upon reasonable evidence of the amount paid or to be paid by the Reinsured.
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ARTICLE 12 ACCESS TO RECORDS
The Reinsurer, by its duly appointed representatives, shall have the right at
any reasonable time, to examine all papers in the possession of the Reinsured
referring to business effected hereunder.
ARTICLE 13 STATISTICS
The Reinsured shall furnish the Reinsurer such quarterly and annual statistics
as may be necessary to comply with statutory requirements and in such form as
may be mutually agreed upon.
ARTICLE 14 ERRORS AND OMISSIONS
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made. Such delay, omission or error shall
be rectified immediately upon discovery.
ARTICLE 15 TAXES
In consideration of the terms under which this Agreement is issued, the
Reinsured undertakes not to claim any deduction in respect of the premium hereon
when making tax returns other than Income or Profits Tax returns to any State or
Territory or the District of Columbia.
ARTICLE 16 FEDERAL EXCISE TAX
(Applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside
the United States of America.)
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax the percentage specified by United States law of the premium payable hereon
to the extent such premium is subject to Federal Excise Tax.
In the event of any return of premium becoming due hereunder the Reinsurer will
deduct the percentage specified by United States law from the amount of the
return and the Reinsured or its agent should take steps to recover the Tax from
the U.S. Government.
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ARTICLE 17 LOSS RESERVES
(This Clause is applicable to any Reinsurer who does not qualify for credit by
states having jurisdiction over the Reinsured.)
At annual intervals (or more frequently as determined by the Reinsured, but not
more frequently than quarterly) the Reinsured will submit to the Reinsurer a
statement showing the proportion of losses, as defined below, applicable to the
Reinsurer.
The Reinsurer will apply for, and secure delivery thereof to the Reinsured, a
clean, irrevocable and unconditional Letter of Credit in an amount equal to the
Reinsurer's share of said losses. The Letter of Credit shall be issued by a
United States bank which is a member of the Federal Reserve System and which is
acceptable to the Insurance Departments of such states.
If, as of a statement date, the Reinsurer's share of losses under this Agreement
shall exceed the then available balance of the Letter of Credit, the Reinsurer
shall, within thirty (30) days after receiving such statement, secure delivery
to the Reinsured of an amendment to the clean, irrevocable and unconditional
Letter of Credit increasing the balance of the Letter of Credit available by the
amount of such difference.
If the Reinsurer's share of losses under this Agreement shall be less than the
then available balance of the Letter of Credit, the Reinsured shall, within
thirty (30) days after receipt of written request of Reinsurer, release such
excess amount by agreeing to consent to an amendment to the Letter of Credit
reducing the balance of the Letter of Credit available by the amount of such
excess.The Reinsured undertakes to use and apply any amounts which it may draw
upon the Letter of Credit, without diminution because of the insolvency of the
Reinsured or Reinsurer, notwithstanding any other provision in this contract,
only for one or more of the following purposes:
(1) To pay or reimburse itself for the Reinsurer's share of losses paid by the
Reinsured for which the Reinsurer is obligated to reimburse the Reinsured, if
not otherwise paid by the Reinsurer.
(2) To obtain a cash deposit of the Reinsurer's share under this contract of
losses, if the clean, irrevocable and unconditional Letter of Credit is not
renewed at least thirty (30) days before the expiration thereof, and the
Reinsurer shall continue thereafter to have a share in such losses.
(3) To pay any other amounts the Reinsured claims are due under this reinsurance
contract.
The Reinsured will immediately return to the Reinsurer any amounts drawn down
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on the Letter of Credit that are subsequently determined not to be due.
The term "losses" as used in this Article shall include:
losses and allocated loss adjustment expenses paid by the Reinsured but not
recovered (in proportion) from the Reinsurer,
reserves for losses reported and outstanding, and allocated loss adjustment
expenses.
ARTICLE 18 ARBITRATION
As a precedent to any right of action hereunder, if any dispute shall arise
between the Reinsured and the Reinsurer with reference to the interpretation of
this Agreement or their rights with respect to any transaction involved, whether
such dispute arises before or after termination of this Agreement, such dispute
upon the written request of either party, shall be submitted to three
arbitrators, one to be chosen by each party, and the third by the two so chosen.
If either party refuses or neglects to appoint an arbitrator within thirty days
after the receipt of written notice from the other party requesting it to do so,
the requesting party may appoint two arbitrators. If the two arbitrators fail to
agree in the selection of a third arbitrator within thirty days of their
appointment, each of them shall name two, of whom the other shall decline one
and the decision shall be made by drawing lots. All arbitrators shall be
disinterested active or retired executive officers of insurance or reinsurance
companies or Underwriters at Lloyd's, London not under the control of either
party to this Agreement.
The Arbitrators shall interpret the Agreement and make their decision with
regard to the custom and usage of the insurance and reinsurance business. They
shall issue their decision in writing based upon a hearing in which evidence may
be introduced without following strict rules of evidence, but in which cross
examination and rebuttal shall be allowed. They shall make their award with a
view to effecting the general purpose of this Agreement in a reasonable manner
rather than in accordance with a literal interpretation of the language.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered upon
the final decision of the arbitrators in any court having jurisdiction. Each
party shall bear the expense of its own arbitrator and shall jointly and equally
bear with the other party the expense of the third arbitrator and of the
arbitration. Said arbitration shall take place in Marietta, Pennsylvania unless
some other place is mutually agreed upon by the Reinsured and the Reinsurer.
ARTICLE 19 WRITTEN AGREEMENT
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There are no other agreements between the Reinsurer and the Reinsured regarding
the reinsurance provided by this Agreement, including but not limited to
agreements which directly or indirectly guarantee a profit under this Agreement
for either party.
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INSOLVENCY FUNDS EXCLUSION CLAUSE
This Agreement excludes all liability of the Company arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed; which provides for
any assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee, or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligation in whole or in part.
NOTES: Wherever used herein the terms:
"Company" shall be understood to mean "Company", "Reinsured", "Reassured" or
whatever other term is used in the attached reinsurance contract to designate
the reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract", "Policy" or
whatever other term is used to designate the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers", "Underwriters" or
whatever other term is used in the attached reinsurance contract to designate
the reinsurer or reinsurers.
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NUCLEAR INCIDENT EXCLUSION CLAUSE -
PHYSICAL DAMAGE - REINSURANCE
1. This Reinsurance does not cover any loss or liability accruing to the
Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of this Clause,
this Reinsurance does not cover any loss or liability accruing to the Reinsured,
directly or indirectly and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary property on the site,
or
II. Any other nuclear reactor installation, including laboratories handling
radioactive materials in connection with reactor installations, and "critical
facilities" as such, or
III. Installations for fabricating complete fuel elements or for processing
substantial quantities of "special nuclear material", and for reprocessing,
salvaging, chemically separating, storing or disposing of "spent" nuclear fuel
or waste materials, or
IV. Installations other than those listed in paragraph (2) III above using
substantial quantities of radioactive isotopes or other products of nuclear
fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate
(a) where Reinsured does not have knowledge of such nuclear reactor power plant
or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for damage to
property caused by or resulting from radioactive contamination, however caused.
However on and after 1st January 1960 this sub-paragraph (b) shall only apply
provided the said radioactive contamination exclusion provision has been
approved by the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2) and (3)
hereof, this Reinsurance does not cover any loss or liability by radioactive
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contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not extend to risks using
radioactive isotopes in any form where the nuclear exposure is not considered by
the Reinsured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954, or by any law amendatory thereof.
7. Reinsured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
NOTE: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that
(a) all policies issued by the Reinsured on or before 31st December 1957 shall
be free from the application of the other provisions of this Clause until expiry
date or 31st December 1960 whichever first occurs whereupon all the provisions
of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the Reinsured
on or before 31st December 1958 shall be free from the application of the other
provisions of this Clause until expiry date or 31st December 1960 whichever
first occurs whereupon all the provisions of this Clause shall apply.
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INDEX
CLAUSE ARTICLE
BUSINESS COVERED .................................... 1
TERRITORY ........................................... 2
EXCLUSIONS .......................................... 3
TERM ................................................ 4
DEFINITION OF LOSS OCCURRENCE ....................... 5
NET RETAINED LINES .................................. 6
ULTIMATE NET LOSS ................................... 7
LIMIT AND RETENTION ................................. 8
RATE AND PREMIUM .................................... 9
CURRENCY ............................................ 10
NOTICE OF LOSS AND LOSS SETTLEMENTS ................. 11
ACCESS TO RECORDS ................................... 12
STATISTICS .......................................... 13
ERRORS AND OMISSIONS ................................ 14
TAXES ............................................... 15
FEDERAL EXCISE TAX .................................. 16
LOSS RESERVES ....................................... 17
ARBITRATION ......................................... 18
WRITTEN AGREEMENT ................................... 19
FIRST AMENDMENT AND WAIVER
TO THE
AMENDED AND RESTATED CREDIT AGREEMENT
DONEGAL GROUP INC.
Dated as of December 31, 1999
This FIRST AMENDMENT AND WAIVER TO THE AMENDED AND RESTATED CREDIT
AGREEMENT dated as of December 31, 1999 (the "First Amendment") is between
DONEGAL GROUP INC., (the "Borrower"); the Banks and other financial institutions
that have executed the signature pages hereto (together with their successors
and assigns, individually, a "Bank" and collectively, the "Banks"); and FLEET
NATIONAL BANK, as Agent for the Banks (in such capacity, together with its
successors in such capacity, the "Agent").
The Borrower and the Banks entered into an Amended and Restated Credit
Agreement dated as of July 27, 1998 (the "Credit Agreement"). The Borrower and
the Banks wish to amend the Credit Agreement, to amend, among other things,
certain financial covenants and to waive a default with respect to Borrower's
failure to comply with Section 6.11 of the Credit Agreement. Capitalized terms
used herein but not defined shall have the meanings assigned to them in the
Credit Agreement. Accordingly, the Borrower and the Banks agree as follows:
Section 1. Amendments to the Credit Agreement. Effective as of the
effective date hereof and subject to the satisfaction of the conditions
precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended
as follows:
(a) Section 6.10 (Minimum Statutory Surplus of Insurance Subsidiaries) of
the Credit Agreement is deleted in its entirety and replaced with the following:
"Section 6.10. Minimum Statutory Surplus of Insurance Subsidiaries. As of
the end of any fiscal quarter, permit the Combined Statutory Surplus to be
less than an amount equal to the sum of (a) $85,000,000 plus (b) 50% of any
cumulative positive Combined Statutory Net Income, after dividends to the
Borrower, for each fiscal quarter, commencing with the quarter ended
December 31, 1999, plus (c) any contributions to surplus made by the
Borrower to any Insurance Subsidiary, from Revolving Loans, during each
fiscal quarter, commencing with the quarter ended December 31, 1999, plus
(d) 50% of any contributions to surplus made by the Borrower to any
Insurance Subsidiary, other than from Revolving Loans, during each fiscal
quarter, commencing with the quarter ended December 31, 1999."
(b) Section 6.11 (Minimum Statutory Surplus of Donegal Mutual) of the
Credit Agreement is deleted in its entirety and replaced with the following:
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"Section 6.11. Minimum Statutory Surplus of Donegal Mutual. As of the end
of any fiscal quarter, permit the Statutory Surplus of Donegal Mutual to be
less than an amount equal to the sum of (a) $50,000,000 plus (b) 50% of any
cumulative positive Statutory Net Income of Donegal Mutual for each fiscal
quarter, commencing with the fiscal quarter ended December 31, 1999."
