SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Under Rule 14a-12
HARLEYSVILLE GROUP INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
___________________________________________________________________________
[GRAPHIC OMITTED] Walter R. Bateman (215) 256-5000
Chairman of the Board www.harleysvillegroup.com
& Chief Executive Officer
355 Maple Ave.
Harleysville, PA 19438
March 21, 2003
Dear Harleysville Group Inc. Stockholder:
You are cordially invited to attend the Annual Meeting of the
Stockholders of Harleysville Group Inc. at the Company's headquarters, 355 Maple
Avenue, Harleysville, Pennsylvania on Wednesday, April 23, 2003, at 10:30 A.M.
At the meeting, stockholders will vote on two scheduled items of
business. Those items and the votes the Board of Directors recommends are:
Item Recommended Vote
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1. Election of three directors FOR
2. Approval of the Amended and Restated Employee FOR
Stock Purchase Plan
We will also discuss Harleysville Group's 2002 operations and will be
pleased to answer your questions about the Company. Enclosed with this proxy
statement are your proxy card and the 2002 Annual Report.
We look forward to seeing you on April 23, 2003. Whether or not you
plan to attend the meeting in person, it is important that you complete and
return the enclosed proxy card in the envelope provided in order that your
shares can be voted at the meeting as you have instructed.
Sincerely,
/s/ Walter R. Bateman
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Walter R. Bateman
[GRAPHIC OMITTED] Rober A. Brown (215) 256-5000
Secretary www.harleysvillegroup.com
355 Maple Ave.
Harleysville, PA 19438
HARLEYSVILLE GROUP INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 23, 2003
To the Stockholders of
HARLEYSVILLE GROUP INC.
The Annual Meeting of Stockholders of HARLEYSVILLE GROUP INC. will be
held at 10:30 A.M., Wednesday, April 23, 2003, at its headquarters at 355 Maple
Avenue, Harleysville, Pennsylvania 19438, for the following purposes:
1. To elect three Class B directors;
2. To approve the Amended and Restated Employee Stock Purchase Plan;
and
3. To transact such other business as may properly be presented.
Your Board recommends a vote to elect the nominated directors and to
approve the Amended and Restated Employee Stock Purchase Plan.
The Board of Directors has fixed the close of business on March 5, 2003
as the record date for determining the stockholders entitled to vote at the
Annual Meeting.
For further information on the individuals nominated as directors,
please read the proxy statement that follows.
This notice, the proxy statement, the proxy card and the 2002 Annual
Report to Stockholders are being distributed to stockholders on or about March
21, 2003.
By Order of the Board of Directors,
/s/ Roger A. Brown
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Roger A. Brown
March 21, 2003
Table of Contents
ANNUAL MEETING OF STOCKHOLDERS 1
PURPOSE OF PROXY STATEMENT 1
MATTERS TO BE VOTED UPON 1
VOTING PROCEDURES 1
OTHER INFORMATION 2
BOARD OF DIRECTORS 3
CORPORATE GOVERNANCE PRACTICES 3
AUDIT COMMITTEE REPORT 6
AUDIT FEES 7
BOARD AND COMMITTEE MEETINGS 8
COMPENSATION OF DIRECTORS 11
STOCK ACQUISITION PROGRAMS 11
SHAREHOLDER ACTIONS 13
ITEM 1. ELECTION OF DIRECTORS 13
BIOGRAPHIES OF DIRECTOR NOMINEES AND DIRECTORS CONTINUING IN OFFICE 13
OTHER EXECUTIVE OFFICERS 15
ITEM 2. APPROVAL OF THE AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN 17
PROPOSAL 17
PURPOSE OF THE PLAN 17
SUMMARY OF THE PLAN 17
FEDERAL INCOME TAX CONSEQUENCES 18
PARTICIPATION IN THE PLAN 19
VOTE REQUIRED 19
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION PLANS 20
OWNERSHIP OF COMMON STOCK 21
TABLE I - 5% STOCKHOLDERS 21
TABLE II - BENEFICIAL OWNERSHIP OF DIRECTORS & EXECUTIVE OFFICERS 22
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE 23
COMPENSATION PHILOSOPHY 23
COMPENSATION METHODOLOGY 23
CHIEF EXECUTIVE OFFICER COMPENSATION 26
INTERNAL REVENUE CODE IMPACT 27
COMPENSATION COMMITTEE INTERLOCKS 27
STOCK PERFORMANCE CHART 28
EXECUTIVE COMPENSATION 29
SUMMARY COMPENSATION TABLE 29
OPTION GRANTS IN 2002 31
OPTION EXERCISES & YEAR-END VALUES 32
LONG TERM INCENTIVE PLAN 32
PENSION PLANS 33
TRANSACTIONS WITH HARLEYSVILLE MUTUAL 35
SECTION 16 REPORTING COMPLIANCE 36
ANNUAL MEETING OF STOCKHOLDERS
Purpose of Proxy Statement
The Board of Directors of Harleysville Group is soliciting your proxy
for voting at the Annual Meeting of Stockholders to be held April 23, 2003 at
the headquarters of the Company. This proxy statement has been mailed to
stockholders on or about March 21, 2003.
Matters to be Voted Upon
At the Annual Meeting, stockholders will vote on the election of three
Class "B" directors, Michael L. Browne, Frank E. Reed and Jerry S. Rosenbloom.
Please see page 13 for information on the election of directors. Stockholders
will also vote to approve the Amended and Restated Employee Stock Purchase Plan.
Please see page 17 for information on the approval of the Amended and Restated
Employee Stock Purchase Plan.
The Board of Directors knows of no other matters to be presented for
stockholder action at the meeting. If other matters are properly presented at
the meeting, your signed and dated proxy card authorizes Roger A. Brown, Bruce
J. Magee or Catherine B. Strauss to vote your shares in accordance with their
best judgment.
Voting Procedures
Who May Vote
Stockholders as of the close of business on March 5, 2003 (the Record
Date) are entitled to vote at the Annual Meeting. Each share of common stock is
entitled to one vote.
How to Vote
Stockholders may vote
o In person at the meeting, or
o By mail by completing and returning the proxy card.
Vote Needed for Election of Directors
The three nominees for directors receiving the highest number of votes
will be elected. The Amended and Restated Employee Stock Purchase Plan will be
approved if it receives affirmative votes representing a simple majority of all
shares present and entitled to vote. As of the Record Date, Harleysville Mutual
Insurance Company owned 16,609,786 shares (or approximately 55.2%) of
Harleysville Group's outstanding common stock. Harleysville Mutual has advised
Harleysville Group that it will vote in favor of the election of the nominated
directors and for approval of the Amended and Restated Employee Stock Purchase
Plan. As a result, the nominated directors will be elected and the Amended and
Restated Employee Stock Purchase Plan will be approved regardless of the votes
of the other stockholders.
Quorum to Transact Business
A quorum for the transaction of business at the Annual Meeting consists
of the holders of a majority of the issued and outstanding shares of the
Company's common stock, present in person or represented by proxy. As of the
Record Date, 30,064,517 shares of Harleysville Group's common stock were issued
and outstanding. If you attend in person and indicate your presence, or mail in
a properly signed and dated proxy card, you will be part of the quorum.
1
Voting of Shares via Proxy
If you have submitted a properly executed proxy by mail and are part of
the quorum, your shares will be voted as you indicate. If you sign, date and
mail in your proxy card without indicating how it should be voted on the
election of the directors or approval of the Amended and Restated Employees
Stock Purchase Plan, your shares will be voted in favor of the election of the
three nominated directors and for the approval of the Plan. If you sign, date
and mail your proxy card and withhold voting for any or all of the nominated
directors (as explained on the proxy card), your vote will be recorded as being
withheld, but it will have no effect on the outcome of the election. A proxy
card marked "abstain" regarding approval of the Amended and Restated Employee
Stock Purchase Plan will not be voted on that item, but such a proxy card will
be included as present and entitled to vote for determining whether the Plan has
been approved. Broker non-votes are not so included. A broker non-vote occurs
when a broker votes on some matters on the proxy card but not on others because
the broker does not have authority to do so.
Revocation of Proxy
If you later decide to revoke or change your proxy, you may do so by:
(1) sending a written statement to that effect to the Secretary of the Company;
or (2) submitting a properly signed proxy with a later date; or (3) voting in
person at the Annual Meeting.
Substantial Owners of Stock
No one other than Harleysville Mutual owns 5% or more of Harleysville
Group common stock. Please see the chart on page 21 for more details.
Duplicate Proxy Statements and Cards
You may receive more than one proxy statement, proxy card or annual
report. This duplication will occur if your shares are registered in different
names or your shares are in more than one type of account maintained by Mellon
Investor Services, LLC, the Company's transfer agent. To have all your shares
voted, please sign and return all the proxy cards you have received. If you wish
to have your accounts registered in the same name(s) and address, please call
Mellon Investor Services, LLC, at 1-800-851-9677, or contact Mellon through its
website: www.mellon-investor.com.
Other Information
Stockholder Proposals
An eligible stockholder who wants to have a qualified proposal
considered for inclusion in the proxy statement for the 2004 Annual Meeting of
Stockholders must notify the Secretary of the Company. The proposal must be
received at the Company's offices no later than November 22, 2003. A stockholder
must have been a registered or beneficial owner of at least 1% of the Company's
outstanding common stock or stock with a market value of $2,000 for at least one
year prior to submitting the proposal, and the stockholder must continue to own
such stock through the date the Annual Meeting is held. A stockholder who has
not timely submitted a proposal for inclusion in the proxy statement and who
plans to present a proposal at the 2004 Annual Meeting of Stockholders must
provide notice of the matter to the Secretary of the Company by February 4,
2004, or the persons authorized under management proxies will have discretionary
authority to vote and act according to their best judgment on said matter.
2
Expenses of Solicitation
Harleysville Group pays the cost of the preparation and mailing this
proxy-soliciting material. In addition to the use of the mail, proxies may be
solicited personally, by telephone or by other electronic means by Harleysville
Group officers and employees, without their receiving additional compensation.
Harleysville Group pays all costs of solicitation, including certain expenses of
brokers and nominees who mail proxy material to their customers or principals.
Independent Public Accountants
Representatives of KPMG LLP, the independent public accountants that
audited Harleysville Group's 2002 financial statements, will attend the Annual
Meeting. They will have the opportunity to make a statement, if they desire to
do so, and will respond to any appropriate questions presented by stockholders.
Harleysville Group has not yet selected its auditor for fiscal 2003.
BOARD OF DIRECTORS
Corporate Governance Practices
In order to promote the highest standards of management for the benefit
of stockholders, the Board of Directors of Harleysville Group follows certain
governance practices regarding how the Board conducts its business and fulfills
its duties. Among these practices are:
Board Size and Composition
The Board presently consists of 9 directors comprised of 8 non-employee
directors and one employee director. The Board believes that the Board should
consist of at least 7 directors and that, because some members of the Board are
also members of the Board of Harleysville Mutual, the total individuals
comprising the Boards of Harleysville Mutual and Harleysville Group should be no
more than 12. The Board further believes that of the maximum total board
membership of 12, no more than 3 should be employee directors, with the
remainder being independent directors as defined by the Nasdaq Stock Market.
Currently, there is only 1 employee director, Mr. Bateman, on each board. No
person may serve as a director on more than three other boards of for-profit
companies.
Qualifications of Directors
The Nominating and Corporate Governance Committee, with input from the
Chairman of the Board and the Chief Executive Officer ("CEO"), screens director
candidates. In overseeing the nomination of candidates for election, the
Committee, and subsequently the Board, seeks qualified individuals with
outstanding records of success in their chosen careers, the skills to perform
the role of director, and the time and motivation to perform as directors.
Directors must bring specialized talents to the Board that can add value to the
Board's deliberative process and advance the business goals and social
consciousness of the Company. Directors must be knowledgeable about
profit-making enterprises and the elements necessary for such enterprises to be
successful.
3
Attendance at Directors' Meetings
Directors are expected to attend all meetings of the Board and the
Committees on which they serve. Members of management regularly attend portions
of Board Meetings.
Director Retirement
It is Board policy that a director should resign as a director upon
resignation or retirement from his or her primary employment, unless the
Nominating and Corporate Governance Committee and the Chairman of the Board
request the individual to remain as a director. Each director, pursuant to the
by-laws of the Company, must retire from the Board at the next annual meeting
following his or her 72nd birthday.
Stock Ownership
Each director by 2007 (or five years after election for newly elected
directors) is expected to beneficially own an amount of the Company's common
stock having a value equal to at least five times the then current annual
retainer. To assist in this goal, the Company grants stock options and offers a
stock purchase plan to directors (see pages 11 and 12 for details).
