UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------- ---------
Commission file no.: 333-93785
Donegal Mutual Insurance Company 401(k) Plan
----------------------------------------------------
(Full title of the plan and the address of the plan,
if different from that of the issuer named below)
Donegal Group Inc.
1195 River Road
Marietta, Pennsylvania 17547
--------------------------------------
(Name of issuer of the securities held
pursuant to the plan and the address
of its principal executive office)
DONEGAL MUTUAL INSURANCE
COMPANY 401(k) PLAN
FINANCIAL STATEMENTS WITH
SUPPLEMENTAL SCHEDULE
YEARS ENDED DECEMBER 31, 2002 AND 2001
AND
INDEPENDENT AUDITOR'S REPORT
McKONLY & ASBURY LLP
[ART] CERTIFIED PUBLIC ACCOUNTANTS
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
TABLE OF CONTENTS
Page
Independent Auditor's Report 1
Financial Statements
Statements of Net Assets Available for Benefits 3
Statements of Changes in Net Assets Available for
Benefits 4
Notes to Financial Statements 5
Supplemental Schedule
Schedule H - Financial Information (Form 5500)
Part IV Line 4i - Schedule of Assets Held for
Investment Purposes at End of Year 14
CLARENCE E. ASBURY, CPA, CVA
TERRY L. HARRIS, CPA
ROBERT A. ROMAKO, CPA
GARY J. DUBAS, CPA
SCOTT A. HEINTZELMAN, CPA, CMA, CFE
TRACEY L. RASH, CPA
MCKONLY & ASBURY LLP
================================================================================
CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
AMERICAN AND PENNSYLVANIA
INSTITUTES OF CERTIFIED PUBLIC
ACCOUNTANTS
[ART] INTERNATIONAL GROUP OF
ACCOUNTING FIRMS
INDEPENDENT AUDITOR'S REPORT
Donegal Mutual Insurance Company
401(k) Plan
Marietta, Pennsylvania
We have audited the accompanying statements of net assets available for benefits
of Donegal Mutual Insurance Company 401(k) Plan as of December 31, 2002 and
2001, and the related statements of changes in net assets available for benefits
for the years then ended. These financial statements are the responsibility of
the Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of Donegal Mutual
Insurance Company 401(k) Plan as of December 31, 2002 and 2001, and the changes
in its net assets available for benefits for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
415 FALLOWFIELD ROAD MAILING ADDRESS: P.O. BOX 1331
2ND FLOOR O CAMP HILL, PA 17011 [ART] HARRISBURG, PA 17105
(717) 761-7910 O FAX (717) 761-7944 WEB SITE: www.macpas.com
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule H -
Financial Information (Form 5500) Part IV Line 4i - Schedule of Assets Held for
Investment Purposes At End of Year, referred to as "supplemental schedule", is
presented for the purpose of additional analysis and is not a required part of
the basic financial statements but is supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. This supplemental
information is the responsibility of the Plan's management. The supplemental
information has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
McKonly & Asbury, LLP
/s/ McKONLY & ASBURY, LLP
Harrisburg, Pennsylvania
June 24, 2003
2
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 2002 AND 2001
2002 2001
------------- ---------------------------------------------------------------
Money
Purchase Profit
401(k) Pension Sharing
Total Account Account Account Total
------------ ----------- ----------- ----------- ------------
Assets
Noninterest-bearing cash $ - $ 4,581,239 $ 6,818,008 $ 2,101,502 $ 13,500,749
------------ ----------- ----------- ----------- ------------
Receivables
Employer contributions - 51,204 - - 51,204
Participant contributions - 77,394 - - 77,394
------------ ----------- ----------- ----------- ------------
Total receivables - 128,598 - - 128,598
------------ ----------- ----------- ----------- ------------
Investments, at fair value
Interest-bearing cash 2,387,301 - - - -
Common/collective trusts 1,374,227 - - - -
Registered investment
companies 8,941,998 - - - -
Employer securities 1,479,770 12,726 1,178,708 264,053 1,455,487
------------ ----------- ----------- ----------- ------------
Total investments 14,183,296 12,726 1,178,708 264,053 1,455,487
------------ ----------- ----------- ----------- ------------
Total assets 14,183,296 4,722,563 7,996,716 2,365,555 15,084,834
------------ ----------- ----------- ----------- ------------
Net assets available
for benefits $ 14,183,296 $ 4,722,563 $ 7,996,716 $ 2,365,555 $ 15,084,834
============ =========== =========== =========== ============
The accompanying notes are an integral
part of these financial statements.