Section 2. Waivers. The Banks waive any Event of Default which would result
from the Borrower's failure to comply with that certain financial covenant under
Section 6.11 of the Credit Agreement as of the fiscal quarter ended September
30, 1999. The foregoing waiver is effective only for said Event of Default and
shall not entitle Borrower to any future waiver in similar or other
circumstances.
Section 3. Conditions of Effectiveness. This First Amendment shall become
effective as of December 31, 1999 when, and only when, the Banks shall have
received a counterpart of this First Amendment duly executed by the Borrower and
the payment of an amendment fee (in immediately available funds) as follows: (a)
Fleet National Bank, $25,000; and (b) Credit Lyonnais New York Branch, $15,000.
Section 4. Representations and Warranties of the Borrower. Borrower
represents as follows:
(a) The execution, delivery and performance by the Borrower of this First
Amendment is within Borrower's corporate powers, have been duly authorized by
all necessary corporate action and does not and will not (a) require any consent
or approval of the shareholders of Borrower; (b) contravene Borrower's charter
or by-laws; (c) violate any provision of, or require any filing, registration,
consent or approval under, any law, rule, regulation (including without
limitation, Regulations U and X), order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to and binding
upon Borrower; (d) result in a breach of or constitute a default or require any
consent under any indenture or loan or credit agreement or any other material
agreement, lease or instrument to which Borrower is a party or by which it or
its properties may be bound or affected; or (e) result in, or require, the
creation or imposition of any mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance of any nature upon or with respect to
any of the properties now owned or hereafter acquired by Borrower; and (f)
Borrower is not in default under any such law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award or any such indenture,
agreement, lease or instrument.
(b) No authorization or approval or other action by a governmental
authority or regulatory body or other Person, and no notice to or filing with
such authority or body or Person by any Person is required for the due
execution, delivery and performance by Borrower of this First Amendment.
(c) This First Amendment has been duly executed and when delivered by the
Borrower will constitute the legal, valid and binding obligations of the
Borrower enforceable against Borrower in accordance with its terms, except to
the extent that such enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights generally and by
general principles of equity.
-2-
<PAGE>
(d) The representations and warranties contained in Article 4 of the Credit
Agreement are correct on and as of the date hereof as though made on and as of
the date hereof.
(e) No Event of Default has occurred and is continuing (except those that
have been waived pursuant to Section 2 of this First Amendment) or would result
from the signing of this First Amendment or the transactions contemplated
hereby.
(f) Since the date of the last financial statements furnished to the Banks,
there has occurred no event which would have a Materially Adverse Effect.
(g) There are no actions, suits or proceedings or investigations (other
than routine examinations performed by insurance regulatory authorities) pending
or, as far as the Borrower can reasonably foresee, threatened against or
affecting the Borrower or any of its Subsidiaries, or any property of any of
them before any court, governmental agency or arbitrator, which if determined
adversely to the Borrower or any Subsidiary would in any one case or in the
aggregate, have a Materially Adversely Effect, or affect Borrower's ability to
perform its obligations under this First Amendment.
(h) No information, exhibit or report furnished in writing by or on behalf
of the Borrower or any officer or director of Borrower to the Banks in
connection with the negotiation of, or pursuant to the terms of, this First
Amendment contained when made any material misstatement of fact or omitted to
state a materially fact necessary to make the statements contained therein not
misleading.
Section 4. Reference to and Effect on the Credit Agreement and Revolving
Notes.
(a) Upon the effectiveness of this First Amendment, on and after the date
hereof, each reference in the Credit Agreement to this "Agreement", "hereunder",
"hereof", "herein" or words of like import and each reference in the Revolving
Notes shall mean and be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement shall remain
in full force and effect and is hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this First Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Bank under the Credit Agreement, nor constitute a waiver
of any provision of the Credit Agreement.
Section 5. Costs, Expenses and Taxes. The Borrower agrees to pay on demand
all costs and expenses of the Banks in connection with the preparation,
execution and delivery of this First Amendment and the other instruments and
documents to be delivered hereunder, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Agent with respect
thereto and with respect to advising the Banks as to its rights and
responsibilities hereunder and thereunder. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable in
connection with the execution and delivery of this First Amendment and the other
instruments and documents to be delivered hereunder, and agrees to
-3-
<PAGE>
save the Banks harmless from and against any and all liabilities with respect to
or resulting from any delay in paying or omission to pay such taxes.
Section 6. Execution in Counterparts. This First Amendment may be executed
in any number of counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute but one and the same instrument.
Section 7. Governing Law. This First Amendment shall be governed by, and
construed in accordance with, the laws of the State of Connecticut.
[Remainder Of Page Intentionally Left Blank]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWER:
DONEGAL GROUP, INC.
By: /s/ Ralph G. Spontak
----------------------------------
Name: Ralph G. Spontak
Title: Sr. V.P. / Secretary
AGENT:
FLEET NATIONAL BANK, as Agent
By:
----------------------------------
Name:
Title:
BANKS:
FLEET NATIONAL BANK
By:
----------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK
BRANCH
By:
----------------------------------
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWER:
DONEGAL GROUP, INC.
By:
----------------------------------
Name:
Title:
AGENT:
FLEET NATIONAL BANK, as Agent
By: /s/ Holly A. O'Neill
----------------------------------
Name: Holly A. O'Neill
Title: Loan Officer
BANKS:
FLEET NATIONAL BANK
By: /s/ Holly A. O'Neill
----------------------------------
Name: Holly A. O'Neill
Title: Loan Officer
CREDIT LYONNAIS NEW YORK
BRANCH
By:
----------------------------------
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWER:
DONEGAL GROUP, INC.
By:
----------------------------------
Name:
Title:
AGENT:
FLEET NATIONAL BANK, as Agent
By:
----------------------------------
Name:
Title:
BANKS:
FLEET NATIONAL BANK
By:
----------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK
BRANCH
By: /s/ Sebastian Rocco
----------------------------------
Name: Sebastian Rocco
Title: Senior Vice President
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding
company doing business in the Mid-Atlantic and Southern states through its five
wholly-owned property-casualty insurance subsidiaries, Atlantic States Insurance
Company ("Atlantic States"), Southern Insurance Company of Virginia
("Southern"), Southern Heritage Insurance Company ("Southern Heritage"),
Delaware Atlantic Insurance Company ("Delaware") and Pioneer Insurance Company
("Pioneer") (collectively "Insurance Subsidiaries"). The Company has three
operating segments: the investment function, the personal lines of insurance and
the commercial lines of insurance. Products offered in the personal lines of
insurance consist primarily of homeowners and private passenger automobile
policies. Products offered in the commercial lines of insurance consist
primarily of commercial automobile, commercial multiple peril and workers'
compensation policies. The Insurance Subsidiaries are subject to regulation by
Insurance Departments in those states in which they operate and undergo periodic
examination by those departments. The Insurance Subsidiaries are also subject to
competition from other insurance carriers in their operating areas. DGI was
formed in September 1986 by Donegal Mutual Insurance Company (the "Mutual
Company"), which owns 62% of the outstanding common shares of the Company as of
December 31, 1999.
Atlantic States participates in an intercompany pooling arrangement with the
Mutual Company and assumes 65% of the pooled business. Southern cedes 50% of its
business to the Mutual Company and Delaware cedes 70% of its workers'
compensation business to the Mutual Company. Because the Mutual Company places
substantially all of the business assumed from Southern and Delaware into the
pool, from which the Company has a 65% allocation, the Company's results of
operations include approximately 83% of the business written by Southern and
approximately 76% of the workers' compensation business written by Delaware.
In November 1998, the Company acquired all of the outstanding stock of
Southern Heritage. This transaction was accounted for as a "purchase." The
Company's financial statements include Southern Heritage as a consolidated
subsidiary from November 1, 1998.
In addition to the Company's Insurance Subsidiaries, it also owned all of the
outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance
services organization which provided inspection and policy auditing information
on a fee-for-service basis to its affiliates and the insurance industry. The
Company sold all of the outstanding shares of AIS on October 1, 1999.
RESULTS OF OPERATIONS 1999 COMPARED TO 1998
Total revenues for 1999 were $159,711,107, which were $29,124,742, or 22.3%,
greater than 1998. Net premiums earned increased to $143,873,970, an increase of
$27,704,978, or 23.9%, over 1998. The acquisition of Southern Heritage accounted
for $19,674,071, or 71% of the increase in earned premiums in 1999. Direct
premiums written of the combined pool of Atlantic States and the Mutual Company
increased $9,516,654 or 6.6%. A 9.4% increase in the direct premiums written of
Southern, a 4.9% increase in the direct premiums written of Delaware and a 13.9%
increase in the direct premiums written of Pioneer accounted for the majority of
the remaining change. The Company reported net realized investment losses of
$38,702, compared to net realized investment losses of $13,562 in 1998. Net
realized losses in both years resulted from normal turnover of the Company's
investment portfolio. As of December 31, 1999, 99.9% of the Company's bond
portfolio was classified as Class 1 (highest quality) by the National
Association of Insurance Commissioners' Securities Valuation Office. Investment
income increased $1,225,876. An increase in the average invested assets from
$208,303,664 to $258,218,661, offset by a decrease in the average yield to 5.1%
from 5.6% in 1998, accounted for the change.
The GAAP combined ratio of insurance operations was 106.5% in 1999, compared
to 99.8% in 1998. The GAAP combined ratio is the sum of the ratios of incurred
losses and loss expenses to premiums earned (loss ratio), underwriting expenses
to premiums earned (expense ratio) and policyholder dividends to premiums earned
(dividend ratio). The loss ratio in 1999 was 69.0%, compared to 63.0% in 1998.
The increase in the loss ratio in 1999 resulted from a deterioration in
operating results in both the commercial and personal lines segments of the
Company. The commercial lines loss ratio increased from 54.9% in 1998 to 68.8%
in 1999, with results in workers' compensation suffering the largest increase
from 46.9% in 1998 to 68.8% in 1999. Homeowners results suffered the largest
increase in personal lines as the loss ratio increased from 72.3% in 1998 to
77.1% in 1999. This increase was somewhat offset by a decrease in the private
passenger automobile loss ratio from 71.0% in 1998 to 69.4% in 1999. The expense
ratio for 1999 was 36.6%, compared to 35.4% in 1998, with the dividend ratio
decreasing from 1.4% in 1998 to 0.9% in 1999. The expense ratio was adversely
affected by a charge to earnings resulting from a restructuring charge of $2
million which increased the expense ratio by 1.4%. The dividend ratio decreased
due to a higher loss ratio in workers' compensation in 1999 compared to 1998.
The Company benefited from a federal income tax law change that was enacted
during 1999 which allows net operating loss carryforwards of an acquired company
to be used to offset future taxable income of other affiliated companies filing
as part of a consolidated tax return.
page 10
<PAGE>
Prior law allowed such net operating loss carryforward to be used to offset
taxable income of the acquired company only. Due to this law change, the net
operating loss carryforward, obtained as part of the acquisition of Southern
Heritage, can now be used to offset taxable income generated by the other
consolidated affiliates. Because of this change, management determined that a
valuation allowance for Southern Heritage's net operating loss carryforward is
no longer needed, and the Company recognized a tax benefit of $3,004,524 in
1999.