Leadership
The Board retains the right to exercise its judgment to combine or
separate the offices of the Chairman of the Board and the Chief Executive
Officer. Currently, the Chairman of the Board is also the Chief Executive
Officer.
CEO Performance Evaluation
The independent directors of the Company annually review the Chief
Executive Officer's performance. Each such director prepares a written
evaluation of the Chief Executive Officer's performance which is submitted to
the Chairman of the Compensation and Personnel Development Committee who
compiles a report of the views of the independent directors. The independent
directors then meet in an executive session to discuss the Chief Executive
Officer's performance and to agree on the content of the appraisal which the
members of the Compensation and Personnel Development Committee later review
with the Chief Executive Officer.
Code of Conduct
The Board of Directors, through the Nominating and Corporate Governance
Committee, establishes and oversees compliance with a Code of Conduct for
Directors, Officers and Employees and a Code of Ethics for Senior Financial
Officers meeting the requirements of the Sarbanes-Oxley Act.
Board Effectiveness Assessment
Annually, the Nominating and Corporate Governance Committee conducts an
assessment of the Board's effectiveness and makes a report on that subject to
the Board. That Committee also reviews and makes recommendations to modify the
Company's Corporate Governance Practices.
4
Director Compensation
In order to attract and retain qualified board members, director
compensation should be competitive with the compensation of directors at peer
companies. Directors' fees are determined by the Nominating and Corporate
Governance Committee after consultation with independent compensation
consultants.
Board Agendas and Meetings
A board calendar for the year is prepared in advance that lists items
to be addressed. Additional items are added by the Chairman and Chief Executive
Officer. Each director is free to suggest items for an agenda, and each director
is free to raise subjects at any Board meeting that are not on the agenda for
that meeting. The Board reviews and approves Harleysville Group's yearly
operating plan and specific financial goals at the start of each year, and the
Board monitors performance throughout the year. The Board also reviews
long-range strategic issues at regular Board meetings as well as at periodic
meetings devoted solely to strategic issues.
Executive Sessions of Independent Directors
The independent directors meet in executive session without the CEO or
other employee-directors in attendance to review the performance of the Chief
Executive Officer and to review recommendations of the Compensation and
Personnel Development Committee concerning compensation for the employee
directors. Executive sessions of the independent directors are always scheduled
at each regular Board meeting. The Chairman of the Nominating and Corporate
Governance Committee presides.
Access to Management and Independent Advisers
The independent directors have access to management and, as necessary
and appropriate, independent advisers.
Audit Committee
The Audit Committee, which adopted a charter in 1999 and revised it in
2000, consists of three members, all of whom satisfy the definition of
independent directors established by both the Nasdaq Stock Market and state
insurance regulatory requirements. All members are financially knowledgeable as
previously prescribed by the Nasdaq Stock Market. The Audit Committee currently
is comprised of individuals who have substantial knowledge of and experience
with the insurance industry; none, however, have yet been determined by the
Board of Directors to be a "financial expert" as defined in Section 407 of the
Sarbanes-Oxley Act and implementing regulations. The Audit Committee Charter was
appended to the 2001 Proxy Statement. The charter will be revised later in 2003
to reflect requirements of both the Sarbanes-Oxley Act, new Securities and
Exchange Commission ("Commission") regulations and the Nasdaq Stock Market
Listing Requirements. There has been no delegation of pre-approval of audit or
non-audit services to any member(s) of the Committee.
5
Audit Committee Report
Prior to release of the Company's financial statements for 2002, which
are contained in the Company's Annual Report, the Audit Committee met and held
discussions with management and KPMG, the independent auditor, regarding the
fair and complete presentation of the Company's results. Management represented
to the Committee that the Company's consolidated financial statements were
prepared in accordance with generally accepted accounting principles, and the
Committee reviewed and discussed the consolidated financial statements with
management and the independent auditors. The Committee discussed with KPMG
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees).
In addition, the Committee has discussed with KPMG the auditor's
independence from the Company and its management, including the matters in the
written disclosures required by the Independence Standards Board Standard No. 1
(Independence Discussions With Audit Committees). The Committee also considered
whether KPMG's provision of other non-audit services to the Company is
compatible with the auditor's independence. The Committee has concluded that the
independent auditors are independent from the Company and its management.
The Committee discussed with the Company's internal and independent
auditor the overall scope and plans for their respective audits. The Committee
meets with the internal and independent auditors, with and without management
present, to discuss the results of their examinations, the evaluations of the
Company's internal controls, and the overall quality of the Company's financial
reporting.
In reliance on the reviews and discussions referred to above, the
Committee has recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 for filing with the Commission.
Management is responsible for the Company's financial reporting process
and for the preparation of its financial statements in accordance with generally
accepted accounting principles. KPMG is responsible for auditing those financial
statements. The Committee's responsibility is to monitor and review these
processes. It is not the Committee's responsibility to conduct auditing or
accounting reviews or procedures. Therefore, in approving the inclusion of the
audited financial statements in the Annual Report on Form 10-K, the Committee
has relied on management's representation that the financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America and on the representations of KPMG included in its
report on the Company's financial statements.
Submitted by the Audit Committee:
Joseph E. McMenamin, Chairman
Lowell R. Beck
Michael L. Browne
6
Audit Fees
KPMG, the Company's independent auditor for 2001 and 2002, rendered the
following services and billed the following fees for fiscal 2001 and 2002.
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Services 2001 Fees 2002 Fees
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Audit $248,000 $230,500
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Audit Related $ 21,000 $10,000
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Tax 0 0
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All Other 0 0
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Audit Services include audits of insurance operations in accordance
with statutory accounting principles required by insurance regulatory
authorities and review of documents filed with the Commission.
Audit Related Services include audits of employee benefit plans, due
diligence related to mergers and acquisitions, internal control reviews and, in
2001, audit of investment return results.
The Audit Committee has determined that the rendering of "audit
related" services is compatible with KPMG maintaining its independence.
All (100%) of the above fees for 2002 were approved by the Audit
Committee. Less than 50% of the hours expended on the independent auditor's
audit of the Company was attributable to persons other than the independent
auditor's full-time permanent employees.
7
Board and Committee Meetings
The Board met 7 times in 2002. A description of each standing Board
Committee follows the table of members and meetings. Each director has attended
at least 75% of all Board and Committee meetings on which he or she served.
BOARD COMMITTEE MEMBERS & MEETINGS AS OF DECEMBER 31, 2002
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Name Audit Compensation Coordinating Corporate Executive Investment Nominating
& Strategy &
Personnel Corporate
Development Governance
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Walter R. Bateman X* X X* X
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Lowell R. Beck X X X
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Michael L. Browne X X X X X
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W. Thacher Brown X
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Robert D. Buzzell X X*
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Mirian M. Graddick X X
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Joseph E. McMenamin X* X X
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Frank E. Reed X X*
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Jerry S. Rosenbloom X* X X
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Number of Meetings in
2002 6 7 2 2 5 4 4
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* Denotes Chairperson of the Committee.
The Audit Committee:
o is comprised exclusively of independent directors;
o appoints the independent auditor and pre-approves its audit plan
and services;
o oversees corporate accounting policies, reporting practices, and
quality and integrity of the financial reports;
o reviews the financial information that is provided to
shareholders, potential shareholders, policyholders, regulatory
authorities and others;
o reviews the internal audit function;
o insures free and open communication among the directors,
independent auditors, internal auditors and the Company's
financial management;
8
o establishes procedures for the receipt and investigation of
complaints regarding accounting and auditing matters; and
o performs other specific duties to accomplish the above as set
forth in its charter.
The Compensation and Personnel Development Committee:
o is comprised exclusively of independent directors;
o reviews and recommends compensation for the CEO and other
executive officers;
o determines participants in, establishes awards under and approves
payouts for the Senior Management Incentive Compensation Plan and
the Long Term Incentive Plan;
o grants awards of stock options, restricted stock and stock
appreciation rights under the Equity Incentive Plan;
o monitors compliance with the officers' stock ownership guidelines;
o conducts the annual review of the CEO's performance;
o oversees Harleysville Group's management development and
succession program; and
o reviews and determines compensation policies;
The Coordinating Committee:
o reviews material transactions between Harleysville Group and
Harleysville Mutual; and
o is currently composed of three individuals who are solely
Harleysville Group directors and three individuals who are solely
Harleysville Mutual directors plus a non-voting chairperson who is
on the board of both companies. No material inter-company
transaction can occur until at least two of the Harleysville Group
directors and at least two of the Harleysville Mutual directors on
the Committee approve a transaction. The decisions of the
Coordinating Committee are binding on Harleysville Group and
Harleysville Mutual.
The Corporate Strategy Committee:
o participates with management in development of the Company's
strategy;
o monitors implementation of the Company's strategy; and
o provides advice and counsel to management on mergers and
acquisitions, capital management and financial risk tolerance.
9
The Executive Committee:
o meets during the intervals between meetings of the Board of
Directors and has the right and authority to exercise the full
powers of the Board of Directors, except where limited by law.
o may not exercise powers given to other Committees unless time is
of the essence.
The Investment Committee:
o establishes overall investment policies and guidelines;
o reviews and approves investments made by the Company; and
o serves as the ex officio trustee of the Company's Pension Plans.
The Nominating and Corporate Governance Committee:
o is comprised exclusively of independent directors;
o considers and recommends nominees for election as a director to
the Board;
o recommends director fees for approval by the Board;
o considers recommendations for nominees for election as a director
from stockholders who submit such recommendations in writing to
the Secretary of the Company;
o assesses the effectiveness of the Board and corporate governance
practices;
o evaluates and monitors corporate governance practices; and
o oversees establishment and compliance with the Code of Conduct for
Directors, Officers and Employees and the Code of Ethics for
Senior Financial Officers.
10
Compensation of Directors
Employee directors receive no additional compensation for serving on
the Board or a Committee.
Non-employee directors receive the following fees:
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Type of Compensation As of April 2002 As of April 2003
- ------------------------------------------------------------------------------------------------------------
Annual Retainer $25,000 $25,000
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Board Attendance Fee per Meeting $ 1,500 $ 1,500
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Committee Attendance Fee per Meeting $ 1,000 $ 1,000
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Annual Retainer for Committee Chair $ 6,000 $ 6,000/9,000
- ------------------------------------------------------------------------------------------------------------
As of the annual meeting, the Chair of the Audit Committee and Chair of the
Compensation & Personnel Development Committee will receive an annual retainer
of $9,000; the chairs of the other committees will receive an annual retainer of
$6,000. Non-employee directors are reimbursed for out-of-pocket expenses. A
non-employee director who serves on both the Harleysville Group and Harleysville
Mutual boards receives only one retainer and, if the boards or the same
Committees of Harleysville Group and Harleysville Mutual meet on the same day,
the non-employee director receives only one attendance fee. In either situation,
the retainer or attendance fee is allocated equally to Harleysville Group and
Harleysville Mutual. During 2002 affiliates of Harleysville Group retained the
law firm of ReedSmith, LLP, of which director Michael L. Brown is a partner, to
perform limited services in the intellectual property area. The fee was less
than $60,000 and the services of ReedSmith were terminated in 2002.
Stock Acquisition Programs
Directors' Stock Option Programs
In 1994, Harleysville Group adopted the 1995 Directors' Stock Option
Program (the "1995 Program"), which provided for the issuance of options on an
aggregate of 130,000 shares of common stock, subject to adjustment for stock
splits or other changes. The 1995 Program was approved by the stockholders at
the Annual Meeting of Stockholders held on April 27, 1994. The 1995 Program
superseded the 1990 Program which has terminated. Under the 1995 Program, on May
24, 1995, each non-employee director of Harleysville Group and Harleysville
Mutual then in office received a one-time grant of 10,000 non-qualified stock
options, less the amount of non-vested options, if any, under the 1990 Program
at the then fair market value and option price of $12.50. Thereafter, each newly
elected non-employee director and each employee director who became a
non-employee director of Harleysville Group or Harleysville Mutual received a
one-time grant of 10,000 non-qualified stock options at the first May Board
meeting following his or her election or becoming a non-employee director.
Options on 122,440 shares have been granted under the 1995 program of which
46,740 remain unexercised. No additional options will be granted under this
program. 20% of the options granted vested on the day of grant with the balance
vesting at the rate of 20% per year of active Board service. No options were
exercisable until six months after the date of grant. The term of each option is
ten years. The 1995 Program is administered by the Compensation and Personnel
Development Committee of the Board of Directors of Harleysville Group.
11
The Committee has no discretion with regard to the eligibility or
selection of directors to receive options under the 1995 Program, the number of
shares of stock subject to such options under the 1995 Program, or the purchase
price thereunder. The 1995 Program does not provide for stock appreciation
rights.