3
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
-------------- ---------------------------------------------------------------
Money
Purchase Profit
401(k) Pension Sharing
Total Account Account Account Total
-------------- -------------- --------------- --------------- --------------
Additions
Contributions
Employer $ 717,865 $ 711,585 $ - $ - $ 711,585
Participants 1,094,702 1,109,400 - - 1,109,400
Rollover 344,991 112,035 - - 112,035
----------- ---------- ---------- ---------- -----------
2,157,558 1,933,020 - - 1,933,020
----------- ---------- ---------- ---------- -----------
Investment income
Interest 39,815 - - - -
Dividends 51,781 382 44,192 9,408 53,982
Net realized/unrealized
appreciation (depreciation)
in fair value of investments (1,569,032) (482,263) (443,021) (131,670) (1,056,954)
----------- ---------- ---------- ---------- -----------
(1,477,436) (481,881) (398,829) (122,262) (1,002,972)
----------- ---------- ---------- ---------- -----------
Total additions 680,122 1,451,139 (398,829) (122,262) 930,048
----------- ---------- ---------- ---------- -----------
Deductions
Benefits paid to participants 1,581,660 262,972 740,419 294,574 1,297,965
Administrative expenses - 14,920 24,403 6,833 46,156
----------- ---------- ---------- ---------- -----------
Total deductions 1,581,660 277,892 764,822 301,407 1,344,121
----------- ---------- ---------- ---------- -----------
Net increase (decrease) (901,538) 1,173,247 (1,163,651) (423,669) (414,073)
Net assets available
for benefits -
Beginning of year 15,084,834 3,549,316 9,160,367 2,789,224 15,498,907
----------- ---------- ---------- ---------- -----------
End of year $14,183,296 $4,722,563 $7,996,716 $2,365,555 $15,084,834
=========== ========== ========== ========== ===========
The accompanying notes are an integral
part of these financial statements.
4
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
1. DESCRIPTION OF PLAN
The following description of the Donegal Mutual Insurance Company (the Company)
401(k) Plan (Plan) provides only general information. Participants should refer
to the Plan agreement for a more complete description of the Plan's provisions.
General
The Plan is a defined contribution 401(k) plan, which became effective January
1, 1998. All employees of the Company as of May 1, 1998 are eligible to
participate in the Plan immediately. All other employees will be eligible to
participate as of the first day of the month after the month in which their
employment with the Company commences. This Plan is subject to the provisions of
the Employee Retirement Income Security Act of 1974 (ERISA). The Company
discontinued their Money Purchase Pension Plan and Profit Sharing Plan on
December 31, 1999 and all assets from these two plans were transferred to the
401(k) Plan during the 2000 year. The transfer of investments consisted of cash
and 51,110 shares of Donegal Group, Inc. common stock. Separate accounts were
established to record the activity of the funds within the 401(k) Account, the
Money Purchase Pension Account and the Profit Sharing Account. Effective January
1, 2002, the funds from all three Accounts have been combined and all 2002
activity is recorded on an aggregate basis.
Contributions
Participants may contribute between 1% and 100% (between 1% and 15% in 2001) of
their annual compensation up to the maximum limit established by the Internal
Revenue Code. The Company will contribute, on behalf of each participant, a sum
equal to 100% of the first 3% of participant deferrals and 50% of the next 6%.
Participant Accounts
Each participant's account is credited with the participant's contribution and
an allocation of the following in accordance with Plan provisions: (a) the
Company's contribution, (b) Plan earnings, and (c) forfeitures of terminated
participants' nonvested accounts. Allocations are based on participant earnings
or account balances, as defined. The benefit to which a participant is entitled
is the benefit that can be provided from the participant's vested account.
(continued)
5
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
1. DESCRIPTION OF PLAN (Cont'd)
Vesting
Participants are immediately vested in their salary deferral contributions and
earnings thereon, as well as all amounts that have been transferred into the
Plan from the discontinued Money Purchase Pension Plan and Profit Sharing Plan.
Vesting of employer matching contributions and earnings thereon is based on
years of service. A participant is 100% vested after 3 years of credited
service. Forfeitures arising from distributions to participants who are less
than 100% vested will be reallocated to existing participants per guidelines
established by the Plan. Forfeitures during 2002 and 2001 amounted to $10,732
and $10,277.
Payment of Benefits
The normal retirement date is the first of the month following attainment of age
65. Early retirement is possible at age 55. Benefits are paid in the form of a
lump-sum distribution. There is a provision available to allow hardship
withdrawals of benefits prior to termination of employment as defined in the
Plan and in compliance with the Internal Revenue Code.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements are prepared under the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of
America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of changes in net assets
available for benefits during the reporting period. Actual results could differ
from those estimates.