RESULTS OF OPERATIONS 1998 COMPARED TO 1997
Total revenues for 1998 were $130,586,365, which were $9,258,759, or 7.6%,
greater than 1997. Net premiums earned increased to $116,168,992, an increase of
$8,866,824, or 8.3%, over 1997. The acquisition of Southern Heritage contributed
$4,835,036, or 4.5%, to the earned premiums in 1998. Direct premiums written by
the combined pool of Atlantic States and the Mutual Company increased $6,426,444
or 4.7%. A 17.5% increase in the direct premiums written of Southern, a 6.5%
decrease in the direct premiums written of Delaware and an 11.7% decrease in the
direct premiums written of Pioneer accounted for the majority of the remaining
change. The Company reported net realized investment losses of $13,562, compared
to net realized investment gains of $314,136 in 1997. Net realized gains and
losses in both years resulted from normal turnover of the Company's investment
portfolio. As of December 31, 1998, 99.9% of the Company's bond portfolio was
classified as Class 1 (highest quality) by the National Association of Insurance
Commissioners' Securities Valuation Office. Investment income increased
$490,384. An increase in the average invested assets from $198,727,027 to
$208,303,664, offset by a decrease in the average yield to 5.6% from 5.8% in
1997, accounted for the change.
The GAAP combined ratio of insurance operations was 99.8% in 1998, compared
to 97.6% in 1997. The GAAP combined ratio is the sum of the ratios of incurred
losses and loss expenses to premiums earned (loss ratio), underwriting expenses
to premiums earned (expense ratio) and policyholder dividends to premiums earned
(dividend ratio). The loss ratio in 1998 was 63.0%, compared to 63.1% in 1997.
The expense ratio for 1998 was 35.4%, compared to 33.3% in 1997, with the
dividend ratio increasing from 1.2% in 1997 to 1.4% in 1998. The increase in the
Company's expense ratio accounted for the change in its combined ratio. The
expense ratio was adversely affected by a charge to earnings in the third
quarter resulting from an unprecedented large mandatory Pennsylvania Insurance
Guaranty Association assessment arising from the insolvency of two medical
malpractice companies. The Company's share of the Guaranty Association liability
arising from these two companies was $1.3 million. Guaranty Association
assessments represent mandatory regulatory charges that must be absorbed by
substantially all property and casualty insurance companies doing business in a
state where an insolvent company had been writing business, including companies,
like Donegal, who do not write lines of business that the insolvent companies
were writing.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates sufficient funds from its operations and maintains a high
degree of liquidity in its investment portfolio. The primary source of funds to
meet the demands of claim settlements and operating expenses are premium
collections, investment earnings and maturing investments. As of December 31,
1999, the Company had no material commitment for capital expenditures.
In investing funds made available from operations, the Company maintains
securities' maturities consistent with its projected cash needs for the payment
of claims and expenses. The Company maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds.
As of December 31, 1999, pursuant to a credit agreement dated December 29,
1995, with Fleet National Bank of Connecticut, the Company had unsecured
borrowings of $37 million. Such borrowings were made in connection with the
acquisitions of Delaware, Pioneer and Southern Heritage and various capital
contributions to the subsidiaries. Per the terms of the credit agreement, the
Company may borrow up to $40 million at interest rates equal to the bank's then
current prime rate or the then current London interbank Eurodollar bank rate
plus 1.70%. At December 31, 1999, the interest rates on the outstanding balances
were 8.5% on an outstanding prime rate balance of $22 million and 7.84% on an
outstanding Eurodollar rate balance of $15 million. In addition, the Company
pays a rate of 3/10 of 1% per annum on the average daily unused portion of the
bank's commitment. On each July 27, commencing July 27, 2001, the credit line
will be reduced by $8 million. Any outstanding loan in excess of the remaining
credit line after such reduction will then be payable.
The Company's principal sources of cash with which to meet obligations and
pay stockholder dividends are dividends from the Insurance Subsidiaries which
are required by law to maintain certain minimum surplus on a statutory basis and
are subject to regulations under which payment of dividends from statutory
surplus is restricted and may require prior approval of their domiciliary
insurance regulatory authorities. The Insurance Subsidiaries are also subject to
Risk Based Capital (RBC) requirements which may further impact their ability to
pay dividends. At December 31, 1999, all five companies' statutory capital and
surplus were substantially above the RBC requirements. At December 31, 1999,
amounts available for distribution as dividends to DGI without prior approval of
the insurance regulatory authorities were $6,851,802 from Atlantic States,
$184,285 from Southern, $956,381 from Delaware, $567,793 from Pioneer and
$1,650,842 from Southern Heritage.
Net unrealized gains (losses) resulting from fluctuations in the fair value
of investments reported in the balance sheet at fair value were $(2,073,989)
(net of applicable federal income tax benefit) at December 31, 1999, and
$1,315,425 (net of applicable federal income tax) at December 31, 1998.
page 11
<PAGE>
CREDIT RISK
The Company provides property and liability coverages through its subsidiaries'
independent agency systems located throughout its operating area. The majority
of this business is billed directly to the insured, although a portion of the
Company's commercial business is billed through its agents, who are extended
credit in the normal course of business.
The Company's Insurance Subsidiaries have reinsurance agreements in place
with the Mutual Company, as described in Note 3 of the financial statements, and
with a number of other major authorized reinsurers, as described in Note 9 of
the financial statements.
IMPACT OF INFLATION
Property and casualty insurance premiums are established before the amount of
losses and loss expenses, or the extent to which inflation may impact such
expenses, are known. Consequently, the Company attempts, in establishing rates,
to anticipate the potential impact of inflation.
YEAR 2000 ISSUES
The Company has not encountered difficulties to date with respect to the Year
2000 millennium change, either internally or with third parties. The Company
will continue to monitor exposure to any Year 2000 related problems.
The Company's expenses to address Year 2000 issues were not material.
The Company has risk that claims related to Year 2000 issues will be made
under insurance policies that it underwrites. The Company has concluded that its
policies do not generally provide coverage for losses relating to Year 2000
issues and has issued endorsements further clarifying this exclusion. However,
due in part to the potential for judicial decisions which expand policies to
cover risks that were not contemplated by the policy, which in turn may produce
unanticipated claims, and because there is no prior history of such claims at
this point in time, the amount of any potential Year 2000 coverage liabilities
is not determinable. However, the Company has not had any claims reported to
date.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
In June 1999, Statement of Financial Accounting Standards (SFAS) No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," was issued deferring the effective
date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," from all fiscal quarters of fiscal years beginning after June 15,
1999 to all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company is in the process of determining the effect, if any, of SFAS No. 133 on
its financial statements. The Company has not held or issued derivative
financial instruments.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates is
concentrated in its investment portfolio and, to a lesser extent, its debt
obligations. The Company monitors this exposure through periodic reviews of
asset and liability positions. Estimates of cash flows and the impact of
interest rate fluctuations relating to the investment portfolio are modeled
regularly.
Principal cash flows and related weighted-average interest rates by expected
maturity dates for financial instruments sensitive to interest rates at December
31, 1999 are as follows:
Principal Weighted-Average
Cash Interest
Flows Rate
- --------------------------------------------------------------------------------
Fixed maturities and
short-term investments:
2000 $ 34,005,257 5.96%
2001 17,174,618 6.58%
2002 10,435,292 5.98%
2003 17,600,000 5.79%
2004 13,500,000 5.73%
Thereafter 161,493,548 6.03%
- --------------------------------------------------------------------------------
Total $254,208,715
================================================================================
Market value $250,034,799
================================================================================
Debt
2000 $ 0 8.23%
2001 5,000,000 8.23%
2002 8,000,000 8.23%
2003 8,000,000 8.23%
2004 8,000,000 8.23%
Thereafter 8,000,000 8.23%
- --------------------------------------------------------------------------------
Total $ 37,000,000
================================================================================
Fair value $ 37,000,000
================================================================================
Actual cash flows may differ from those stated as a result of calls and
prepayments.
EQUITY PRICE RISK
The Company's portfolio of equity securities, which is carried on the balance
sheet at market value, has exposure to price risk. Price risk is defined as the
potential loss in market value resulting from an adverse change in prices.
Portfolio characteristics are analyzed regularly and market risk is actively
managed through a variety of techniques. The portfolio is diversified across
industries, and concentrations in any one company or industry are limited by
parameters established by management.
The combined total of realized and unrealized equity investment gains and
(losses) were $(404,147), $(307,147), and $586,178 in 1999, 1998 and 1997,
respectively. During these three years the largest total equity investment gain
and (loss) in a quarter was $897,971 and $(1,435,101), respectively.