In 1999, Harleysville Group adopted the Year 2000 Directors' Stock
Option Program (the "Y2000 Program") which provides for the issuance of options
on an aggregate of 123,500 shares of common stock, subject to adjustment for
stock splits or other changes. The Y2000 Program was approved by the
stockholders at the Annual Meeting of Stockholders held on April 28, 1999.
Except for options already granted under the 1995 Program, the Y2000 Program
superseded the 1995 Program. Under the Y2000 Program, at each May Board meeting
from 2000 through 2004, each non-employee director of Harleysville Group and
Harleysville Mutual will receive a grant of 2,500 non-qualified stock options,
less the amount of options each may have, if any, under the 1995 Program that
vest in that year, at the then current fair market value. 23,000 options were
granted in May 2002 at an exercise price of $27.20 per share. A maximum of
63,000 options remain available to be awarded. The options vest immediately,
although no option is exercisable until six months after the date of grant. The
term of each option is ten years. The Y2000 Program is administered by the
Compensation and Personnel Development Committee of the Board of Directors of
Harleysville Group. The Committee has no discretion with regard to the
eligibility or selection of directors subject to such options under the Y2000
Program, the option price thereunder or the number of shares granted to a
director each May. The Y2000 Program does not provide for stock appreciation
rights.
Directors' Equity Award Program
Each Harleysville Group Board member who was a Board member on April
25, 1996 and remained an active Board member on August 28, 1996 received a grant
of 5,646 shares of Harleysville Group common stock restricted against transfer
and subject to forfeiture until the first to occur of his or her retirement from
the Board after attaining age 72, death or disability. A total of 45,168 shares
was awarded to eight directors. Each director-holder possesses the right to vote
the shares and receive dividends thereon. Directors' current holdings of
restricted stock are set forth on the chart on page 22.
Directors' Stock Purchase Plan
In 1996, Harleysville Group adopted the Directors' Stock Purchase Plan.
This plan was approved by the stockholders at the Annual Meeting of Stockholders
held on April 24, 1996. This plan permits non-employee directors of Harleysville
Group and Harleysville Mutual to purchase Company common stock at the lower of
85% of the fair market value of the shares at the start or end of a six-month
subscription period, which runs from July 15 to January 14, and January 15 to
July 14. The Plan provides for up to 20 subscription periods. Directors are
permitted to contribute, through withholding from fees or a lump sum payment, up
to $20,000 per subscription period with the number of shares, including
fractional shares, purchased being equal to the dollar amount contributed,
divided by the purchase price. Two hundred thousand shares of Harleysville Group
common stock have been reserved for this program. During the thirteen
subscription periods since its inception, a total of 83,627 shares have been
purchased by directors.
12
SHAREHOLDER ACTIONS
Item 1. Election of Directors
Harleysville Group's Board of Directors consists of 9 directors. Each
director is elected for a three-year term, except that if a nominee will attain
the age of 72 within the next two years following such nominee's election, such
nominee will be nominated for a term of one or two years, as the case may be, to
expire on the first Annual Meeting date following the nominee's reaching age 72.
The Board of Directors is divided into three classes. The current three-year
terms of Class A, B and C directors expire in the years 2004, 2003 and 2005,
respectively.
Three Class B directors are to be elected at the 2003 Annual Meeting.
The nominees are:
- ----------------------------------------------------------------------------------------------------
Name Class Age Director Since Year Term will
Expire if Elected
- ----------------------------------------------------------------------------------------------------
Michael L. Browne B 56 1986 2006
- ----------------------------------------------------------------------------------------------------
Frank E. Reed B 68 1986 2006
- ----------------------------------------------------------------------------------------------------
Jerry S. Rosenbloom B 63 1999 2006
- ----------------------------------------------------------------------------------------------------
Your Board of Directors recommends a vote "FOR" the Nominated Directors.
If a nominee is unavailable for election, stockholders will vote for
another nominee proposed by the Board or the Board may reduce the number of
directors to be elected at the meeting.
Directors continuing in office are:
- ----------------------------------------------------------------------------------------------------
Name Class Age Director Since Year Term will
Expire if Elected
- ----------------------------------------------------------------------------------------------------
Lowell R. Beck A 68 1996 2004
- ----------------------------------------------------------------------------------------------------
Robert D. Buzzell A 69 1992 2004
- ----------------------------------------------------------------------------------------------------
Joseph E. McMenamin A 70 1999 2004
- ----------------------------------------------------------------------------------------------------
Walter R. Bateman C 55 1992 2005
- ----------------------------------------------------------------------------------------------------
Mirian M. Graddick C 48 2000 2005
- ----------------------------------------------------------------------------------------------------
W. Thacher Brown C 55 2002 2005
- ----------------------------------------------------------------------------------------------------
Biographies of Director Nominees and Directors Continuing in Office
Mr. Browne was elected a director of Harleysville Group in 1986. From
1980 to 1983, Mr. Browne was the Insurance Commissioner of the Commonwealth of
Pennsylvania. In 1983, Mr. Browne joined the law firm of ReedSmith, LLP, in
Philadelphia, Pennsylvania, as a partner. He was a managing partner of its
Delaware Valley regional office from January 1993 until January 2001 when he
became head of ReedSmith's international insurance practice.
13
Mr. Reed was elected a director of Harleysville Group in 1986 and has
been a director of Harleysville Mutual since 1985. From 1984 to March 1990, Mr.
Reed served as President and Chief Operating Officer of First Pennsylvania
Corporation and First Pennsylvania Bank, Philadelphia, Pennsylvania. Beginning
in March 1990, as a result of a merger between First Pennsylvania Corporation
and CoreStates Financial Corp., Mr. Reed became President and Chief Executive
Officer of CoreStates Philadelphia National Bank. Mr. Reed retired from that
position in March 1995. Mr. Reed was Chairman of the Board and a director of
360(degree) Communications Company until its merger in July 1998 with Alltel
Corporation, of which he is now a director.
Dr. Rosenbloom, who has been a director of Harleysville Mutual since
1995, became a director of Harleysville Group in 1999. Dr. Rosenbloom is the
Frederick H. Ecker Professor of Insurance and Risk Management at the Wharton
School of the University of Pennsylvania, a position he has held since 1978. He
also served as Chairman of the Department of Insurance and Risk Management at
Wharton from 1989 until 1994. Dr. Rosenbloom is a director of Annuity and Life
Re and a trustee of Century Shares Trust (a mutual fund).
Mr. Bateman, who was elected Chairman of the Board of both Harleysville
Group and Harleysville Mutual in 1998, has served as a director of Harleysville
Group and Harleysville Mutual since 1992 when he was also elected President and
Chief Operating Officer of both companies. Mr. Bateman was elected Chief
Executive Officer of Harleysville Group and Harleysville Mutual, effective
January 1, 1994. In August 2002 his title became Chairman of the Board and Chief
Executive Officer of Harleysville Group. From 1988 to 1991, Mr. Bateman was in
charge of field operations for Harleysville Group and Harleysville Mutual. He
was Executive Vice President of both companies and responsible for all insurance
operations from 1991 to 1992. He is a director of Harleysville National
Corporation.
Ms. Graddick was elected a director of Harleysville Group in February
2000. She is Executive Vice President for human resources of the AT&T Corp.,
Bedminster, New Jersey, a position she assumed in March 1999. Previously, she
had been Vice President at AT&T for various human resource responsibilities
since 1994. Prior to that, she held various executive positions with AT&T, where
she commenced working in 1981.
W. Thacher Brown was elected a director of Harleysville Group in
December 2002. He was elected a director of Mutual in 1994. Mr. Brown has been
President of 1838 Investment Advisers in Radnor, Pennsylvania since 1988. He is
President of MBIA Asset Management Inc. and a director of MBIA Insurance Company
Inc. He is also a director of Airgas, Inc.
Mr. Beck was elected a director of Harleysville Group in 1996. From
1982 until his retirement in 1996, Mr. Beck was President and Chief Executive
Officer of the National Association of Independent Insurers, an insurance
industry trade group headquartered in Des Plaines, Illinois. Prior to 1982, he
served in various executive capacities with the American Bar Association in
Chicago, Illinois. He has served as of counsel to the law firm of Stone and
Moore, Chicago, Illinois and is currently adjunct professor of political science
at the University of Tennessee at Chattanooga.
Dr. Buzzell was elected a director of Harleysville Group in 1992 and
Harleysville Mutual in 1991. Dr. Buzzell was Distinguished Visiting Professor of
Marketing at Georgetown University from 1998 to 2001. From 1993 to 1998, he was
Distinguished Professor of Marketing, George Mason University, School of
Business Administration, Fairfax, Virginia. Prior to that position, he was
Sebastian S. Kresge Professor of Business Administration at Harvard University,
Graduate School of Business Administration. Dr. Buzzell currently serves on the
Board of Directors of VF Corporation.
14
Mr. McMenamin became a director of Harleysville Group and Harleysville
Mutual in 1999. Mr. McMenamin was President and Chief Operating Officer of the
Keystone Insurance Companies, Philadelphia, Pennsylvania from 1983 until he
retired in 1996. Prior to that he had been controller of Keystone for four years
and CFO & Treasurer of Keystone for four years. He served as a Board member of
the Keystone Insurance Companies until December 1998 when he joined the
Harleysville boards.
Other Executive Officers
- --------------------------------------------------------------------------------
Name Age Title
- --------------------------------------------------------------------------------
M. Lee Patkus 51 President & COO
- --------------------------------------------------------------------------------
Douglas A. Gaudet 49 Senior Executive Vice President, Insurance
Operations
- --------------------------------------------------------------------------------
Mark R. Cummins 46 Executive Vice President, Chief Investment
Officer & Treasurer
- --------------------------------------------------------------------------------
Catherine B. Strauss 55 Executive Vice President, Human Resources &
Public Affairs
- --------------------------------------------------------------------------------
Bruce J. Magee 48 Senior Vice President & CFO
- --------------------------------------------------------------------------------
E. Wayne Ratz 57 Senior Vice President & Chief Information
Officer
- --------------------------------------------------------------------------------
Roger A. Brown 54 Senior Vice President, Secretary, General
Counsel & Corporate Governance Officer
- --------------------------------------------------------------------------------
Robert G. Whitlock 46 Senior Vice President & Chief Actuary
- --------------------------------------------------------------------------------
Keith Fry 47 Senior Vice President, Field Operations
- --------------------------------------------------------------------------------
Roger Beekley 60 Vice President & Controller
- --------------------------------------------------------------------------------
M. Lee Patkus has been President & COO of the Company and COO of
Harleysville Mutual since August 2002. Prior to that, he had been Executive Vice
President in charge of the field and subsidiary operations of Harleysville Group
and Harleysville Mutual since November 1999. From 1994 to 1999 he worked for St.
Paul Insurance Companies and its predecessor, USF&G, and was in charge of
various regional operations. Most recently he was Regional President of the
Southeast Commercial Region.
15
Douglas A. Gaudet was named Senior Executive Vice President in August
2002. He is in charge of Insurance Operations. Previously he had been Executive
Vice President in charge of claims and underwriting commencing November 2000.
From May 1999 to November 2000 he was Managing Director/Chief Underwriting
Officer for Crum and Forster. From 1991 to 1999 he was employed by Zurich Group,
most recently as President, Service and Technology for Zurich Commercial.
Mark R. Cummins is Executive Vice President, Chief Investment Officer
and Treasurer of Harleysville Group and Harleysville Mutual and has been in
charge of the investment and treasury function since 1992.
Catherine B. Strauss has been Executive Vice President for Human
Resources and Public Affairs for Harleysville Group and Harleysville Mutual
since August 2002. Before that, commencing in 1998, she was Senior Vice
President and had been a vice president in charge of human resources since 1996.
Bruce J. Magee has been Senior Vice President & Chief Financial Officer
of Harleysville Group and Harleysville Mutual since January 1, 1994. From 1986
to 1993 he was Vice President and Controller of Harleysville Group Inc.
E. Wayne Ratz is Senior Vice President and Chief Information Officer of
Harleysville Group and Harleysville Mutual, a position he has held since
February 1997.
Roger A. Brown has been Senior Vice President, Secretary and General
Counsel for Harleysville Group and Harleysville Mutual since 1995. He was
Assistant General Counsel from 1986 until assuming his present position. He was
named Corporate Governance Officer in 2001.
Robert G. Whitlock, Jr. is Senior Vice President and Chief Actuary of
Harleysville Group and Harleysville Mutual. He was Vice President and Actuary
before assuming his present position in February 1995 and was in charge of
various actuarial functions since 1991.
Keith A. Fry was named Senior Vice President for Harleysville Group and
Harleysville Mutual in charge of field and subsidiary operations in August 2002.
Before that, he was President & COO of Harleysville Lake States Insurance
Company, a subsidiary of the Company, a position he assumed in 1997.