(continued)
6
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
Investments
Investments are valued at quoted market prices as determined by the Plan
trustee. Purchases and sales of securities are recorded on a trade-date basis.
Interest income is recorded on the accrual basis. Dividends are recorded on the
ex-dividend date.
7
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Payment of Benefits
Benefits are recorded when paid.
3. INVESTMENTS
Transamerica Life Insurance and Annuity Company (Transamerica) was both the
trustee and custodian which held the funds for the Plan and maintained an
individual account for each participant during the 2001 year. Contributions made
on a participant's behalf under the Plan were directly allocated to that
participant's account. During the 2001 Plan year, contributions made to each
participant's account were invested, based on the individual's direction, in one
or more of nineteen pooled separate accounts or Company stock (see note 5 for
Company stock transactions).
On December 31, 2001, the nineteen pooled separate accounts were converted to
noninterest-bearing cash to facilitate the January 2, 2002 transfer of funds to
Putnam Investments. The total amount of January 2, 2002 Transamerica assets
transferred to Putnam Investments was $13,500,749, of which $4,581,239 was
transferred from the 401(k) Account, $6,818,008 was transferred from the Money
Purchase Pension Account, and $2,101,502 was transferred from the Profit Sharing
Account. All Class A and Class B Donegal Group, Inc. common stock shares were
also transferred to Putnam Investments on January 2, 2002.
Putnam Investments is both the trustee and custodian which holds the funds for
the Plan during the 2002 year and maintains an individual account for each
participant. Contributions made on a participant's behalf under the Plan will be
directly allocated to that participant's account.
Contributions made to each participant's account will be invested, based on the
individual's direction, in one or more of twenty investment options. The twenty
options consist of one interest-bearing cash account (money market fund), two
common collective trust funds, fifteen registered investment companies (mutual
funds), and two classes of employer securities.
(continued)
8
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
3. INVESTMENTS (Cont'd)
Investments as of December 31, 2002 and 2001 are summarized below (investments
that represent 5% or more of the Plan's net assets are separately identified):
2002 2001
----------- ----------
Interest-bearing cash - Putnam Money
Market Fund $ 2,387,301 $ -
Common collective trusts
Putnam S&P 500 Index Fund 880,775 -
Other 493,452 -
Registered investment companies
PIMCO Total Return 1,003,399 -
The Janus Fund 889,324 -
The George Putnam Fund of Boston 970,401 -
Putnam International Growth Fund 1,088,634 -
Putnam Equity Income Fund 2,028,325 -
Other 2,961,915 -
Employer securities -
Class A Donegal Group, Inc. common stock 1,017,396 979,685
Other 462,374 475,802
----------- ----------
$14,183,296 $1,455,487
=========== ==========
During the years ended December 31, 2002 and 2001, the Plan's investments,
(including investments bought, sold, and held during the year) appreciated
(depreciated) in fair value as follows:
2002 2001
----------- -----------
Fair value as determined by the trustees
Interest-bearing cash $ - $ -
Common collective trusts (193,868) -
Pooled separate accounts - (1,207,598)
Registered investment companies (1,423,762) -
Employer securities 48,598 150,644
----------- -----------
$(1,569,032) $(1,056,954)
=========== ===========
(continued)
9
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
4. TAX DETERMINATION
The Internal Revenue Service has determined and informed the Company by a letter
dated December 12, 2001 that the Plan is designed in accordance with applicable
sections of the INTERNAL REVENUE CODE (IRC). Although the Plan has been amended
since receiving the determination letter, the Company believes the Plan is
designed and is currently being operated in compliance with the applicable
requirements of the IRC. Therefore, no provision for income taxes has been
included in the Plan's financial statements.
10
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
5. RELATED PARTY AND PARTY-IN-INTEREST
The Plan held 94,641 shares of Class A and 41,100 shares of Class B Donegal
Group, Inc. common stock with fair values of $1,017,396 and $462,374 as of
December 31, 2002. The Plan held 94,110 shares of Class A and 44,887 shares of
Class B Donegal Group, Inc. common stock with fair values of $979,685 and
$475,802 as of December 31, 2001. During April of 2001, the Company reclassified
their existing common stock as Class B common stock and authorized a
one-for-three reverse split of the Class B common stock. Simultaneously, a new
class of common stock was authorized as Class A common stock and a stock
dividend of two shares of Class A common stock for each share of Class B common
stock held of record was declared. The net realized/ unrealized appreciation of
the fair value of Donegal Group, Inc. common stock (including Class A and Class
B) during 2002 and 2001 was $48,598 and $150,644. As of December 31, 2002 and
2001, the shares of Donegal Group, Inc. common stock represent more than 5% of
net assets available for benefits.