page 12
<PAGE>
DONEGAL GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost (fair value $133,995,994 and $131,633,299) $136,173,547 $127,183,788
Available for sale, at fair value (amortized cost $103,419,994 and $89,089,995) 100,043,548 90,525,855
Equity securities, available for sale, at fair value (cost $9,043,818 and $6,206,735) 9,229,498 6,763,943
Short-term investments, at cost, which approximates fair value 15,995,257 30,521,887
- ------------------------------------------------------------------------------------------------------------------------------
Total investments 261,441,850 254,995,473
Cash 3,922,403 8,227,042
Accrued investment income 3,474,430 3,164,599
Premiums receivable 18,218,525 19,824,894
Reinsurance receivable 53,070,283 48,339,223
Deferred policy acquisition costs 11,203,302 11,334,301
Federal income taxes receivable 698,969 227,841
Deferred tax asset, net 9,121,232 3,536,692
Prepaid reinsurance premiums 32,154,837 27,203,111
Property and equipment, net 5,516,688 5,920,420
Accounts receivable--securities -- 329,299
Due from affiliate 262,954 --
Other 647,184 2,128,611
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $399,732,657 $385,231,506
==============================================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Losses and loss expenses $149,979,141 $141,409,008
Unearned premiums 97,657,020 94,722,785
Accrued expenses 5,888,392 4,821,594
Drafts payable 597,775 1,394,373
Reinsurance balances payable 1,216,034 1,785,914
Cash dividend declared to stockholders 760,673 708,513
Borrowings under line of credit 37,000,000 37,500,000
Accounts payable--securities 2,500,000 503,840
Due to affiliate -- 870,083
Other 719,010 884,392
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 296,318,045 284,600,502
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $1.00 par value, authorized 2,000,000 shares; none issued
Common stock, Class A, authorized 15,000,000 shares; none issued
Common stock, $1.00 par value, authorized 20,000,000 shares,
issued 8,574,210 and 8,325,221 shares and outstanding
8,451,922 and 8,202,933 shares 8,574,210 8,325,221
Additional paid-in capital 43,536,748 41,271,322
Accumulated other comprehensive income (loss) (2,073,989) 1,315,425
Retained earnings 54,269,399 50,610,792
Treasury stock, at cost (891,756) (891,756)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 103,414,612 100,631,004
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $399,732,657 $385,231,506
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 13
<PAGE>
DONEGAL GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Revenues
Premiums earned $211,361,789 $172,507,090 $159,055,645
Premiums ceded 67,487,819 56,338,098 51,753,477
- ---------------------------------------------------------------------------------------------------------------------------
Net premiums earned 143,873,970 116,168,992 107,302,168
Investment income, net of investment expenses 13,223,537 11,997,661 11,507,277
Installment payment fees 1,439,334 895,283 818,981
Lease income 819,474 753,408 643,183
Service fees 393,494 784,583 741,861
Net realized investment gains (losses) (38,702) (13,562) 314,136
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 159,711,107 130,586,365 121,327,606
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Losses and loss expenses 145,493,825 110,448,552 99,408,492
Reinsurance recoveries 46,288,823 37,281,467 31,751,974
- ---------------------------------------------------------------------------------------------------------------------------
Net losses and loss expenses 99,205,002 73,167,085 67,656,518
Amortization of deferred policy acquisition costs 24,608,000 19,490,000 18,696,000
Other underwriting expenses 28,034,876 21,712,346 17,058,668
Policy dividends 1,341,294 1,635,300 1,319,384
Interest 1,535,249 1,292,992 910,237
Other 1,357,585 1,611,627 1,513,256
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 156,082,006 118,909,350 107,154,063
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 3,629,101 11,677,015 14,173,543
Income tax expense (benefit) (3,027,836) 2,659,175 3,532,357
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 6,656,937 $ 9,017,840 $ 10,641,186
===========================================================================================================================
Net income per common share
Basic $ .80 $ 1.11 $ 1.33
===========================================================================================================================
Diluted $ .80 $ 1.09 $ 1.32
===========================================================================================================================
STATEMENTS OF COMPREHENSIVE INCOME
Net income $ 6,656,937 $ 9,017,840 $ 10,641,186
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising during the period,
net of income tax expense (benefit) of
$(1,781,261), $151,999 and $409,974 (3,414,957) 295,057 795,831
Reclassification adjustment for (gains) losses included
in net income, net of income tax expense (benefit) of
$(13,159), $(4,611) and $106,806 25,543 8,951 (207,330)
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (3,389,414) 304,008 588,501
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 3,267,523 $ 9,321,848 $ 11,229,687
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 14
<PAGE>
DONEGAL GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------ Paid-in Comprehensive Retained Treasury Stockholders'
Shares Amount Capital Income (Loss) Earnings Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1997 4,540,569 $4,540,569 $37,862,715 $ 422,916 $39,664,830 $(891,756) $ 81,599,274
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 61,523 61,523 1,069,402 1,130,925
Net income 10,641,186 10,641,186
Other comprehensive income 588,501 588,501
Cash dividends
$.2925 per share (2,363,223) (2,363,223)
Stock dividend 1,520,339 1,520,329 (1,520,329)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 6,122,431 $6,122,431 $38,932,117 $ 1,011,417 $46,422,454 $(891,756) $ 91,596,663
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 141,542 141,542 2,339,205 2,480,747
Net income 9,017,840 9,017,840
Other comprehensive income 304,008 304,008
Cash dividends
$.3375 per share (2,768,254) (2,768,254)
Stock dividend 2,061,248 2,061,248 (2,061,248)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 8,325,221 $8,325,221 $41,271,322 $ 1,315,425 $50,610,792 $(891,756) $100,631,004
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 248,989 248,989 2,265,426 2,514,415
Net income 6,656,937 6,656,937
Other comprehensive loss (3,389,414) (3,389,414)
Cash dividends
$.36 per share (2,998,330) (2,998,330)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 8,574,210 $8,574,210 $43,536,748 $(2,073,989) $54,269,399 $(891,756) $103,414,612
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 15
<PAGE>
<TABLE>
<CAPTION>
DONEGAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 6,656,937 $ 9,017,840 $10,641,186
- ------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 936,373 520,675 390,857
Realized investment (gains) losses 38,702 13,562 (314,136)
Changes in Assets and Liabilities, net of acquisition:
Losses and loss expenses 8,570,133 7,125,806 3,490,429
Unearned premiums 2,934,235 6,478,435 811,785
Accrued expenses 1,066,798 (542,693) 827,727
Premiums receivable 1,606,369 (1,253,529) (169,213)
Deferred policy acquisition costs 130,999 (399,428) (610,161)
Deferred income taxes (3,790,122) 158,593 7,108
Reinsurance receivable (4,731,060) (6,182,621) (78,023)
Accrued investment income (309,831) (186,170) (112,644)
Amounts due to/from affiliate (1,133,037) (4,180,378) (438,442)
Reinsurance balances payable (569,880) (127,931) (11,926)
Prepaid reinsurance premiums (4,951,726) (3,819,226) (508,964)
Current income taxes (471,128) (171,387) (700,983)
Other, net 519,441 100,292 192,808
- ------------------------------------------------------------------------------------------------------------------------------
Net adjustments (153,734) (2,466,000) 2,776,222
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,503,203 6,551,840 13,417,408
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of fixed maturities
Held to maturity (23,132,805) (24,774,417) (15,834,418)
Available for sale (32,233,424) (43,662,157) (21,614,427)
Purchase of equity securities (14,258,861) (15,824,465) (10,598,546)
Sale of fixed maturities
Available for sale 503,895 2,207,500 --
Maturity of fixed maturities
Held to maturity 14,393,638 24,815,155 11,909,421
Available for sale 19,049,880 16,106,644 18,860,222
Sale of equity securities 11,767,268 16,155,130 6,695,236
Sale of Atlantic Insurance Services, net (48,810) -- --
Acquisition of Southern Heritage -- (18,028,072) --
Purchase of property and equipment (443,498) (650,014) (2,758,851)
Net sales (purchases) of short-term investments 14,526,630 15,099,631 (1,242,030)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,876,087) (28,555,065) (14,583,393)
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuance of common stock 2,514,415 2,480,747 1,130,925
Borrowings (payments) under line of credit, net (500,000) 27,000,000 2,000,000
Cash dividends paid (2,946,170) (2,663,795) (2,251,788)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (931,755) 26,816,952 879,137
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (4,304,639) 4,813,727 (286,848)
Cash at beginning of year 8,227,042 3,413,315 3,700,163
- ------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 3,922,403 $ 8,227,042 $ 3,413,315
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Donegal Group Inc. (the "Company") was organized as a regional insurance holding
company by Donegal Mutual Insurance Company (the "Mutual Company") and operates
in the Mid-Atlantic and Southern states through its wholly-owned stock insurance
companies, Atlantic States Insurance Company ("Atlantic States"), Southern
Insurance Company of Virginia ("Southern"), Southern Heritage Insurance Company
("Southern Heritage"), Delaware Atlantic Insurance Company ("Delaware"), and
Pioneer Insurance Company ("Pioneer") (collectively "Insurance Subsidiaries").
The Company has three operating segments: the investment function, the personal
lines of insurance and the commercial lines of insurance. Products offered in
the personal lines of insurance consist primarily of homeowners and private
passenger automobile policies. Products offered in the commercial lines of
insurance consist primarily of commercial automobile, commercial multiple peril
and workers' compensation policies. The Insurance Subsidiaries are subject to
regulation by Insurance Departments in those states in which they operate and
undergo periodic examination by those departments. The Insurance Subsidiaries
are also subject to competition from other insurance carriers in their operating
areas. Atlantic States participates in an intercompany pooling arrangement with
the Mutual Company and assumes 65% of the pooled business. Southern cedes 50% of
its business to the Mutual Company and Delaware cedes 70% of its Workers'
Compensation business to the Mutual Company. At December 31, 1999, the Mutual
Company held 62% of the outstanding common stock of the Company.
In addition to the Company's Insurance Subsidiaries, it also owned all of the
outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance
services organization. The Company sold all of the stock of AIS on October 1,
1999.
BASIS OF CONSOLIDATION
The consolidated financial statements, which have been prepared in accordance
with generally accepted accounting principles, include the accounts of Donegal
Group Inc. and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. The term
"Company" as used herein refers to the consolidated entity.
USE OF ESTIMATES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the liabilities for losses and loss
expenses. While management uses available information to provide for such
liabilities, future changes to these liabilities may be necessary based on
changes in trends in claim frequency and severity.
INVESTMENTS
The Company classifies its debt and equity securities into the following
categories:
Held to Maturity--Debt securities that the Company has the positive intent
and ability to hold to maturity; reported at amortized cost.
Available for Sale--Debt and equity securities not classified as held to
maturity; reported at fair value, with unrealized gains and losses excluded
from income and reported as a separate component of stockholders' equity (net
of tax effects).
Short-term investments are carried at amortized cost, which approximates fair
value.
If there is a decline in fair value below amortized cost which is other than
temporary, the cost basis for such investments in the held to maturity and
available for sale categories is reduced to fair value. Such decline in cost
basis is recognized as a realized loss and charged to income.
Premiums and discounts on debt securities are amortized over the life of the
security as an adjustment to yield using the effective interest method. Realized
investment gains and losses are computed using the specific identification
method.
Premiums and discounts for mortgage-backed debt securities are amortized
using anticipated prepayments with significant changes in estimated prepayments
accounted for under the prospective method.
page 17
<PAGE>
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investments--Fair values for fixed maturity securities are based on quoted
market prices, when available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments or
values obtained from independent pricing services through a bank trustee. The
fair values for equity securities are based on quoted market prices.
Cash and Short-Term Investments--The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Premium and Reinsurance Receivables and Payables--The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Borrowings Under Line of Credit--The carrying amounts reported in the balance
sheet for the line of credit approximate fair value due to the variable rate
nature of the line of credit.
REVENUE RECOGNITION
Insurance premiums are recognized as income over the terms of the policies.
Unearned premiums are calculated on a daily pro-rata basis.
POLICY ACQUISITION COSTS
Policy acquisition costs, consisting primarily of commissions, premium taxes and
certain other variable underwriting costs, are deferred and amortized over the
period in which the premiums are earned. Anticipated losses and loss expenses,
expenses for maintenance of policies in force and anticipated investment income
are considered in the determination of the recoverability of deferred
acquisition costs.
PROPERTY AND EQUIPMENT
Property and equipment are reported at depreciated cost that is computed using
the straight-line method based upon estimated useful lives of the assets.
LOSSES AND LOSS EXPENSES
The liability for losses and loss expenses includes amounts determined on the
basis of estimates for losses reported prior to the close of the accounting
period and other estimates, including those for incurred but not reported losses
and salvage and subrogation recoveries.
These liabilities are continuously reviewed and updated by management, and
management believes that such liabilities are adequate to cover the ultimate net
cost of claims and expenses. When management determines that changes in
estimates are required, such changes are included in current earnings.
The Company has no material exposures to environmental liabilities.
INCOME TAXES
The Company and its subsidiaries currently file a consolidated federal income
tax return.
The Company accounts for income taxes using the asset and liability method.
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
CREDIT RISK
The Company provides property and liability coverages through its Insurance
Subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured, although a
portion of the Company's commercial business is billed through its agents, who
are extended credit in the normal course of business.
The Company's Insurance Subsidiaries have reinsurance agreements in place
with the Mutual Company and with a number of other authorized reinsurers with at
least an A.M. Best rating of A- or an equivalent financial condition.
REINSURANCE ACCOUNTING AND REPORTING
The Company relies upon reinsurance agreements to limit its maximum net loss
from large single risks or risks in concentrated areas, and to increase its
capacity to write insurance. Reinsurance does not relieve the primary insurer
from liability to its policyholders. To the extent that a reinsurer may be
unable to pay losses for which it is liable under the terms of a reinsurance
agreement, the Company is exposed to the risk of continued liability for such
losses. However, in an effort to reduce the risk of non-payment, the Company
requires all of its reinsurers to have an A.M. Best rating of A- or better or,
with respect to foreign reinsurers, to have a financial condition which, in the
opinion of management, is equivalent to a company with at least an A- rating.
page 18
<PAGE>
STOCK-BASED COMPENSATION
Stock-based compensation plans are accounted for under the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. As such, compensation expense would
be recorded on the date of a stock option grant only if the current market price
of the underlying stock exceeded the exercise price. Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
permits entities to recognize as expense, over the vesting period, the fair
value of all stock-based awards on the date of the grant. Alternatively, SFAS
No. 123 allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro-forma net income and earnings per share disclosures for
employee stock option grants made as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro-forma disclosures under
SFAS No. 123.
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding for the period, while
diluted earnings per share reflects the dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock.