Roger J. Beekley has been Vice President and Controller of Harleysville
Group since January 1, 1994 and is Vice President and Controller of Harleysville
Mutual, a position he has held since 1982.
16
Item 2. Approval of the Amended and Restated Employee Stock Purchase Plan
Proposal
The Company has maintained an Employee Stock Purchase Plan ("Plan")
since it first became publicly traded in 1986. The Plan was last amended in 1995
when 500,000 additional shares were reserved for issuance. A total of 1,496,387
shares, as adjusted for stock splits and dividends, have been purchased under
the Plan since its inception. As of February 1, 2003 101,960 shares remained
available for purchase. On February 26, 2003, the Board of Directors adopted an
Amended and Restated Plan under which an additional 650,000 shares of common
stock would be reserved for issuance under the Plan and the termination date
would be extended until 2008. The stockholders are being asked to approve the
Amended and Restated Plan at the Annual Meeting. The following description of
the Plan is intended merely as a summary of the principal features of the Plan
and is qualified in its entirety by reference to the provisions of the Plan
which is attached as an exhibit to this proxy statement.
Purpose of the Plan
The purpose of the Plan is to provide eligible employees with an
opportunity to acquire or increase a proprietary interest in the Company. It is
intended that the Plan will meet the requirements of Section 423 of the Internal
Revenue Code ("Section 423").
Summary of the Plan
Eligibility and Enrollment. The Plan will continue to be available to all
regular full and part-time employees of the Company, its parent, and
subsidiaries who work twenty (20) hours or more per week: The amended and
restated plan provides for a total of twenty-six (26) subscription periods, with
the first subscription period commencing July 15, 1995 and the last one
scheduled to commence January 15, 2008. Employees may enroll during a two-week
enrollment period immediately preceding each subscription period. No employee
may assign his or her rights to participate in the Plan to any other person.
Purchase Price. The purchase price of a share will continue to be the
lesser of 85% of the fair market value of such share on the last trading day
before the first day of the subscription period or 85% of the fair market value
of such share on the last trading day of the subscription period. The fair
market value of the stock will be the closing price of a share on the Nasdaq
Stock Market
Payment of Purchase Price; Payroll Deductions. Contributions may be made
only through payroll deduction. Employees may contribute no less than the lesser
of 1% of base pay or $3.00 bi-weekly and no more than 15% of base pay on an
after-tax basis, subject to the limitations that no employee can purchase more
than $25,000 in fair market value of Company stock under this Plan in any one
calendar year determined as of the start of a subscription period and no
employee may purchase shares if such employee owns stock representing five
percent (5%) or more of the voting power of the Company or a purchase would
result in that level of ownership. No interest will accrue on the payroll
deductions. An employee may discontinue his or her participation in the Plan at
any time or may change the rate of payroll deduction effective for the next
subscription period. If at any time the number of shares subscribed exceeds the
number of shares available, the shares available will be allocated to employees
in proportion to existing Plan account balances.
Issuance of Shares. Shares will be issued in book entry form. As a result,
at the end of each subscription period, an employee will be credited with the
number of shares, including fractional shares to four decimal places, produced
by dividing the amount contributed during the subscription period by the
purchase price.
17
Withdrawal. If an employee chooses, he or she may withdraw participation in
the Plan at any time prior to the last day of the subscription period and
receive the full amount of his or her contributions without interest.
Termination of employment for any reason is an automatic withdrawal unless the
termination is within 90 days of a purchase date in which case the employee may
purchase shares at the end of the period.
Source of Shares. The shares available under the Plan may be either
authorized but unissued shares or shares re-acquired by Harleysville Group.
Distribution of shares will be made only after the registration of such shares
with the SEC or pursuant to exemptions from registration under applicable SEC
rules and regulations.
Administration. The Plan is administered by a Committee of three members
appointed by the Board of Directors of Harleysville Group. The Committee has the
general authority to interpret the provisions of the Plan and adopt such rules
as it deems necessary or desirable for the administration of the Plan; provided,
however, that the Committee will have no discretion with respect to eligibility
of employees to participate, the number of shares of stock subject to the Plan,
or the purchase price thereunder.
Adjustments. The Plan provides for adjustments in the shares reserved and
available for the Plan, by reason of a stock split, stock dividend, merger,
consolidation, combination of shares or similar occurrence.
Termination and Amendments. The Plan may be suspended or terminated by the
Board at any time. The Board may amend the Plan for any reason, except that it
may not, without stockholder approval, change the selection or eligibility of
employees to participate in the Plan, the number of shares of stock subject to
purchase or the purchase price thereunder, or materially increase the benefits
accruing to employees under the Plan.
Federal Income Tax Consequences
No income will be realized for federal income tax purposes by an employee
upon the purchase of shares under the Plan. Under the Internal Revenue Code
("Code"), employees who do not dispose of their shares within two years after
the date on which the right to purchase was granted (the beginning of the
subscription period) or within one year after their shares were purchased, the
gain on sale of the shares (or their increase in value in the event of death
prior to sale) will, under the present provisions of the Code, be taxed as
ordinary income to the extent of the lesser of (i) an amount equal to the
difference between the fair market value of the shares on the date of grant and
85% of such value on such date or (ii) an amount equal to the difference between
the fair market value of the shares at the time of disposition and the amount
paid for such shares under the Plan. Any additional gain will be treated as
long-term capital gain assuming the shares are capital assets in the employee's
hands. If an employee is entitled to long-term capital gain treatment upon a
sale of the stock, the Company will not be entitled to any deduction for federal
income tax purposes with respect thereto. For employees who dispose of their
shares within two years after the beginning of the subscription period or within
one year after their shares were purchased, the gain on the sale of the share
will, under the present provisions of the Code, be taxed as ordinary income to
the extent of the lesser of (i) the difference between the purchase price of the
shares and the fair market value of the shares on the purchase date or (ii) the
difference between the fair market value at the time of disposition and the
option price. Such difference will be deductible by the Company for federal
income tax purposes. Any additional gain will be treated as long-term or
short-term capital gain, depending on whether the shares have been held for more
or less than one year from the date they were purchased. Depending upon the
circumstances, the deductible portion of an employee's long-term capital gains,
as described above, may be subject to the alternative minimum tax.
18
The foregoing is only a summary of federal income tax consequences, and
does not purport to be complete.
Participation in the Plan
Participation in the Plan is voluntary and is dependent upon each eligible
employee's election to participate and his or her determination of the level of
payroll deduction. As of December 31, 2002, there were 2,427 employees eligible
to participate. Accordingly, future purchases under the Plan are not
determinable. Nevertheless, as the Plan contains the same fundamental terms as
it has since its inception in 1986, the following table sets forth certain
information regarding shares purchased under the Plan during fiscal 2002 by the
Company's Chief Executive Officer and Named Executive Officers as shown in the
Summary Compensation Table, all current executive officers as a group, and all
other employees who participated in the Plan as a group (non-employee directors
are not eligible to participate in the Plan):
- ------------------------------------------------------------------------------------------
Name Number of Dollar Value
Units Purchased At Purchase Date
- ------------------------------------------------------------------------------------------
Walter R. Bateman 874 $ 21,301
- ------------------------------------------------------------------------------------------
Mark R. Cummins 902 $ 21,999
- ------------------------------------------------------------------------------------------
Bruce J. Magee 109 $ 2,666
- ------------------------------------------------------------------------------------------
E. Wayne Ratz 898 $ 21,957
- ------------------------------------------------------------------------------------------
Roger A. Brown 937 $ 22,910
- ------------------------------------------------------------------------------------------
Current Executive Officers as a Group 8,069 $ 197,027
- ------------------------------------------------------------------------------------------
All other Employees Who Participated 77,898 $1,904,938
- ------------------------------------------------------------------------------------------
Vote Required
Approval of the Amended and Restated Plan requires the affirmative vote
by the holders of a majority of shares represented at the meeting in person or
by proxy.
Your Board of Directors recommends a vote "FOR" approval of the
Employee Stock Purchase Plan.
19
Securities Authorized Under Equity Compensation Plans as of December 31, 2002
- --------------------------------------------------------------------------------------------------
Number of Securities
Number of Securities Weighted-Average Remaining Available for
to be Issued Upon Exercise Price of Future Issuance Under
Plan Category Exercise of Outstanding Equity Compensation Plans
Outstanding Options, Options, Warrants (Excluding Securities
Warrants and Rights and Rights Reflected in Column(a))
(a) (b) (c)
- --------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security 2,120,541 $21.92 3,070,466
Holders
- --------------------------------------------------------------------------------------------------
Equity Compensation Plans
Not Approved by Security 2,000 $19.13 642,573
Holders
- --------------------------------------------------------------------------------------------------
Totals 2,122,541 $21.92 3,713,039
- --------------------------------------------------------------------------------------------------
There are two equity compensation arrangements not approved by
stockholders. One is the Agents' Stock Purchase Plan whereby the top-tier
independent insurance agencies that sell insurance products for the Company's
subsidiaries and affiliates may purchase twice a year, on January and July 15,
Company stock at a discount of 10% off the closing price on the previous day.
The amount that can be purchased by any one agency is limited to no more than
$25,000 in value every six months. A total of 1,000,000 shares was reserved for
issuance under this program at the time of its adoption in February 1995. As of
March 1, 2003, 357,427 shares have been issued under this program. The other
plan not approved by stockholders was a one-time grant of non-qualified stock
options to purchase 2,000 shares to E. Wayne Ratz at the time of his
commencement of employment in 1997. The options have an exercise price of $19.13
per share and expire in 2007.
The equity compensation plans approved by shareholders, other than the
current Employee Stock Purchase Plan, are described on pages 11 and 12 and pages
25 and 26.
20
OWNERSHIP OF COMMON STOCK
Table I - 5% Stockholders
Those persons owning more than 5% of Harleysville Group stock as of December 31,
2002, are set forth below. On that date there were 29,917,575 shares of
Harleysville Group stock held by stockholders.
- --------------------------------------------------------------------------------------------------------------
Name and Address Voting Authority Dispositive Total Amount Percent
Authority of Beneficial of Class
--------------------------------------------------- Ownership
Sole Shared Sole Shared
- --------------------------------------------------------------------------------------------------------------
Harleysville Mutual
Insurance Company 16,608,536 16,608,536 16,608,536 55.5%
Harleysville, PA 19438
- --------------------------------------------------------------------------------------------------------------
21
Table II - Beneficial Ownership of Directors & Executive Officers
This table shows Harleysville Group stock holdings of Directors, Nominees, Named
Executive Officers (who are the CEO and the next four most highly paid executive
officers based on salary and bonus attributable to 2002) and all directors and
executive officers as a group as of March 1, 2003. Please see the table on page
15 for titles of the Named Executive Officers. The "aggregate number of shares
beneficially owned" listed in the second column includes the numbers listed in
the third and fourth columns. For a description of the restricted shares owned
by Directors, please see the Directors' Equity Award Program description on page
12. For a description of the restricted shares owned by Named Executive Officers
other than Mr. Bateman, see page 30. On March 1, 2003, there were 30,063,267
shares of Harleysville Group stock held by stockholders.
- ------------------------------------------------------------------------------------------------------------
Name Aggregate Right to Number of Shares Percent of
Number Acquire of Restricted Shares
of Shares w/in 60 days Stock Owned (less than 1%
Beneficially (number of unless
Owned shares) indicated)
- ------------------------------------------------------------------------------------------------------------
Walter R. Bateman 433,566 223,624 5,646 1.4%
- ------------------------------------------------------------------------------------------------------------
Lowell R. Beck 17,646 13,500 0
- ------------------------------------------------------------------------------------------------------------
W. Thacher Brown 46,782 17,500 5,646
- ------------------------------------------------------------------------------------------------------------
Michael L. Browne 19,133 7,500 5,646
- ------------------------------------------------------------------------------------------------------------
Robert D. Buzzell 27,183 16,240 5,646
- ------------------------------------------------------------------------------------------------------------
Mirian M. Graddick 12,298 7,500 0
- ------------------------------------------------------------------------------------------------------------
Joseph E. McMenamin 15,570 11,500 0
- ------------------------------------------------------------------------------------------------------------
Frank E. Reed 37,584 17,500 5,646
- ------------------------------------------------------------------------------------------------------------
Jerry S. Rosenbloom 32,537 5,500 5,646
- ------------------------------------------------------------------------------------------------------------
Mark R. Cummins 92,021 74,226 0
- ------------------------------------------------------------------------------------------------------------
Bruce J. Magee 95,271 72,505 0
- ------------------------------------------------------------------------------------------------------------
E. Wayne Ratz 58,571 39,149 6,807
- ------------------------------------------------------------------------------------------------------------
Roger A. Brown 65,475 48,629 0
- ------------------------------------------------------------------------------------------------------------
All directors & executive officers as a 1,304,433 780,300 87,533 4.3%
group (19)
- ------------------------------------------------------------------------------------------------------------
Disclaimer of Beneficial Ownership
The following directors and officers disclaim beneficial ownership of
certain shares included in the totals above: Michael Browne disclaims beneficial
ownership of 130 shares held by him as custodian for a minor child.