Certain 2002 year Plan investments are interest-bearing cash, common collective
trusts and registered investment companies managed by Putnam Investments. Putnam
Investments is the trustee as defined by the Plan and, therefore, these
transactions qualify as party-in-interest transactions.
Certain 2001 year Plan investments were pooled separate accounts managed by
Transamerica. Transamerica was the trustee for the 2001 year as defined by the
Plan and, therefore, these transactions qualify as party-in-interest
transactions.
6. ADMINISTRATIVE EXPENSES
Certain administrative functions are performed by officers or employees of the
Plan's sponsor. No such officer or employee receives compensation from the Plan.
Primarily all of the trustee fees and audit fees were paid directly by the
Company in 2001 and all of the trustee fees and audit fees were paid directly by
the Company in 2002.
11
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
7. PLAN TERMINATION
Although it has not expressed an intention to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100% vested in their accounts.
12
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
Schedule H (Form 5500)
Part IV - Transactions During Plan Year
Line 4i - Schedule of Assets Held for Investment Purposes At End of Year
Name of Plan Sponsor: Donegal Mutual Insurance Company
Name of Plan: Donegal Mutual Insurance Company 401(k) Plan
Employer Identification Number: 23-1336198
Three-digit Plan Number: 003
Year Ending December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
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(a) (b) Identity of issue, borrower, lessor, (c) Description of investment, including (d) Cost (e) Current value
or similar party maturity date, rate of interest,
collateral, or maturity value
------------------------------------------------------------------------------------------------------------------------------------
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* Putnam Money Market Fund Money Market Fund ** 2,387,301
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing cash 2,387,301
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------------------------------------------------------------------------------------------------------------------------------------
* Putnam Bond Index Fund Common Collective Trust ** 493,452
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Putnam S & P 500 Index Fund Common Collective Trust ** 880,775
------------------------------------------------------------------------------------------------------------------------------------
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Total common collective trusts 1,374,227
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------------------------------------------------------------------------------------------------------------------------------------
* Putnam Capital Opportunities Fund Mutual Fund ** 453,830
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------------------------------------------------------------------------------------------------------------------------------------
MSIF Small Company Growth Fund Mutual Fund ** 268,156
------------------------------------------------------------------------------------------------------------------------------------
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PIMCO Total Return Mutual Fund ** 1,003,399
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
The Janus Fund Mutual Fund ** 889,324
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------------------------------------------------------------------------------------------------------------------------------------
* The George Putnam Fund of Boston Mutual Fund ** 970,401
------------------------------------------------------------------------------------------------------------------------------------
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* Putnam Voyager Fund Mutual Fund ** 125,345
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* Putnam Research Fund Mutual Fund ** 547,297
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Putnam Asset Allocation - Growth Portfolio Mutual Fund ** 264,857
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Putnam Asset Allocation - Balanced Portfolio Mutual Fund ** 459,168
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Putnam Asset Allocation - Mutual Fund ** 402,407
Conservative Portfolio
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Putnam International Growth Fund Mutual Fund ** 1,088,634
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Putnam Equity Income Fund Mutual Fund ** 2,028,325
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Putnam Mid Cap Value Fund Mutual Fund ** 164,046
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Alger Midcap Growth Institutional Portfolio Mutual Fund ** 60,498
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Genesis Trust Mutual Fund ** 216,311
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Total registered investment companies (mutual funds) 8,941,998
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Donegal Group, Inc. Common stock, Class A, 94,641 shares ** 1,017,396
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
* Donegal Group, Inc. Common stock, Class B, 41,100 shares ** 462,374
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Total employer securities 1,479,770
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------------------------------------------------------------------------------------------------------------------------------------
Total investments 14,183,296
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* Party-in-interest
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** Historical cost information has not been disclosed for these participant-directed investments.
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13
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
trustees (or other persons who administer the employee benefit plan) have duly
caused this annual report to be signed on its behalf by the undersigned hereunto
duly authorized in Marietta, Pennsylvania on June 27, 2003.
DONEGAL MUTUAL INSURANCE
COMPANY 401(k) PLAN
By: /s/ Donald H. Nikolaus
--------------------------------
Donald H. Nikolaus, Trustee
By: /s/ Ralph G. Spontak
--------------------------------
Ralph G. Spontak, Trustee
By: /s/ Daniel J. Wagner
--------------------------------
Daniel J. Wagner, Trustee
14
DONEGAL MUTUAL INSURANCE COMPANY
401(k) PLAN
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
23 Consent of McKonly & Asbury LLP (filed herewith)
99 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
15