2--ACQUISITIONS OF BUSINESSES
In November 1998, the Company acquired all of the outstanding stock of Southern
Heritage for a cash price of $18,824,950. Southern Heritage primarily writes
personal automobile and homeowners policies in the Southeastern region of the
country. This transaction was accounted for as a "purchase." The Company's
financial statements include Southern Heritage as a consolidated subsidiary from
November 1, 1998.
Assets in the amount of $56,568,710 were acquired, and liabilities in the
amount of $38,330,912 were assumed in the purchase transaction. The purchase
price exceeded the fair value of net assets acquired by $587,152, which is
recognized as goodwill and is being amortized over five years.
The following table reflects unaudited pro-forma combined results of
operations of the Company and Southern Heritage on the basis that the
acquisition had taken place at the beginning of each year. The pro-forma
information is presented for information purposes only and is not indicative of
the actual results that would have resulted if the acquisition had been made as
of those dates. The pro-forma is not intended to be a projection of future
results.
1998 1997
- --------------------------------------------------------------------------------
Revenues $161,307,562 $157,037,483
Net income 2,978,411 9,558,889
Earnings per common share
Basic .37 1.20
Diluted .36 1.19
The above table includes interest expense and amortization of goodwill as if
the acquisition occurred January 1, 1997.
In March 1997, the Company acquired all of the outstanding stock of Pioneer.
This transaction was accounted for as if it were a "pooling of interest," and as
such the Company's financial statements have been restated to include Pioneer as
a consolidated subsidiary from January 1, 1993 to the present.
3--TRANSACTIONS WITH AFFILIATES
The Company conducts business and has various agreements with the Mutual Company
which are described below:
A. REINSURANCE POOLING AND OTHER REINSURANCE ARRANGEMENTS
Atlantic States cedes to the Mutual Company all of its insurance business and
assumes from the Mutual Company 65% of the Mutual Company's total pooled
insurance business, including that assumed from Atlantic States and
substantially all of the business assumed and retained by the Mutual Company
from Southern and Delaware. Atlantic States, Southern, Delaware and Pioneer each
have a catastrophe reinsurance agreement with the Mutual Company which limits
the maximum liability under any one catastrophic occurrence to $400,000,
$300,000, $300,000 and $200,000, respectively, and $700,000 for a catastrophe
involving more than one of the companies. The Mutual Company and Delaware have
an excess of loss reinsurance agreement in which the Mutual Company assumes up
to $200,000 of losses in excess of $50,000 and a workers' compensation quota
share agreement whereby Delaware cedes 70% of that business. The Mutual Company
and Pioneer have an excess of loss reinsurance agreement in which the Mutual
Company assumes up to $200,000 of losses in excess of $50,000. The Mutual
Company and Pioneer also have an aggregate excess of loss reinsurance agreement,
entered into as part of the sale of Pioneer from the Mutual Company to
Donegal Group Inc., in which the Mutual Company agreed to assume the adverse
loss development of claims with dates of loss prior to December 31, 1996, as
developed through December 31, 1998, and to assume losses in excess of a 60%
loss ratio through December 31, 1998. The Mutual Company and Southern have an
excess of loss reinsurance agreement in which the Mutual Company assumes up to
$25,000 of losses in excess of $100,000 and a quota share agreement whereby
Southern cedes 50% of its direct business less certain reinsurance to the Mutual
Company. Southern, Delaware and Pioneer each have retrocessional reinsurance
agreements with the Mutual Company under which they cede, and then assume back,
100% of their business net of other reinsurance.
page 19
<PAGE>
The following amounts represent reinsurance transactions with the Mutual
Company during 1999, 1998 and 1997:
CEDED REINSURANCE: 1999 1998 1997
====================================================================
Premiums written $ 66,090,699 $ 55,372,556 $ 47,946,847
====================================================================
Premiums earned $ 60,977,975 $ 51,617,429 $ 47,488,716
====================================================================
Losses and loss expenses $ 41,775,579 $ 32,791,739 $ 28,582,315
====================================================================
Unearned premiums $ 30,999,377 $ 25,886,653 $ 22,131,526
====================================================================
Liability for losses and
loss expenses $ 43,907,885 $ 39,039,648 $ 35,295,994
====================================================================
ASSUMED REINSURANCE:
====================================================================
Premiums written $124,433,678 $114,667,549 $107,604,989
====================================================================
Premiums earned $119,364,863 $111,333,956 $107,302,168
====================================================================
Losses and loss expenses $ 80,325,374 $ 69,869,999 $ 68,104,859
====================================================================
Unearned premiums $ 56,887,815 $ 51,819,000 $ 48,485,408
====================================================================
Liability for losses
and loss expenses $ 90,397,135 $ 85,766,514 $ 83,271,292
====================================================================
Losses and loss expenses assumed from the Mutual Company for 1999, 1998 and
1997 are reported net of inter-company catastrophe recoveries which amounted to
approximately $2.0 million, $2.3 million, and $0 million, respectively.
B. EXPENSE SHARING
The Mutual Company provides facilities, management and other services to the
Company, and the Company reimburses the Mutual Company for such services on a
periodic basis under usage agreements and pooling arrangements. The charges are
based upon the relative participation of the Company and the Mutual Company in
the pooling arrangement, and management of both the Company and the Mutual
Company consider this allocation to be reasonable. Charges for these services
totalled $27,466,898, $25,250,873 and $22,115,329 for 1999, 1998 and 1997,
respectively.
C. LEASE AGREEMENT
The Company leases office equipment and automobiles to the Mutual Company under
a 10-year lease dated January 1, 1990.
D. WORKERS' COMPENSATION AGREEMENTS
The Mutual Company has agreements in place with Delaware, Southern and Pioneer
to reallocate the loss results of workers' compensation business written by
those companies as part of commercial accounts primarily written by the Mutual
Company or Atlantic States. These agreements provide for the workers'
compensation loss ratios of each company to be no worse than the average
workers' compensation loss ratio for all of the companies combined.
E. LEGAL SERVICES
Donald H. Nikolaus, President and a director of the Company, is also a partner
in the law firm of Nikolaus & Hohenadel. Such firm has served as general counsel
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.
4--INVESTMENTS
The amortized cost and estimated fair values of fixed maturities and equity
securities at December 31, 1999 and 1998, are as follows:
1999
- -------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 36,860,655 $ 34,292 $1,219,840 $35,675,107
Canadian government
obligation 498,245 -- 8,245 490,000
Obligations of states
and political
subdivisions 67,823,291 819,155 1,005,936 67,636,510
Corporate securities 15,819,143 73,228 639,010 15,253,361
Mortgage-backed
securities 15,172,213 30,077 261,274 14,941,016
- -------------------------------------------------------------------------------
Totals $136,173,547 $956,752 $3,134,305 $133,995,994
===============================================================================
1999
- -------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $63,645,993 $ 1,982 $2,443,578 $ 61,204,397
Obligations of states
and political
subdivisions 20,524,977 204,284 506,415 20,222,846
Corporate securities 15,472,456 578 419,871 15,053,163
Mortgage-backed
securities 3,776,568 321 213,747 3,563,142
Equity securities 9,043,818 1,384,882 1,199,202 9,229,498
- ------------------------------------------------------------------------------
Totals $112,463,812 $1,592,047 $4,782,813 $109,273,046
==============================================================================
1998
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 32,890,694 $ 484,622 $ 29,816 $ 33,345,500
Obligations of states
and political
subdivisions 66,941,133 3,489,849 10,044 70,420,938
Corporate securities 9,131,114 422,916 4,030 9,550,000
Mortgage-backed
securities 18,220,847 96,014 -- 18,316,861
- ------------------------------------------------------------------------------
Totals $127,183,788 $ 4,493,401 $ 43,890 $131,633,299
==============================================================================
page 20
<PAGE>
1998
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 54,975,813 $ 570,376 $106,689 $ 55,439,500
Obligations of states
and political
subdivisions 19,140,686 822,884 6,497 19,957,073
Corporate securities 10,642,598 150,045 5,324 10,787,319
Mortgage-backed
securities 4,330,898 11,065 -- 4,341,963
Equity securities 6,206,735 743,210 186,002 6,763,943
- ------------------------------------------------------------------------------
Totals $ 95,296,730 $2,297,580 $304,512 $ 97,289,798
==============================================================================
The amortized cost and estimated fair value of fixed maturities at December
31, 1999, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------
Estimated
Amortized Fair
Cost Value
- --------------------------------------------------------------------
HELD TO MATURITY
Due in one year or less $ 6,063,143 $ 6,064,900
Due after one year through five years 27,717,192 27,557,500
Due after five years through ten years 65,406,112 64,593,457
Due after ten years 21,814,887 20,839,121
Mortgage-backed securities 15,172,213 14,941,016
- --------------------------------------------------------------------
Total held to maturity $136,173,547 $133,995,994
====================================================================
AVAILABLE FOR SALE
Due in one year or less $ 11,952,924 11,948,304
Due after one year through five years 30,723,822 30,267,827
Due after five years through ten years 40,342,032 39,476,379
Due after ten years 16,624,648 14,787,896
Mortgage-backed securities 3,776,568 3,563,142
- --------------------------------------------------------------------
Total available for sale $103,419,994 $100,043,548
====================================================================
The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 1999 and 1998, amounted to $5,655,877 and
$5,285,367, respectively.
Net investment income of the Company, consisting primarily of interest and
dividends, is attributable to the following sources:
1999 1998 1997
- --------------------------------------------------------------------
Fixed maturities $12,738,765 $10,981,353 $10,703,397
Equity securities 439,660 294,646 238,777
Short-term investments 770,562 1,385,500 1,141,834
Real estate 236,139 175,250 127,250
- --------------------------------------------------------------------
Investment income 14,185,126 12,836,749 12,211,258
Investment expenses 961,589 839,088 703,981
- --------------------------------------------------------------------
Net investment income $13,223,537 $11,997,661 $11,507,277
====================================================================
Gross realized gains and losses from sales of investments and the change in
the difference between fair value and cost of investments, before applicable
income taxes, are as follows:
1999 1998 1997
- -------------------------------------------------------------------------
Gross realized gains:
Fixed maturities $ -- $ 132,431 $ 84,196
Equity securities 586,745 1,119,679 408,429
- -------------------------------------------------------------------------
586,745 1,252,110 492,625
- -------------------------------------------------------------------------
Gross realized losses:
Fixed maturities 6,083 5,180 694
Equity securities 619,364 1,260,492 177,795
- -------------------------------------------------------------------------
625,447 1,265,672 178,489
- -------------------------------------------------------------------------
Net realized gains (losses) $ (38,702) $ (13,562) $ 314,136
=========================================================================
Change in difference between
fair value and cost of
investments:
Fixed maturities $(11,439,370) $1,439,782 $2,248,484
Equity securities (371,528) (166,335) 355,544
- -------------------------------------------------------------------------
$(11,810,898) $1,273,447 $2,604,028
=========================================================================
Income taxes (benefit) on realized investment gains were ($13,159), ($4,611)
and $106,806 for 1999, 1998 and 1997, respectively. Deferred income taxes
applicable to net unrealized investment gains and losses included in
shareholders' equity were $(1,116,777) and $677,643 at December 31, 1999 and
1998, respectively.
Donegal Group has not held or issued derivative financial instruments.