22
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE
Compensation Philosophy
The Compensation and Personnel Development Committee of the Board of
Directors (the "Compensation Committee"), which consists entirely of independent
directors as defined in Section 162(m) of the Internal Revenue Code and as
defined by Nasdaq, oversees a management compensation program designed to
further the attainment of the Company's strategic goals of growth and
profitability and thus enhance shareholder value. In order to achieve these
strategic goals, the Company has identified four principles to guide its
compensation program. The program is designed to:
o Attract, retain and motivate talented executives;
o Reward competencies and behaviors critical to the Company's success;
o Offer total compensation levels that are consistent with the
performance of the executive measured against other executives both
within the Company and within the industry; and
o Focus executives on performance goals and measures that are the key to
the Company's success by providing variable compensation programs
linked to creation of shareholder value.
Compensation Methodology
The Harleysville Group compensation program is designed to enable
Harleysville Group to fairly compete for talented and experienced staff with
companies of similar size whether publicly or privately held. Data from many
different insurance and other companies are employed to determine proper
competitive compensation levels for an organization the size of Harleysville. As
a result, the group from which data are gathered and used is not the same as the
peer group represented on the Stock Performance Charts which includes all Nasdaq
Stock Market traded property/casualty companies regardless of size, or other
characteristics, although data from many of the same companies may be employed.
Total compensation is comprised of fixed compensation (annual base
salary), variable compensation (annual and long term incentive plans) and stock
options. Since 2000, the total compensation target has been the 50th percentile
of the market. This total compensation target is designed to enable the
organization to attract and retain high-performing executives and to reward
above average performance, while a flexible mix between base salary and variable
compensation permits higher potential of pay for those positions where
performance results are highly measurable and where the value of those results
to the Company is clear and significant. In exceptional cases, for the purpose
of attraction, retention or incenting of specific employees, stock appreciation
rights or restricted stock are awarded as well. An independent compensation
consultant provides data to the Committee regarding market rates for
compensation and compensation plan structures. The data is derived from analysis
of publicly available information and proprietary survey sources.
The specific components of the compensation program and how they
function are described below:
23
o Base Salary
Consistent with the compensation philosophy, annual base
salary is designed to be competitive within the industry. Each position
in the Company is placed in an appropriate paygrade whose midpoint
level is set at the median pay for that position when compared to the
industry on a size adjusted basis. A salary range based on the midpoint
is developed for that paygrade. An individual Named Executive Officer's
salary within his or her paygrade is determined each fall for the
following year while other executive officers' salaries are determined
after the close of the year for the 12 month period commencing April 1
and are based on a combination of individual performance and Company
performance, the weightings of which may change from year to year. To
evaluate Company performance, the Compensation Committee compares the
Company's overall corporate performance against the insurance industry
with respect to return on equity, combined ratio and premium growth.
The term "combined ratio", which is a standard term of measurement in
the property/casualty insurance industry, means the ratio produced by
adding (1) the ratio of losses, loss adjustment expenses, and
policyholder dividends to net earned premiums and (2) the ratio of
underwriting expenses to net written premium. The resulting fraction
then is expressed as a percentage.
o Annual Incentive Compensation
The Company each year adopts targets under its Senior
Management Incentive Compensation Plan in order to direct executive
officer attention to the attainment of significant annual corporate
goals. For the 2002 Plan, the goals included: a combined ratio goal for
the entire Harleysville organization's property/casualty operations; a
return on equity goal; a premium growth goal; and operational
effectiveness and improvement. The weightings for each factor were:
combined ratio 40%; return on equity 30%; premium growth 10%; and
operational effectiveness and improvement goals 20%. The Plan is
designed to pay a target award at a level of 15% to 40% of annual
salary depending on officer position and title when the target goals
are achieved. Payouts may be over 100% of target and up to 200% of the
target award if actual performance exceeds the target. Conversely,
payouts may be less than 100% and as low as zero if actual performance
does not attain the target. Consistent with the Compensation
Committee's philosophy, the size of the award range is determined for
the Chief Executive Officer specifically and executive officers
generally based on an analysis of the appropriate competitive total
compensation package that is typically available for executive officers
of a property/casualty insurance company of similar size. For 2002, the
threshold for a payout under the Plan was a return on equity of the
Company equal to or exceeding 8%. The payouts for 2000, 2001, and 2002
reflect that all the target goals were not fully attained in those
years. Since 2000, the Company has adopted distinct goals for the Chief
Investment Officer that provide incentives for investment performance
in addition to corporate performance goals. The 2002 goals and the
weightings for each were 18% for combined ratio; 30% for return on
equity; 7% for fee income revenue; 25% for equity investment
performance; and 20% for fixed income investment performance.
24
o Long Term Incentive Compensation
The Company has maintained since 1988 a Long Term Incentive
Plan designed to reward those senior executive officers of Harleysville
Group involved in establishing the Company's strategy. From the Plan's
inception and up to and including the Plan period beginning in 1999,
the Plan rewarded the attainment of long-term return on equity goals.
Target goals were set each year for the next four-year period. Awards
were designed to provide payments at the end of each successive
four-year performance period in an amount that is a percentage of each
participant's salary at January 1st of the first year of each period,
with the amount of payment dependent upon a combination of Harleysville
Group's annual rate of return on equity ("ROE") and direct written
premium growth over the four-year period. Potential target awards for
each year were designed to range from 15% to 45% of a participant's
salary depending upon officer level. A target amount was payable if
Harleysville Group's average ROE exceeded certain levels of targeted
ROE. There was a maximum payment of 150% of target award if
Harleysville Group's ROE exceeded certain higher levels of targeted
ROE. If ROE fell between the target level and the maximum level, then
the amount of the award was prorated accordingly. Once an ROE of 8% was
achieved, an additional incentive award based on direct written premium
growth took effect. If less than the targeted level of ROE was reached,
a reduced percentage of the target award was granted. In the event that
ROE fell below a stated level, a negative percentage of the target
award was assessed, and previously credited awards were proportionately
reduced. Under the terms of this Long Term Incentive Plan, the
Compensation Committee retained discretion, subject to Plan limits, to
modify the terms of outstanding awards to take into account the effect
of unforeseen or extraordinary events and accounting changes. Awards,
if earned, were paid in cash at the end of the four-year performance
period. Cash payments to the Named Executive Officers made under awards
for the plans for four-year periods 1997-2000, 1998-2001, and 1999-2002
are reflected in the Summary Compensation Table on page 29 under the
years 2000, 2001, and 2002 respectively, although paid in the following
year. The size of the award opportunity was determined for the Chief
Executive Officer specifically and executive officers generally based
on the same factors referenced under Annual Incentive Compensation
above.
Commencing in 2000, including the last three years of the
1999-2002 plan, the Plan was changed, with stockholder approval, in
order to help achieve the desired total compensation target. The Plan
became a three-year plan and the award, which has both a cash and stock
component that can vary by participant, is based on relative total
shareholder return ("TSR"), the components of which include both change
in stock price and imputed dividend reinvestment, compared to a
universe of at least 50 property/casualty stocks. The target award,
which ranges from 30% to 200% of base salary at the beginning of the
period, is payable if the TSR is at the 50th percentile. Target cash
and target shares are established as of January 1 of the first year of
each three-year period based on a participant's base salary and the
value of a share of stock. A maximum award of 150% of target is paid if
the TSR is at the 80th percentile or higher while a minimum award of
50% of target is paid if the TSR is at the 35th percentile. No award is
paid if the TSR is below the 35th percentile. TSR falling between the
35th and 50th percentiles and between the 50th and 80th percentiles
will be interpolated to determine the size of the award. The first
payouts under this structure were in 2003 for TSR between January 1,
2000 and December 31, 2002 for both the 1999-2002 plan and the
2000-2002 plan. The figures in the Summary Compensation table reflect
payments under both those plans. They reflect that TSR at 100.2% for
both the last three years of the 1999-2002 plan and the 2000-2002 plan
were above the 80th percentile thus paying off at 150% of target, the
maximum amount. The figures reflect the appreciated value of a share of
stock from $14.25 per share on December 31, 1999 to $26.43 on December
31, 2002.
25
See the chart on page 32 for further information on awards
under this Plan for 2002-2004.
o Stock Options
Pursuant to the terms of the Equity Incentive Plan, each year
the Compensation Committee grants stock options to officers and key
employees of Harleysville Group. Because stock option grants are a
component of a compensation target, these awards do not take into
account options already held by the officer. A target award of stock
options for each paygrade is established after taking into account the
other components of compensation to achieve the total compensation
target established by the Compensation Committee for the paygrade level
of the executive position. The Compensation Committee generally uses
the Black-Scholes option value method to determine the value of the
stock option grant component of compensation and awards the number of
stock options whose total value equals the target amount. In 2002,
because of the volatility of the stock market, grants were kept at the
same level as in 2000 and 2001 to maintain a competitive compensation
target. Based upon the recommendation of the CEO, in light of the
officer's performance, an officer may receive an award greater or
lesser than target, including none at all. Commencing in January 2002,
executive officers above a certain level, including the CEO and other
Named Executive Officers, must, within five years, beneficially own
Harleysville Group stock equal to a specific multiple of base salary in
order to receive stock options at a level necessary to keep total
compensation at the target level. For the CEO the multiple is five, for
the president and chief operating officer and executive vice presidents
the multiple is three, and for senior vice presidents the multiple is
two times base salary. The stock option grants to the Named Executive
Officers in 2002 are set out on the Summary Compensation Table on page
29 and the Option Grant Table on page 31. All stock options granted
under the Equity Incentive Plan in 2002, as well as in 2001 and 2000,
have been non-qualified options receiving no special tax benefit, have
an exercise price equal to the fair market value of a share of common
stock on the date of grant, have a term of 10 years and vest at the
rate of 50% each on the first and second anniversary dates of award,
except that options become immediately exercisable upon an optionee's
retirement, death or disability. Retired optionees, age 61 and younger,
may exercise the options within one year of retirement, and retired
optionees, age 62 and older, may exercise the options granted prior to
May 1997 within two years after retirement and may exercise the options
granted May 1997 and after within five years after retirement, if the
options do not otherwise expire. However, if a retiree over 55 has a
combination of age and service at retirement that exceeds the number
72, then that retiree has five years in which to exercise the options
after retirement. The exercise price may be paid by delivery of already
owned shares. The Compensation Committee may, in its discretion,
accelerate the exercisability of options in the event of a merger,
consolidation or other change in control of Harleysville Group. The
Company has never re-priced stock options and has no current intention
to do so.
Chief Executive Officer Compensation
Mr. Bateman's compensation for 2002 as set forth in the Summary
Compensation Table on page 29 was based on the factors set forth above. His
total compensation, composed of base salary, annual incentive compensation, long
term compensation and stock option grants, reflects both a target compensation
package commensurate with similar officers within the insurance industry peer
group as well as an evaluation of his personal and company performance on both a
qualitative and quantitative basis.
26
Mr. Bateman's base salary paid in 2002 was determined in October 2001
based upon a review of Mr. Bateman's performance and the Company's results for
the preceding 12 months. As of October 2001, fundamental key performance
measures continued to improve. Operating income had increased 17.9% although net
income decreased as a result of mandatory write-downs of impaired investment
securities. Even with the terrorist attacks of September 11, the combined ratio
had decreased to 104.1% from 107.1%. The trailing 12 month ROE was 9.0%. Book
value increased to $19.93 from $19.35 a year earlier and total stockholders
equity had increased to $586.1 million from $558.5 million. Premium volume, net
written and earned, had increased 8% and 5.4% respectively. In addition,
termination of underperforming agents, exiting unprofitable lines of business
and non-renewal of unprofitable individual accounts continued. The Committee was
mindful of the strategic vision for the Company and the re-underwriting and
pricing increase actions that had been implemented to further that vision in
2002. Accordingly, the Committee awarded Mr. Bateman a 6.8% increase for 2002.
Mr. Bateman's annual incentive compensation plan payout of $201,916 for
2002 was based on a formula that reflected attainment of 30.8% of the ROE award
goal; 136.4% of the premium growth award goal; 140.0% of the operational
effectiveness and improvement goals; and 98.2% of the combined ratio award goal.
Likewise, the long term incentive payout of $5,239,503 reflects two long term
incentive plan payouts, one for the period 1999-2002 and one for the period
2000-2002. Both plans paid at 150% of target, in that TSR of Company stock was
in the upper quintile compared to the peer group. During the periods covered,
the value of shares of Company stock increased by 85.5% and the total
shareholder return was 100.2%. Approximately 87.4% of the payout value, or
$4,576,991, was represented by stock with approximately 12.6% of the payout, or
$662,513, represented by cash. Finally, the award of stock options in May 2002
was based on the appropriate formula applied to Mr. Bateman's salary paygrade.
Internal Revenue Code Impact
Internal Revenue Code Section 162(m) imposes conditions on the full
deductibility of compensation in excess of $1 million. The Compensation
Committee has reviewed, and continues to review, the potential consequences to
the Company of this section. This section had no impact on the Company in 2002,
and it is not expected to have any impact on the Company in 2003 inasmuch as the
compensation levels other than from stock option exercises or the Long Term
Incentive Plan are below the $1 million figure, and any income from stock option
exercises and the Long Term Incentive Plan is fully deductible under the current
requirements of Section 162(m).
Compensation Committee Interlocks
No member of the Compensation Committee is an employee of an entity on
whose board an executive officer of the Company sits.
Submitted by the Compensation & Personnel Development Committee
Jerry S. Rosenbloom, Chairman
Michael L. Browne
Robert D. Buzzell
Mirian M. Graddick
27
STOCK PERFORMANCE CHART
The following graph shows changes over the past five-year period (all
full calendar-year periods) in the value of $100 invested in (1) Harleysville
Group common stock; (2) the Nasdaq Stock Market index; and (3) the Peer Group
index. All values are as of the last trading day of each year.
Comparison of 5-Year Cumulative Total Stockholder Return
[Graphic Omitted]
1997 1998 1999 2000 2001 2002
- --------------------------------------------------------------------------------
o Harleysville Group 100 109.9 62.4 132.2 110.5 125.4
- --------------------------------------------------------------------------------
# Nasdaq 100 141.0 261.5 157.4 124.9 86.3
- --------------------------------------------------------------------------------
^ Peer Group 100 85.3 64.3 83.2 85.3 87.7
- --------------------------------------------------------------------------------
YEARS
The year-end values of each investment shown in the preceding graph are
based on share price appreciation plus dividends, with the dividends reinvested
as of the day such dividends were ex-dividend. The calculations exclude trading
commissions and taxes. Total stockholder returns from each investment, whether
measured in dollars or percentages, can be calculated from the year-end
investment values shown beneath each graph.
The graph was prepared by the Center for Research in Security Prices
("CRSP"). The Nasdaq Stock Market index includes all U.S. Companies in the
Nasdaq Stock Market and the Peer Group index includes 55 Nasdaq Company stocks
in SIC Major Group 633 (SIC 6330-6339: U.S. and foreign, fire, marine and
casualty insurance). A complete list of these companies may be obtained from
CRSP at the University of Chicago Graduate School of Business, 1101 East 58th
Street, Chicago, Illinois 60637; (773) 702-7467. CRSP reweights the indices
daily, using the market capitalization on the previous trading day.
28
EXECUTIVE COMPENSATION
Summary Compensation Table
This table indicates, for the last three fiscal years, cash and other
compensation paid to the Named Executive Officers.
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Principal Year Annual Long-Term All Other
Position as of Compensation Compensation Compensation
December 31, 2002 Awards Payouts
--------------------------------------------------------------------------------------------
Salary Bonus Restricted Securities Long-Term
Stock Awards Underlying Incentive
Stock Options Payouts
(# of shares)
- ------------------------------------------------------------------------------------------------------------------------------------
Walter R. Bateman 2002 $560,000 $201,916 0 37,648 $5,239,503 $21,982
Chairman & 2001 $524,200 $ 51,766 0 37,648 $ 167,117 $16,518
Chief Executive Officer 2000 $499,200 $145,492 0 37,648 $ 194,731 $38,681
- ------------------------------------------------------------------------------------------------------------------------------------
Mark R. Cummins 2002 $307,300 $ 49,645 0 17,148 $ 764,319 $10,409
Executive Vice President, 2001 $292,700 $ 18,825 0 16,148 $ 52,669 $ 9,212
Chief Investment 2000 $272,300 $ 73,030 0 14,038 $ 61,664 $20,720
Officer & Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
Bruce J. Magee 2002 $230,800 $ 41,609 0 13,205 $ 532,056 $ 7,992
Senior Vice President & 2001 $219,800 $ 10,853 0 12,205 $ 41,114 $ 6,760
Chief Financial Officer 2000 $211,900 $ 30,879 0 12,205 $ 47,909 $14,567
- ------------------------------------------------------------------------------------------------------------------------------------
E. Wayne Ratz 2002 $213,000 $38,400 0 12,614 $ 482,187 $ 7,376
Senior Vice President & 2001 $199,100 $ 9,831 6,807 10,614 0 $ 6,268
Chief Information Officer 2000 $191,900 $27,965 0 10,614 0 $13,192
- ------------------------------------------------------------------------------------------------------------------------------------
Roger A. Brown 2002 $217,200 $39,157 0 13,205 $ 447,809 $ 7,521
Senior Vice President, 2001 $199,977 $ 9,887 0 12,205 0 $ 6,296
Secretary & General Counsel 2000 $178,200 $25,968 0 10,614 0 $12,250
- ------------------------------------------------------------------------------------------------------------------------------------
Cash bonuses under the Senior Management Incentive Compensation Plan
for services rendered in fiscal years 2000, 2001, and 2002 have been listed in
the year earned, although actually paid in the following year.
Bonuses under the Long Term Incentive Plan for services rendered in
fiscal years 1997-2000, 1998-2001, and in 1999-2002 and 2000-2002 have been
listed in 2000, 2001, and 2002 respectively, although, again, paid in the
subsequent year. Because of the revision to the Long Term Incentive Plan in
2000, when the plan became a three-year instead of a four-year plan, there were
two Long Term Incentive Plan pay-outs in 2003 for plans ending in 2002. Actual
payouts for these two plan periods were a combination of cash and stock, with
the majority of the payout in all instances being stock. In the aggregate stock
represented 82.2% of the amount of the total long-term incentive payouts to the
Named Executive Officers.
29
The terms of stock options awarded in fiscal years 2000, 2001, and
2002 are described in the Report of the Compensation and Personnel Development
Committee on page 26. Mr. Ratz is the only Named Executive Officer, other than
Mr. Bateman who holds his restricted shares in his capacity as director, that
holds restricted stock of the Company. As of December 31, 2002 he held 6,807
restricted shares with a value of $179,909. They were awarded in 2001 and vest
in 2004 if Mr. Ratz is still employed by the Company and attains certain
information technology mileposts. Mr. Ratz possesses both the right to vote and
receive dividends on these shares.
Named Executive Officers are eligible to participate in the tax-qualified
Extra Compensation Plan (a 401(k) plan) and a Nonqualified Excess Match Program.
This Nonqualified Excess Match Program pays a match at the same rate as paid
under the Extra Compensation Plan on the amount of base salary in excess of the
annual limitation on compensation imposed by the Internal Revenue Code and,
commencing in 2000, on annual incentive plan payments. Prior to 2001, the Extra
Compensation Plan match could either be 25%, 50%, 75%,100% of base salary
dependent upon whether net income as a percentage of premium earned meets or
exceeds specific limits set forth in the Extra Compensation Plan. Effective for
2001 and later, the Plan match can be 25, 50, 75, 100 or 125% of base salary
dependent upon the ROE of the Company for the year. The amount shown under "All
Other Compensation" in the Summary Compensation Table reflects contribution to
the Extra Compensation Plan (a) for 2002 of $5,500 on behalf of each of the
Named Executive Officers to match 2002 pre-tax elective deferred contributions
made by each to the Extra Compensation Plan; (b) for 2001 of $5,100 on behalf of
each of the Named Executive Officers to match the 2001 pre-tax elective deferred
contributions made by each to the Extra Compensation Plan; and (c) for 2000 of
$10,200 on behalf of each of the Named Executive Officers to match the 2000
pre-tax elective deferred contributions made by each to the Extra Compensation
Plan. The remainder of each amount is the allocation for each Named Executive
Officer under the Nonqualified Excess Match Program.
Severance Arrangements
Beginning in 1999, the Company has entered into agreements with the
Named Executive Officers that provide for compensation to be paid to the Named
Executive Officers in the event of both a change in control of Harleysville
Group or its parent Harleysville Mutual and a subsequent substantial change in
status of such Named Executive Officer. Changes in status include diminution of
responsibilities, reduction in pay, failure to continue comparable incentive
plans, change of place of employment or termination of employment, if they occur
within three years of change in control and are not for cause, e.g., the Named
Executive Officer's failure to perform his or her duties or willful conduct that
injures the Company. The compensation to be paid to Mr. Bateman is 2.99 times,
and the compensation to be paid to the other Named Executive Officers is two
times the sum of annual base salary and the average annual incentive target
awards over the past three years, plus the prorated long term incentive plan
target awards for all plans in which the Named Executive Officer participates
and the value of any stock options which may not legally be exercised at the
time of change in control. The compensation may be paid in a lump sum or
periodically at the election of the Named Executive Officer. A Named Executive
Officer may also receive funds to pay any resulting excise tax payable and will
continue to participate in welfare benefit plans for three years comparable to
those received prior to the change in control and change in status.
30
Option Grants in 2002
This table shows the number and value of stock options granted to the
Named Executive Officers in 2002.
- ---------------------------------------------------------------------------------------------------------------------------
Name Number of % of Total Exercise Price Expiration Grant Date
Securities Options Per Share Date Present Value
Underlying Granted to
Options Employees in
Granted Fiscal Year
- ---------------------------------------------------------------------------------------------------------------------------
Walter R. Bateman 37,648 8.0% $27.20 5/21/12 $340,388
- ---------------------------------------------------------------------------------------------------------------------------
Mark R. Cummins 17,148 3.6% $27.20 5/21/12 $155,018
- ---------------------------------------------------------------------------------------------------------------------------
Bruce J. Magee 13,205 2.8% $27.20 5/21/12 $119,373
- ---------------------------------------------------------------------------------------------------------------------------
E. Wayne Ratz 12,614 2.7% $27.20 5/21/12 $114,031
- ---------------------------------------------------------------------------------------------------------------------------
Roger A. Brown 13,205 2.8% $27.20 5/21/12 $119,373
- ---------------------------------------------------------------------------------------------------------------------------
In calendar year 2002, Harleysville Group granted a total of 472,917
options representing the right to purchase 472,917 shares of common stock to 112
officers and key employees under the Equity Incentive Plan.
The Grant Date Present Value was determined using the Black-Scholes
option pricing model. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect
Harleysville Group's estimate of future stock price growth. Use of this model
should not be viewed in any way as a forecast of the future performance of
Harleysville Group's common stock, which will be determined by future events and
unknown factors.
For a description of the stock option program, please see page 26.
31
Option Exercises & Year-end Values
This table shows the number and value of stock options exercised in 2002
and the value of unexercised options as of the end of 2002 for the Named
Executive Officers. Year-end value is calculated using the difference between
the option exercise price and $26.43 (year-end stock price) multiplied by the
number of shares underlying the option.
- --------------------------------------------------------------------------------------------------------------------------
Name No. of Value No. of Securities Value of Unexercised
Shares Realized Underlying In-the-Money
Acquired on Unexercised Options at Options at Year-End
Exercise Fiscal Year-End
--------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------
Walter R. Bateman 17,000 $252,535 223,624 56,472 $1,847,067 $1,318
- --------------------------------------------------------------------------------------------------------------------------
Mark R. Cummins 17,460 $323,212 74,226 25,222 $ 516,234 $ 565
- --------------------------------------------------------------------------------------------------------------------------
Bruce J. Magee 9,720 $180,264 72,505 19,307 $ 598,886 $ 427
- --------------------------------------------------------------------------------------------------------------------------
E. Wayne Ratz 0 $0 39,149 17,920 $ 200,472 $ 371
- --------------------------------------------------------------------------------------------------------------------------
Roger A. Brown 9,230 $111,337 48,629 19,307 $ 359,053 $ 427
- --------------------------------------------------------------------------------------------------------------------------
Long Term Incentive Plan Performance Opportunity Awards in Last Fiscal year
This table shows the potential target payouts for the Named Executive
Officers under the Long Term Incentive Plan for a three-year performance period
commencing in 2002. Four-year performance periods under the Plan were completed
in 2000, 2001, and 2002 and a three-year performance period under the Plan was
also completed in 2002. Actual payments for those performance periods are shown
in the Summary Compensation Table on page 29 for those years.