5--DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are as follows:
1999 1998 1997
- -------------------------------------------------------------------------
Balance, January 1 $ 11,334,301 $ 8,448,060 $ 7,837,899
Acquisition of
Southern Heritage -- 2,486,813 --
Acquisition costs deferred 24,477,001 19,889,428 19,306,161
Amortization charged
to earnings 24,608,000 19,490,000 18,696,000
- -------------------------------------------------------------------------
Balance, December 31 $ 11,203,302 $11,334,301 $ 8,448,060
=========================================================================
6--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998, consisted of the
following:
- -------------------------------------------------------------------------
Estimated
Useful
1999 1998 Life
- -------------------------------------------------------------------------
Cost--office equipment $ 4,615,884 $ 5,648,108 5-15 years
automobiles 958,313 890,264 3 years
leasehold improvements -- 59,233 15-40 years
real estate 2,627,599 2,627,597 15-50 years
software 315,973 434,344 5 years
- -------------------------------------------------------------------------
8,517,769 9,659,546
Accumulated depreciation (3,001,081) (3,739,126)
- -------------------------------------------------------------------------
$ 5,516,688 $ 5,920,420
=========================================================================
Depreciation expense for 1999, 1998, and 1997 amounted to $847,228, $559,710
and $442,726, respectively.
page 21
<PAGE>
7--LIABILITY FOR LOSSES AND LOSS EXPENSES
Activity in the liability for losses and loss expenses is summarized as
follows:
1999 1998 1997
- ------------------------------------------------------------------------
Balance at January 1 $141,409,008 $118,112,390 $114,621,961
Less reinsurance
recoverable 47,545,592 40,638,565 39,194,405
- ------------------------------------------------------------------------
Net balance at January 1 93,863,416 77,473,825 75,427,556
Acquisition of
Southern Heritage -- 14,967,242 --
- ------------------------------------------------------------------------
New balance at beginning
as adjusted 93,863,416 92,441,067 75,427,556
- ------------------------------------------------------------------------
Incurred related to:
Current year 99,659,002 75,463,085 69,040,518
Prior years (454,000) (2,296,000) (1,384,000)
- ------------------------------------------------------------------------
Total incurred 99,205,002 73,167,085 67,656,518
- ------------------------------------------------------------------------
Paid related to:
Current year 58,906,426 44,388,736 39,133,249
Prior years 36,668,000 27,356,000 26,477,000
- ------------------------------------------------------------------------
Total paid 95,574,426 71,744,736 65,610,249
- ------------------------------------------------------------------------
Net balance at
December 31 97,493,992 93,863,416 77,473,825
Plus reinsurance
recoverable 52,485,149 47,545,592 40,638,565
- ------------------------------------------------------------------------
Balance at December 31 $149,979,141 $141,409,008 $118,112,390
========================================================================
The Company recognized a decrease in the liability for losses and loss
expenses of prior years (favorable development) of $0.5 million, $2.3 million
and $1.4 million in 1999, 1998 and 1997, respectively. These favorable
developments are primarily attributable to lower-than-expected claim severity in
the private passenger automobile liability, workers' compensation and commercial
multiple peril lines of business.
8--LINE OF CREDIT
At December 31, 1999 and 1998, pursuant to a credit agreement dated December 29,
1995, and amended as of July 27, 1998, with Fleet National Bank of Connecticut,
the Company had unsecured borrowings of $37 million and $37.5 million,
respectively. Such borrowings were made in connection with the acquisitions of
Delaware, Pioneer, and Southern Heritage and various capital contributions to
the subsidiaries. Per the terms of the credit agreement, the Company may borrow
up to $40 million at interest rates equal to the bank's then current prime rate
or the then current London interbank Eurodollar bank rate plus 1.70%. At
December 31, 1999, the interest rates were 8.5% on an outstanding prime rate
balance of $22 million and 7.84% on an outstanding Eurodollar rate balance of
$15 million. In addition, the Company pays a rate of 3/10 of 1% per annum on the
average daily unused portion of the bank's commitment. On each July 27,
commencing July 27, 2001, the credit line will be reduced by $8 million. Any
outstanding loan in excess of the remaining credit line, after such reduction,
will then be payable. The Company violated one of the covenants in the loan
agreement that required Donegal Mutual's surplus to be maintained at a certain
level. This violation was waived by the bank and the agreement was amended to
lower this requirement.
9--UNAFFILIATED REINSURERS
In addition to the primary reinsurance in place with the Mutual Company, the
Insurance Subsidiaries have other reinsurance in place, principally with four
unaffiliated reinsurers. The following amounts represent reinsurance
transactions with unaffiliated reinsurers during 1999, 1998 and 1997:
Ceded reinsurance: 1999 1998 1997
- -----------------------------------------------------------------------
Premiums written $ 6,348,846 $4,784,768 $4,315,594
=======================================================================
Premiums earned $ 6,509,844 $4,720,669 $4,264,761
=======================================================================
Losses and loss expenses $ 4,513,244 $4,489,728 $3,169,659
=======================================================================
Unearned premiums $ 1,155,460 $1,316,458 $ 750,757
=======================================================================
Liability for losses and
loss expenses $ 8,577,264 $8,505,944 $5,342,571
=======================================================================
10--INCOME TAXES
The provision for income tax consists of the following:
1999 1998 1997
- -----------------------------------------------------------------------
Current $ 762,286 $2,500,582 $3,525,249
Deferred (3,790,122) 158,593 7,108
- -----------------------------------------------------------------------
Federal tax provision $(3,027,836) $2,659,175 $3,532,357
=======================================================================
The effective tax rate is different than the amount computed at the statutory
federal rate of 34% for 1999, 1998 and 1997. The reason for such difference and
the related tax effect are as follows:
1999 1998 1997
- ------------------------------------------------------------------------
Income before
income taxes $ 3,629,101 $11,677,015 $14,173,543
========================================================================
Computed "expected"
taxes at 34% $ 1,233,894 $ 3,970,185 $ 4,819,005
Recognition of net operating
loss carryover of
Southern Heritage (3,004,524) -- --
Tax-exempt interest (1,352,657) (1,180,773) (1,130,311)
Dividends received deduction (83,948) (177,374) (48,477)
Other, net 179,399 47,137 (107,860)
- ------------------------------------------------------------------------
Federal income
tax provision $(3,027,836) $ 2,659,175 $ 3,532,357
========================================================================
page 22
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998, are as follows:
1999 1998
- --------------------------------------------------------------------
Deferred tax assets:
Unearned premium $ 4,454,147 $ 4,593,745
Loss reserves 4,666,536 4,581,026
AMT credit carryforward 577,611 --
Net operating loss carryforward -
Southern Heritage 2,646,172 3,429,107
Valuation allowance -- (3,429,107)
Unrealized loss 1,116,777 --
Other 306,412 --
- --------------------------------------------------------------------
Total $13,767,655 $ 9,174,771
====================================================================
Deferred tax liabilities:
Depreciation expense $ 469,426 $ 425,292
Deferred policy acquisition costs 3,809,123 3,853,662
Salvage recoverable 367,874 483,960
Unrealized gain -- 677,643
Other -- 197,522
- --------------------------------------------------------------------
Total $ 4,646,423 $ 5,638,079
====================================================================
Net deferred tax assets $ 9,121,232 $ 3,536,692
====================================================================
A valuation allowance is provided when it is more likely than not that some
portion of the tax asset will not be realized. At December 31, 1998, management
determined that a valuation allowance related to the net operating loss
carryforward of Southern Heritage should be established. Management has
determined that it is not required to establish a valuation allowance for any
deferred tax asset at December 31, 1999, since it is more likely than not that
the deferred tax assets will be realized through reversals of existing temporary
differences, future taxable income, carryback to taxable income in prior years
and the implementation of tax planning strategies.
A change in the federal income laws was enacted during 1999 which now allows
net operating loss carryforwards of an acquired company to be used to offset
future taxable income of other affiliated companies filing as part of a
consolidated tax return. Prior law allowed such net operating loss carryforward
to be used to offset taxable income of the acquired company only. Due to this
law change, the net operating loss carryforward, obtained as part of the
acquisition of Southern Heritage, can now be used to offset taxable income
generated by the other consolidated affiliates. This is the primary factor in
management's determination that no valuation allowance is required at the end of
1999. Accordingly, the tax benefit of this carryforward, as adjusted for the
1998 tax return as filed, of $3,004,524 was recognized in 1999.
At December 31, 1999 the Company has a net operating loss carryforward of
$7,782,859 which is available to offset taxable income of the Company. Such net
operating loss carryforward will expire beginning in 2009. Federal income tax
laws limit the amount of net operating loss carryforward that the Company can
use in any one year to approximately $1 million.
11--STOCK COMPENSATION PLANS
EQUITY INCENTIVE PLANS
The Company has had an Equity Incentive Plan for key employees since 1986 and
adopted a nearly identical new plan in 1996. Both plans provide for the granting
of awards by the Board of Directors in the form of stock options, stock
appreciation rights, restricted stock or any combination of the above. The new
plan was adopted in 1996 and amended in 1997 and 1999 making a total of
1,800,000 shares available. The plans provide that stock options may become
exercisable up to 10 years from date of grant, with an option price not less
than fair market value on date of grant. The stock appreciation rights permit
surrender of the option and receipt of the excess of current market price over
option price in cash.
Information regarding activity in the Company's stock option plans is
presented below:
Weighted-Average
Number of Exercise Price
Shares Per Share
- ---------------------------------------------------------------
Outstanding at December 31, 1996 -- $ --
Granted - 1997 532,451 13.50
Exercised - 1997 2,963 13.50
Forfeited - 1997 13,632 13.50
- ---------------------------------------------------------------
Outstanding at December 31, 1997 515,856 13.50
Granted - 1998 505,333 18.00
Exercised - 1998 10,073 13.50
Forfeited - 1998 -- --
- ---------------------------------------------------------------
Outstanding at December 31, 1998 1,011,116 15.73
Granted - 1999 433,500 8.00
Exercised - 1999 -- --
Forfeited - 1999 19,335 15.52
- ---------------------------------------------------------------
Outstanding at December 31, 1999 1,425,281 $13.50
===============================================================
Exercisable at:
December 31, 1997 173,333 $13.50
===============================================================
December 31, 1998 502,965 $15.00
===============================================================
December 31, 1999 826,226 $16.20
===============================================================
Shares available for future grants at December 31, 1999 are 374,719.
The following table summarizes information about fixed stock options at
December 31, 1999:
Exercise Prices
---------------------------------
$8.00 $13.50 $18.00
- -----------------------------------------------------------------------------
Options outstanding at
December 31, 1999:
Number of options 418,500 495,115 511,666
- -----------------------------------------------------------------------------
Weighted-average remaining
contractual life 5.0 years 2.0 years .25 years
- -----------------------------------------------------------------------------
Options exercisable at
December 31, 1999:
Number of options -- 495,115 331,111
- -----------------------------------------------------------------------------
page 23
<PAGE>
1996 EQUITY INCENTIVE PLAN FOR DIRECTORS
During 1996 the Company adopted an Equity Incentive Plan For Directors. The plan
was amended in 1998, making 265,735 shares available for award. Awards may be
made in the form of stock options, and the plan additionally provides for the
issuance of 177 shares of restricted stock to each director on the first
business day of January in each year, commencing January 2, 1997. As of December
31, 1999, the Company has 71,112 unexercised options under this plan.
Additionally 2,124, 2,124 and 2,124 shares of restricted stock were issued on
January 2, 1999, 1998 and 1997, respectively.
EMPLOYEE STOCK PURCHASE PLANS
During 1996 the Company adopted the 1996 Employee Stock Purchase Plan which
replaced a similar plan that had been adopted effective January 1, 1988. The
1996 plan made 162,873 shares available for issuance.