- -------------------------------------------------------------------------------------------------
Name Target Cash as a Target Performance
Percent of Salary Number of Shares Period
in 2002
- -------------------------------------------------------------------------------------------------
Walter R. Bateman 45% 36,333 3 years
- -------------------------------------------------------------------------------------------------
Mark R. Cummins 35% 3,859 3 years
- -------------------------------------------------------------------------------------------------
Bruce J. Magee 35% 2,415 3 years
- -------------------------------------------------------------------------------------------------
E. Wayne Ratz 15% 3,121 3 years
- -------------------------------------------------------------------------------------------------
Roger A. Brown 15% 3,182 3 years
- -------------------------------------------------------------------------------------------------
For a description of the current Long Term Incentive Compensation plan, please
see page 25.
32
Pension Plans
These tables show estimated annual benefits payable upon retirement to
the Named Executive Officers under the qualified Pension Plan in conjunction
with a non-qualified Supplemental Pension Plan.
Pension Plan Table I shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Bateman and Mr. Magee, who became
executive officers prior to January 1, 1989.
TABLE I
- ------------------------------------------------------------------------------------------------------------
Average 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
5 Year
Base Salary Plus
Annual Incentive
@ 12/31/02
- ------------------------------------------------------------------------------------------------------------
$650,000 $117,891 $176,837 $235,782 $294,728 $294,728 $294,728
- ------------------------------------------------------------------------------------------------------------
$600,000 $108,516 $162,774 $217,032 $271,290 $271,290 $271,290
- ------------------------------------------------------------------------------------------------------------
$550,000 $ 99,141 $148,712 $198,282 $247,853 $247,853 $247,853
- ------------------------------------------------------------------------------------------------------------
$500,000 $ 89,766 $134,649 $179,532 $224,415 $224,415 $224,415
- ------------------------------------------------------------------------------------------------------------
$450,000 $ 80,391 $120,587 $160,782 $200,978 $200,978 $200,978
- ------------------------------------------------------------------------------------------------------------
$400,000 $ 71,016 $106,524 $142,032 $177,540 $177,540 $177,540
- ------------------------------------------------------------------------------------------------------------
$350,000 $ 61,641 $ 92,462 $123,282 $154,103 $154,103 $154,103
- ------------------------------------------------------------------------------------------------------------
$300,000 $ 52,266 $ 78,399 $104,532 $130,665 $130,665 $130,665
- ------------------------------------------------------------------------------------------------------------
$250,000 $ 42,891 $ 64,337 $ 85,782 $107,228 $107,228 $107,228
- ------------------------------------------------------------------------------------------------------------
$200,000 $ 33,516 $ 50,274 $ 67,032 $ 83,790 $ 83,790 $ 83,790
- ------------------------------------------------------------------------------------------------------------
$150,000 $ 24,141 $ 36,212 $ 48,282 $ 60,353 $ 60,353 $ 60,353
- ------------------------------------------------------------------------------------------------------------
33
Pension Plan Table II shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Cummins, Mr. Ratz and Mr. Brown who
became executive officers after January 1, 1989.
TABLE II
- -----------------------------------------------------------------------------------------------------------
Average 5 Year 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
Base Salary
Plus Annual
Incentive @
12/31/02
- -----------------------------------------------------------------------------------------------------------
$650,000 $103,653 $160,455 $220,580 $280,705 $280,705 $280,705
- -----------------------------------------------------------------------------------------------------------
$600,000 $ 95,528 $146,580 $202,080 $257,580 $257,580 $257,580
- -----------------------------------------------------------------------------------------------------------
$550,000 $ 87,403 $132,705 $183,580 $234,455 $234,455 $234,455
- -----------------------------------------------------------------------------------------------------------
$500,000 $ 79,278 $118,917 $165,080 $211,330 $211,330 $211,330
- -----------------------------------------------------------------------------------------------------------
$450,000 $ 71,153 $106,729 $146,580 $188,205 $188,205 $188,205
- -----------------------------------------------------------------------------------------------------------
$400,000 $ 63,028 $ 94,542 $128,080 $165,080 $165,080 $165,080
- -----------------------------------------------------------------------------------------------------------
$350,000 $ 54,903 $ 82,354 $109,806 $141,955 $141,955 $141,955
- -----------------------------------------------------------------------------------------------------------
$300,000 $ 46,778 $ 70,167 $ 93,556 $118,830 $118,830 $118,830
- -----------------------------------------------------------------------------------------------------------
$250,000 $ 38,653 $ 57,979 $ 77,306 $ 96,632 $ 96,632 $ 96,632
- -----------------------------------------------------------------------------------------------------------
$200,000 $ 30,528 $ 45,792 $ 61,056 $ 76,320 $ 76,320 $ 76,320
- -----------------------------------------------------------------------------------------------------------
$150,000 $ 22,403 $ 33,604 $ 44,806 $ 56,007 $ 56,007 $ 56,007
- -----------------------------------------------------------------------------------------------------------
A pension is based on the highest five-year average of credited salary
plus average annual incentive compensation. The benefits reflected in the charts
assume that a Named Executive Officer receives an annual incentive compensation
equal to 20% of his or her annual base salary.
For the purposes of the Pension Plans, executive officers named in the
Summary Compensation Table have been credited with the following years of
service: Mr. Bateman, 15 years; Mr. Cummins, 11 years; Mr. Magee, 17 years, Mr.
Ratz, 6 years, and Mr. Brown, 17 years.
The retirement benefits shown in the Pension Plan Tables assume that
benefits will be payable at age 65 in the form of a single life annuity, and are
not subject to any deduction for Social Security or other offset amounts. For
the purposes of calculating benefits under the Pension Plans, no Named Executive
Officer may be credited with more than 25 years of service.
34
TRANSACTIONS WITH HARLEYSVILLE MUTUAL
Harleysville Group was formed by Harleysville Mutual in 1979. It was a
wholly-owned subsidiary of Harleysville Mutual until June 1986, when
Harleysville Mutual sold shares of Harleysville Group's common stock in a public
offering. Harleysville Mutual's ownership of Harleysville Group's outstanding
common stock was reduced from 100% to approximately 70% at that time. In April
1992, Harleysville Mutual sold additional shares of its Harleysville Group
common stock holdings, further reducing Harleysville Mutual's ownership to
approximately 55%. In 2000, Harleysville Mutual completed a purchase of
1,000,000 shares of Harleysville Group stock, thereby increasing its stock
ownership at that time to approximately 57%. Harleysville Group's operations are
interrelated with the operations of Harleysville Mutual. Harleysville Group
believes that its various transactions with Harleysville Mutual, of which the
material ones are summarized herein, have been fair to Harleysville Group (as
well as Harleysville Mutual) and at least as favorable to Harleysville Group as
those terms that could have been negotiated with an independent third party.
Under a lease effective January 1, 2000, Harleysville Mutual rents the
home office property from a partnership owned by Harleysville Group for a
five-year term at a base rent of $3.4 million. Harleysville Mutual may also pay
additional rent, based on a formula, for any additions, improvements or
renovations. There was an additional rental payment made in 2002 of $110,000.
Harleysville Mutual is also responsible for all operating expenses including
maintenance and repairs. The base rent and formula for additional charges are
based upon an appraisal obtained from an independent real estate appraiser.
Harleysville Mutual and Harleysville Group and their respective affiliates share
these facilities, and the expenses of the facilities are allocated according to
an intercompany allocation agreement.
Harleysville Group provides certain management services to Harleysville
Mutual and its insurance subsidiaries. Under related agreements, Harleysville
Group serves as the paymaster for the Harleysville companies, with each company
being charged for its proportionate share of salary and employee benefits
expense based upon time allocation. Harleysville Group received a fee of $6.8
million in 2002 for its services under these management agreements.
Harleysville Group borrowed approximately $18.5 million from
Harleysville Mutual in connection with the acquisition of Mid-America Insurance
Company and Harleysville Insurance Company of New York in 1991. It was a demand
loan with a stated maturity in March 1998. In February 1998, the maturity was
extended to March 2005 and the interest rate became LIBOR plus .65%, which was a
commercially reasonable market rate in 1998.
Harleysville Group's property/casualty insurance subsidiaries
participate in an underwriting pool with Harleysville Mutual whereby such
subsidiaries cede to Harleysville Mutual all of their insurance business and
assume from Harleysville Mutual an amount equal to their participation in the
pooling agreement. All losses and loss settlement and other underwriting
expenses are prorated among the parties on the basis of participation in the
pooling agreement. The agreement pertains to all insurance business written or
earned on or after January 1, 1986, and Harleysville Group's pool participants
are not liable for losses occurring prior to January 1, 1986. Harleysville
Group's participation in 2002 was 72%. The pooling agreement may be amended or
terminated by agreement of the parties. Information describing the pool
arrangement is contained in Harleysville Group's 2002 Annual Report to
Stockholders.
35
The property/casualty insurance subsidiaries of Harleysville Group
entered into a reinsurance agreement with Harleysville Mutual, effective January
1, 1997, whereby Harleysville Mutual reinsures the property/casualty insurance
company subsidiaries of Harleysville Group on a post-pooled basis for property
losses as a result of catastrophes, excluding earthquakes and hurricanes and,
effective July 1, 2002, excluding losses from terrorism, incurred in a quarter.
Harleysville Mutual in turn pays to the subsidiaries in the event of covered
catastrophes 100% of the subsidiaries' accumulated net loss in a quarter in
excess of their retention (or deductible), which for 2002 was their pooling
percentage times $5 million, up to a maximum net loss equaling $20 million times
the subsidiaries' total pooling percentages. The premium paid by the
subsidiaries of Harleysville Group to Harleysville Mutual in 2002 was $7.8
million. Further information about the reinsurance agreement is contained in
Harleysville Group's 2002 Annual Report to Stockholders.
SECTION 16 REPORTING COMPLIANCE
Harleysville Group believes that for 2002, for both the pre-August 27
rules and the post-August 26 rules, its officers, directors and 10% shareholders
complied with the requirements of Section 16 of the Securities Exchange Act of
1934 based on a review of forms filed, or written notice that no annual forms
were required. However, in reviewing all filings of Section 16 reporting persons
it was determined that in December 2000, Lowell Beck, a director, sold 1,000
shares of Harleysville Group stock but inadvertently no Form 4 was filed at that
time. Upon discovering the omission, a Form 4 was filed in July 2002. In October
1997, Walter Bateman's spouse received a bequest of 300 shares of Harleysville
Group stock but no form was filed at that time. A Form 5 reflecting that bequest
has been filed.
36
Appendix
HARLEYSVILLE GROUP INC.
Amended & Restated
EMPLOYEE STOCK PURCHASE PLAN
Approved by the Board of Directors February 26, 2003
I. PURPOSE
The Harleysville Group Inc. Employee Stock Purchase Plan (the "Plan")
is established by the Harleysville Group Inc. (the "Company") for the benefit of
the eligible employees of the Company, its parent and its subsidiaries. The
purpose of the Plan is to provide each eligible employee with an opportunity to
acquire or increase a proprietary interest in the Company. The Plan is intended
to meet the requirements of Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). As used herein, the terms "parent" and "subsidiary" shall
have the same meaning as in Section 425 of the Code.
II. DEFINITIONS
1. "Company" shall mean Harleysville Group Inc., a Delaware
corporation, and any successor in a reorganization or similar
transaction.
2. "Base Pay" shall mean the regular compensation paid to a
Participant with respect to the Enrollment Period. Base Pay shall
not include overtime, bonuses, or other items which are not
considered to be regular earnings by the Committee.
3. "Board" shall mean the Board of Directors of the Company.
4. "Code" shall mean the Internal Revenue Code of 1986, as amended.
5. "Committee" shall mean the Committee of three officers appointed
by the Board.
6. "Common Stock" shall mean the common stock of the Company, par
value of $1.00 per share, and may be either stock previously
authorized but unissued, or stock reacquired by the Company.
7. "Disability" shall mean the inability of a Participant to perform
the services normally rendered due to any physical or mental
impairment that can be expected to be of either permanent or
indefinite duration, as determined by the Company on the basis of
appropriate medical evidence, and that results in the
Participant's cessation of active employment with the Company.
8. "Enrollment Period" shall mean the January 1-14 or July 1-14
immediately preceding a subscription period.
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9. "Fair Market Value" shall mean the last existing closing price of
Common Stock on the Nasdaq Stock Market.
10. "Parent" shall mean Harleysville Mutual Insurance Company.
11. "Participant" shall mean an eligible employee who files an
enrollment card.
12. "Plan" shall mean the Company's Employee Stock Purchase Plan.
13. "Retirement" shall mean cessation of a Participant's employment
at age 55 or after if an employee is entitled to a benefit under
the Company's qualified defined benefit pension plan.
14. "Subscription Period" shall mean the period from January 15
through July 14 or from July 15 through January 14.
15. "Termination of Employment" shall mean a cessation of the
Participant's employment with the Company, its parent or any
affiliates for any reason other than retirement, death or
disability.
III. PLAN ADMINISTRATION
A. ADMINISTRATION: The Plan shall be administered by the Committee.
Subject to the express provisions of the Plan, the Committee
shall have full and exclusive authority:
(i) to interpret the Plan;
(ii) to prescribe, amend and rescind rules and regulations
relating to the Plan; and
(iii) to make all other determinations deemed necessary or
advisable in the implementation and administration of
the Plan as permitted by federal and state laws and
regulations, or by rules and regulations of a national
securities exchange or the Nasdaq Stock Market.
All determinations of the Committee in the administration of the
Plan, as described herein, shall be final and conclusive and
binding upon all persons including, without limitation, the
Company, its stockholders, Participants, and any persons having
any interest under the Plan.
B. MAXIMUM NUMBER OF SHARES AVAILABLE: Subject to adjustment as
specified in Section III.D. below, the aggregate number of
shares of common stock that may be issued under the Plan is
1,650,000 shares representing 1,000,000 shares previously
approved in 1995 and 650,000 shares approved in 2003. Such
650,000 shares shall be newly registered subsequent to the
adoption and approval of this Plan. Such shares that are issued
may be authorized and unissued shares or treasury shares.
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C. ELIGIBILTY:
(a) All regular full-time employees and regular part-time
employees who work at least twenty (20) hours or more a
week for the Company, its parent, or its subsidiaries which
have been designated by the Board as participating in the
Plan (including subsidiaries which are so designated after
the shareholders have approved the Plan) are eligible to
participate in the Plan.
(b) A person who is otherwise eligible to participate shall not
be granted any right to purchase stock under the Plan to
the extent (i) it would, if exercised, cause the person to
own shares of stock (including shares which would be owned
if all outstanding options to purchase stock owned by such
person were exercised) which possess five percent (5%) or
more of the total combined voting power or value of all
classes of stock of the Company, its parent or any
subsidiary, or (ii) it causes such person to have purchase
rights under the Plan and all other stock purchase plans of
the Company, its parent or any subsidiary, which meet the
requirements of Section 423 of the Code which accrue at a
rate which exceeds $25,000 of fair market value of stock of
the Company, its parent or any subsidiary (determined at
the time the right to purchase stock under this Plan is
granted) for each calendar year in which such right is
outstanding. For this purpose a right to purchase stock
accrues when it first becomes exercisable during the
calendar year (but the rate of accrual for any calendar
year can in no event exceed $25,000 of the fair market
value of the stock subject to the right) and the number of
shares of stock under one right may not be carried over to
any other right.
(c) If an employee obtains a hardship withdrawal under the
Extra Compensation Plan of the Company or any similar plan
maintained by the Company, its parent, or a subsidiary,
then said employee may not, for the six (6) month period
following the hardship withdrawal, make any contributions
for purchase of stock under the Plan. In such case, such
employee will be deemed to have withdrawn his or her
contribution for the current Subscription Period and will
have such contributions returned to him or her. The
employee is further not entitled to re-subscribe to the
Plan until the beginning of the first Subscription Period
following the completion of the six (6) month period.
D. ADJUSTMENTS: In the event of stock dividends, stock splits,
re-capitalizations, mergers, consolidations, combinations,
exchanges of shares, spin-offs, liquidations, reclassifications
or other similar changes in the capitalization of the Company,
the number of shares of Common Stock available for award under
this Plan in the aggregate or to any one individual shall be
adjusted proportionately. In the event of any other change
affecting the Common Stock reserved under the Plan, such
adjustment, if any, as may be deemed equitable by the Committee,
shall be made to give proper effect to such event.
E. REGISTRATION CONDITIONS:
1. Unless issued pursuant to a registration statement under the
Securities Act of 1933, as amended, no shares shall be
issued to a Participant under the Plan.
2. The Company shall not be obligated to deliver any Common
Stock until it has been listed on each securities exchange
on which the Common Stock may then be listed and until there
has been qualification under or compliance with such federal
or state laws, rules or regulations as the Company may deem
applicable. The Company shall use reasonable efforts to
obtain such listing, qualification and compliance.
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IV. ENROLLMENT AND ENROLLMENT PERIODS
Enrollment will take place in the Enrollment Periods. Any employee who
is eligible to participate and desires to subscribe for the purchase of stock
for the following Subscription Period must file a subscription agreement with
the Company's Payroll unit during the Enrollment Period. Once enrolled, a
Participant Employee will continue to participate in the Plan for each
succeeding Subscription Period until he or she terminates his or her
participation or ceases to be an Eligible Employee. If a Participant desires to
change his or her rate of contribution he or she may do so effective for the
next Subscription Period by filing a new subscription agreement during the
applicable Enrollment Period.
V. DURATION OF OFFER AND SUBSCRIPTION PERIODS
This plan shall be in effect from July 1, 1995 through and including
July 31, 2008. During the duration of the Plan there will be twenty-six (26)
Subscription Periods.
VI. SUBSCRIPTION PRICE
The "Subscription Price" for each share of Common Stock shall be the
lesser of eighty-five percent (85%) of the Fair Market Value of such share on
the last trading day before the first day of the Subscription Period or
eighty-five percent (85%) of the fair market value of such share on the last
trading day of the Subscription Period, but in no event less than $1.00 per
share, the par value of share of Company Common Stock.
VII. AMOUNT OF CONTRIBUTION AND METHOD OF PAYMENT
Except as otherwise provided herein, the Subscription Price will be
payable by the Participant Employee by means of payroll deduction. The minimum
deduction shall be no less than the lesser of one percent (1%) of the
Participant's Base Pay or $3.00 bi-weekly and the maximum deduction shall be no
more than fifteen percent (15%) of such Base Pay. Payroll deductions will
commence with the first pay issued during the Subscription Period and will
continue with each pay throughout the entire Subscription Period except for pay
periods for which the Participant receives no compensation (i.e., uncompensated
personal leave, leave of absence, etc.).
VIII. PURCHASE OF SHARES
The Company will maintain on its books a "Plan Account" in the name of
each Participant. At the close of each pay period, the amount deducted from the
Participant's Base Pay will be credited to the Participant's Plan Account. As of
the last day of each Subscription Period, the amount then in the Participant's
Plan Account will be divided by the Subscription Price for such Subscription
Period and the Participant's Plan Account will be credited with the number of
whole and fractional shares which results, subject to the limitations set forth
in Section III (c). Shares will be issued in a book entry form with the
Company's stock transfer agent. A Participant will receive a statement of
account in a timely fashion from the transfer agent following the end of each
Subscription Period. In the event the number of shares subscribed for any
Subscription Period exceeds the number of shares available for sale under the
Plan for such period, the available shares shall be allocated among the
Participants in proportion to their Plan Account balances.
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IX. WITHDRAWAL FROM THE PLAN
A Participant may withdraw from the Plan at any time. At the time of
withdrawal the amount credited to the Participant's Plan Account will be
refunded in cash without interest.
X. SEPERATION FROM EMPLOYMENT
Separation from employment for any reason including death, disability,
retirement or termination of employment shall be treated as an automatic
withdrawal as set forth in Section IX except that if separation occurs within
three months prior to a purchase date, such Participant may continue to
participate during that Subscription Period although no further contributions
may be made. A transfer among the Company, its parent or its designated
subsidiaries shall not be treated as a separation from employment.
XI. ASSIGNMENT
No Participant may assign his or her subscription or rights to
subscribe to any other person and any attempted assignment shall be void.
XII. AMENDMENT OR DISCONTINUANCE OF THE PLAN
The Board shall have the right to amend, modify or terminate the Plan
at any time without notice provided that no Participant's existing rights are
adversely affected thereby and provided further that without the approval of the
holders of a majority of the issued and outstanding shares of Common Stock no
such amendment shall increase the total number of shares subject to the Plan,
change the formula by which the price at which the shares shall be purchased is
determined, change the class of employees eligible to participate in the Plan,
or materially increase the benefits accruing to Participants under the Plan.
XIII. MISCELLANEOUS PROVISIONS
A. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN: The Board of
Directors may suspend or terminate the Plan or revise or amend
it in any respect whatsoever; provided, however, that if
shareholder approval is required by federal or state laws or
regulations or by rules and regulations of a national securities
exchange or the Nasdaq National Market of The Nasdaq Stock
Market, the amendment will not be effective until such
stockholder approval.
B. GOVERNMENT AND OTHER REGULATIONS: The obligation of the Company
to issue stock under the Plan shall be subject to all applicable
laws, rules and regulations, and to such approvals by any
government agencies as may be required.
C. OTHER COMPENSATION PLANS AND PROGRAMS: The Plan shall not be
deemed to preclude the implementation by the Company, Parent or
its subsidiaries of other compensation plans or programs which
may be in effect from time to time. Participation in this Plan
shall not affect an employee's eligibility to participate in any
other benefit or incentive plan of the Company, its Parent or
its subsidiaries except as provided in such other plan. Any
purchases made pursuant to this Plan shall not be used in
determining the benefits provided under any other plan of the
Company, Parent or its subsidiaries unless specifically provided
in such other Plan.
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D. CONSTRUCTION OF PLAN: The interpretation of the Plan and the
application of any rules implemented hereunder shall be
determined in accordance with the laws of the Commonwealth of
Pennsylvania.
E. PRONOUNS, SINGULAR AND PLURAL: The masculine may be read as
feminine, the singular as plural, and the plural as singular as
necessary to give effect to the Plan.
F. LIMITATION OF RIGHTS:
1. No Right to Continue as an Employee: Neither the Plan,
nor the granting of a right to participate nor any other
action taken pursuant to the Plan, shall constitute or
be evidence of any agreement or understanding, express
or implied, that the Participant has a right to continue
as an employee of the Company for any period of time, or
at any particular rate of compensation.
2. No Stockholder's Rights: A Participant shall have no
rights as a stockholder with respect to the shares
issued hereunder until the end of a Subscription Period
in which a Participant is enrolled, and no adjustment
will be made for dividends or other rights for which the
record date is prior to the date such shares are issued.
G. STOCKHOLDER APPROVAL: The adoption of this amended and restated
Plan shall be subject to stockholder approval.
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This proxy when properly signed will be voted as specified. If a choice is not specified, the proxy will be voted FOR the
election of directors
Please [ ]
Mark Here
for Address
Change or
Comments
SEE REVERSE SIDE
1. ELECTION OF CLASS B DIRECTORS
FOR WITHHOLD (INSTRUCTION: to withhold authority to vote for any
all the AUTHORITY individual nominee, strike a line through the nominee's
nominees to vote for the name below.)
listed. nominees listed.
[ ] [ ] 01 Michael L. Brown 02 Frank E. Reed
03 Jerry S. Rosenbloom
A vote FOR is recommended by the Board of Directors.
FOR AGAINST ABSTAIN
2. APPROVAL OF THE [ ] [ ] [ ]
AMENDED AND RESTATED
EMPLOYEE STOCK
PURCHASE PLAN
A vote FOR is recommended by the Board of Directors.
3. In their discretion, the proxies are authorized to vote
upon such other business as may properly come before
the meeting and any adjournment thereof.
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Signature_________________________________________Signature_________________________________________________Date____________
This proxy should be dated, signed by the stockholder exactly as his or her name appears herein and returned promptly in the
enclosed envelope. Persons signing in a fiduciary capacity should so indicate.
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^ FOLD AND DETACH HERE ^
[GRAPHIC OMITTED]
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 23, 2003
10:30 A.M.
355 Maple Ave.
Harleysville, PA 19438
YOUR VOTE IS IMPORTANT!
Mark, sign and date your proxy card and return it promptly in the enclosed
envelope.
PLEASE VOTE
You can now access your account online via Investor ServiceDirect at
http://www.melloninvestor.com
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[GRAPHIC OMITTED]
PROXY
HARLEYSVILLE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 23, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Roger A. Brown, Bruce J.
Magee, and Catherine B. Strauss, and each or any of them, proxies of the
undersigned, with full power of substitution, to vote all the shares of
Harleysville Group Inc. (the "Company") which the undersigned may be entitled to
vote at the Annual Meeting of Stockholders of the Company, to be held at 355
Maple Avenue, Harleysville, Pennsylvania, on April 23, 2003, at 10:30 A.M.,
local time, and at any adjournment thereof, as follows:
(Continued, and to be marked, dated and signed onreverse side)
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Address Change/Comments (Mark the corresponding box on the reverse side)
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^ FOLD AND DETACH HERE ^
Map to Harleysville Group Inc.
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Harleysville
Group Inc.
355 Maple Avenue [GRAPHIC OMITTED]
Harleysville, PA 19438
(800) 523-6344
(215) 256-5000
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