The 1996 Plan extends over a 10-year period and provides for shares to be
offered to all eligible employees at a purchase price equal to the lesser of 85%
of the fair market value of the Company's common stock on the last day before
the first day of the enrollment period (June 30 and December 31). A summary of
plan activity follows:
Shares Issued
-----------------
Price Shares
- -------------------------------------------------------------
January 1, 1997 $ 8.24766 11,689
July 1, 1997 $ 9.26367 11,357
January 1, 1998 $11.65430 8,901
July 1, 1998 $13.06875 9,179
January 1, 1999 $13.28125 10,227
July 1, 1999 $ 9.66875 11,876
On January 1, 2000, the Company issued an additional 23,906 shares at a price
of $5.41875 per share under this plan.
AGENCY STOCK PURCHASE PLAN
On December 31, 1996, the Company adopted the Agency Stock Purchase Plan which
made 514,102 shares available for issuance. The plan provides for agents of
affiliated companies of Donegal Group Inc. to invest up to $12,000 per
subscription period (April 1 to September 30 and October 1 to March 31) under
various methods. Stock is issued at the end of the subscription period at a
price equal to 90% of the average market price during the last ten trading days
of the subscription period. During 1999, 1998 and 1997, 47,841, 35,003 and
40,200 shares, respectively, were issued under this plan.
PRO-FORMA DISCLOSURES
The weighted-average grant date fair value of options granted for the various
plans during 1999, 1998 and 1997 was $1.98, $4.48 and $4.74, respectively.
The fair values above were calculated based upon risk-free interest rates of
6.3% for the Stock Purchase Plans and the Equity Incentive Plans, expected lives
of 6 months for the Stock Purchase Plans and 5 years for the Equity Incentive
Plans, expected volatility of 47% for 1999 and 34% for 1998 and 1997 and an
expected dividend yield of 5.0% for 1999 and 2.4% for 1998 and 1997.
The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized for
its fixed stock option plans and certain of its stock purchase plans. Had the
Company recognized stock compensation expense in accordance with SFAS No. 123,
net income and earnings per share would have been reduced to the pro-forma
amounts shown below:
1999 1998 1997
- -------------------------------------------------------------------------
Net income:
As reported $6,656,937 $9,017,840 $10,641,186
Pro-forma 5,457,591 8,362,764 10,263,965
Basic earnings per share:
As reported .80 1.11 1.33
Pro-forma .66 1.03 1.28
Diluted earnings per share:
As reported .80 1.09 1.32
Pro-forma .66 1.01 1.28
12--STATUTORY NET INCOME, CAPITAL AND SURPLUS AND DIVIDEND RESTRICTIONS
The following is selected information for the Insurance Subsidiaries as
determined in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities:
1999 1998 1997
- ------------------------------------------------------------------------------
ATLANTIC STATES
Statutory capital
and surplus $ 68,518,020 $ 62,672,151 $ 56,606,354
=============================================
Statutory unassigned
surplus $ 37,557,156 $ 31,711,287 $ 25,645,490
=============================================
Statutory net income $ 3,855,803 $ 6,480,524 $ 7,349,284
===========================================================================
SOUTHERN
Statutory capital
and surplus $ 7,293,856 $ 6,388,316 $ 7,069,112
=============================================
Statutory unassigned
surplus $ 2,191,586 $ 1,636,046 $ 2,316,842
=============================================
Statutory net income $ 184,285 $ 66,297 $ 703,727
===========================================================================
DELAWARE
Statutory capital
and surplus $ 9,563,808 $ 8,548,354 $ 7,657,691
=============================================
Statutory unassigned
surplus $ 4,363,808 $ 3,348,354 $ 2,457,691
=============================================
Statutory net income $ 898,360 $ 1,085,807 $ 1,070,463
===========================================================================
PIONEER
Statutory capital
and surplus $ 5,677,926 $ 5,300,349 $ 5,377,492
=============================================
Statutory unassigned
deficit $ (1,322,074) $ (1,699,651) $ (1,622,508)
=============================================
Statutory net income $ 108,322 $ 188,579 $ 542,799
===========================================================================
SOUTHERN HERITAGE
Statutory capital
and surplus $ 16,508,422 $ 15,805,641 $ 16,532,876
=============================================
Statutory unassigned
deficit $(16,006,893) $(16,709,674) $(12,482,439)
=============================================
Statutory net income (loss) $ 487,098 $ (3,937,548) $ 151,135
===========================================================================
page 24
<PAGE>
The Company's principal source of cash for payment of dividends are dividends
from its Insurance Subsidiaries which are required by law to maintain certain
minimum capital and surplus on a statutory basis and are subject to regulations
under which payment of dividends from statutory surplus is restricted and may
require prior approval of their domiciliary insurance regulatory authorities.
Atlantic States, Southern, Delaware, Pioneer and Southern Heritage are also
subject to Risk Based Capital (RBC) requirements which may further impact their
ability to pay dividends. At December 31, 1999, all five companies' statutory
capital and surplus were substantially above the RBC requirements. At December
31, 1999, amounts available for distribution as dividends to Donegal Group Inc.
without prior approval of insurance regulatory authorities are $6,851,802 from
Atlantic States, $184,285 from Southern, $956,381 from Delaware, $567,793 from
Pioneer and $1,650,842 from Southern Heritage.
13--RECONCILIATION OF STATUTORY FILINGS TO AMOUNTS REPORTED HEREIN
The Company's Insurance Subsidiaries are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting principles.
Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in the
accompanying financial statements are as follows:
Year Ended December 31,
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Statutory net income of
Insurance Subsidiaries $5,533,868 $ 8,301,081 $ 9,666,273
Increases (decreases):
Deferred policy
acquisition costs (130,999) 399,428 610,161
Deferred federal
income taxes 3,790,122 (158,593) (7,108)
Salvage and subrogation
recoverable (226,617) 1,217,092 984,981
Consolidating eliminations
and adjustments (1,387,864) (967,940) (950,000)
Parent-only net income (loss) (908,987) 178,249 291,831
Non-insurance subsidiary
net income (loss) (12,586) 48,523 45,048
- ---------------------------------------------------------------------------
Net income as
reported herein $6,656,937 $ 9,017,840 $ 10,641,186
===========================================================================
December 31,
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Statutory capital and surplus
of Insurance Subsidiaries $107,562,032 $ 98,714,811 $76,710,649
Increases (decreases):
Deferred policy
acquisition costs 11,203,302 11,334,301 8,448,060
Deferred federal
income taxes 9,121,232 3,592,605 3,302,043
Salvage and subrogation
recoverable 7,736,942 7,963,559 6,155,467
Statutory reserves 5,066,505 9,066,998 8,712,694
Non-admitted assets and
other adjustments, net 793,715 1,178,102 394,432
Fixed maturities
available for sale (2,889,365) 2,038,604 808,908
Consolidating eliminations
and adjustments (36,630,839) (36,383,362) (16,121,711)
Parent-only equity 1,451,088 2,843,990 2,953,248
Non-insurance
subsidiary equity -- 281,396 232,873
- ----------------------------------------------------------------------------
Stockholders' equity as
reported herein $103,414,612 $100,631,004 $91,596,663
============================================================================
14--SUPPLEMENTARY INFORMATION ON STATEMENT OF CASH FLOWS
The following reflects income taxes and interest paid during 1999,
1998 and 1997:
1999 1998 1997
- ---------------------------------------------------------------------
Income taxes $1,233,414 $ 2,671,969 $ 4,094,338
=====================================================================
Interest $1,370,155 $ 1,270,646 $ 904,385
=====================================================================
During 1999, the Company wrote off fixed assets with a net carrying
value of $407,000 which was a non-cash charge to earnings.
15--EARNINGS PER SHARE
The following information illustrates the computation of net income,
outstanding shares and earnings per share on both a basic and diluted
basis for the years ending December 31, 1999, 1998 and 1997:
Weighted-
Average Earnings
Net Shares Per
Income Outstanding Share
- ----------------------------------------------------------------
1999:
Basic $ 6,656,937 8,327,356 $ .80
Effect of stock options -- -- --
- ----------------------------------------------------------------
Diluted $ 6,656,937 8,327,356 $ .80
================================================================
1998:
Basic $ 9,017,840 8,126,286 $1.11
Effect of stock options -- 123,404 (0.02)
- ----------------------------------------------------------------
Diluted $ 9,017,840 8,249,690 $1.09
================================================================
1997:
Basic $10,641,186 7,994,937 $1.33
Effect of stock options -- 41,274 (0.01)
- ----------------------------------------------------------------
Diluted $10,641,186 8,036,211 $1.32
================================================================
page 25
<PAGE>
The following options to purchase shares of common stock were not included in
the computation of diluted earnings per share because the exercise price of the
options was greater than the average market price:
1999 1998 1997
- --------------------------------------------------------------------------------
Options excluded from
diluted earnings per share 1,425,281 887,712 474,582
================================================================================
16--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
($ in thousands)
December 31, 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Investment in subsidiaries (equity method) $138,702 $134,441
Cash 371 599
Property and equipment 2,232 2,276
Other 750 2,124
- --------------------------------------------------------------------------------
Total assets $142,055 $139,440
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Cash dividends declared to stockholders $ 761 $ 708
Line of credit 37,000 37,500
Other 879 601
- --------------------------------------------------------------------------------
Total liabilities 38,640 38,809
- --------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $1.00 par value, authorized
2,000,000 shares, none issued
Common stock, Class A, authorized
15,000,000 shares, none issued
Commonstock, $1.00 par value, authorized
20,000,000 shares, issued 8,574,210
and 8,325,221 shares and outstanding
8,451,922 and 8,202,933 shares 8,574 8,325
Additional paid-in capital 43,537 41,271
Accumulated other comprehensive income (loss) (2,074) 1,316
Retained earnings, including equity in
undistributed net income of
subsidiaries($72,539 and $64,922) 54,270 50,611
Treasury stock, at cost (892) (892)
- --------------------------------------------------------------------------------
Total stockholders' equity 103,415 100,631
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $142,055 $139,440
================================================================================
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues
Dividends-subsidiaries $ 820 $ 1,000 $ 950
Other 865 776 658
- --------------------------------------------------------------------------------
Total revenues 1,685 1,776 1,608
- --------------------------------------------------------------------------------
Expenses
Operating expenses 938 718 643
Interest 2,463 1,293 1,022
- --------------------------------------------------------------------------------
Total expenses 3,401 2,011 1,665
- --------------------------------------------------------------------------------
Loss before income tax benefit
and equity in undistributed net
income of subsidiaries (1,716) (235) (57)
Income tax benefit (807) (413) (346)
- --------------------------------------------------------------------------------
Income (loss) before equity in undistributed
net income of subsidiaries (909) 178 289
Equity in undistributed net income
of subsidiaries 7,566 8,840 10,352
- --------------------------------------------------------------------------------
Net income $ 6,657 $ 9,018 $10,641
================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,657 $ 9,018 $10,641
- --------------------------------------------------------------------------------
Adjustments:
Equity in undistributed net
income of subsidiaries (7,566) (8,840) (10,352)
Other 2,365 (921) 382
- --------------------------------------------------------------------------------
Net adjustments (5,201) (9,761) (9,970)
- --------------------------------------------------------------------------------
Net cash provided (used) 1,456 (743) 671
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Net purchase of property and
equipment (426) (564) (1,251)
Capital contribution to subsidiaries -- (2,000) --
Sale of AIS 100 -- --
Acquisition of Southern Heritage -- (18,028) --
Other (426) (5,613) 4
- --------------------------------------------------------------------------------
Net cash used (752) (26,205) (1,247)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (2,946) (2,664) (2,252)
Issuance of common stock 2,514 2,481 1,131
Line of credit, net (500) 27,000 2,000
- --------------------------------------------------------------------------------
Net cash provided (used) (932) 26,817 879
- --------------------------------------------------------------------------------
Net change in cash (228) (131) 303
Cash at beginning of year 599 730 427
- --------------------------------------------------------------------------------
Cash at ending of year $ 371 $ 599 $ 730
================================================================================
page 26
<PAGE>
17--SEGMENT INFORMATION
As an underwriter of property and casualty insurance, the Company has three
reportable segments which consist of the investment function, the personal lines
of insurance and the commercial lines of insurance. Using independent agents,
the Company markets personal lines of insurance to individuals and commercial
lines of insurance to small and medium-sized businesses.
The Company evaluates the performance of the personal lines and commercial
lines primarily based upon underwriting results as determined under statutory
accounting practices (SAP) for the total business of the Company.
Assets are not allocated to the personal and commercial lines and are
reviewed in total by management for purposes of decision making. Donegal Group
Inc. operates only in the United States and no single customer or agent provides
10 percent or more of revenues.
Financial data by segment is as follows:
1999 1998 1997
-----------------------------------------
($ in thousands)
- --------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 47,707 $ 44,493 $ 45,702
Personal lines 96,167 71,676 61,600
- --------------------------------------------------------------------------------
Total premiums earned 143,874 116,169 107,302
- --------------------------------------------------------------------------------
Net investment income 13,224 11,998 11,507
Realized investment
gains (losses) (39) (14) 314
Other 2,652 2,433 2,205
- --------------------------------------------------------------------------------
Total revenues $159,711 $130,586 $121,328
================================================================================
Income before income taxes:
Underwriting income (loss):
Commercial lines $ (826) $ 3,688 $ 3,497
Personal lines (8,238) (5,327) (2,734)
- --------------------------------------------------------------------------------
SAP underwriting gain
(loss) (9,064) (1,639) 763
GAAP adjustments (251) 1,803 1,809
- --------------------------------------------------------------------------------
GAAP underwriting gain
(loss) (9,315) 164 2,572
Net investment income 13,224 11,998 11,507
Realized investment gains (losses) (39) (14) 314
Other (241) (471) (219)
- --------------------------------------------------------------------------------
Income before income taxes $ 3,629 $ 11,677 $ 14,174
================================================================================
18--RESTRUCTURING CHARGE
On September 29, 1999, the Company announced a plan to consolidate certain
subsidiary support functions into its Marietta, Pennsylvania office. As a result
of this consolidation, the Company recorded a restructuring charge of $2,206,000
for employee termination benefits, occupancy charges, lease cancellation costs,
and asset impairments. The charge is included in other underwriting expenses.
The consolidation is expected to be compete by the end of the first quarter of
2000.
Employee termination benefits of $782,000 include severance payments, which
may be paid in a lump sum or over a defined period, and related benefits for
approximately 60 employees. Of the terminated employees, approximately 50% were
from subsidiary support functions and approximately 50% were from the Marietta,
Pennsylvania office. By December 31, 1999, all of the terminated employees had
left the employment of the Company.
Included in occupancy charges of $488,000 are future lease obligations,
less anticipated sublease benefits, for leased space which will no longer be
used by the Delaware and Southern Heritage subsidiary support functions.
Also included in the restructuring charge was $529,000 related to contract
cancellation costs that represented the estimated cost to buy out of the
remaining term on printer, copier, and computer processing contracts that
provided no future benefit to the Company as a result of the restructuring. All
such assets have been taken out of service.
Asset impairments, which were a direct result of the consolidation of
subsidiary functions, amounted to $407,000. They consisted of capitalized
programming and data center costs, voice systems, and leasehold and office
improvements. These assets were written-down to zero. All such assets have been
taken out of service.
Activity in the restructuring accrual is as follows:
Employee
Termination Contract
Benefits Occupancy Cancellations Total
- --------------------------------------------------------------------------------
Restructuring
charge $782,000 $488,000 $529,000 $1,799,000
Cash payments (343,000) (47,000) (365,000) (755,000)
Reversal of
prior accrual (71,000) -- (91,000) (162,000)
- --------------------------------------------------------------------------------
Balance at
December 31,
1999 $368,000 $441,000 $ 73,000 $ 882,000
================================================================================
Based on revised estimates, $162,000 of the restructuring accrual was
reversed by a reduction to the restructuring charge in other underwriting
expenses in the fourth quarter of 1999. Employee termination benefits and
contract cancellation costs were lower than original estimates.
19--GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
The Company accrues for guaranty-fund and other insurance-related assessments in
accordance with Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance
for determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through premium
tax offsets or policy surcharges. The Company's liability for guaranty-fund and
other insurance-related assessments was $534,518 at December 31, 1999, most of
which the Company expects to pay in 2000.
page 27
<PAGE>
20--INTERIM FINANCIAL DATA (UNAUDITED)
1999
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net premiums
earned $36,093,971 $35,829,815 $35,955,556 $35,994,628
Total revenues 40,109,990 39,787,987 39,802,234 40,010,896
Net losses and loss
expenses 24,451,651 24,162,300 26,449,962 24,141,089
Net income (loss) 2,151,367 1,300,736 (2,442,880) 5,647,714
Net income (loss) per
common share
Basic $.26 $.16 $(.29) $.67
Diluted .26 .16 (.29) .67
1998
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net premiums
earned $27,204,544 $27,578,257 $28,064,764 $33,321,427
Total revenues 30,896,144 31,023,026 31,654,736 37,012,459
Net losses and loss
expenses 15,801,905 19,225,138 20,434,534 17,705,508
Net income 3,316,653 1,892,892 44,414 3,763,881
Net income per
common share
Basic $.41 $.22 $.01 $.46
Diluted .40 .22 .01 .46
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Donegal Group Inc.
We have audited the accompanying consolidated balance sheets of Donegal Group
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donegal
Group Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Philadelphia, Pennsylvania
February 18, 2000
page 28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums earned $143,873,970 $116,168,992 $107,302,168 $104,527,038 $ 89,522,203
Investment income, net 13,223,537 11,997,661 11,507,277 10,799,369 9,713,744
Realized investment gains (losses) (38,702) (13,562) 314,136 172,734 399,706
Total revenues 159,711,107 130,586,365 121,327,606 117,581,664 101,615,698
Income before income taxes 3,629,101 11,677,015 14,173,543 10,736,628 12,060,351
Income taxes (3,027,836) 2,659,175 3,532,357 2,178,854 2,500,741
Net income 6,656,937 9,017,840 10,641,186 8,557,774 9,559,610
Basic earnings per share 0.80 1.11 1.33 1.10 1.29
Diluted earnings per share 0.80 1.09 1.32 1.09 1.26
Cash dividends per share 0.36 0.34 0.29 0.25 0.23
BALANCE SHEET DATA AT YEAR END:
Total investments $261,441,850 $254,995,473 $204,964,805 $192,489,250 $168,215,538
Total assets 399,732,657 385,231,506 304,104,505 287,990,994 244,943,598
Debt obligations 37,000,000 37,500,000 10,500,000 8,500,000 5,000,000
Stockholders' equity 103,414,612 100,631,004 91,596,663 81,599,274 73,020,689
Stockholders' equity per share 12.24 12.27 11.39 10.26 9.64
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In November 1998, the Company acquired all of the outstanding stock of Southern
Heritage. This transaction was accounted for as a "purchase." The Company's
financial statements include Southern Heritage as a consolidated subsidiary from
November 1, 1998.
page 29
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING
April 20, 2000 at the Company's headquarters at 10:00 a.m.
FORM 10-K
A copy of Donegal Group's Annual Report on Form 10-K will be furnished free upon
written request to Ralph G. Spontak, Senior Vice President and Chief Financial
Officer, at the corporate address.
MARKET INFORMATION
Donegal Group's common stock is traded on NASDAQ under the symbol "DGIC." During
1998 and 1999, the stock price ranged as follows:
CASH DIVIDEND
DECLARED
QUARTER HIGH LOW PER SHARE
1998
1st 17.625 15.188 --
2nd 22.781 16.875 .0825
3rd 19.875 14.250 .085
4th 15.750 12.625 .17
1999
1st 16.250 10.500 --
2nd 13.000 10.063 .09
3rd 11.625 6.125 .09
4th 10.625 5.750 .18
CORPORATE OFFICES
1195 River Road
P.O. Box 302
Marietta, Pennsylvania 17547-0302
(717) 426-1931
E-mail Address: [email protected]
Donegal Website: http://www.donegalgroup.com
TRANSFER AGENT
First Chicago Trust Co., a Division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
(800) 317-4445
E-mail Address: [email protected]
FCTC Website: http://www.fctc.com
Hearing Impaired: TDD: 201-222-4955
DIVIDEND RINVESTMENT PLAN
The Company offers a dividend reinvestment plan
through its transfer agent.
For information contact:
Donegal Group Inc. Dividend Reinvestment Plan
c/o First Chicago Trust Co., a Division of EquiServe
P.O. Box 2598
Jersey City, NJ 07303-2598
(800) 317-4445
STOCKHOLDERS
The number of common stockholders of record as
of December 31, 1999 was 622.
31
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Registrant owns 100% of the outstanding stock of the following insurance
companies:
Name State of Formation
- ---- ------------------
Atlantic States Insurance Company Pennsylvania
Southern Insurance Company of Virginia Virginia
Pioneer Insurance Company Ohio
Delaware Atlantic Insurance Company Delaware
Southern Heritage Insurance Company Georgia
EXHIBIT 23
Independent Auditors' Consent and Report on Schedules
The Board of Directors
Donegal Group Inc.:
The audits referred to in our report dated February 18, 2000 include the related
financial statement schedules as of December 31, 1999, and for each of the years
in the three-year period ended December 31, 1999, included in the annual report
on Form 10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We consent to incorporation by reference in the registration statements (Nos.
333-1287, 333-06681, 33-26693, 33-61095, 333-93785 and 333-94301) on Form S-8
and registration statement (No. 333-36585) on Form S-3 of Donegal Group Inc. of
our reports dated February 18, 2000, relating to the consolidated balance sheets
of Donegal Group Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows and related financial statement schedules for each of the years
in the three-year period ended December 31, 1999, which reports appear in the
December 31, 1999 annual report on Form 10-K of Donegal Group Inc.
KPMG LLP
Philadelphia, Pennsylvania
March 28, 2000
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 100,043,548
<DEBT-CARRYING-VALUE> 136,173,547
<DEBT-MARKET-VALUE> 133,995,994
<EQUITIES> 9,229,498
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 261,441,850
<CASH> 3,922,403
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<DEFERRED-ACQUISITION> 11,203,302
<TOTAL-ASSETS> 399,732,657
<POLICY-LOSSES> 149,979,141
<UNEARNED-PREMIUMS> 97,657,020
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0
0
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143,873,970
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<UNDERWRITING-AMORTIZATION> 24,608,000
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<INCOME-PRETAX> 3,629,101
<INCOME-TAX> (3,027,836)
<INCOME-CONTINUING> 6,656,937
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<EXTRAORDINARY> 0
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<EPS-BASIC> .80
<EPS-DILUTED> .80
<RESERVE-OPEN> 93,863,416
<PROVISION-CURRENT> 99,659,002
<PROVISION-PRIOR> (454,000)
<PAYMENTS-CURRENT> 58,906,426
<PAYMENTS-PRIOR> 36,668,000
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